<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 9, 1998
REGISTRATION NO. 333-50103
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
CREDITRUST CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
MARYLAND 7389 52-1754916
(State of incorporation) (Primary Standard Industrial (I.R.S. Employer Identification No.)
Classification Code Number)
</TABLE>
7000 SECURITY BOULEVARD
BALTIMORE, MARYLAND 21244-2543
(410) 594-7000
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
------------------------------
JOSEPH K. RENSIN
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
CREDITRUST CORPORATION
7000 SECURITY BOULEVARD
BALTIMORE, MARYLAND 21244
(410) 594-7000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------------
COPIES OF ALL COMMUNICATIONS, INCLUDING ALL COMMUNICATIONS SENT TO THE AGENT FOR
SERVICE, SHOULD BE SENT TO:
<TABLE>
<S> <C>
HENRY D. KAHN, ESQUIRE ANITA J. FINKELSTEIN, ESQUIRE
PIPER & MARBURY L.L.P. VENABLE, BAETJER, HOWARD & CIVILETTI, LLP
36 SOUTH CHARLES STREET 1201 NEW YORK AVE., NW
BALTIMORE, MARYLAND 21201 WASHINGTON, DC 20005
410-539-2530 202-962-4800
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement. If any of
the securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, other
than securities offered in connection with dividend or interest reinvestment
plans, check the following box: / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: / / _____________________________________________________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: / / _____________________________________________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: / /
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THE SECURITIES IN
ANY STATE IN WHICH SUCH OFFERS, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO
ANY REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
[LOGO]
SUBJECT TO COMPLETION, DATED JULY 9, 1998
2,000,000 SHARES
COMMON STOCK
All of the shares of Common Stock, par value $0.01 per share (the "Common
Stock"), offered hereby are being sold by Creditrust Corporation ("Creditrust"
or the "Company"). Prior to this offering (the "Offering"), there has been no
public market for the Common Stock of the Company. Joseph K. Rensin, Chairman
and Chief Executive Officer of the Company, currently owns 100% of the
outstanding Common Stock. Upon completion of the Offering, Mr. Rensin will own
approximately 75% of the Company's outstanding Common Stock (approximately 71.3%
if the Underwriters exercise their over-allotment option in full). For a
discussion of the factors considered in determining the initial public offering
price, see "Underwriting."
It is currently estimated that the initial public offering price will be
between $13.00 and $15.00 per share. The Company has applied for listing of the
shares of Common Stock for quotation on the Nasdaq National Market ("Nasdaq")
under the symbol "CRDT."
SEE "RISK FACTORS" BEGINNING ON PAGE 7 OF THIS PROSPECTUS FOR A DISCUSSION
OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE
SHARES OF COMMON STOCK OFFERED HEREBY.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO
PUBLIC AND COMMISSIONS(1) COMPANY(1)(2)
<S> <C> <C> <C>
Per Share..................... $ $ $
Total(3)...................... $ $ $
</TABLE>
(1) Excludes (i) a non-accountable expense allowance payable to the
Representatives of the Underwriters equal to 1% of the gross proceeds of the
Offering and (ii) Common Stock Purchase Warrants to purchase up to 54,000
shares of Common Stock at a price per share equal to the Price to Public,
which Warrants were purchased by an affiliate of Boenning & Scattergood,
Inc. in April 1998. The Company has agreed to indemnify the Underwriters
against certain liabilities, including liabilities under the Securities Act
of 1933, as amended (the "Securities Act"). See "Underwriting."
(2) Before deducting expenses of the Offering payable by the Company estimated
at $ , including the Representatives' non-accountable expense
allowance.
(3) The sole stockholder (the "Selling Stockholder") has granted the
Underwriters a 30-day option to purchase up to an additional 300,000 shares
of Common Stock on the same terms and conditions as set forth herein, solely
to cover over-allotments, if any. If the Underwriters exercise such option
in full, the total Price to Public, Underwriting Discounts and Commissions
and Proceeds to the Selling Stockholder will be $ , $ , and
$ , respectively. See "Underwriting."
The shares of Common Stock are offered by the Underwriters named herein,
subject to prior sale, when, as and if delivered to and accepted by the
Underwriters, and subject to their right to reject any order in whole or in
part. It is expected that delivery of certificates representing the shares of
Common Stock will be made against payment therefor at the offices of Ferris,
Baker Watts, Incorporated, 1720 Eye Street, N.W., Washington, D.C. or through
The Depository Trust Company, on or about , 1998.
FERRIS, BAKER WATTS BOENNING & SCATTERGOOD, INC.
Incorporated
THE DATE OF THIS PROSPECTUS IS , 1998
<PAGE>
[THIS PAGE WILL CONTAIN SEVERAL PHOTOGRAPHS DEPICTING VARIOUS ASPECTS OF THE
REGISTRANT'S OPERATIONS]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING ENTERING INTO STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE
DETAILED INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO,
APPEARING ELSEWHERE IN THIS PROSPECTUS, AND THE MATTERS DESCRIBED UNDER "RISK
FACTORS." EACH PROSPECTIVE INVESTOR IS URGED TO READ THIS PROSPECTUS IN ITS
ENTIRETY. UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS (I)
ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION AND (II) GIVES
EFFECT TO A 60,000-FOR-1 STOCK SPLIT EFFECTED PRIOR TO THE DATE HEREOF. ON JUNE
19, 1998, CREDITRUST SPV2, LLC, A SPECIAL-PURPOSE FINANCE SUBSIDIARY OF THE
COMPANY, COMPLETED A SECURITIZATION CONSISTING OF MOST OF THE RECEIVABLES OWNED
BY CREDITRUST AT MARCH 31, 1998 AND CERTAIN RECEIVABLES OBTAINED FOR MANAGEMENT
IN 1997 AND SERVICED BY THE COMPANY (THE "SERVICED RECEIVABLES") (THE
"SECURITIZATION"). SEE "PROSPECTUS SUMMARY--RECENT DEVELOPMENTS" AND "RECENT
DEVELOPMENTS--SECURITIZATION."
THE COMPANY
Since 1991, Creditrust has been in the business of acquiring, managing and
collecting accounts of delinquent consumer debt (the "Receivables"). Acquired
Receivables are composed of obligations of customers located throughout the
United States. The Receivables acquired by the Company primarily consist of
individual VISA-Registered Trademark-, MasterCard-Registered Trademark- and
private label credit card accounts and consumer loan accounts issued by
originating institutions ("Originating Institutions"), such as major banks and
merchants. Most of these Receivables have been charged-off by the Originating
Institution. Due to its ability to acquire large portfolios of Receivables,
Creditrust provides Originating Institutions with an opportunity to recoup a
portion of amounts that already have been charged-off. To date, the Company has
acquired control over or purchased in excess of $1.4 billion in Receivables, as
measured by the balance charged-off by the Originating Institutions. Since its
inception, the Company has collected in excess of $35 million on Receivables,
and Creditrust currently operates two facilities capable of accommodating over
900 account officers.
The Company believes that the amount of consumer credit card delinquencies
has grown and will continue to grow at a very rapid rate. According to the
NILSON REPORT, gross credit card charge-offs are expected to grow from $31.3
billion in 1997 to $38.8 billion in 2000 and $51.8 billion in 2005. In response
to this trend and in recognition of its competitive advantage, the Company
accelerated its growth plans in 1996 and 1997 by expanding its call center
operations and continuing to invest in state-of-the-art information technology.
The Company's headquarters has capacity for a staff of approximately 225
associates, an increase from 50 in its former location. In June 1997, Creditrust
opened an operations center to house approximately 700 additional associates. A
dedicated fiber optic wide-area network connects the two facilities, which are
located less than two miles from each other.
The Company believes it acquires, manages, and liquidates Receivables more
efficiently than its competitors, Originating Institutions and collection
agencies. Substantially all of these Receivables have been deemed uncollectible
by the Originating Institutions. In many cases, the Receivables represent
obligations of individuals ("customers") who have experienced some life-altering
event, such as divorce, career displacement or major medical illness in the past
several years and currently are recovering financially from their setback.
Through the use of proprietary software systems, state-of-the-art computing and
telecommunications technology and procedures, the Company has a history of
recovering amounts that are multiples of the purchase price paid for the
Receivables. Unlike Originating Institutions and third-party collection
agencies, the Company has flexibility in structuring repayment plans that
accommodate the needs of its customers. For example:
- Creditrust is able to offer a significant discount on the overall
obligations because the Receivables have been acquired at a significant
discount from face value;
- Creditrust is able to tailor repayment plans that provide for the payment
of the obligation as a component of the customer's monthly budget;
3
<PAGE>
- Creditrust is not affected by many of the constraints that influence
account resolution decisions of banks and savings and loan institutions;
and
- Creditrust is not bound by the limited time periods to resolve Receivables
faced by third-party collection agencies nor is it subject to compensation
structures that favor one repayment option over another.
Creditrust applies its proprietary software systems, procedures and
state-of-the-art computing and telecommunications technology to all stages of
its business. Creditrust seeks to maximize its expected yield through the
application of its proprietary customer scoring models to portfolios of
Receivables for which it bids. To perform this evaluation, the Company employs
its extensive historical database and proprietary Portfolio Analysis Tool
("PAT"). The Company manages a large number of consumer accounts through
Mozart-TM-, its proprietary revenue and work flow management system. Creditrust
assimilates information on each Receivable by use of internally developed
proprietary and commercially available databases, allowing it a greater
probability of contacting customers and ultimately collecting on the Receivable.
The Company offers a full complement of support services to its associates,
including ongoing training, quality improvement, computer automated account
management and predictive dialing capacity (a computerized telephony system
which utilizes predictive algorithms to maximize the number of customer contacts
and which passes live calls to account officers while filtering out unproductive
calls such as busy signals and no answers), skiptrace (a process wherein the
Company appends additional location information to its customer records through
a combination of computerized database evaluations and manual investigative
efforts in order to maximize the number of verified customer phone numbers
available for account officer contacts) and legal (the function that coordinates
recovery efforts on accounts that have been referred to attorneys for
collection), thereby providing the resources necessary to maximize collections.
If other collection methods are unsuccessful, Creditrust has access to its
internal legal department and its nationwide network of outside attorneys to
assist in the collection of the Receivables.
Creditrust strives to maintain and enhance on an ongoing basis its position
as one of the leading purchasers, managers and liquidators of defaulted consumer
receivables through an information-driven strategy, the key elements of which
are to (i) continue the development of proprietary portfolio analysis and
information and revenue management systems; (ii) maintain maximum flexibility in
the collection process; (iii) maintain strong relationships with Originating
Institutions for the purchase of Receivables; (iv) utilize trained professionals
to act as credit counselors in the collection process; and (v) leverage its
current platform to service substantially larger Receivables volumes without
proportional cost increases. The Company believes that implementing such a
strategy will enable it not only to participate in a rapidly expanding market,
but also to lead an emerging industry which can more efficiently process and
maximize the collection of distressed consumer Receivables.
The Company recognizes that a key element of its future success is ready
access to capital resources. The Company expects to meet its capital
requirements through operating cash flows and the application of the proceeds of
this Offering, the Securitization, future similar securitizations and warehouse
financing expected to be made available following completion of the Offering.
The Company was incorporated in Maryland in 1991. The principal executive
offices of the Company are located at 7000 Security Boulevard, Baltimore,
Maryland 21244, and its telephone number is (410) 594-7000.
4
<PAGE>
RECENT DEVELOPMENTS
In June 1998, the Company completed a securitization of most of the
Receivables owned by the Company at March 31, 1998 and the Serviced Receivables
by issuing, through a special-purpose finance vehicle, $14.5 million principal
amount of 6.43% Creditrust Receivables-Backed Notes Series 1998-1 (the
"Securitization Notes"). These notes received a "AA" rating from Standard &
Poor's Corporation and are insured by a financial guaranty insurance policy. The
Company recognized a gain on sale in the amount of $6.1 million and will receive
a 20% servicing fee on future recoveries. The Company also netted cash of $5.6
million and recorded a residual investment in securitization of $4.2 million.
See "Recent Developments--Securitization."
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the
Company....................... 2,000,000 shares
Common Stock to be outstanding
after the Offering............ 8,000,000 shares(1)
Use of Proceeds................. The proceeds of the Offering will be used (i) to pay
principal plus accrued interest on the Company's $5.0
million of Senior Subordinated Notes, Series 1998 (the
"Subordinated Notes") and (ii) for working capital
(principally to acquire additional Receivables) and other
general corporate purposes. See "Use of Proceeds."
Proposed Nasdaq NMS Symbol...... "CRDT"
</TABLE>
- ------------------------
(1) Does not include 450,000 shares of Common Stock issuable upon exercise of
outstanding common stock purchase warrants (the "Warrants") issued to the
holders of the Company's Subordinated Notes and 375,000 shares of Common
Stock issuable upon the exercise of stock options granted under the
Company's stock incentive plan. See "Management--Compensation Pursuant to
Plans" and "Description of Capital Stock--Warrants."
RISK FACTORS
Investment in the Common Stock offered hereby involves a high degree of
risk. Each prospective investor should carefully consider all of the matters
described herein under "Risk Factors."
5
<PAGE>
SUMMARY FINANCIAL DATA
(dollars in thousands, except for per share data)
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED MARCH
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 31,
--------------------------------------------------------- -----------
<S> <C> <C> <C> <C> <C> <C>
1993 1994 1995 1996 1997 1997
----------- ----------- --------- --------- --------- -----------
<CAPTION>
(UNAUDITED) (UNAUDITED) (AUDITED) (AUDITED) (AUDITED) (UNAUDITED)
--------- -----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Total Revenue...................................... $ 2,182 $ 3,639 $ 4,560 $ 5,521 $ 9,826 $ 1,940
Total Expenses from Operations..................... 1,681 2,984 3,114 4,518 8,782 1,543
Net Earnings....................................... 110 265 734 474 456 174
Earnings per Common Share.......................... $ .02 $ .04 $ .12 $ .08 $ .08 $ .03
Weighted Average Number of Shares Outstanding...... 6,000,000 6,000,000 6,000,000 6,000,000 6,000,000 6,000,000
OTHER DATA:
Weighted Average Investment in Finance
Receivables(1)................................... 1,152 1,470 1,731 3,187 5,919 6,624
Collections on Finance Receivables(2).............. 2,385 3,971 4,914 6,252 12,420 2,353
EBITDA(3).......................................... 514 726 1,538 1,162 1,268 421
Collections Applied to Principal on Receivables.... 227 328 670 832 2,100 417
Cash Flows provided by
(used in):
Operating Activities............................. (83) 191 982 1,207 1,237 543
Investing Activities............................. (428) (738) (585) (4,188) 1,431 (163)
Financing Activities............................. 623 1,015 (138) 2,909 (2,374) (307)
Charged-off Balance
(at end of period)(2)............................ $ 71,252 $ 119,256 $ 175,512 $ 434,563 $1,104,647 $ 452,013
Number of Accounts................................. 27,366 55,524 84,528 213,899 580,353 221,587
Number of Employees................................ 44 44 61 125 245 161
<CAPTION>
<S> <C>
1998
-----------
(UNAUDITED)
-----------
<S> <C>
STATEMENT OF EARNINGS DATA:
Total Revenue...................................... $ 3,403
Total Expenses from Operations..................... 2,673
Net Earnings....................................... 415
Earnings per Common Share.......................... $ .07
Weighted Average Number of Shares Outstanding...... 6,000,000
OTHER DATA:
Weighted Average Investment in Finance
Receivables(1)................................... 4,831
Collections on Finance Receivables(2).............. 3,766
EBITDA(3).......................................... 823
Collections Applied to Principal on Receivables.... 407
Cash Flows provided by
(used in):
Operating Activities............................. 711
Investing Activities............................. 155
Financing Activities............................. (723)
Charged-off Balance
(at end of period)(2)............................ $1,104,647
Number of Accounts................................. 580,353
Number of Employees................................ 218
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
---------------------------
<S> <C> <C>
PRO FORMA
(UNAUDITED) AS ADJUSTED(4)
----------- --------------
BALANCE SHEET DATA:
Cash.............................................................................. $ 913 $ 25,529
Total Debt........................................................................ 1,558 --
Total Stockholder's Equity........................................................ 2,479 27,525
</TABLE>
- ------------------------
(1) Does not include the Serviced Receivables.
(2) Includes the Serviced Receivables as of December 31, 1997.
(3) EBITDA is defined as earnings before interest, taxes, depreciation and
amortization. EBITDA is presented because management believes the indicator
relied upon by the Company in the management of its business as a key
measure of the Company's ability to derive cash from its investing and
financing activities provides useful information regarding the Company's
ability to service existing debt, incur additional debt and fund the
acquisition of additional Receivables or meet other capital requirements.
For instance, an increase in EBITDA would generally indicate to the Company
that increases in income on finance Receivables and servicing fees represent
increased capacity to fund purchases of additional portfolios without
reliance on external funding sources. Conversely, a reduction in the
indicator would mean that there was less internally generated cash available
for new portfolio investments. Additionally, the manner in which the Company
computes EBITDA may not be the same way in which other companies compute
similarly described data. Therefore, this data may not be comparable to
similarly titled measures of other companies.
(4) Gives effect to the issuance of the Subordinated Notes and the Warrants in
April 1998 and the issuance of the 2,000,000 shares of Common Stock offered
hereby and the application of the net proceeds therefrom to repay
indebtedness, including the Subordinated Notes. As the result of the assumed
repayment of the Subordinated Notes and the write-off of related debt
issuance costs, the Company will recognize a non-cash extraordinary charge
for early extinguishment of indebtedness of approximately $659,000
(after-tax) upon the completion of this Offering (ignoring any amortization
of financing costs and original issue discount that will have been expensed
between the date of issuance and the date of repayment). Does not give
effect to gain on sale of $6.1 million, or $3.7 million after taxes,
recognized upon the completion of the Securitization.
6
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, THE
FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING AN
INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY. THIS DISCUSSION ALSO
IDENTIFIES IMPORTANT CAUTIONARY FACTORS THAT COULD CAUSE THE COMPANY'S ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED IN FORWARD-LOOKING STATEMENTS
OF THE COMPANY MADE BY OR ON BEHALF OF THE COMPANY. IN PARTICULAR, THE COMPANY'S
FORWARD-LOOKING STATEMENTS, INCLUDING THOSE REGARDING THE EFFECTIVE
IMPLEMENTATION OF THE COMPANY'S OPERATING STRATEGY, THE ADEQUACY OF THE
COMPANY'S CAPITAL RESOURCES AND OTHER STATEMENTS REGARDING TRENDS RELATING TO
VARIOUS REVENUE AND EXPENSE ITEMS, COULD BE AFFECTED BY A NUMBER OF RISKS AND
UNCERTAINTIES INCLUDING THOSE DESCRIBED BELOW.
COLLECTIBILITY OF RECEIVABLES
The business of the Company consists of acquiring and collecting previously
defaulted Receivables generated by consumer credit card and installment account
transactions. The Receivables generally are acquired by the Company from
Originating Institutions. Substantially all of the Receivables consists of an
account balance that has been deemed uncollectible and, consequently,
written-off by the Originating Institution. Prior to the Company acquiring the
Receivables, numerous attempts generally have been made by the Originating
Institutions to collect on the defaulted accounts, typically through in-house
collection departments, as well as third-party collection agencies. The Company
acquires the Receivables from the Originating Institutions at a significantly
discounted price and believes it can successfully obtain recoveries on the
Receivables in amounts in excess of its acquisition cost for the Receivables.
Notwithstanding this belief, actual recoveries on the Receivables may vary as
the result of a variety of factors within and beyond the Company's control.
Accordingly, there can be no assurances as to the timing or amounts to be
collected in respect of the Receivables.
RISKS ASSOCIATED WITH RAPID GROWTH
The Company recently has experienced significant expansion, which has placed
significant demands on its management, administrative, operational and financial
resources. On August 6, 1997, the Company increased its consumer accounts by
160% when it began servicing approximately 400,000 additional consumer accounts
(the "Serviced Receivables"). The Company seeks to continue such rapid growth,
which could place additional demands on its resources. Future internal growth
will depend on numerous factors, including the effective and timely initiation
and development of relationships with Originating Institutions, the availability
of additional financing to purchase additional Receivables, the ability to
securitize Receivables, the Company's ability to maintain the quality of
services it provides to its customers and to Originating Institutions and the
recruitment, motivation and retention of qualified personnel. Sustained growth
also may require the implementation of enhancements to its operational and
financial systems and will require additional management, operational and
financial resources. There can be no assurance that the Company will be able to
manage its expanding operations effectively or to maintain its historical
collection rates, or that it will be able to maintain or accelerate its growth,
and any failure to do so could have a materially adverse effect on the Company's
business, results of operations, and financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business."
LABOR AVAILABILITY
The consumer accounts receivables management industry is very labor
intensive and generally experiences a high rate of turnover in personnel. The
Company experienced a personnel turnover rate of approximately 15% for 1995,
approximately 12% for 1996 and approximately 15% for 1997. The annual personnel
turnover rate is computed by dividing the number of employees who left the
Company during a particular month by the number of employees who were employed
at the beginning of the month, averaged over 12 months. A higher turnover rate
among the Company's employees would increase the Company's recruiting and
training costs and could adversely impact the overall recovery of its
Receivables. If the
7
<PAGE>
Company were unable to recruit and retain a sufficient number of employees, it
would be forced to limit its growth or possibly curtail its operations. Growth
in the Company's business will require it to continue to recruit and train
significant numbers of qualified personnel. There can be no assurance that the
Company will be able to continue to hire, train and retain a sufficient number
of qualified employees. Activities by other companies in this or similar
industries, including the agency collection industry and the teleservices
industry, to recruit available qualified employees, and the impact of new
companies on the labor market, could have a materially adverse effect on the
Company and the Company's ability to recruit, train and retain qualified
employees and may increase hourly wages and the costs of benefits necessary to
recruit and retain sufficient numbers of qualified employees. See "Business."
RISK OF FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's quarterly operating results have fluctuated in the past and
may fluctuate in the future as a result of a variety of factors which can affect
revenues, cost of collections and other expenses. These factors include costs
relating to personnel, communications and legal collections, as well as
variations in the value of portfolios of Receivables based on the accuracy of
the Company's pricing models, pricing pressures in connection with future
acquisitions of Receivables and capital expenditures and other costs relating to
the expansion of its operations. The Company recognizes revenue based on
estimates of future collections with respect to the portfolios of Receivables it
owns, which are accounted for as static pools. See Note B of Notes to Financial
Statements. Once included in such pools, the compositions of the portfolios are
not adjusted if particular Receivables do not perform as anticipated. Although
the Company's estimates are based on extensive statistical databases covering
multiple years of operating history, there can be no assurance that the actual
recovery experience on one or more of such pools will correlate to the Company's
historical statistical experience. No assurance can be given that the Company
will not be required to record impairment provisions in amounts that materially
adversely affect results of operations. In the third quarter of 1997, the
Company made refinements in its collection models to reflect the performance of
individual portfolios which decreased net income for the year by $700,000 after
taxes from the amount which would have been computed prior to the change. To the
extent that estimated future cash flow discounted at the expected yield is less
than the recorded investment, the Company would record a provision for loss. No
assurance can be given that unanticipated future events, including further
refinements to the Company's collection models, will not result in changes in
estimates in future periods. In addition, general economic conditions and
specific economic conditions affecting the consumer finance industry may also
cause fluctuations in the Company's quarterly operating results. Many of these
factors are outside of the Company's control. In the event that one or more of
such factors cause fluctuations in the Company's quarterly operating results,
the price of the Common Stock could be materially adversely affected. The
Company's net earnings for the quarter in which this Offering is concluded will
also be adversely affected by a non-cash extraordinary charge for early
extinguishment of indebtedness.
RISKS ASSOCIATED WITH SECURITIZATION
In June 1998, the Company completed its initial securitization consisting of
most of the finance Receivables owned by the Company at March 31, 1998 and the
Serviced Receivables. Securitizations expose the Company to various risks. Under
the indenture and servicing agreement providing for the issuance of the
Securitization Notes, the Company, as servicer, could lose the right to service
the Receivables included in the Securitization for a variety of reasons
constituting servicer defaults, including defaults in servicing obligations,
breaches of representations and warranties related to the Securitization,
bankruptcy or other insolvency of the Company, and other matters affecting the
Company. The loss of the right to service the Receivables included in the
Securitization would have a material adverse effect on the Company. The
Securitization resulted in recognition of a gain on sale and the realization of
the residual investment in securitization for financial reporting purposes.
Future income will be reduced due to the elimination of income on finance
Receivables, partially offset by the receipt of servicing income, and interest
income on residual investment in securitization. In addition, in accordance with
SFAS 115 unrealized holding gains and losses, net of the related tax effect, are
not reflected in earnings but are
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recorded as a separate component of stockholders' equity until realized. A
decline in the value of an available-for-sale security below cost that is deemed
other than temporary is charged to earnings and results in the establishment of
a new cost basis for the security and, therefore, could have an adverse effect
on the Company's financial position and/or results of operations. Any downward
adjustment in the carrying amount of this or future residual interests could
also have an adverse effect on the market price of the Company's Common Stock.
The Company intends to pursue additional securitizations in the future.
Additionally, the timing of future securitizations, if any, could affect
period-to-period comparisons. There also can be no assurance that the Company
will be able to complete future securitizations at all or on terms favorable to
it.
DEPENDENCE ON MANAGEMENT AND KEY PERSONNEL
The Company's success depends to a significant extent on the performance and
continued services of senior management and certain key personnel with
experience in developing, financing and operating the Company. The Company hired
Mr. Chandler, Vice President--Recovery, Mr. Palmer, Vice President, Treasurer
and Chief Financial Officer and Mr. Moore, Vice President--Acquisitions in 1996
and Mr. Elkes, Vice President--Information Technology and Mr. Dumser, Vice
President--General Counsel in 1997. The Company does not have an employment
agreement with Joseph K. Rensin, Chairman and Chief Executive Officer of the
Company, but does maintain "key man" life insurance coverage in the amount of
$4,000,000 on Mr. Rensin. The Company has employment agreements with each of its
other executive officers. Such agreements cannot assure the continued services
of such officers. These agreements contain certain noncompetition provisions
that survive the termination of employment in certain circumstances. However,
there can be no assurance such noncompetition agreements will be enforceable.
The loss of the services of Mr. Rensin or one or more of the other executive
officers or key employees could have a material adverse impact on the Company's
financial condition and results of operations. See "Management."
AVAILABILITY OF ADDITIONAL RECEIVABLES FOR PURCHASE
The Company's success is dependent on the continued availability of
Receivables that meet its requirements. The availability of portfolios of
Receivables for future purchase at prices favorable to the Company is dependent
on a number of factors outside of the control of the Company, including the
continuation of the current growth trend in consumer installment debt. See
"Business--Industry Overview." Curtailment of that trend could result in less
credit being extended by Originating Institutions and consequently fewer
Receivables available for purchase at prices that conform to the Company's
strategy for profitable collection. The possible entry of new competitors
(including competitors that historically have focused on the acquisition of
different asset types) may adversely affect the Company's access to Receivables.
In addition, overly aggressive pricing by competitors could have the effect of
raising the cost of portfolios of Receivables above those that conform to the
Company's pricing models.
AVAILABILITY OF FINANCING TO PURCHASE RECEIVABLES
The Company's continued success will be dependent on the availability of
capital for the purchase of new Receivables. The Company has received a proposal
for a $20 million warehouse facility. While management believes it will be able
to secure this facility, the Company has not yet received a lending commitment
and there can be no assurance that financing will be available on the terms
presently contemplated by the Company. To the extent the Company is unable to
secure and maintain financing, there may be a material adverse effect on the
Company. Financing for further purchases of Receivables is dependent upon the
Company's continued success in predicting collectibility and cash flows from
current holdings. There is no guarantee that the Company's performance will be
sufficient to attract further financing. The interest rates at which future
financings are attainable also can affect the value of future Receivables
purchased and the Company's profit margins on them.
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RISKS ASSOCIATED WITH FLUCTUATION IN ECONOMIC CONDITIONS
The Company has experienced rapid growth since its inception in 1991. During
that time, the U.S. economy has been very strong and many economic factors have
been favorable. During strong economic cycles, available credit, including
consumer credit, increases, but payment delinquencies and defaults generally
decrease. During periods of economic slowdown and recession, such delinquencies
and defaults generally increase but Originating Institutions tighten lending
standards and the amount of consumer credit extended may decrease. No assurances
can be given that the Company's collection experience would not worsen in a weak
economic cycle. If the actual recovery experience with respect to the
Receivables is materially lower than that projected, the financial condition of
the Company would be materially adversely affected.
CONTROL BY PRINCIPAL STOCKHOLDER
All of the Company's Common Stock currently is owned by Joseph K. Rensin.
Following completion of the Offering, Mr. Rensin will beneficially own
approximately 75% of the outstanding Common Stock (approximately 71.3% assuming
the exercise of the Underwriters' over-allotment option in full). See "Principal
Stockholders." Accordingly, Mr. Rensin will have control over the affairs of the
Company, including the ability to elect directors and determine the outcome of
votes by the Company's stockholders on all corporate matters, including mergers,
sales of all or substantially all of the Company's assets, charter amendments
and other matters requiring stockholder approval.
DEPENDENCE ON TECHNOLOGY/RISK OF BUSINESS INTERRUPTION
The Company's success is dependent in large part on its continued investment
in sophisticated telecommunications and computer systems, including predictive
dialers, automated call distribution systems and digital switching equipment.
The Company has invested significantly in technology in an effort to remain
competitive and anticipates that it will be necessary to continue to do so in
the future. Moreover, computer and telecommunications technologies are evolving
rapidly and are characterized by short product life cycles, which requires the
Company to anticipate and stay current with technological developments. There
can be no assurance that the Company will be successful in anticipating,
managing or adopting such technological changes on a timely basis or that the
Company will have the capital resources available to invest in new technologies.
In addition, the Company's business is highly dependent on its computer and
telecommunications equipment and software systems, the temporary or permanent
loss of which, through casualty or operating malfunction, could have a
materially adverse effect on the Company's business. In the normal course of its
business, the Company must record and process significant amounts of data
quickly and accurately in order to properly bid on prospective acquisitions of
Receivables and to maintain and expand its proprietary databases. While the
Company believes that its existing information systems are sufficient to meet
its current demands, the expected substantial growth in the Company's operations
may require additional investment. Any simultaneous failure of both of the
Company's fault tolerant information systems or proprietary software and their
backup systems could cause interruptions in the Company's operation and could
have a material adverse effect on the Company. The Company's business is
dependent on service provided by various local and long distance telephone
companies. A significant increase in the cost of telephone services or any
significant interruption in telephone services could have a materially adverse
impact on the Company.
COMPETITION
The consumer finance collections industry remains highly fragmented, with
approximately 6,000 consumer and commercial agencies and the top ten agencies
controlling less than 20% of industry revenue. Creditrust experiences
significant competition in the purchase and servicing of Receivables. The
Company believes its major competitors include Commercial Financial Services,
Tulsa, Oklahoma, West Capital Corporation, San Diego, California, and
Outsourcing Solutions, Inc., St. Louis, Missouri. These companies may be larger
and may have greater capital and other resources than Creditrust. There can be
no assurance
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that the Company will be able to compete with its future or existing
competitors. See "Business-- Competition."
SUBSTANTIAL DISCRETION OF MANAGEMENT CONCERNING USE OF PROCEEDS
The Company expects to use a substantial portion of the net proceeds of this
Offering to pay principal and accrued interest on $5.0 million of Subordinated
Notes, and to purchase additional portfolios of Receivables, with the remaining
proceeds being used for working capital requirements and other general corporate
purposes. However, the Company does not have any specific commitments to
purchase any particular portfolios. Accordingly, management will have
substantial discretion in the allocation of the net proceeds of this Offering.
See "Use of Proceeds."
GOVERNMENT REGULATION
While the Company is not a credit card issuer, certain of its operations may
be affected by laws and regulations applicable to credit card issuers as well.
The relationship of a customer and a creditor is extensively regulated by
federal and state consumer protection and related laws and regulations.
Significant laws include the Fair Debt Collection Practices Act ("FDCPA"),
Federal Truth-In-Lending Act, Fair Credit Billing Act, Equal Credit Opportunity
Act, Fair Credit Reporting Act and Electronic Funds Transfer Act (and various
federal regulations which relate to these Acts), as well as applicable,
comparable statutes in the states in which customers reside or in which
Originating Institutions are located. If certain of these laws apply to the
Company, failure to comply could have a material adverse effect on the Company.
Certain laws, including the laws described above, may limit the Company's
ability to collect amounts owing with respect to Receivables, regardless of any
act or omission on the part of the Company. No assurance can be given that any
indemnities received from Originating Institutions will be adequate to protect
the Company from losses on the Receivables or liabilities to customers.
Additional consumer protection laws may be enacted that could impose
requirements on the enforcement of, and collection on, consumer credit card or
installment accounts. Any new laws or rulings that may be adopted, and existing
consumer protection laws, may adversely affect the ability to collect on the
Receivables. In addition, the failure of Creditrust to comply with such
requirements could adversely affect the Company's ability to enforce the
Receivables.
DIVIDENDS
The Company has never declared or paid dividends on its Common Stock. Even
after the Offering, the Company expects that future earnings, if any, will be
used to acquire Receivables or otherwise be retained to finance the growth and
development of the Company's business. Accordingly, the Company does not intend
to declare or pay dividends on the Common Stock for the foreseeable future.
Under the Maryland General Corporation Law (the "MGCL"), the Company is
prohibited from paying a dividend unless, after giving effect to the payment of
the dividend, (i) the Company may continue to pay its debts in the ordinary
course of business, and (ii) the Company's assets equal or exceed its
liabilities plus the preferences of any outstanding preferred equity securities
upon dissolution. Any credit facility which the Company may enter into may
contain dividend restrictions.
ABSENCE OF PRIOR PUBLIC MARKET; RELATIONSHIP OF OFFERING PRICE TO MARKET PRICE
Prior to the Offering, there has been no public market for the Common Stock.
Although the Company has applied for listing of the Common Stock on Nasdaq,
there can be no assurance that an active trading market will develop or continue
after the Offering or that the market price of the Common Stock will not decline
below the initial public offering price. The initial public offering price of
the Common Stock will be determined by negotiations among the Company, the
qualified independent underwriter and representatives of the Underwriters, and
may not be indicative of the market price for shares of Common Stock after the
Offering. Prices for the shares of Common Stock after the Offering will be
determined in the market
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and may be influenced by many factors, including the depth and liquidity of the
market for the Common Stock, investor perception of the Company, the consumer
credit industry as a whole and general economic and market conditions. See
"Underwriting."
VOLATILITY OF MARKET PRICE FOR COMMON STOCK
From time to time after the Offering, there may be significant volatility in
the market price of the Common Stock. Quarterly operating results of the Company
or of other companies viewed by investors as being in comparable industries,
changes in earnings estimated by analysts, changes in general conditions in the
economy or the financial markets or other developments affecting the Company
could cause the market price of the Common Stock to fluctuate substantially. See
"Risks Associated with Fluctuations in Quarterly Operating Results." In
addition, in recent years the stock market has experienced extreme price and
volume fluctuations. This volatility has had a significant effect on the market
prices of securities issued by many companies for reasons unrelated to their
operating performance.
CERTAIN ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's charter could make a merger, tender
offer or proxy contest involving the Company more difficult, even if such events
were perceived by stockholders as beneficial to their interests. The charter
empowers the Board of Directors to establish the preferences, conversion and
other rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption of, and issue up to,
5,000,000 shares of Preferred Stock without additional stockholder approval.
These provisions could frustrate attempts to acquire sufficient shares to
accomplish a change of control of the Company. Thus the Board could issue
additional shares and classes of stock that could adversely affect the voting or
other rights of holders of the Common Stock. Other provisions of the charter and
Amended and Restated Bylaws (i) provide that special meetings of the
stockholders may be called only by the Board of Directors or upon written demand
of the holders of not less than a majority of the votes entitled to be cast at a
special meeting and (ii) establish certain advance notice procedures for
nomination of candidates for election as directors by stockholders and/or
stockholder proposals to be considered at annual stockholder meetings. Mr.
Rensin would also have sufficient voting power to approve any amendment to the
charter or bylaws recommended by the Board of Directors without the affirmative
vote of any other stockholder.
DILUTION
The purchasers of the Common Stock offered hereby will experience immediate
and substantial dilution of $10.56 per share, the amount by which the purchase
price of the Common Stock offered hereby exceeds the net book value of the
Common Stock immediately following the Offering, assuming an initial public
offering price of $14.00 per share and after deducting estimated underwriting
discounts and expenses. In connection with the issuance of the Subordinated
Notes, the Company issued the Warrants, 396,000 of which are exercisable at an
exercise price equal to the lesser of $12.00 per share or 85% of the initial
public offering price of the Company's Common Stock. Investors will realize
further dilution as the result of exercise of the Warrants. See "Dilution." In
the event the Company issues additional Common Stock in the future, including
shares which may be issued in connection with future acquisitions or the
exercise of outstanding stock options, purchasers of Common Stock in this
Offering may experience further dilution in net book value per share of the
Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, there will be 8,000,000 shares of Common
Stock outstanding. Of these shares, the 2,000,000 (2,300,000 if the
over-allotment option is exercised in full) shares sold in the Offering will be
freely tradeable without restriction, except for any shares purchased by an
"affiliate" of the Company. The remaining 6,000,000 (5,700,000 if the
over-allotment option is exercised in full) shares of Common Stock have been
owned by Mr. Rensin for more than two years and have not been registered
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under the Securities Act of 1933, as amended (the "Securities Act"). Such shares
will be subject to the provisions of Rule 144 of the Securities Act, including
the volume limitations thereunder. Sales of substantial numbers of shares of
Common Stock after the Offering could adversely affect the market price for the
Common Stock. In addition, the Company, each of its directors and officers, its
stockholder and the holders of the Warrants to purchase 396,000 shares of Common
Stock have agreed, for a period of 180 days from the date of this Prospectus,
not to sell or otherwise dispose, directly or indirectly, of any shares of
Common Stock in the public market, without the prior written consent of Ferris,
Baker Watts, Incorporated. In addition, an affiliate of Boenning & Scattergood,
Inc. which purchased 54,000 Warrants has agreed, subject to certain exceptions,
for a period of one year commencing April 2, 1998, not to sell or otherwise
dispose, directly or indirectly, of any shares of Common Stock. The market price
of the Common Stock could be materially and adversely affected by the sale or
availability for sale of shares, which may be issued under the Company's stock
incentive plans.
The Company issued Warrants to purchase 450,000 shares of Common Stock in
connection with its issuance of the Subordinated Notes. The Company has agreed
with the holders of the Warrants to file a shelf registration statement
providing for the resale of the shares of Common Stock issuable upon exercise of
the Warrants within 60 days of the effectiveness of this Registration Statement
and to keep the Registration Statement effective until April 1, 2000.
NEED FOR QUALIFIED INDEPENDENT UNDERWRITER
Under Rule 2720 of the Rules of Conduct of the National Association of
Securities Dealers, Inc. (the "NASD"), when more than 10% of the subordinated
debt securities of the Company are held by a member of the NASD or an affiliate
of a member, the Price to Public of the shares must be no higher than that
recommended by a "qualified independent underwriter" as that term is defined in
Rule 2720. Boenning & Scattergood, Inc., one of the Representatives, is a member
of the NASD, and an affiliate of Boenning & Scattergood holds 12% of the
Company's Subordinated Notes. In accordance with Rule 2720, Ferris, Baker Watts,
Incorporated has agreed to act as qualified independent underwriter in
connection with pricing the Offering and conducting due diligence. The price to
the public of the shares, when sold to the public at the Price to Public set
forth on the cover page of this Prospectus, will be no higher than that
recommended by Ferris, Baker Watts, Incorporated. Ferris, Baker Watts,
Incorporated will receive no additional compensation for its services as
qualified independent underwriter. See "Underwriting."
FORWARD LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements. These
statements include the plans and objectives of management for future operations,
including plans and objectives relating to future growth of the number of
Receivables and availability of financing. The forward-looking statements
included herein are based on current expectations that involve numerous risks
and uncertainties. Assumptions relating to the foregoing involve judgments with
respect to, among other things, future economic, competitive and market
conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond the control of the
Company. Although the Company believes that the assumptions underlying the
forward-looking statements are reasonable, any of the assumptions could be
inaccurate and, therefore, there can be no assurance that the forward-looking
statements included in this Prospectus will prove to be accurate. In light of
the significant uncertainties inherent in the forward-looking statements
included herein, the inclusion of such information should not be regarded as a
representation by the Company or by any other person that the objectives and
plans of the Company will be achieved.
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RECENT DEVELOPMENTS--SECURITIZATION
OVERVIEW
In June 1998, the Company completed its first securitization of Receivables.
The Company intends to pursue similarly structured securitization transactions
in the future. In the Securitization, the Company transferred Receivables owned
by the Company with a charge-off balance of $412 million and a carrying value of
$4.6 million. It also purchased for $6.5 million and simultaneously transferred
Serviced Receivables with a charge-off balance of $692 million, at a transaction
price negotiated at the time that the servicing arrangement was initiated, to
Creditrust SPV2, LLC ("SPV2"), a special-purpose finance company created and
owned by the Company. SPV2 issued, through a trust created under an indenture
and servicing agreement with an independent trustee, $14.5 million of 6.43%
Creditrust Receivables-Backed Notes, Series 1998-1 (the "Securitization Notes"),
secured by a trust estate consisting, in part, of Receivables transferred by
SPV2 and a financial guaranty insurance policy. The Securitization qualified as
a sale under generally accepted accounting principles. The Securitization Notes
received a "AA" rating from Standard & Poor's Corporation.
As of June 30, 1998, the Company owned Receivables not contributed to the
Securitization with a charge-off balance of $83.4 million and a carrying value
of $3.2 million and was servicing Receivables under the Securitization with a
charge-off balance of $1.1 billion and a cost (measured at the time of the
Securitization) of $10.8 million. Accordingly, a substantial portion of the
Company's revenues will be attributable to servicing income on the securitized
Receivables pending acquisition of additional portfolios of owned Receivables.
The Securitization Notes were sold to institutional investors in a private
placement transaction. The Company received the proceeds of the sale. The
projected recovery value of the transferred Receivables exceeded the principal
balance of the Securitization Notes. The Company retains a residual interest in
SPV2 representing this interest. No payments with respect to the residual
interest may be made until payment of various fees (including trustee fees, the
servicing fees payable to the Company, backup servicer fees, and note insurer
fees and premiums), payments required to be made to a reserve account under the
indenture and servicing agreement, and payments of interest and principal on the
Securitization Notes, have been made in full. The Company acts as servicer with
respect to the Receivables included in the Securitization, and receives a
servicing fee equal to 20% of collections. As servicer, the Company continues
its collection activities with its customers as it otherwise would with owned
Receivables. Accordingly, customer relationships are not affected by the
Securitization.
FINANCIAL STATEMENT EFFECT OF SECURITIZATION
BALANCE SHEET
The proceeds from the Securitization were used by the Company to pay the
purchase price of the Serviced Receivables, to retire debt associated with the
owned Receivables, and to pay transaction costs. After such application, the
Company retained net proceeds of $5.6 million. The Company recognized gain on
the sale of the owned Receivables in the Securitization of $6.1 million (which
resulted in an increase in retained earnings of $3.7 million). The Company also
recorded a residual investment in securitization of $4.2 million. Also, the
deferred tax liability was increased by $2.4 million as a result of the
Securitization being treated as a sale for financial statement purposes and as a
financing for income tax purposes. See Note R of Notes to Financial Statements.
STATEMENT OF EARNINGS
The Securitization, and any additional securitizations that may be effected
by the Company in the future, will have a material effect on a number of the
revenue and expense categories reflected on the Company's statement of earnings.
Consequently, until such time, if any, as the Company's revenues from
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owned and securitized Receivables are substantially greater than the revenues
and gain recognized with respect to a particular securitization,
period-to-period comparisons may be affected.
The Company has not included in this Prospectus pro forma financial
statements that give effect to the Securitization. The Company does not believe
that it is possible to reflect meaningfully certain of the effects of the
Securitization in a pro forma statement of earnings prepared in accordance with
the rules of the Securities and Exchange Commission governing the preparation of
pro forma financial statements. It is not practicable for the Company to
determine factually supportable pro forma adjustments, including adjustments
relating to interest income accruals on the residual investment in
securitization, giving effect to cash collections on owned finance Receivables
and purchased Serviced Receivables for periods prior to the date of consummation
of the Securitization. Additionally, in a pro forma income statement, the
Company would be required to reduce revenues to reflect the Securitization
without reducing expenses or reflecting various other effects of the
Securitization. Accordingly, the Company believes that an investor's
understanding of the effects of the Securitization on the Company's statement of
earnings can best be aided by understanding the effects of the Securitization on
various components of revenue (including income on finance Receivables,
servicing income, and gain on sale) and interest income/expense (income on
residual investment in securitization, interest expense and income expense).
The following is a summary of the principal effects of the Securitization on
the Company's statement of earnings:
EFFECT ON INCOME ON FINANCE RECEIVABLES. The Company will experience a
significant reduction in the aggregate of income on finance Receivables and
servicing income in future periods, because the 20% servicing fee on the
securitized Receivables is significantly less than the income on finance
Receivables typically realized or the servicing income received with respect to
the Serviced Receivables. Thus, for example, the Company actually realized a
total of $9.8 million of income on finance Receivables and servicing income on
Serviced Receivables subject to the Securitization during 1997 and $2.7 million
of income on finance Receivables and servicing income on Serviced Receivables
subject to the Securitization during the first quarter of 1998. By comparison,
had the Securitization been completed on January 1, 1997 and 1998, respectively,
the Company would have received only a 20% servicing fee on all of the
securitized Receivables (both owned and serviced), equal to approximately $2.5
million for 1997 and $753,000 for the first quarter of 1998. The Company is
actively purchasing additional portfolios of finance Receivables on an ongoing
basis with cash on hand, including remaining net proceeds from the issuance of
the Subordinated Notes and from the Securitization. However, the Company cannot
predict when additional portfolios of finance Receivables purchased with
available resources, the proceeds of this Offering, or the proceeds of future
borrowings would generate revenues in an amount sufficient to offset the revenue
reduction arising from the Securitization.
EFFECT ON GAIN ON SALE. The Company realized gain on sale of $6.1 million
during the second quarter of 1998 as a result of Securitization. While the
Company expects to pursue additional securitizations, it cannot predict the
timing of such securitizations, the number of securitizations in any year or the
amount of gain on sale associated with any such securitization. Accordingly,
periods in which gain on sale is recognized may not be comparable to periods in
which gain on sale is not recognized.
EFFECT ON INCOME ON RESIDUAL. The Company recorded a residual investment in
securitization of $4.2 million in connection with the Securitization, which is
accounted for as available-for-sale debt security. The investment in
securitization is accounted for under the provisions of Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS 115") as available-for-sale debt securities and is
estimated to accrue income at the rate of 12% per annum. Once the Securitization
Notes are retired, recoveries will be applied to reduce the carrying amount of
the investment in securitization and accrued income. Accordingly, the
recognition of income on the residual created in this or future periods may
affect period-to-period comparisons. Additionally, unrealized gains and losses
reflecting changes in fair value of the residual investment, net of tax, will
not be reflected in earnings but will be recorded as a separate component of
stockholders' equity until realized.
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EFFECT ON INTEREST INCOME/EXPENSE. The Company's interest expense will
decline as a result of repayment of certain debt incurred to finance the
purchase of Receivables. This debt, in the amount of $1.0 million and bearing
interest at the rate of prime plus one percent per annum, was repaid on June 19,
1998. However, this reduction in interest expense is offset by interest on the
Company's Subordinated Notes currently bearing interest at 10% per annum, which
will be repaid with a portion of the proceeds of this Offering. The Company has
used the proceeds of the Subordinated Note offering principally for the purpose
of purchasing additional portfolios of Receivables pending completion of this
Offering. The Company will have significant cash balances after completion of
this Offering, which balances will be available to purchase additional
portfolios of Receivables. However, the Company also anticipates that it will
enter into warehouse credit arrangements and will purchase certain Receivables
under such a warehouse facility. Therefore, the level of future interest
income/expense may vary.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered hereby, at an assumed offering price of $14.00 per share, are estimated
to be $25.2 million, after deducting underwriting discounts and commissions and
estimated offering expenses. The Company expects to use a portion of the net
proceeds from the sale of the Common Stock to repay the $5.0 million of
Subordinated Notes plus accrued interest. The Subordinated Notes were issued on
April 2, 1998 in a private placement transaction, bear interest at 10% per annum
in 1998 and 15% per annum thereafter, mature on March 31, 2001, and are required
to be repaid upon the Company's initial public offering. The net proceeds from
the sale of the Subordinated Notes are being used for general working capital
purposes, including the purchase of additional portfolios of consumer
Receivables aggregating $3.2 million through June 30, 1998. In connection with
the issuance of the Subordinated Notes, the Company issued the Warrants. The
remaining net proceeds of the Offering will be used primarily to acquire
Receivables. Net proceeds may also be used for working capital requirements and
for other general corporate purposes. Pending such use, it is anticipated that
the Company will invest the net proceeds in short-term, investment grade
marketable securities.
DIVIDEND POLICY
As a privately held corporation, the Company has never declared or paid
dividends on its Common Stock. The Company expects that future earnings, if any,
will be retained to finance the growth and development of the Company's business
and, accordingly, does not intend to declare or pay dividends on the Common
Stock for the foreseeable future. The declaration, payment and amount of future
dividends, if any, will be subject to the discretion of the Company's Board of
Directors and will depend upon, among other factors, the future earnings,
results of operations, financial condition and capital requirements of the
Company. In addition, any future credit facility may restrict the Company from
paying dividends. Also, under the MGCL, the Company is prohibited from paying
any dividend unless after giving effect to the payment of the dividend (i) the
Company may continue to pay its debts in the ordinary course of business, and
(ii) the Company's assets equal or exceed its liabilities plus the preferences
of any outstanding preferred equity securities upon dissolution. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
16
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1998 on an actual, pro forma and pro forma as adjusted basis to give effect:
(i) on a pro forma basis to the issuance of the Subordinated Notes and the
Warrants and the allocation of the total issuance price of these securities to
debt and paid-in capital, respectively and (ii) as further adjusted, to the
assumed elimination of indebtedness under the Company's bank credit facility of
$1.5 million (but not the gain on sale of $6.1 million, or $3.7 million after
taxes, upon the completion of the Securitization) and, to the sale of the
2,000,000 shares of Common Stock offered hereby and the application of the net
proceeds therefrom to pay principal and interest on the Subordinated Notes
(which will result in a $659,000 non-cash extraordinary charge for early
extinguishment of indebtedness, after taxes, upon the retirement of the
Subordinated Notes). The following table should be read in conjunction with
"Recent Events--Securitization," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," the Company's financial
statements, including the notes thereto, and the other financial information
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1998
-------------------------------------
<S> <C> <C> <C>
PRO FORMA
ACTUAL PRO FORMA (1) AS ADJUSTED
--------- ------------- -----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Debt:
Notes Payable............................................................ $ 1,558 $ 0 $ 0
Subordinated Notes....................................................... 0 4,505 0
Stockholder's Equity:
Common Stock, 20,000,000 shares authorized, 6,000,000 shares issued and
outstanding, 8,000,000 shares as adjusted, par value $0.01 per share
(2).................................................................... 60 60 80
Paid-in Capital.......................................................... 53 547 25,737
Retained Earnings........................................................ 2,367 2,367 1,708
--------- ------------- -----------
Total Stockholder's Equity............................................... 2,479 2,974 27,525
--------- ------------- -----------
Total Capitalization..................................................... $ 4,037 $ 7,479 $ 27,525
--------- ------------- -----------
--------- ------------- -----------
</TABLE>
- ------------------------
(1) Reflects the issuance of the Subordinated Notes and Warrants for total
consideration of $5.0 million. This consideration was allocated to the
issuance price of the Subordinated Notes ($4.5 million) and the Warrants
($494,000) based on their respective fair values under the terms of the
Subordinated Notes. The Subordinated Notes must be repaid upon the Company's
initial public offering at $5.0 million, plus accrued interest. This will
also result in a non-cash extraordinary charge for early extinguishment of
indebtedness.
(2) Upon the closing of the Offering and assuming an initial public offering
price of $14.00 per share, there will be outstanding Warrants to purchase
396,000 shares at $11.90 per share and employee stock options or Warrants to
purchase 429,000 shares of Common Stock at the initial public offering
price.
17
<PAGE>
DILUTION
At March 31, 1998, the pro forma net tangible book value of the Company was
$3.0 million or $0.50 per share. Pro forma net tangible book value represents
the total assets less total liabilities of the Company adjusted for the issuance
of the Warrants as of March 31, 1998. Net book value dilution per share
represents the difference between the amount per share paid by purchasers of
shares of Common Stock in the Offering and the pro forma net tangible book value
per share of Common Stock immediately after completion of the Offering. After
giving effect to the issuance by the Company of the Warrants, the sale by the
Company of the 2,000,000 shares of Common Stock offered hereby at an assumed
initial offering price of $14.00 per share, the application of the proceeds
therefrom to repay indebtedness, including the Subordinated Notes, and the
recognition of an extraordinary charge for extinguishment of indebtedness, net
of taxes, of $659,000 (but not the $6.1 million of gain on sale, or $3.7 million
net of taxes, arising from the Securitization), the pro forma net tangible book
value of the Company would have been $27.5 million or $3.44 per share. This
represents an immediate increase in pro forma net tangible book value of $2.94
per share to the Company's existing stockholder and an immediate dilution in net
book value of $10.56 per share to new investors purchasing shares of Common
Stock in the Offering. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price...................... $ 14.00
Pro forma net book value prior to the Offering........... 0.50
Increase attributable to new investors................... 2.94
-----------
Pro forma net book value after the Offering.............. 3.44
-----------
Dilution in net book value to new investors................ $ 10.56
-----------
-----------
</TABLE>
The following table sets forth as of December 31, 1997, the difference
between the existing stockholder and the purchasers of shares in the Offering
with respect to the number of shares purchased from the Company, but without
giving effect to the assumed exercise of the Warrants, the total consideration
paid and the average price per share paid:
<TABLE>
<CAPTION>
SHARED PURCHASED TOTAL CONSIDERATION
------------------------- -------------------------- AVERAGE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PRICE PER SHARE
---------- ------------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Existing Stockholder.... 6,000,000 75% $ 112,724 .4% $ 0.02
New Investors........... 2,000,000 25% $ 28,000,000 99.6% $ 14.00
Total................... 8,000,000 100% $ 28,112,724 100.0%
</TABLE>
Upon the closing of the Offering and assuming an initial public offering
price of $14.00 per share, there will be outstanding Warrants to purchase
396,000 shares at $11.90 per share and employee stock options or Warrants to
purchase 429,000 shares of Common Stock at the initial public offering price. To
the extent that any of the outstanding Warrants exercisable at a price less than
the initial public offering price are exercised, there will be further dilution
to new investors. See "Shares Eligible for Future Sale."
18
<PAGE>
SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
The following table sets forth selected balance sheet, income statement and
cash flow data of the Company as of the end of and for each of the years in the
five-year period ended December 31, 1997. The selected financial data for the
years ended December 31, 1995, 1996 and 1997 have been derived from the
Company's audited financial statements included elsewhere in this Prospectus.
The selected financial data presented for the periods ended March 31, 1997 and
1998 are unaudited and are included in the financial statements contained
elsewhere in this Prospectus. The selected financial data for the years ended
December 31, 1993 and 1994 have been derived from unaudited financial statements
not included in this Prospectus. The selected financial data presented below
should be read in conjunction with the Company's financial statements and notes
thereto and "Management's Discussion and Analysis of Financial Conditions and
Results of Operations" included in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 31,
--------------------------------------------------------- ------------------------
1993 1994 1995 1996 1997 1997 1998
----------- ----------- --------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED) (AUDITED) (AUDITED) (AUDITED) (UNAUDITED) (UNAUDITED)
STATEMENT OF EARNINGS DATA:
Total Revenue............................. $ 2,182 $ 3,639 $ 4,560 $ 5,521 $ 9,826 $ 1,940 $ 3,403
Expenses from Operations:
Personnel............................... 900 1,390 1,847 2,618 5,922 938 1,712
Communications.......................... 246 361 404 573 912 144 278
Rent.................................... 123 216 240 382 853 123 303
Portfolio Repurchase Costs.............. -- -- -- 384 -- -- --
Other Expenses.......................... 412 1,016 624 562 1,095 338 380
----------- ----------- --------- --------- --------- ----------- -----------
Total Expenses from Operations............ 1,681 2,984 3,114 4,518 8,782 1,543 2,673
Earnings from Operations.................. 502 656 1,445 1,003 1,044 398 730
Other Income (Expense).................... (344) (252) (249) (213) (363) (112) (65)
Earnings Before Income Tax................ 157 404 1,196 790 682 285 665
Net Earnings.............................. 110 265 734 474 456 174 415
Earnings per Common Share................. $ .02 $ .04 $ .12 $ .08 $ .08 $ .03 $ .07
Weighted Average Shares Outstanding....... 6,000,000 6,000,000 6,000,000 6,000,000 6,000,000 6,000,000 6,000,000
OTHER DATA:
Weighted Average Investment in finance
Receivables(1).......................... $ 1,152 $ 1,470 $ 1,731 $ 3,187 $ 5,919 $ 6,624 $ 4,831
Collections on finance Receivables(2)..... $ 2,385 $ 3,971 $ 4,914 $ 6,252 $ 12,420 $ 2,353 $ 3,766
EBITDA(3)................................. $ 514 $ 726 $ 1,538 $ 1,162 $ 1,268 $ 421 $ 823
Collections Applied to Principal on
Receivables............................. $ 227 $ 328 $ 670 $ 832 $ 2,100 $ 417 $ 407
Cash Flows provided by (used in):
Operating Activities.................... (83) 191 982 1,207 1,237 543 711
Investing Activities.................... (428) (738) (585) (4,188) 1,431 (163) 155
Financing Activities.................... 623 1,015 (138) 2,909 (2,374) (307) (723)
Charged-off Balance(2).................... $ 71,252 $ 119,256 $ 175,512 $ 434,563 $1,104,647 $ 452,013 $1,104,647
Number of Accounts........................ 27,366 55,524 84,528 213,899 580,353 221,587 580,353
Number of Employees....................... 44 44 61 125 245 161 218
BALANCE SHEET DATA:
Cash...................................... $ 594 $ 289 $ 548 $ 476 $ 770 $ 549 $ 913
Total Debt................................ $ -- $ -- $ -- $ 3,793 $ 2,106 $ 3,749 $ 1,558
Stockholder's Equity...................... $ 135 $ 400 $ 1,134 $ 1,608 $ 2,064 $ 1,782 $ 2,479
</TABLE>
- ------------------------
(l) Does not include the Serviced Receivables.
(2) Includes the Serviced Receivables as of December 31, 1997.
(3) EBIDTA is defined as earnings before interest, taxes, depreciation and
amortization. EBITDA is presented because management believes the indicator
relied upon by the Company in the management of its business as a key
measure of the Company's ability to derive cash from its investing and
financing activities provides useful information regarding the Company's
ability to service existing debt, incur additional debt and fund the
acquisition of additional Receivables or meet other capital requirements.
For instance, an increase in EBITDA would generally indicate to the Company
that increases in income on finance Receivables and servicing fees represent
increased capacity to fund purchases of additional portfolios without
reliance on external funding sources. Conversely, a reduction in the
indicator would mean that there was less internally generated cash available
for new portfolio investments. Additionally, the manner in which the Company
computes EBITDA may not be the same way in which other companies compute
similarly described data. Therefore, this data may not be comparable to
similarly titled measures of other companies.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS AND OTHER PARTS OF THIS PROSPECTUS CONTAIN, IN ADDITION TO HISTORICAL
INFORMATION, FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES.
THE COMPANY'S ACTUAL RESULTS COULD DIFFER SIGNIFICANTLY FROM THE RESULTS
DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. THE FOLLOWING DISCUSSION AND
ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE AUDITED FINANCIAL STATEMENTS OF
THE COMPANY, INCLUDING THE NOTES THERETO, INCLUDED ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
The Company acquires, services and liquidates portfolios of distressed
Receivables and believes that it is one of the largest distressed consumer
receivables purchasers anywhere in the United States. From its founding in 1991,
the Company has acquired charged-off Receivable balances (measured at the amount
charged-off by the Originating Institution at the date of charge-off)
aggregating approximately $1.4 million in 1991, $22.6 million in 1992, $47.3
million in 1993, $48 million in 1994, $56.3 million in 1995, $259.1 million in
1996 and $670 million in 1997 including certain Serviced Receivables, for a
total balance of acquired or Serviced Receivables exceeding approximately $1.4
billion as of June 30, 1998. The following table illustrates this growth:
[INSERT C/R CHART 1]
20
<PAGE>
The following table illustrates the Company's collection experience for the
periods indicated:
<TABLE>
<CAPTION>
AT AND FOR THE
AT AND FOR THE YEAR ENDED DECEMBER QUARTER ENDED
31, MARCH 31,
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
------------------------------------ ------------------------
1995 1996 1997 1997 1998
---------- ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
Collections(1)................................... $ 4,814 $ 6,252 $ 12,420 $ 2,353 $ 3,766
Income on receivables............................ $ 4,560 $ 5,521 $ 7,246 $ 1,940 $ 1,503
Servicing income................................. $ -- $ -- $ 2,580 $ -- $ 1,242
Gain on sale..................................... $ -- $ -- $ -- $ -- 658
Total receivables and servicing income........... $ 4,560 $ 5,521 $ 9,826 $ 1,940 $ 3,403
Weighted average investment in finance
Receivables(2)................................. $ 1,731 $ 3,187 $ 5,842 $ 6,624 $ 4,831
Weighted average charged-off balance(1)(3)....... $ 146,669 $ 248,990 $ 689,924 $ 434,563 $ 1,104,647
Charged-off balance at end of period(1)(4)....... $ 178,512 $ 434,563 $ 1,104,647 $ 452,013 $ 1,104,647
</TABLE>
- ------------------------
(1) Includes the Serviced Receivables during the year ended December 31, 1997
and the quarter ended March 31, 1998.
(2) Does not include the Serviced Receivables and represents the average
investment balance during the period measured by the financial statement
carrying value of portfolios of Receivables owned by the Company determined
by dividing the total value for the portfolio of Receivables at the end of
each month in the period by the number of months in the period.
(3) Represents the average of the charged-off balances acquired by the Company
determined by dividing the total charged-off balance at the end of each
month in the period by the number of months in the period, without regard to
collections or Receivables settled.
(4) Represents the balance of Receivables acquired by the Company as of the end
of the period measured by balances charged-off by the Originating
Institutions, without regard to collections or Receivables settled.
The Company accounts for its investment in finance Receivables on an accrual
basis using unique and exclusive static pools. Static pools are established
using similar accounts with similar attributes, usually based on acquisition
timing and/or by seller. Once a static pool is established the Receivables in
the pool are not changed. The difference between the contractual receivable
balance of the accounts in the static pools and the cost of each static pool
(the discount), is not recorded since the Company expects to collect a
relatively small percentage of each static pool's contractual receivable
balance. Each static pool is initially recorded at cost. See Note B of Notes to
Financial Statements.
Accrual accounting for each static pool is measured as a unit for the
economic life of the static pool (similar to one loan) for recognition of income
on finance Receivables, or collections applied to principal on finance
Receivables, and for provision for loss or impairment. The effective interest
rate for each static pool is estimated based on the estimated monthly
collections over the estimated economic life of each pool, currently five years
based on the Company's collection experience. Income on finance Receivables is
accrued monthly based on each static pool's effective interest rate applied to
each static pool's monthly opening carrying value. Monthly collections received
for each static pool reduce each static pool's carrying value. To the extent
collections exceed the interest accrual, the carrying value is reduced and the
reduction is recorded as collections applied to principal. If the accrual is
greater than collections, then the carrying
21
<PAGE>
value accretes. Accretion arises as a result of collection rates being lower in
the early months of ownership than the estimated effective yield which reflects
collections for the entire economic life of the static pool. Measurement of
impairment and any provision for loss is based on each static pool. To the
extent the estimated future cash flow, discounted at the estimated yield
increases or decreases, the Company adjusts the yield accordingly. To the extent
that the carrying amount of a particular static pool exceeds its fair value, a
valuation allowance would be recognized in the amount of such an impairment. The
estimated yield for each static pool is based on estimates of future cash flows
from collections, and actual cash flows may vary from current estimates.
The Company monitors its models with a view toward refining the
predictability of both the amount and timing of collections. For the years ended
December 31, 1995 and 1996, the Company relied largely on static pool-wide past
performance characteristics. After extensive statistical analysis of static pool
performance specifics during the year ended December 31, 1997, the Company
implemented a further refinement in its collection models. The refinement
included static pool specific estimates and had the effect of reducing total
future projected cash flows on a portfolio-wide basis. The total effect on the
individual static pools of this change in estimates was to decrease net income
for the year ended December 31, 1997, by approximately $700,000 after taxes from
the amount which would have been computed prior to this change. Total cash flow
for 1997 was unaffected by the change in future estimates, with the result that
the reduction in income on finance Receivables was applied to increase the
amount of collections applied to finance Receivables. See Note C of Notes to
Financial Statements. While the Company believes that its collection models will
continue to provide accurate forecasts of future collections, changes in
collection patterns within the Company's portfolios, which may result from a
variety of factors beyond the Company's control, including changes in general
economic conditions and changes in consumer attitudes toward repayment of
defaulted obligations, may have an impact on the Company's future estimates.
The Company also receives servicing fees with respect to the Serviced
Receivables for which it applies the same collection techniques as it does for
owned portfolios of finance Receivables. In the quarter ended September 30,
1997, the Company began recognizing servicing income in connection with its
agreement to liquidate the Serviced Receivables. Under the terms of the
servicing agreement, the financial institution had agreed to accept any
third-party offer to purchase or allow the Company to securitize the Serviced
Receivables provided the proceeds to the financial institution exceeded a
minimum amount. See "Liquidity and Capital Resources." The Serviced Receivables
were included in the Securitization described below.
In the quarter ended March 31, 1998, the Company realized $658,000 in sales
income (See Note L of Notes to Financial Statements). In June 1998, the Company
completed its first securitization of finance Receivables. In the
Securitization, the Company transferred Receivables owned by the Company with a
charge-off balance of $412 million and a carrying value of $4.6 million and also
purchased for $6.5 million and simultaneously transferred Serviced Receivables
with a charge-off balance of $692 million, at a transaction price negotiated at
the time that the servicing arrangement was initiated, to SPV2. SPV2 issued
$14.5 million of 6.43% Securitization Notes, secured by the Receivables
transferred to SPV2 and a financial guaranty insurance policy. As of June 30,
1998, the Company also owned Receivables not contributed to the Securitization
with a charge-off balance of $83.4 million and a carrying value of $3.2 million.
The projected recovery value of the transferred Receivables exceeded the
principal balance of the Securitization Notes. The Company retains a residual
interest in SPV2 representing this interest. The Company acts as servicer with
respect to the Receivables included in the Securitization, and receives a
servicing fee equal to 20% of collections. As servicer, the Company continues
its collection activities with its customers as it otherwise would with owned
Receivables. Accordingly, customer relationships are not affected by the
Securitization.
22
<PAGE>
The Securitization qualified as a sale under generally accepted accounting
principles. For securitized pools of finance Receivables, future income is
reduced due to the elimination of income on finance Receivables and partially
offset by the receipt of servicing income and interest income on the residual
investment in securitization. After payment of all principal and interest on the
Securitization Notes, the Company will receive all collections, subject to an
obligation to pay the seller of the Serviced Receivables 10% of collections with
respect to the Serviced Receivables after aggregate collections on this
portfolio exceed a specified amount with respect to the Serviced Receivables.
The proceeds from the Securitization were used by the Company to pay the
purchase price of the Serviced Receivables, to retire debt associated with the
owned Receivables, and to pay transaction costs. The Company recognized gain on
the sale of the owned Receivables in the Securitization of $6.1 million and
received cash of $5.6 million. The Company also recorded a residual investment
in securitization of $4.2 million. The investment in securitization is accounted
for under the provisions of SFAS 115 as debt securities available-for-sale and
is estimated to accrue income at the rate of 12% per annum. Once the
Securitization Notes are retired, recoveries will be applied to reduce the
carrying amount of the investment in securitization and accrued income. The
Company expects to pursue similar securitization transactions in the future. See
"Recent Developments--Securitization" and Note R of Notes to Financial
Statements for additional discussion concerning the financial statement effects
of the Securitization.
In April 1998, the Company issued, for $5.0 million in total consideration,
$5.0 million principal amount of Subordinated Notes and Warrants to purchase
396,000 shares of Common Stock at an exercise price, following completion of
this Offering, of $11.90 per share (assuming an initial public offering price of
$14.00 per share) and Warrants to purchase 54,000 shares of Common Stock at an
exercise price equal to the initial public offering price. The Company recorded
the fair value of the Subordinated Notes at $4.5 million and recorded as
additional paid-in capital the remaining consideration of $494,000 attributable
to the fair value of the Warrants. Upon the conclusion of the Offering, the
Company will be required to repay the Subordinated Notes at $5.0 million plus
accrued interest to the date of repayment. This will result in the Company
recording an extraordinary charge for the early repayment of indebtedness which,
including debt issuance costs, will result in an extraordinary charge of
approximately $659,000 after-tax, ignoring any amortization of financing costs
and original issue discount that will have been expensed between the date of
issuance and the date of pay-off. Accordingly, quarter-to-quarter comparisons of
results for the quarter in which this Offering is concluded will be adversely
affected.
Income taxes have been provided for in the results of operations based on
the statutory federal and state rates on accounting income. Permanent
differences between the statutory rates and actual rates are minimal. Income on
finance Receivables for tax purposes is recognized on the cost recovery method.
Under the cost recovery method, gross collections on finance Receivables are not
taxable until the cost of the finance Receivables has been collected. Imputed
loan repayments and interest expense on payments to participants are recorded as
costs for tax purposes when due based on collection participation levels. In the
past the Company has financed certain portfolio purchases through participations
with certain investors, but does not anticipate that this will be used as a
funding source in the future. Temporary differences in recognition of income on
finance Receivables have resulted in deferred tax liabilities. Temporary
differences in recognition of payments to participants and deferred gain
generally have accumulated deferred tax assets. The Company's deferred tax
liabilities have grown as a result of the rapid increase in acquisitions of
Receivables by the Company, providing the Company with additional liquidity
offered by the deferred tax liabilities. Management expects deferred tax
liabilities to increase as long as the operating expenses on existing and
additional finance Receivables exceed collections on fully cost recovered
portfolios.
In the past, the Company would arrange for certain portfolio purchases to be
financed by related parties when financing from banks or other institutional
lenders was not readily available. In a typical financing arrangement, the
Company would acquire a portfolio of consumer Receivables for the benefit of
23
<PAGE>
the Company and other participants and under which the Company would receive an
above-market servicing fee or a participation interest and in all cases would
continue the collection process. The Company does not intend to utilize these
financing arrangements after completion of the Offering.
RESULTS OF OPERATIONS
The following table sets forth certain statement of earnings and
supplemental cash flow data on a historical basis, each a percentage of
revenues:
<TABLE>
<CAPTION>
YEAR ENDED QUARTER ENDED
DECEMBER 31, MARCH 31,
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenue
Income on finance Receivables........................................ 100.0% 100.0% 73.7% 100.0% 44.2%
Servicing fees....................................................... -- -- 26.3 -- 36.5
Gain on sale......................................................... -- -- -- -- 19.3
--------- --------- --------- --------- ---------
100.0 100.0 100.0 100.0 100.0
Expenses
Personnel............................................................ 40.5 47.4 60.3 48.3 50.3
Contingency legal and court costs.................................... 8.2 3.8 3.3 5.2 3.1
Communications....................................................... 8.9 10.4 9.3 7.4 8.2
Rent and other occupancy............................................. 5.3 6.9 8.7 6.3 8.9
Professional fees.................................................... 2.6 2.8 5.1 5.4 5.6
General and administrative........................................... 2.9 3.5 2.8 6.8 2.5
Portfolio repurchase costs........................................... -- 7.0 -- -- --
--------- --------- --------- --------- ---------
68.3 81.8 89.4 79.5 78.5
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Earnings from Operations............................................... 31.7 18.2 10.6 20.5 21.5
Other Income (Expense)
Interest and other................................................... 0.5 1.3 0.2 0.0 0.3
Interest expense..................................................... (5.9) (5.2) (3.8) (5.8) (2.2)
--------- --------- --------- --------- ---------
Earnings before income taxes........................................... 26.2 14.3 6.9 14.7 19.5
Provision for income taxes............................................. 10.1 5.7 2.3 5.7 7.3
--------- --------- --------- --------- ---------
Net Earnings........................................................... 16.1% 8.6% 4.6% 9.0% 12.2%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
EBITDA................................................................. 33.7% 21.0% 12.9% 21.7% 24.2%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Collections applied to principal on receivables........................ 14.7 15.1 21.5 21.5 12.0
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
QUARTER ENDED MARCH 31, 1998 COMPARED TO QUARTER ENDED MARCH 31, 1997
REVENUES. Total revenues for the quarter ended March 31, 1998 were $3.4
million compared to total revenues of $1.9 million for the quarter ended March
31, 1997, an increase of 75.4%. This increase in revenues was principally the
result of the receipt of $1.2 million in servicing income in the quarter ended
March 31, 1998 and a $658,000 gain on sale; there was no servicing income or
gain on sale in the first quarter of 1997. Offsetting these increases, income on
finance Receivables declined $437,000 in the quarter ended March 31, 1998
compared to the quarter ended March 31, 1997 as a result of the higher
investment level of Receivables owned in 1997 over 1998. The Company made
greater levels of portfolio acquisitions
24
<PAGE>
in late 1996 and early 1997 than it did in late 1997 and early 1998, when the
Company was pursuing alternative funding sources to bank financing. As a result,
the weighted average investment in Receivables declined to $4.8 million in the
first quarter of 1998 from $6.6 million in the first quarter of 1997.
Collections increased $1.4 million or 60.0%. The weighted average charged-off
balances owned or serviced by the Company increased from $435 million at March
31, 1997 to $1.105 billion at March 31, 1998, an increase of 144.4%.
Revenues in the quarter ended March 31, 1998 were favorably affected by a
$658,000 gain on sale resulting from the resale of a portfolio repurchased under
a settlement agreement (see Note L of Notes to the Financial Statements).
Previously deferred income of $895,000 was recognized against a $237,000 cost of
the resale. See "Financial Condition--Deferred Income."
TOTAL EXPENSES FROM OPERATIONS. Total expenses from operations increased by
$1.1 million to $2.7 million in the quarter ended March 31, 1998 from $1.5
million in the quarter ended March 31, 1997. Total expenses from operations as a
percent of revenue were 79.5% and 78.5% in 1997 and 1998, respectively.
Operating expenses for the quarter ended March 31, 1998 increased over the
quarter ended March 31, 1997 by 73.2% due to (a) a 82.6% increase in personnel
costs as a result of growing total staff from 161 to 218 as of March 31, 1997
and 1998, respectively; (b) a 146.3% increase in rent and occupancy due to the
start up of the approximately 36,000 square foot operations center in March 1997
compared to the full quarter of occupancy for the quarter ended March 31, 1998;
and (c) increases in communications and professional fees as a result of usage
increases in long distance, credit reporting, legal and accounting services.
Expenses increased in the quarter ended March 31, 1998 primarily as a result
of costs associated with recovery efforts on the Serviced Receivables, and in
anticipation of additional acquisitions in the 1998 fiscal year. Management
believes that many of the expense categories discussed above can support the
servicing and the liquidation of substantially larger volumes of Receivables
without proportional expense increases.
Personnel expenses were $938,000 or 48.3% of revenue in the quarter ended
March 31, 1997 and $1.7 million or 50.3% of revenue for the quarter ended March
31, 1998. Major categories of personnel expense increases included: (a)
additional compensation costs for development, installation and training
associated with the expanded information technology systems; (b) a significant
investment in senior management infrastructure, including senior management
staff in information technology and legal; and (c) an increase in the number of
account officers to service a larger volume of Receivables.
Rent and other occupancy costs were $123,000 or 6.3% of revenue and $303,000
or 8.9% of revenue in the quarters ended March 31, 1997 and 1998, respectively.
This increase is attributable to the addition of approximately 36,000 square
feet of space for the new operations center started up in March 1997 and
depreciation expense increases due to equipment and furniture additions of
approximately $1 million for headquarters and the new operations center opened
after the first quarter of 1997.
Professional fees were $104,000 or 5.4% of revenue and $192,000 or 5.6% of
revenue in the quarters ended March 31, 1997 and 1998, respectively. The
increases were attributable to increased annual audit fee and various legal
expenses.
EARNINGS FROM OPERATIONS. Earnings from operations were $398,000 or 20.5%
of revenues in the quarter ended March 31, 1997 and $730,000 or 21.5% of
revenues in the quarter ended March 31, 1998. This increase resulted from
several factors, particularly the positive effect on revenues from servicing
income and gain on sale, which largely offset the substantial growth in
corporate infrastructure to support a substantially larger base of operations.
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OTHER INCOME (EXPENSE). Interest expense decreased from $112,000 in the
quarter ended March 31, 1997 to $76,000 in the quarter ended March 31, 1998.
Interest attributable to amounts due to participants decreased from $7,000 in
the quarter ended March 31, 1997 to $4,000 in the quarter ended March 31, 1998
as a result of a decrease in the average annual amount outstanding due to
participants from $96,000 in the quarter ended March 31, 1997 to $34,000 in the
quarter ended March 31, 1998. The interest expense on the Company's bank credit
facility decreased from $87,000 in the quarter ended March 31, 1997 to $42,000
in the quarter ended March 31, 1998 as a result of the outstanding balance
declining from a weighted average of $3.8 million to $1.8 million for the
quarters ended March 31, 1997 and 1998, respectively.
EARNINGS BEFORE INCOME TAXES. As the result of the foregoing, earnings
before income taxes were $285,000 in the quarter ended March 31, 1997 and
$665,000 in the quarter ended March 31, 1998.
PROVISION FOR INCOME TAXES. Income taxes for the quarters ended March 31,
1997 and 1998 were at effective tax rates of 39.0% and 37.6%, respectively. The
effective tax rate fluctuates as a result of changes in pre-tax income and
nondeductible expenses. Deferred tax liabilities increased from $1,094,000 at
December 31, 1997 to $1,344,000 at March 31, 1998, principally due to the
reversal of a deferred tax benefit of $345,000 since the deferred gain on sale
was previously taxed.
NET EARNINGS. Net earnings for the quarter ended March 31, 1997 were
$174,000 versus $415,000 for the quarter ended March 31, 1998. The 138.5%
increase was attributable principally to higher revenues in the quarter ended
March 31, 1998 over the quarter ended March 31, 1997 of $1.5 million offset by
higher costs of $1.1 million and further decreased by a $139,000 increase in tax
expenses.
EBITDA. EBITDA increased $402,000 or 95.6% from $421,000 to $823,000 at
March 31, 1997 to March 31, 1998, respectively. EBITDA increased more than net
income due to a decline in the growth rate of interest expense, taxes and
depreciation relative to total revenues. EBITDA as a percentage increased 2.5%
from 21.7% to 24.2%.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
REVENUES. Total revenues for the year ended December 31, 1997 were $9.8
million compared to total revenues of $5.5 million for the year ended December
31, 1996, an increase of 78.0%. This increase in revenues was the result of an
increase in the weighted average investment in Receivables from $3.2 million in
1996 to $5.9 million in 1997, as well as the receipt of $2.6 million in
servicing income in 1997; there was no servicing income prior to 1997. The 31.2%
increase in income on finance Receivables resulted from the increase in the
amount of collections on higher levels of Receivables owned or serviced by the
Company in 1997. Offsetting the increase was a decrease of approximately $1.1
million ($700,000 net of deferred tax benefit) in income on finance Receivables
as a result of the change in estimate of future collections described above
under "Overview." Collections increased $6.2 million or 98.7%. The weighted
average charged-off balances owned or serviced by the Company increased from
$249.0 million at the end of 1996 to $689.9 million at the end of 1997, an
increase of 177.1%.
TOTAL EXPENSES FROM OPERATIONS. Total expenses from operations increased by
$4.3 million to $8.8 million in the year ended December 31, 1997 from $4.5
million in the year ended December 31, 1996. Total expenses from operations as a
percent of revenue were 81.8% and 89.4% in 1996 and 1997, respectively.
Operating expenses increased over 1996 by 94.4% due to (a) a 126.2% increase in
personnel costs as a result of growing total staff from 125 to 245 as of
December 31, 1996 and 1997, respectively; (b) a 123.4% increase in rent and
occupancy due to the relocation of the headquarters and operations groups into
larger space and the start up of the approximately 36,000 square foot operations
center in March 1997; (c) increases in communications, other expenses and
professional fees as a result of usage increases in long distance, credit
reporting, facility, legal and accounting services; and (d) offset by the
absence of portfolio repurchase costs in 1997.
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Expenses increased in 1997 primarily as a result of costs associated with
recovery on increased acquisitions of Receivables, including the Serviced
Receivables, and in anticipation of additional acquisitions in 1998. Management
believes that many of the expense categories discussed above can support the
servicing and the liquidation of substantially larger volumes of Receivables
without proportional expense increases.
Personnel expenses were $2.6 million or 47.4% of revenue in 1996 and $5.9
million or 60.3% of revenue for the year ended December 31, 1997. Major
categories of personnel expense increases included: (a) additional compensation
costs for development, installation and training associated with the expanded
information technology systems; and (b) a significant investment in senior
management infrastructure, including senior management staff in financing,
acquisitions, information technology, legal, recovery and skiptrace; and (c) an
increase in the number of account officers to service larger volumes of
Receivables.
Rent and other occupancy costs were $382,000 or 6.9% of revenue and $853,000
or 8.7% of revenue in 1996 and 1997, respectively. This increase is attributable
to the leasing of additional office space for the headquarters for a full year
in 1997 as compared to eight months in 1996, the addition of 36,000 square feet
of space for the new operations center started up in the first half of 1997 and
depreciation expense increases due to equipment and furniture additions of
approximately $1 million for headquarters and the new operations center.
Professional fees were $156,000 or 2.8% of revenue and $504,000 or 5.1% of
revenue in 1996 and 1997, respectively. Included in professional fees in 1997
were $279,000 in fees related to the Company's initial efforts to undertake an
initial public offering and a securitization program, both of which efforts had
been deferred at December 31, 1997; additional fees related to these efforts
remain capitalized on the Company's balance sheet. See "Financial Condition."
EARNINGS FROM OPERATIONS. As the result of these factors, and particularly
the substantial growth in corporate infrastructure to support a substantially
larger base of operations, earnings from operations were $1.0 million or 18.2%
of revenues in 1996 and $1.0 million or 10.6% of revenues in 1997.
OTHER INCOME (EXPENSE). Interest expense increased from $288,000 in 1996 to
$377,000 in 1997. Interest attributable to amounts due to participants decreased
from $204,000 in 1996 to $21,000 in 1997, as a result of a decrease in the
average annual amount outstanding due to participants from $516,000 in 1996 to
$68,000 in 1997. The interest expense on the Company's bank credit facility
increased from $60,000 in 1996 to $296,000 in 1997 as a result of the
establishment of the bank credit facility on September 23, 1996, to provide
advances of up to $4.0 million for the acquisition of Receivables and the
increased volume of Receivables balances financed with this facility. Interest
expense further increased due to two additional equipment leases completed in
1997.
EARNINGS BEFORE INCOME TAXES. As the result of the foregoing, earnings
before income taxes were $790,000 in the year ended December 31, 1996 and
$682,000 in the year ended December 31, 1997.
PROVISION FOR INCOME TAXES. Income taxes for the calendar years ended
December 31, 1996 and 1997 were at effective tax rates of 39.9% and 33.0%,
respectively. The effective tax rate fluctuates as a result of changes in
pre-tax income and nondeductible expenses. Deferred tax liabilities increased
from $623,000 at December 31, 1996 to $1,094,000 at December 31, 1997,
principally due to growth in timing differences on finance Receivables as
significantly most of the carrying value in finance Receivables has been written
off for tax purposes. The increase was partially offset by a deferred tax
benefit incurred on an increase of $195,000 in lease incentives attributable to
the free rent period on the operations center.
NET EARNINGS. Net earnings for the year ended December 31, 1996 were
$474,000 versus $456,000 for the year ended December 31, 1997. The 3.7% decrease
was attributable principally to higher revenues in
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1997 over 1996 of $4.25 million offset by higher costs of $4.35 million and
further increased by a $90,000 decrease in tax expenses.
EBITDA. EBITDA increased $106,000 or 9.1% from $1.2 million to $1.3 million
from December 31, 1996 to 1997, respectively. EBITDA increased more than net
income due to a decline in the growth rate of interest expense, taxes and
depreciation relative to total revenues. However, EBITDA as a percentage of
revenues decreased 8.1% from 21.0% to 12.9%.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
REVENUES. Total revenues for the year ended December 31, 1996 were $5.5
million compared to $4.6 million for the year ended December 31, 1995, an
increase of 21.1%. This increase in revenues was the result of an increase in
the weighted average investment in Receivables to $3.2 million in 1996 from $1.7
million in 1995 and the effect of a full year's recoveries on Receivables
acquired in 1995. The weighted average charged-off balances acquired by the
Company increased from $146.7 million in 1995 to $249.0 million in 1996, or
69.7%.
TOTAL EXPENSES FROM OPERATIONS. Total expenses from operations increased by
$1.4 million to $4.5 million in the year ended December 31, 1996 from $3.1
million in the year ended December 31, 1995. Total expenses from operations as a
percent of revenue in 1995 and 1996 were 68.3% and 81.8%, respectively.
Operating expenses increased over 1995 by 45.1% due to (a) a 41.8% increase in
personnel costs as a result of growing total staff from 61 to 125 as of December
31, 1995 and 1996, respectively; (b) a 59.4% increase in rent and occupancy due
to the relocation of the headquarters and operations groups; (c) increases of
communications, professional fees, and other expenses as a result of usage
increases in long distance, first time auditing, credit reporting and facility
growth; and (d) portfolio repurchase costs as the result of the buyout of
certain participants in 1996.
Personnel expenses were $1.8 million or 40.5% of revenues and $2.6 million
or 47.4% of revenues for the years ended December 31, 1995 and 1996,
respectively. These increases related primarily to increases in account
officers, information technology personnel and senior management staff, as
described above in the comparison of 1997 versus 1996.
Communications expenses were $404,000 or 8.9% of revenue in 1995 and
$573,000 or 10.4% of revenue in 1996. The increase in communications expenses is
attributable primarily to increased long-distance telephone and credit report
usage on the higher volume of finance Receivables owned and management
information services.
Rent and other occupancy costs were 5.3% of revenue during 1995 and 6.9% of
revenue for 1996. This increase is attributable to the leasing of additional
office space, the relocation of the Company's headquarters in 1996 and increased
depreciation and maintenance charges as a result of the Company's purchase of
additional workstations during 1996 to support its increased recovery and
skiptrace personnel.
Among other cost variances, contingency legal collection costs declined as a
result of lower costs associated with a shift in emphasis from the use of
outside lawyers to the use of in-house personnel. In the third quarter of 1996,
the Company repurchased certain participants' interests in certain investments
in Receivables for approximately $550,000. The Company recorded a charge of
$384,000 in connection with this repurchase. The balance of the payment was
imputed among interest and principal payments on the participation accounted for
as a loan.
EARNINGS FROM OPERATIONS. As the result of these factors, especially the
beginning of the growth of corporate staff and the new premises, all with the
goal to support a substantially larger base of operations, earnings from
operations were $1.0 million or 18.2% of revenue in 1996 and $1.4 million or
31.7% of revenues in 1995.
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Interest expense increased from $270,000 in 1995 to $288,000 in 1996.
Interest attributable to amounts due to participants decreased as a result of a
decrease in the average annual amount outstanding due to participants. The
Company incurred interest on the Company's bank credit facility in 1996 as a
result of the establishment of the facility on September 23, 1997.
EARNINGS BEFORE INCOME TAXES. As the result of the foregoing, earnings from
operations and the interest costs discussed, earnings before income taxes were
$790,000 in the year ended December 31, 1996 and $1.2 million in the year ended
December 31, 1995.
PROVISION FOR INCOME TAXES. Income taxes for the calendar years ended
December 31, 1995 and 1996 were at effective tax rates of 38.7% and 39.9%,
respectively. The effective tax rate fluctuates as a result of changes in
pre-tax income and nondeductible expenses. Deferred tax liabilities increased
from $374,000 at December 31, 1995 to $623,000 at December 31, 1996.
NET EARNINGS. Net earnings for the years ended December 31, 1995 and 1996
were $734,000 and $474,000, respectively. The decrease was attributable
principally to portfolio repurchase costs charged-off in 1996 of $384,000 and
deferred gain of $895,000 in 1996. In connection with the Company's intent to
reacquire participations, the Company recorded an expense of $384,000 relating
to such repurchases. In addition, in 1996, the Company deferred income of
$895,000 in connection with the settlement of litigation arising from the sale
of two portfolios of receivables acquired in 1996. For accounting purposes, the
Company expects to offset the cost of repurchasing receivables by the deferred
gain, which was recognized in the first quarter of 1998. See "Financial
Condition and Liquidity--Deferred Income."
EBITDA. EBITDA decreased $300,000 or 24.5% from $1.5 million in 1995 to
$1.2 million in 1996, consistent with the change in net income. Interest, taxes
and depreciation decreased by $117,000; however, this was offset by an increase
in portfolio repurchase costs and other expenses.
FINANCIAL CONDITION
CASH. Cash increased 18.6% from $770,000 as of December 31, 1997 to
$913,000 as of March 31, 1998, primarily as a result of an increase in cash flow
provided by operating activities and by principal collections on finance
Receivables offset by net cash used in financing activities. See "Recent
Developments--Securitization."
FINANCE RECEIVABLES. Finance Receivables decreased 8.1% to $4.6 million, as
of March 31, 1998 from $5.0 million as of December 31, 1997 due to $407,000 of
collections applied to principal. No finance Receivables were purchased in the
quarter ended March 31, 1998. As of June 30, 1998, the Company had purchased
$3.2 million of finance Receivables with a portion of the net proceeds of the
issuance of the Subordinated Notes. In addition, in June 1998, the Company
completed the Securitization. See "Recent Developments--Securitization" and Note
R of Notes to Financial Statements.
PROPERTY AND EQUIPMENT. Property and equipment, net, increased an estimated
3.1% to $1.5 million as of March 31, 1998 from $1.4 million as of December 31,
1997 due to $126,000 in purchases (principally through capital leases) of
computer equipment, furniture and fixtures and leasehold improvements related to
facility expansion net of $82,000 of depreciation. Technology infrastructure
costs in 1997 were approximately $647,000 and were principally related to
hardware purchased to outfit the Company's operations center which opened in
mid-1997.
DEFERRED COSTS. Deferred costs were $661,000 as of March 31, 1998 and
$535,000 as of December 31, 1997. Deferred costs consist of $352,000 in
capitalized securitization development costs, $217,000 in capitalized initial
public offering development costs and $93,000 in subordinated debt issuance
costs. All capitalized securitization costs were expensed in connection with the
completion of the Securitization. Initial public offering costs are principally
legal and accounting fees incurred in 1997 that management believes have a
future benefit to the Company in its efforts to raise additional equity capital
in this
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Offering. In the event that this Offering is abandoned or delayed significantly,
the deferred costs categories would be charged to earnings in the period in
which such abandonment or delay occurred. Management expects to incur additional
costs in the initial public offering, which costs could be significant. The
Company also capitalized $93,000 in the first quarter of 1998 and will
capitalize in the second quarter of 1998 approximately $540,000 total in debt
issuance costs related to the issuance of the Subordinated Notes; the Company
will be required to write off these costs at the time of the consummation of the
initial public offering and the mandatory repayment of the Subordinated Notes.
The Company estimates that additional legal and accounting costs plus other
distribution expenses other than Underwriters' discounts and commissions and the
Underwriters' non-accountable expense allowance will approximate $350,000 in the
event an Offering closes by the end of July 1998.
NOTES PAYABLE AND CAPITALIZED LEASE OBLIGATIONS. Notes payable decreased
from $2.1 million as of December 31, 1997 to $1.6 million as of March 31, 1998.
Capitalized lease obligations increased from $972,000 to $1,021,000 for the same
period. The decrease on the notes payable was attributable to net repayments on
the Company's bank credit facility of $548,000. Interest expense associated with
the notes was $42,000 as of March 31, 1998. These notes were repaid in June 1998
at the time of the Securitization, and no further borrowings are available under
this bank credit facility. Following the Offering, the Company expects to obtain
a $20 million warehouse facility for which it has received proposals but no
binding commitments. The Company's annual debt service requirement as of March
31, 1998 under its bank credit facility was $1.6 million in principal and
interest expense. These amounts were repaid in June 1998. Debt service on the
Subordinated Notes is $587,000 of interest through March 1999. See "Liquidity
and Capital Resources."
DEFERRED INCOME. As of December 31, 1996 and 1997, the Company had deferred
income of $895,000. As of March 31, 1998, the deferred income was recognized.
Historically, the Company purchased Receivables from time to time with
commitments from a third party to purchase a portion of the newly acquired
Receivables. The Company entered into three such transactions during 1996
resulting in gains totaling $996,000. In 1997, a complaint was filed against the
Company by one such purchaser. In June 1997, the Company settled, resulting in a
dismissal of the complaint. Under the terms of the settlement, the Company
agreed to repurchase the Receivables for approximately $1.3 million, as adjusted
for collections until consummation of the repurchase, resulting in deferred
income of $895,000. The repurchase occurred in February 1998 for approximately
$1.0 million. The portfolio was resold in February 1998 to a financial
institution for $800,000. The Company recognized a gain on sale of approximately
$658,000 in the first quarter of 1998, approximately $404,000 after tax.
DEFERRED TAX LIABILITY. Deferred tax liability at March 31, 1998 is $1.3
million compared to $1.1 million as of December 31, 1997. This increase of
$200,000 was primarily attributable to a decrease in deferred tax benefit on
previously deferred gain on sale reported in the first quarter of 1998 for book
purposes.
TOTAL STOCKHOLDER'S EQUITY. Total stockholder's equity increased 20.1% to
$2.5 million at March 31, 1998 from $2.1 million at December 31, 1997 as a
result of net income of $415,000 during the quarter ended March 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company has derived substantially all of its cash flow from collections
on finance Receivables and servicing income. In addition, the Company receives
cash upon the sale of Receivables in connection with securitizations. In the
past, the primary sources of funds to acquire Receivables were cash flow, the
sale of participations to third parties, and borrowings under a bank credit
facility. In September 1996, the Company entered into a credit facility with a
commercial bank providing up to $4.0 million in advances to finance the
acquisition of finance Receivables. In 1997, the Company was notified that the
bank providing the Company's bank credit facility was being acquired. At the
time of the Securitization, the Company's
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existing bank debt was repaid and no further borrowings are permitted under that
facility. At December 31, 1997, and March 31, 1998, there was no availability
under the Company's bank credit facility. The Company is in current discussions
with several financial institutions for a new credit facility of approximately
$15 to $20 million; however, as of the date hereof the Company has received no
commitments.
In April 1998, the Company issued $5.0 million of the Subordinated Notes in
a private placement transaction. These notes are required to be repaid upon
consummation of this Offering. In connection with the private placement, the
Company issued Warrants to purchase 396,000 shares of Common Stock exercisable
at the lower of $12.00 per share or 85% of the initial public offering price and
Warrants to purchase 54,000 shares of Common Stock exercisable at the initial
public offering price.
On June 19, 1998, the Company completed a securitization of most of the
Receivables owned as of March 31, 1998 and the Serviced Receivables. Gross
proceeds of the Securitization were $14.5 million. After Securitization expenses
and the purchase of the Serviced Receivables, the Company retired its Notes
Payable to its existing senior lender of $1 million resulting in net cash
proceeds available for working capital (including Receivables purchases) of $5.6
million.
As of March 31, 1998, the Company had cash of $913,000. Capital expenditures
from operations were $75,000, $332,000 and $123,000 for the years ended December
31, 1995, 1996 and 1997, respectively and $14,000 for the quarter ended March
31, 1998. Capital additions made pursuant to capital leases were $64,000 in
1995, $0 in 1996, $1.1 million in 1997 and $112,000 in the first quarter of
1998. Receivables purchases were $1.2 million, $5.6 million, $557,000 and none
for the years ended December 31, 1995, 1996, and 1997, and for the quarter ended
March 31, 1998, respectively.
As an additional means of increasing the amount of Receivables under
management, in August 1997, the Company entered into an exclusive servicing
agreement with a financial institution pursuant to which the Company serviced
approximately 400,000 additional accounts representing approximately $737
million of charged-off balances of Serviced Receivables. The Serviced
Receivables were included in the Securitization.
In April 1997, the Company acquired new computer equipment and furniture in
connection with the opening of its second operations facility, which can handle
up to an additional 640 account officers and a duplicate, concurrent back-up
computer center. In order to finance its capital requirements, substantially all
of the equipment and furniture was leased from a commercial bank leasing
division for approximately $836,000. The Company invested an additional $277,000
in the third quarter of 1997, primarily for additional computers, telephones and
predictive dialers. The Company's plans include further growth in operations
centers and may include the addition of a call center and/or consolidation of
existing recovery groups into larger facilities. In January 1998, the Company
entered into two additional equipment leases aggregating approximately $112,000.
The debt service requirements associated with borrowings under any new
credit facility would significantly increase liquidity requirements. The Company
anticipates that its operating cash flow and proceeds from any capital event
will be sufficient to meet its anticipated future operating expenses and to
service its debt requirements as they become due. In order to continue its
growth, the Company will have to make future purchases of Receivables that may
require significant additional investment in excess of the capital raised in
this Offering. The Company anticipates financing such purchases with a portion
of the proceeds of any capital event and excess cash flows, if any, as well as
additional borrowings under a $20 million warehouse facility for which the
Company has received financing proposals but no definitive commitments. It is
expected that such a facility would enable the Company to purchase additional
portfolios of Receivables to be held under the warehouse subject to a
securitization or other permanent financing within 12 months. To date, no
commitment for a new credit facility has been extended. In addition, the Company
expects to secure additional funding through additional securitizations similar
to
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the Securitization. See "Prospectus Summary--Recent Developments" and "Recent
Developments-- Securitization."
YEAR 2000
The Year 2000 issue arises out of potential problems with computer systems
or any equipment with computer chips that use dates where the date has been
stored as just two digits (e.g. 98 for 1998). On January 1, 2000, any clock or
date recording mechanism, including date sensitive software, which uses only two
digits to represent the year, may recognize a date using 00 as the year 1900
rather than the year 2000. This could result in a system failure or
miscalculations and cause a disruption of operations, including, among other
things, a temporary inability to process transactions, send letters and
statements or engage in similar activities.
The Company believes it has replaced or modified all of its material
computer systems and business applications software so that its computer systems
would properly utilize dates beyond December 31, 1999 and does not believe that
any further material expenditures will be necessary to make these systems Year
2000 compliant. Most of the Company's major customers are the largest
Originating Institutions in the country, which the Company expects will become
Year 2000 compliant due to the nature of their businesses and the financial
strength of these businesses. Additionally, the Company does not generally
communicate on-line with Originating Institutions on a continuing basis, but
rather receives discrete date files for analysis and to support recovery
activities. The Company has to date been able to convert data received from
Originating Institutions and other third parties to be Year 2000 compliant and
expects that it will continue to be able to do so in the future.
INFLATION
The Company believes that inflation has not had a material impact on its
results of operations for the three years ended December 31, 1997 and the
quarter ended March 31, 1998.
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BUSINESS
GENERAL
Creditrust is in the business of acquiring, managing and collecting accounts
of delinquent consumer Receivables. Acquired Receivables are composed of
obligations of customers located throughout the United States. The Receivables
acquired by the Company primarily consist of individual
VISA-Registered Trademark-, MasterCard-Registered Trademark- and private label
credit card accounts and consumer loan accounts issued by Originating
Institutions, such as major banks and merchants. Most of these Receivables have
been charged-off by the Originating Institution. Due to its ability to acquire
large portfolios of Receivables, Creditrust provides Originating Institutions
with an opportunity to recoup a portion of amounts that already have been
charged-off. To date, the Company has acquired control over or purchased in
excess of $1.4 billion in Receivables, as measured by the balance charged-off by
the Originating Institutions. Since its inception, the Company has collected in
excess of $35 million on Receivables.
The Company believes it acquires, manages and liquidates Receivables more
efficiently than its competitors, Originating Institutions and collection
agencies. Substantially all of these Receivables have been deemed uncollectible
by the Originating Institutions. In many cases, the Receivables represent
obligations of individuals ("customers") who have experienced some life-altering
event, such as divorce, career displacement or major medical illness in the past
several years and currently are recovering financially from their setback.
Through the use of proprietary software systems, state-of-the-art computing and
telecommunications technology and procedures, the Company has a history of
recovering amounts that are multiples of the purchase price paid for the
Receivables. Unlike Originating Institutions and third-party collection
agencies, the Company has flexibility in structuring repayment plans that
accommodate the needs of its customers. For example:
- Creditrust is able to offer a significant discount on the overall
obligations because the Receivables have been acquired at a significant
discount from face value;
- Creditrust is able to tailor repayment plans that provide for the payment
of the obligation as a component of the customer's monthly budget;
- Creditrust is not affected by many of the constraints that influence
account resolution decisions of banks and savings and loan institutions;
and
- Creditrust is not bound by the limited time periods to resolve Receivables
faced by third-party collection agencies nor is it subject to compensation
structures that favor one repayment option over another.
Creditrust applies its proprietary software systems, procedures and
state-of-the-art computing and telecommunications technology to all stages of
its business. Creditrust seeks to maximize its expected yield through the
application of its proprietary customer scoring models to portfolios of
Receivables for which it bids. To perform this evaluation, the Company employs
its extensive historical database and proprietary Portfolio Analysis Tool, PAT.
The Company manages a large number of consumer accounts through Mozart-TM-, its
proprietary revenue and work flow management system. Creditrust assimilates
information on each Receivable by use of internally developed proprietary and
commercially available databases, with the goal of increasing the probability of
contacting customers and ultimately collecting on the Receivable. The Company
offers a full complement of support services to its associates, including
ongoing training, quality improvement, computer automated account management and
predictive dialing capacity, skiptrace and legal, thereby providing the
resources necessary to maximize collections. If other collection methods are
unsuccessful, Creditrust has access to its internal legal department and its
nationwide network of outside attorneys to assist in the collection of the
Receivable.
With the growth in consumer debt, and consequent increased rate of default
of consumer credit obligations, the Company accelerated its growth plans in 1996
by expanding to new headquarters in April
33
<PAGE>
1996. The Company's headquarters has capacity for a staff of approximately 225
associates, in comparison to its former facility which had the capacity for a
staff of 50 associates. In June 1997, Creditrust opened an operations center to
accommodate approximately 700 additional associates. A dedicated fiber optic
wide-area network connects the two facilities, which are located less than two
miles from each other.
INDUSTRY OVERVIEW
The dollar amount of consumer debt has increased from $.84 trillion in 1993
to $1.19 trillion in 1996 and is projected by Duff & Phelps to continue to grow
to over $1.48 trillion by the year 2000. The dollar amount of bank card
delinquencies has correspondingly increased from $11.2 billion to $22.5 billion
between 1993 and 1996. In line with these increases, credit card debt
delinquencies on VISA-Registered Trademark- and MasterCard-Registered Trademark-
accounts totaled $7.2 billion and $17.7 billion in 1993 and 1996, respectively
(Source: NILSON REPORT, November 1997).
According to the publisher of the NILSON REPORT, credit card debt
represented 30% of all consumer installment and open-end credit debt in 1990.
The November 1997 NILSON REPORT reported that the percentage of credit card debt
to total consumer installment and open-end credit debt was expected to rise to
43% in 1997, 54% in 2000 and 59% in 2005. As the amount of credit card debt has
risen, total delinquencies have grown as well. Gross credit card charge-offs as
of 1990 represented 3.83% of outstanding credit card receivables ($9.1 billion).
As set forth in the chart below, the June 1997 NILSON REPORT estimated that
number would rise to 5.69% in 1997 ($31.3 billion), but decline to 4.95% in 2000
($38.8 billion) and 4.39% in 2005 ($51.8 billion).
[INSERT C/R CHART 2]
Source: NILSON REPORT
Concurrently with the increase in the level of charged-off consumer debt,
Originating Institutions have sought a variety of ways to increase their
collections. Generally, there are three alternatives Originating Institutions
have to collect outstanding indebtedness: (i) maintain an internal collection
staff, (ii) outsource collection efforts to traditional third-party debt
collection agencies, or (iii) sell portfolios of charged-off debt to third
parties such as Creditrust who are willing to pay cash for those accounts.
Historically, Originating Institutions have relied upon large internal
collection staffs for their initial
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<PAGE>
collection efforts, which efforts tended to be transferred to outside collection
agencies for accounts delinquent for more than 180 days. More recently, in an
effort to focus on core business activities and to take advantage of economies
of scale, better performance and the lower cost structure offered by third
parties, many Originating Institutions have chosen to outsource some or all of
their collection efforts. Further, Originating Institutions have realized that
by removing non-performing consumer loans from their systems and balance sheets
through bulk sales of portfolios of non-performing consumer loans, they can
redirect their personnel and assets to service their performing loan customer
base and can receive immediate cash flow in the amount of the discounted sale
price.
The secondary market for charged-off credit card portfolios has expanded as
a result of the significant growth in delinquent credit card portfolios at major
credit card issuing banks and the increasing tendency for banks to sell their
portfolios of non-performing consumer loans to asset recovery specialists. The
NILSON REPORT publisher states that this secondary market which was $2.2 billion
when it was just beginning in 1990 reached $15.5 billion in 1997, and is
projected to reach $25.0 billion by 2000.
In the early 1990's, Originating Institutions began selling charged-off
consumer Receivables as an alternative to maintaining a large, in-house
collection staff and/or paying the commission-based fees of traditional
third-party collection agencies. As an early entrant, Creditrust pioneered the
purchase of charged-off receivables and began to develop and access
sophisticated databases of consumer information that could be used by a
dedicated staff of collection professionals in an effort to increase the rates
of recovery on charged-off Receivables. Through the use of these additional
resources and by focusing solely on the collection of Receivables, these
companies have been able to increase the rate of recovery over the rates
historically experienced by Originating Institutions and traditional third-party
collection agencies.
Portfolios of Receivables typically are purchased at a discount from the
aggregate principal value and accrued interest on the Receivables, with an
inverse correlation between purchase price and the perceived effort necessary to
recover the Receivables. Purchasers have developed a variety of ways to finance
such acquisitions. Some Originating Institutions pursue an auction type sales
approach of constructing a portfolio of Receivables and seeking bids from
specially invited competing parties. This has resulted in an increase in the
number of portfolios of Receivables offered for sale by account brokers. Other
means of acquiring Receivables include privately negotiated direct sales when
the Originating Institution contacts known, reputable purchasers and the terms
are negotiated. Originating Institutions have also entered into "forward flow"
contracts that provide for an Originating Institution to sell some or all of its
Receivables over a period of time to a single third party on the terms agreed to
in a contract.
STRATEGY
Creditrust's goals are to maintain and enhance on an ongoing basis its
position as one of the leading purchasers, managers, and liquidators of
defaulted consumer receivables. Creditrust's operating strategy is keyed to its
proprietary information technology-driven systems. Creditrust's business and
growth strategies are summarized below:
STATE-OF-THE-ART INFORMATION TECHNOLOGY SYSTEMS. Creditrust has developed
and is upgrading on an ongoing basis its state-of-the-art, proprietary software
tools which it uses to analyze and score portfolios offered to it for sale and
to manage the collections and information flow process. These systems allow the
Company to (i) buy portfolios on more favorable terms than competing buyers who
lack its information technology advantage; (ii) collect the portfolios
efficiently and (iii) identify trends in defaulted consumer portfolios earlier
than its competitors who lack Creditrust's knowledge advantage. Creditrust's
information technology tools enable it to buy portfolios which management
believes can yield the most attractive returns on its investments. Through its
sophisticated revenue management systems, Creditrust can apply the most
appropriate collection process to an individual account.
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<PAGE>
MAXIMUM FLEXIBILITY IN COLLECTION PROCESS. The Company believes that it can
collect more on defaulted Receivables than the Originating Institutions or
traditional agency collection firms. The Company is not faced with the various
regulatory and financial reporting constraints that many Originating
Institutions face. Because Creditrust's only business is the collection of
defaulted Receivables, it is not subject to some of the business and customer
relations constraints faced by Originating Institutions which must consider
collection decisions in the context of the traditional credit process. In the
case of the agency collectors, the Company is able to offer credit terms which
most other collectors cannot. Agency collectors normally work on a cycle which
requires them to complete working a portfolio in a specified period of time.
These considerations work together to enable the Company to structure repayment
plans that are flexible and present, in the Company's belief, more attractive
and realistic repayment prospects.
RELATIONSHIPS WITH LEADING ORIGINATING INSTITUTIONS. The Company pioneered
the purchase of defaulted credit card and installment receivables and has
developed strong relationships with many of the largest Originating Institutions
from which it is a frequent buyer. These relationships offer the Company the
regular opportunity to be invited to bid on a range of portfolios. The diversity
of the Originating Institutions and their respective customer bases also allows
the Company to maintain geographically diversified portfolios.
TRAINED PROFESSIONALS. The Company has developed highly effective training
programs and methods. In contrast to many agency collection firms, the Company
trains its account officers to function in a manner similar to financial
counselors. The account officers routinely help customers with issues related to
their financial health and credit history. The Company seeks to instill in its
account officers a culture of professionalism and reinforces this message
through incentive arrangements intended to moderate the rate of turnover in an
industry that typically has high turnover rates.
CAPABILITY OF CURRENT PLATFORM TO SUSTAIN RAPID GROWTH. In 1996 and 1997,
the Company made extensive commitments to expand its operations by moving into
new corporate headquarters and opening the operations center. It has invested in
information technology and telephony systems capable of supporting as many as
900 account officers. Key members of the management team have been added. As a
result of these investments, Creditrust is capable of servicing substantially
larger volumes of Receivables without incurring proportional infrastructure and
additional fixed costs.
ACCELERATE GROWTH THROUGH DEVELOPMENT OF DIVERSE FUNDING ARRANGEMENTS. The
Company has historically funded its growth through bank borrowings and
participation arrangements. In 1997, it acquired control over the Serviced
Receivables through an arrangement with an investor that was a financial
institution. The Company recently concluded its first securitization and plans
to pursue additional securizations in the future. See "Recent
Developments--Securitization." As the result of the capital raised in a recent
private placement, the Securitization and in this Offering and capital that may
become available following this Offering from borrowing and securitization
programs, the Company believes that it can accelerate it acquisition of
Receivables and capitalize on its information technology and other competitive
advantages, as well as its first mover advantage in this market.
ANALYSIS OF RECEIVABLES TO ACQUIRE
The Company's Acquisitions Department locates and develops new and
continuing sources of portfolios of Receivables for purchase. Once such
portfolios are located, the Acquisitions Department is responsible for
coordinating due diligence, including site visits as needed, coordinating
ordering, receipt, tracking and distribution of account documentation and media,
and insuring that Creditrust's acquisition costs stay within clearly defined
parameters. The Acquisitions Department also supervises the Post-Purchase
Liaison Group, a group that coordinates buy-backs and returns with sellers after
the acquisition of Receivables. The Post-Purchase Liaison Group also coordinates
the import of acquired portfolios into the Company's proprietary collection
system and routinely supports the efforts of both the Legal and
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<PAGE>
Recovery Departments by facilitating the receipt of additional information from
the seller which is pertinent to an account or group of accounts such as account
statements or loan files.
In order for Creditrust to consider a potential seller as a portfolio
source, a variety of factors must be considered. A seller should be able to
demonstrate a significant volume of Receivables available for sale and the
reasonable expectation of significant capacity for subsequent sales. To attempt
to avoid an unacceptable level of returned accounts resulting from verified
fraud, prior satisfaction or erroneous sale, all qualified sellers must be able
to demonstrate that they have satisfactory procedures in place for internal
audits, underwriting criteria, post-sales support and return/buy-back
warranties.
Creditrust acquires Receivables that primarily consist of defaulted consumer
debt obligations. Generally, the obligations have been incurred through
VISA-Registered Trademark-, MasterCard-Registered Trademark-, private label
credit cards and consumer loans issued by major banks and merchants. The
Receivables typically are charged-off by the Originating Institutions after a
default-period of 180 days. The Company focuses on purchasing such charged-off
Receivables, generally targeting portfolios that average 18 to 30 months past
due. From the time of purchase, the Company estimates that the average portfolio
of Receivables will have a 60-month life.
Prior to acquiring any Receivables, Creditrust receives a due diligence disk
or tape containing information about each of the accounts being proposed for
sale. Creditrust thoroughly analyzes electronic information provided on each
Receivable account being proposed for sale in its PAT software. PAT reviews and
analyzes each account and compares its asset type, last known geographic
location of the obligor, age since last collection, charged-off dollar balance
and other characteristics with Creditrust's recovery results from similar
Receivables to date. This computer model is updated automatically every time a
customer payment is received, and PAT produces a comprehensive breakdown of the
proposed portfolio. This report compares Receivables in the proposed portfolio
with Creditrust's recovery history on similar Receivables in other portfolios.
PAT then summarizes all anticipated recoveries and projects a value expressed in
both dollars and liquidation percentages for the first year, as well as the
total recovery for the portfolio's anticipated five-year life. This projection
is taken in concert with the Company's knowledge of the current consumer credit
marketplace and any subjective factors that may be available regarding the
portfolio or seller. Internally, the Company also has guidelines, which restrict
it to bidding a maximum percentage of the PAT-projected recovery for any given
portfolio.
It is not uncommon for a seller to require an almost immediate analysis and
funding. The Company's ability to accomplish next-day turnaround on pricing and
funding provides it with a significant competitive advantage.
PAT was developed based on the theory that each portfolio, no matter how
similar it may appear to other like-size portfolios, has its own unique
"fingerprint," because of the component Receivables of which it is comprised.
Therefore, no two portfolios will score the same on PAT due to the fundamental
differences in the Receivables they contain. For example, two similarly aged
portfolios would score differently because the underlying Receivables are
located in different geographic areas.
PAT utilizes a sophisticated CHAID (Chi-squared Automatic Interaction
Detector) algorithm to sort each account in the proposed portfolio (the
population) and constructs classification trees evaluating distinct segments of
the population based upon one or more predictor variables. CHAID is an algorithm
that calculates the probability that the observed relationship between the
predictor and the dependent variable would occur if the predictor and the
dependent variable were statistically independent of each other. Using
statistical significance, CHAID automatically subgroups the data into exhaustive
and exclusive segments which differ significantly in terms of a target variable
(exhaustive means that every data point belongs to at least one segment, while
exclusive means that every data point belongs to only one segment). This method
of analysis is very flexible. Classification trees can examine the effects of
predictor variables one at a time, unlike regression, which examines them all at
once.
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<PAGE>
The CHAID analysis begins by dividing the population into two or more
distinct segments based upon predictor variables. It continues by segmenting
each of the newly created sub-segments, or nodes, based upon a secondary
predictor variable. This process is repeated until no more distinct subgroups
can be created.
In Creditrust's situation, the liquidity of accounts would be Y, while those
factors which are related to liquidity would be X. The target variable is
predicted liquidity, and the predictor variables are factors which are related
to the ability to collect payments, including numerous cohorts such as age of
the account, size of the account balance and geographical location. The average
historical liquidity for each segment is then used to forecast future liquidity
for any accounts which fall into the specific segment. A relationship between Y
and X does not fit any mathematical functional form. The majority of accounts
will have zero liquidity as most of Creditrust's collections come from a small
number of customers. This skewed distribution does not lend itself to
traditional regression analysis. Moreover, it is accurate to separate accounts
into groups and identify those customers who have a high likelihood of
collection. For this reason, the CHAID algorithm is utilized to forecast
liquidity as it appears to exhibit a relatively high confidence level for
predictive analysis of recovery on these accounts.
In analyzing a portfolio of Receivables for acquisition, the Company reviews
various characteristics of the individual Receivables within the portfolio. The
following tables illustrate certain of the characteristics of Receivables owned
by the Company at specified dates. Because a significant portion of the
Company's customers recently have experienced some life-altering event, the
Company has found that a period of time must pass before those customers are
able to commence recovering financially. Additionally, newer Receivables (i.e.,
Receivables that are between three and eighteen months past due) generally are
more expensive to acquire than older Receivables. Accordingly, management
believes that certain older Receivables may be more desirable than certain newer
ones, though the Company does not eliminate portfolios solely on the basis of
age. The range of age since default on Receivables controlled by the Company in
respect of both number of Receivables and dollar value as of December 31, 1995,
1996 and 1997 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
- -------------------------------------------------------------------------------------------------------------
1995 1996 1997
- ----------------------------------- ----------------------------------- -----------------------------------
NO. OF NO. OF NO. OF
RECEIVABLES BALANCE RECEIVABLES BALANCE RECEIVABLES BALANCE
YEAR ACCOUNTS (MILLIONS) YEAR ACCOUNTS (MILLIONS) YEAR ACCOUNTS (MILLIONS)
--- ----------- ----------- --- ----------- ----------- --- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
0-2 29,415 $ 57.8 0-2 89,548 $ 167.6 0-2 73,685 $ 146.9
2-4 29,633 $ 67.0 2-4 57,809 $ 130.7 2-4 428,646 $ 796.1
4-6 7,258 $ 14.1 4-6 30,999 $ 66.5 4-6 52,454 $ 117.5
6+ 1,337 $ 2.3 6+ 15,210 $ 21.4 6+ 25,553 $ 44.0
</TABLE>
Creditrust specializes in purchasing larger balance Receivables. The Company
has found the best cost-to-collect ratio generally occurs when the average
balance is at least $1,000, and typically less than $5,000. Select ranges of
charged-off dollar balances of Receivables controlled by the Company as of
December 31, 1995, 1996, and 1997 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
- -------------------------------------------------------------------------------------------------------------------------------
1995 1996 1997
- ----------------------------------------- ----------------------------------------- -----------------------------------------
CHARGE-OFF NO. OF BALANCE CHARGE-OFF NO. OF BALANCE CHARGE-OFF NO. OF BALANCE
AMOUNT RECEIVABLES (MILLIONS) AMOUNT RECEIVABLES (MILLIONS) AMOUNT RECEIVABLES (MILLIONS)
- --------------- ----------- ----------- --------------- ----------- ----------- --------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$0-$1,000 17,664 $ 9.8 $0-$1,000 70,680 $ 40.2 $0-$1,000 184,176 $ 113.4
$1,001-$5,000 46,645 $ 109.7 $1,001-$5,000 109,703 $ 251.2 $1,001-$5,000 362,891 $ 764.5
>$5,001 3,334 $ 21.7 >$5,001 13,183 $ 94.7 >$5,001 33,271 $ 226.7
</TABLE>
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<PAGE>
The Company's Receivables grouped by asset type as of December 31, 1995,
1996 and 1997 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
- -----------------------------------------------------------------------------
1995 1996
- ------------------------------------- -------------------------------------
NO. OF BALANCE NO. OF BALANCE
ASSET TYPE RECEIVABLES (MILLIONS) ASSET TYPE RECEIVABLES (MILLIONS)
- ----------- ----------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Visa/ Visa-Registered Trademark-/
Mastercard-Registered Trademark- 36,125 $85.1 Mastercard-Registered Trademark- 102,969 $229.0
Private Private
Label/ Label/
Discover-Registered Trademark- 0 $ 0.0 Discover-Registered Trademark- 38,032 $ 39.0
Installment Installment
Obligations 31,518 $56.1 Obligations 52,565 $118.1
<CAPTION>
- -----------
1997
- ----------- -------------------------------------
NO. OF BALANCE
ASSET TYPE ASSET TYPE RECEIVABLES (MILLIONS)
- ----------- ----------- ----------- ----------
<S> <C> <C> <C>
Visa/ Visa-Registered Trademark-/
Mastercard- Mastercard-Registered Trademark- 487,249 $942.4
Private Private
Label/ Label/
Discover-Re Discover-Registered Trademark- 38,077 $ 39.1
Installment Installment
Obligations Obligations 55,012 $123.1
</TABLE>
The seller must be able to demonstrate that the Receivables originated from
a satisfactory geographic distribution, because the Company has found that heavy
concentration in a single state or area creates a substantially greater risk of
non-recovery and that the size of Receivables balances falls within the range
that the Company has found to provide the best cost-to-collect ratio. Creditrust
also reviews the geographic distribution of the proposed Receivables for reasons
other than to avoid portfolios concentrated in one or a few areas. For example,
certain states have more debtor-friendly laws than others and, therefore, would
be less desirable from an account officer's perspective. Additionally, different
regions may place differing degrees of importance on fiscal responsibility and
creditworthiness. Based on experience and historical data, the Company attempts
to determine the future recovery potential of the Receivables in a given
portfolio.
State credit laws, population demographics and population size affect the
number of accounts originating from a particular state, as well as the
collectibility of these accounts. The Company's portfolios are broadly dispersed
across the United States, as shown in the following chart:
PORTFOLIO COMPOSITION BY STATE
[PIE CHART SHOWING GEOGRAPHIC
DISTRIBUTION OF CREDITRUST'S CUSTOMERS]
<TABLE>
<S> <C> <C>
/ / California 16.2
/ / Texas 14.6
/ / Florida 10.2
/ / New York 9.7
/ / Pennsylvania 4.3
/ / Massachusetts 3.9
/ / Maryland 3.6
/ / New Jersey 3.2
/ / Illinois 3.1
/ / North Carolina 2.7
/ / Other 28.5
</TABLE>
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<PAGE>
This quantitative and qualitative data is taken in concert with Creditrust's
knowledge of the current debt marketplace and any subjective factors that may be
available regarding the portfolio or the seller. An internal credit committee
must decide unanimously whether to pursue the portfolio and, based on the
Company's internal guidelines and limited by the specific portfolio's PAT score,
the committee determines the maximum price that Creditrust would be willing to
pay for the given portfolio and the bid price which will maximize yield on the
Receivables. Once a particular purchase has been agreed upon, the acquisition is
documented in an agreement that contains customary terms and conditions.
SERVICING ORGANIZATION
Creditrust utilizes two state-of-the art servicing facilities. The
headquarters facility, approximately 19,000 square feet, houses the executive
offices and servicing facilities for approximately 225 associates. The second
facility, approximately 36,000 square feet which opened in June 1997, serves as
Creditrust's primary operations center and is designed to house approximately
700 additional associates, along with information systems and recruiting
departments. Currently, the Company has approximately 350 employees and is
organized into five functional departments: Information Technology;
Acquisitions; Skiptrace; Recovery and Legal.
INFORMATION TECHNOLOGY DEPARTMENT
The Information Technology ("IT") Department is the backbone of the
Company's operations, handling all computer and telephone systems and providing
for the ongoing development necessitated by both technological advances and
business needs. The IT Department is responsible for the ongoing enhancement of
the Company's proprietary software (Mozart-TM- and PAT) and servicing reports
and database developments. The IT Department regularly reports to all credit
bureaus on the Company's entire portfolio. The IT Department works in concert
with the Acquisitions Department to import, analyze and evaluate all prospective
purchases using PAT. The technologies serviced by this Department include:
SOFTWARE. The Company's portfolio analysis (PAT) and recovery (Mozart-TM-)
programs were created and modified in-house by Creditrust's programmers. The
software is written in a high-speed, relational database language and is
designed to reside on powerful, but readily available, servers. Both programs
have been in use for more than six years and are considered to be bug-free.
Back-up tapes of account information are recorded each day and are stored at an
off-site location for safety and security.
COMPUTER HARDWARE AND NETWORKS. The software programs reside on three
Novell-based servers and are connected via fiber-optic wide area networks
("WANs") and local area networks ("LANs") to Intel
Pentium-Registered Trademark--based PCs. The call centers have been fully wired
so that additional account officer terminals simply may be placed onto open
desks and plugged into the network. The architecture of the system has been
constructed to be at the forefront of the technological edge, while remaining
easily scaleable and updateable, two features critical to the rapid growth
anticipated by the Company. The current architecture is capable of supporting
1,500 account officers with the simple addition of PCs. This should allow the
Company significant growth without a need for further upgrade in the near-term.
The systems are fully redundant so as to ensure the uninterrupted process of the
recovery efforts. The Company has extensive emergency plans in place for access
to an off-site call center location, should that contingency be necessary.
TELEPHONY. The Company employs the latest technology in telephony,
including predictive dialers, automatic routers, two top of the line AT&T
Definity-Registered Trademark- G-3 telephone systems (capable of handling over
1,500 account officers) and many other state-of-the art components. The call
centers have been fully wired so that additional account officer telephones may
simply be placed onto an open desk and plugged into the network. The
architecture has been designed at the cutting edge, while remaining scaleable
and updateable.
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<PAGE>
VERIFICATION AND RESEARCH OF ACCOUNT INFORMATION. When a portfolio of
Receivables is acquired, each account automatically is run through an extensive
series of proprietary and commercially available databases to compile as much
information about each Receivable as possible. The information is combined with
the information already provided by the Originating Institution and
automatically entered into the Company's proprietary account tracking and
management software system (Mozart-TM-).
Within 24 hours of importing the Receivable into Mozart-TM-, account
officers begin calling every telephone number available, and within days a
letter is sent out to the customer advising that Creditrust has purchased the
Receivable. This initial letter is designed to invite discussion or the
resolution of the Receivable and generally contains an offer of settlement at a
modest discount.
SKIPTRACE DEPARTMENT--LOCATING CUSTOMERS
Skiptracers are technology-driven telephone detectives. In the event that
contact is not made with a customer based on the compiled information for that
Receivable, the account is automatically transferred to the Skiptrace
Department. The Skiptrace Department is divided into multiple teams, each of
which is headed by a supervisor. As an initial step to locate customers, each
skiptracer endeavors to compile a complete "electronic profile" for each
customer and to find every possible telephone number for the customer.
Skiptracers utilize internally developed databases consisting of more than
65,000 creditors, plus a variety of public databases and third-party database
providers. The Skiptrace Department has the capability of accessing real-time
customer credit reports, electronic nationwide directory assistance, an
internally maintained "neighbors file" of over 100 million nationwide residents
and numerous other resources. The Company maintains over 800 million individual
database records on its current and potential customers. Employing any or all of
these tools frequently enables the Skiptracers to locate otherwise unreachable
customers. Of those customers transferred to the Skiptrace Department, a working
phone number is frequently found. Once a customer is found, Mozart-TM-
automatically assigns the customer to one of the teams in the Recovery
Department.
RECOVERY DEPARTMENT--SERVICING CUSTOMERS AND COLLECTION OF RECEIVABLES
The Recovery Department, unlike an old-fashioned "collections shop," is
tasked with providing recovery service and credit rehabilitation to the
customers. Instead of simply calling about an old bill, Creditrust's account
officers work to maximize yield through credit restoration while minimizing
customer negativity and maintaining a positive working environment for the
staff.
The Recovery Department is responsible for recovering account balances and
selling customer service and credit rehabilitation to its customers. The Company
employs advanced Pentium-Registered Trademark- PC Workstations and sophisticated
telephone call management systems to maximize its employee productivity and
thereby increase recovery from its accounts. The telephone call management
systems include predictive dialers, automated call and account distribution
systems, digital switching and customized computer software. Mozart-TM- provides
the Recovery Department with real-time customer reporting; full customer account
data information; collection discussion notes on each account; telephone numbers
and addresses; payment history; automatic notice of acquisition, settlement
letters, reminders and late payment notices; automatic legal pleadings
production; automatic account distribution to account officers; surveillance of
on-screen activity and telephone conversations for quality control, productivity
and regulatory compliance and exception reports on payment plans. Creditrust's
account officers work to maximize yield through credit restoration while
minimizing customer apprehension and maintaining a positive working environment
for the staff. The Recovery Department currently is organized into teams of 16
with one supervisor per team. The supervisors work with the team members and
assist account officers with quality control and productivity. Through the
Company's extensive network of computer and telephone systems, each team member
in the Recovery Department is responsible for contacting customers, explaining
the benefits of paying Creditrust, working with customers to develop acceptable
means to satisfy their obligations to Creditrust and recovering the Receivables.
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<PAGE>
MAKING CUSTOMER CONTACT. When an account officer is able to establish
contact with a given customer, the customer's account automatically is placed
inside that account officer's work queue. Each account officer is assigned a
number of dedicated customer accounts depending on the account officer's skill
level. This work queue automatically is replenished on a daily basis, by
Mozart-TM-, as the Receivables are resolved, whether favorably or unfavorably.
In addition to their group of dedicated accounts, account officers receive
Receivables from a general pool daily.
On the initial customer contact call, the customer is given a standardized
and strictly controlled presentation regarding the benefits of resolving its
account with Creditrust. Emphasis is placed on determining the reason for the
customer's default in order to better assess the customer's situation and to
assist in creating a plan for repayment. Creditrust account officers are trained
to follow rigid Receivables resolution priorities.
Mozart-TM- presents the account officer with all available information and a
variety of resolution options. A large emphasis is placed by the account officer
on making the customer aware of all possible alternative methods available. The
computer system will not allow an account officer to exceed his or her specified
settlement authority without electronic authorization of a supervisor approval
code. Once a customer and the account officer agree to a repayment schedule, the
account officer records the terms of the arrangement in Mozart-TM-. The computer
system then automatically will generate a series of letters reminding the
customer of important dates.
CASH MANAGEMENT. Creditrust, through its strong emphasis on technology and
innovation, has built a customer base that is not exclusively dependent on the
postal service to deliver payments. As a result, more than 70% of all payments
are completed by either the Western Union Quick Collect-TM- program or by
proprietary QuickChek pre-authorized checks drawn on the customer's checking
account. Creditrust has developed a proprietary system ("QuickChek") that allows
the account officer to obtain the customer's authorization to reproduce an
actual check, drawn on the customer's checking account on an agreed upon date
over a series of months and for the exact amount of the agreed payment.
Creditrust participates as an authorized agent for the Quick Collect-TM- program
and is therefore able to receive payments directly in its offices within
minutes.
DELINQUENCY FOLLOW-UP. The problem of delinquent or late payments on
established repayment plans is greatly mitigated through the use of the Quick
Collect-TM- and QuickChek programs. However, some customers cannot or will not
participate in one of these plans. The Company has developed a system to deal
with late payments to minimize the drain on the productivity of the account
officers. In the event that payment is not received within one day of the
scheduled due date, Mozart-TM- automatically issues a late payment letter to the
customer. This is followed by a second letter ten days after the due date.
Unless a scheduled payment is received on or before the day it is due,
Mozart-TM- automatically moves the Receivable to the account officer's late
queue for immediate customer contact.
LATE PAYMENT COLLECTOR. When a customer falls more than 30 days late in a
payment plan, the Receivable automatically is transferred to a specially
trained, dedicated Late Payment Collector. These individuals are tasked with
getting the customer back on track according to the terms of his or her payment
plan or, in certain circumstances, negotiating revised terms for payment. In
some instances, a customer's financial circumstances may have worsened and a
plan that accurately fits the new situation is necessary. In other cases, the
customer is able to dispense with the perceived burden of monthly installments
by making a lump sum payment. The Company induces resolution through a variety
of methods. Late Payment Collectors act as a counselor to the customer and may
assist the customer in securing new resources for the resolution of its account.
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<PAGE>
LEGAL DEPARTMENT
An important component of the Company's collections effort involves the
Legal Department and the pursuit of those customers who have the ability, but
not the willingness, to resolve their obligations. Creditrust employs two
in-house attorneys, several paralegals and a dedicated support staff to process
thousands of court cases each year. The Legal Department has the capacity to
internally prepare and file collection proceedings in multiple jurisdictions.
The Legal Department is responsible for coordinating a network of in excess of
45 attorneys nationwide, determining the suit criteria for each individual
jurisdiction, placing cases for immediate suit, obtaining judgment, seizing bank
accounts, repossessing automobiles that have equity, coordinating sales of
property and instituting wage garnishments to satisfy judgments. In addition,
the Legal Department is responsible for overseeing the Company's compliance with
applicable laws, rules and regulations associated with the conduct of its
business. See "Business-- Government Regulation."
FORECLOSURE AND ASSET DISPOSITION. Creditrust, through its Legal
Department, occasionally engages in the execution and foreclosure of real
property. In the event that a judgment has been secured, and real estate has
been verified as belonging solely to the customer, foreclosure in support of
execution of judgment is considered. Unlike foreclosure pursuant to the power of
sale contained in a mortgage or deed of trust, a judicial sale of real property
follows the state court rules for sheriff's levy and seizure of property. Those
rules vary widely by state.
COMPLIANCE PROCEDURES. The Company believes it is compliant with all
provisions of the FDCPA and applicable state laws, although it may not be
specifically subject thereto. The Company monitors account officer activity on
an ongoing basis through its Quality Improvement Group. Account officers are
trained and tested on their knowledge of the FDCPA, and they are telephonically
monitored for compliance with the FDCPA and the Company's stringent standards of
customer satisfaction and complaint-free Receivables resolution. In conjunction
with telephonic monitoring, an account officer's Receivables activities are
monitored through the Company's proprietary DoubleVision system, which allows a
supervisor or manager to observe exactly what the account officer sees on the
computer monitor, including every keystroke and every system activity generated.
On a daily basis, a series of audit reports is generated automatically by
Mozart-TM-, including daily management reports, liquidity reports, telephone
reports, skiptrace reports and account officer cash transaction reports. The
flexibility of Mozart-TM- allows real-time query of any information necessary.
COMPETITION
The consumer finance collections industry is highly competitive, and the
Company expects that competition from new and existing competitors will
intensify. The Company experiences competition in acquiring Receivables,
including from purchasers with substantially greater resources than the Company.
The Company competes with a wide range of third-party collection companies and
other financial services companies, which may have substantially greater
personnel and financial resources than the Company. In addition, certain of its
competitors may have signed "forward flow" contracts pursuant to which certain
Originating Institutions have agreed to transfer distressed Receivables in the
future, which could restrict those Originating Institutions from selling certain
Receivables to Creditrust. The Company seeks to compete with these companies on
the basis of its superior information technology capabilities, which enable it
to evaluate, purchase, and collect on Receivables more effectively than certain
of its competitors. The Company believes its major competitors include
Commercial Financial Services, Tulsa, Oklahoma, West Capital Corporation, San
Diego, California and Outsourcing Solutions, Inc., Chesterfield, Missouri.
TRADEMARKS AND PROPRIETARY INFORMATION
The Company has filed trademark applications with the United States Patent
and Trademark Office with respect to the names "Mozart-TM-" and "Creditrust" and
the Creditrust logo.
43
<PAGE>
The Company uses a variety of management information and telecommunications
systems to enhance productivity in all areas of its business. The Company has
developed its own software system tailored to the needs of the particular
customer base it serves. The Company uses readily available
Pentium-Registered Trademark- PC-based hardware configurations to operate a
combination of proprietary and commercially available software. The majority of
the Company's software can be customized to accommodate the specific work
standards required by the Company's account officers and skiptracers.
GOVERNMENT REGULATION
The FDCPA and comparable state statutes establish specific guidelines and
procedures which debt collectors must follow to communicate with consumer
debtors, including the time, place and manner of such communications. It is the
Company's policy to comply with the provisions of the FDCPA and comparable state
statutes in all of its collection activities, although it may not be
specifically subject thereto. If these laws apply to some or all of the
Company's collection activities, the Company's failure to comply with such laws
could have a materially adverse effect on the Company. The relationship of a
customer and a credit card issuer is extensively regulated by federal and state
consumer protection and related laws and regulations. While the Company is not a
credit card issuer, because many of its Receivables were originated through
credit card transactions, certain of the Company's operations are affected by
such laws and regulations. Significant laws include the Federal Truth-In-Lending
Act, the Fair Credit Billing Act, the Equal Credit Opportunity Act, the Fair
Credit Reporting Act and the Electronic Funds Transfer Act (and the Federal
Reserve Board's regulations which relate to these Acts), as well as comparable
statutes in those states in which customers reside or in which the Originating
Institutions are located. State laws may also limit the interest rate and the
fees that a credit card issuer may impose on its customers. Among other things,
the laws and regulations applicable to credit card issuers impose disclosure
requirements when a credit card account is advertised, when it is applied for
and when it is opened, at the end of monthly billing cycles and at year end.
Federal law requires credit card issuers to disclose to consumers the interest
rates, fees, grace periods and balance calculation methods associated with their
credit card accounts, among other things. In addition, customers are entitled
under current laws to have payments and credits applied to their credit card
accounts promptly, to receive prescribed notices and to require billing errors
to be resolved promptly. In addition, some laws prohibit certain discriminatory
practices in connection with the extension of credit. Failure by the Originating
Institutions to have complied with applicable statutes, rules and regulations
could create claims and rights offset by the customers that would reduce or
eliminate their obligations under their Receivables, and this could have a
materially adverse effect on the Company. Pursuant to agreements under which the
Company acquires Receivables, the Company is normally indemnified against losses
caused by the failure of the Originating Institution to have complied with
applicable statutes, rules and regulations relating to the Receivables before
they are sold to Creditrust.
Certain laws, including the laws described above, may limit the Company's
ability to collect amounts owing with respect to the Receivables regardless of
any act or omission on the part of the Company. For example, under the federal
Fair Credit Billing Act, a credit card issuer is subject to all claims (other
than tort claims) and defenses arising out of certain transactions in which a
credit card is used if the obligor has made a good faith attempt to obtain
satisfactory resolution of a disagreement or problem relative to the transaction
and, except in cases where there is a specified relationship between the person
honoring the card and the credit card issuer, the amount of the initial
transaction exceeds $50.00 and the place where the initial transaction occurred
was in the same state as the customer's billing address or within 100 miles of
that address. As a purchaser of credit card Receivables, the Company may acquire
certain Receivables subject to legitimate defenses on the part of the customer.
The statutes further provide that, in certain cases, customers cannot be held
liable for, or their liability is limited with respect to, charges to the credit
card account that were a result of an unauthorized use of the credit card. No
assurances can be given that certain of the Receivables were not established as
a result of unauthorized use of a credit card, and, accordingly, the amount of
such Receivables could not be collected by the Company. Pursuant to some
44
<PAGE>
agreements under which the Company acquired Receivables, the Company is
indemnified against certain losses with respect to such Receivables regardless
of any act or omission on the part of the Company or the Originating
Institution.
Additional consumer protection laws may be enacted that would impose
requirements on the enforcement of and collection on consumer credit card or
installment accounts. Any new laws, rules or regulations that may be adopted as
well as existing consumer protection laws, may adversely affect the ability of
the Company to collect the Receivables. In addition, the failure of Creditrust
to comply with such requirements could adversely affect the Company's ability to
enforce the Receivables.
PROPERTIES
Creditrust is headquartered in a leased facility consisting of approximately
19,000 square feet at 7000 Security Boulevard, Baltimore, Maryland 21244. The
headquarters facility has capacity for approximately 225 associates and houses
all of the training facilities and administrative offices. The Company recently
leased an additional facility located approximately two miles from its
headquarters at 1705 Whitehead Road, Baltimore, Maryland 21244. This operations
center comprises approximately 36,000 square feet and has the capacity to
accommodate approximately 700 additional associates and expanded training and
recruiting departments. The operations center houses the Company's updated
communications and software systems center, which is fully redundant to the
computer center, located at the corporate headquarters.
EMPLOYEES
As of June 23, 1998, the Company had 337 full-time employees. None of the
Company's employees are represented by a labor union. The Company believes that
its relations with its employees are good.
LEGAL PROCEEDINGS
The Company is subject to routine litigation in the ordinary course of
business, including contract, collections and employment-related litigation.
None of these routine matters, individually or in the aggregate, is believed by
the Company to be material to its business or financial condition.
45
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The table below sets forth certain information concerning each of the
executive officers and directors of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------ --- ---------------------------------------------------------------------
<S> <C> <C>
Joseph K. Rensin.................... 33 Chairman of the Board, President and Chief Executive Officer
Frederick W. Glassberg(1)(2)........ 64 Director
John G. Moran(1)(2)................. 52 Director
Harry G. Pappas, Jr.(1)(2).......... 49 Director
Michael S. Witlin................... 30 Director
Rick W. Chandler.................... 50 Vice President, Recovery
John L. Davis....................... 35 Vice President, Business Development and Corporate Secretary
J. Barry Dumser..................... 50 Vice President, General Counsel
David A. Elkes...................... 28 Vice President, Information Technology
Jefferson B. Moore.................. 36 Vice President, Acquisitions
Richard J. Palmer................... 46 Vice President, Chief Financial Officer and Treasurer
</TABLE>
- ------------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
JOSEPH K. RENSIN, CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE
OFFICER--Mr. Rensin co-founded Creditrust in 1991 and has been instrumental in
all aspects of the Company's development, including the Company's
state-of-the-art Receivables recovery computer database and systems software, as
well as the customer relations approach to collections and recovery. Prior to
founding Creditrust, he founded two different technology-related companies,
which he sold profitably. He attended the University of Maryland College Park
from 1983 to 1987. While in college, he wrote three books on computers published
by Prentice-Hall.
FREDERICK WILLIAM GLASSBERG, DIRECTOR--Mr. Glassberg joined the Creditrust
Board in 1997. Mr. Glassberg is president of Dornbush Enterprises, Inc., d/b/a
Crystal Hill Advisors in Columbia, Maryland, which provides commercial real
estate management advice and financial advisory services to corporate and
municipal clients. Mr. Glassberg serves on the Board of Directors of the
following three subsidiaries of The Enterprise Foundation:
Cornerstone/Progressive Grove, Inc., a tax-exempt Georgia corporation that owns
apartments; Cornerstone/Robbins, Inc., a tax-exempt Georgia corporation that
owns apartments; and Cornerstone/Spring Creek, Inc., a Texas corporation with a
tax-exempt status application pending, which owns apartments. Prior to joining
Dornbush Enterprises, Mr. Glassberg served as Chief Financial Officer of a
subsidiary of The Rouse Company for nine years.
JOHN G. MORAN, DIRECTOR--Mr. Moran joined the Creditrust Board in 1997. He
is Associate Dean and Executive-in-Residence of the Sellinger School of Business
and Management at Loyola College in Baltimore, Maryland. He also is President of
The Moran Group, LTD, which offers management consulting services to for-profit
and not-for-profit organizations. From 1986 until he entered his academic and
business positions in 1995, Mr. Moran was President of Household Bank, FSB
(Eastern Division), which had 39 branches in Maryland and Virginia and deposits
of approximately $1.5 billion.
HARRY G. PAPPAS, JR., DIRECTOR--Mr. Pappas joined the Creditrust Board in
1997. From July 1992 to the present, Mr. Pappas has been the principal of Harry
G. Pappas, Jr. Consulting, specializing in financial consulting services to
businesses and business owners. In addition, effective January 1998, Mr. Pappas
became Managing Director, Finance and Administration, and Chief Financial
Officer of Partners' First Holdings, LLC, a credit card services joint venture
among Bank of Montreal, Bank Boston and First
46
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Annapolis Consulting. Mr. Pappas acted as the Chief Financial Officer of
Precision Auto Care, Inc. from February 1997 to May 1997; of Youth Services
International, Inc. from September 1994 to May 1995 and of Meridian Healthcare
from July 1993 to May 1994. From February 1991 to July 1992, he was Vice
Chairman and Chief Financial Officer of MBNA Corporation in Newark, Delaware.
Prior to this, Mr. Pappas was Chief Financial Officer at MNC Financial, Inc. and
Equitable Bancorporation, and he was a partner with Ernst & Young LLP. Mr.
Pappas also serves on the board of directors of Precision Auto Care, Inc.
MICHAEL S. WITLIN, DIRECTOR--Mr. Witlin co-founded Creditrust with Mr.
Rensin in 1991. He served as Vice President of the Company and participated in
management of the Company until 1995. For two years thereafter, he was an
Associate Consultant at Company Entier where he provided consulting services in
business process re-engineering and systems design to privately held and public
companies as well as federal agencies.
RICK W. CHANDLER, VICE PRESIDENT, RECOVERY--Prior to joining Creditrust in
1996, Mr. Chandler served as Vice President of Consumer Collections for Bank
One, Dayton, Ohio, for two years. During his tenure with Bank One he was
responsible for over 400 employees and managed $2.3 billion in receivables.
Prior to Bank One, Mr. Chandler was Director of Assets for six years for SPS
Transaction Services, a subsidiary company of Morgan Stanley, Dean Witter & Co.
At SPS he managed over 280 employees and had responsibility for over $1 billion
in assets.
JOHN L. DAVIS, VICE PRESIDENT, BUSINESS DEVELOPMENT AND CORPORATE
SECRETARY--Mr. Davis joined Creditrust in 1993 as a member of the Recovery
Department. Shortly thereafter, he moved to the Legal Department as a Legal
Coordinator. In that role, he became familiar with the nationwide network of
attorneys that the Company retains and was responsible for increasing the growth
of that network to the present level of over 45 attorneys. Mr. Davis became the
Manager of the Legal Department in January 1994. Prior to joining Creditrust, he
worked in the Creditors' Rights Department of the Baltimore based law firm of
Wright, Constable & Skeen for three years. Prior to this, he worked full time
for the law firm of Greenan, Walker, Steuart, Trainor & Billman while
simultaneously earning his BS degree in Paralegal Studies at the University of
Maryland.
J. BARRY DUMSER, VICE PRESIDENT, GENERAL COUNSEL--Mr. Dumser joined
Creditrust in 1997 after serving as Vice President, Chevy Chase Bank where his
duties included management of the bank's bankruptcy and deceased processing
units. Mr. Dumser held additional responsibilities including the litigation
unit, which supported the bank's collection effort with its 2.5 million
customers and over $5.5 billion in receivables. Prior to joining Chevy Chase
Bank, Mr. Dumser served as Vice President and Counsel to Matterhorn Bank
Programs. Mr. Dumser's responsibilities with the Company include management of
the in-house legal staff as well as management of the network of over 45 outside
attorneys, established to handle the nation-wide litigation efforts on a
percentage of the Company's accounts. Mr. Dumser received his BS in Economics
from Wharton School of Finance and Commerce and his MBA from Boston University
School of Management. Mr. Dumser received his JD from the University of
Baltimore School of Law in 1993 and was admitted to the Maryland Bar that same
year.
DAVID A. ELKES, VICE PRESIDENT, INFORMATION TECHNOLOGY--Mr. Elkes joined
Creditrust in 1997 after serving as Vice President, Engineering for CRSS Data
Systems in Baltimore where his responsibilities included managing the
Engineering, Training and Internet Services divisions, engineering customers'
data systems solutions and designing and implementing customers' internet
solutions. Prior to CRSS, Mr. Elkes was a Senior Network Engineer for Skills
Bank Corporation in Baltimore. His duties there included managing, maintaining
and supporting a 100 node, corporate data network consisting of multiple
servers, topologies, operating systems and communications protocols, and writing
software in support of corporate sales and data analysis efforts. He currently
is responsible for the management of the Company's information technology team
and its programmers. Mr. Elkes has knowledge and experience in a wide variety of
computer hardware and software. He received his BA degree from The Johns Hopkins
47
<PAGE>
University in Baltimore, Maryland. Mr. Elkes is a Master Certified Network
Engineer and holds many other professional certifications.
JEFFERSON BARNES MOORE, VICE PRESIDENT, ACQUISITIONS--Mr. Moore joined
Creditrust in 1997 after serving since 1991 as the Vice President of Koll-Dove
Global Disposition Services, LLC, the largest third-party consumer receivable
transaction clearing house in the United States. At Koll-Dove, Mr. Moore was
personally responsible for $2.5 billion in consumer charge off sales, involving
over 75 separate transactions and over 25 banks and multiple purchasers in 1996
alone. He brings to Creditrust extensive experience in evaluating portfolios and
a database of institutional issuers of consumer Receivables. During his tenure
with Koll-Dove, he was instrumental in the Resolution Trust Corporation and
Federal Deposit Insurance Corporation loan auction programs. Prior to Koll-Dove,
Mr. Moore was involved in commercial real estate sales for 12 years. Mr. Moore
received his BS degree in Business Administration from the University of
Missouri, Columbia.
RICHARD J. PALMER, VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND
TREASURER--Prior to joining Creditrust in 1996, Mr. Palmer served as Chief
Financial Officer of CRI, Inc., a national real estate investment company with
headquarters in Rockville, Maryland, for 11 years. Mr. Palmer joined CRI, Inc.
in 1983 as Assistant to the President, became director of Tax Policy in 1984 and
CFO in 1985. Prior to CRI, Inc. he was with Grant Thornton LLP for seven years
culminating in the position of Tax Manager. Mr. Palmer joined KPMG Peat, Marwick
in 1973 shortly after graduating with a BS degree in accounting from Florida
Atlantic University in Boca Raton, Florida. He received his Florida certified
public accounting certificate in 1974 and received reciprocity in the District
of Columbia in 1976.
The Company's officers are elected annually by and serve at the discretion
of the Board of Directors. Creditrust's Board of Directors is not divided into
classes. At each annual meeting of stockholders, directors are elected to serve
until the next annual meeting of stockholders and until their successors have
been elected and qualified.
The Board of Directors has standing Audit and Compensation Committees. The
Audit Committee annually recommends to the Board the appointment of independent
certified public accountants for the Company, reviews the scope and fees of the
annual audit and any special audit, and reviews the results with the auditors.
It further reviews accounting practices and policies of the Company with the
auditors and the adequacy of the accounting and financial controls of the
Company and submits recommendations to the Board regarding oversight and
compliance with accounting principles and legal requirements. The Compensation
Committee reviews and makes recommendations to the Board regarding salaries and
benefits of officers of the Company and administers the Company's incentive
stock option and employee stock purchase plans.
COMPENSATION OF DIRECTORS
Directors of the Company who are also employees of the Company do not
receive additional compensation for their services as directors. Upon
consummation of the Offering, directors who are not employees of the Company
will receive annual director compensation consisting of shares of Common Stock
with a value of $10,000 pursuant to the Company's 1998 Stock Incentive Plan and
$5,000 in cash. Each director who is not an employee will receive $1,500 for
each Board meeting attended in person and $500 for each Board meeting attended
telephonically. In addition, each director will receive $500 for each committee
meeting attended in person and $300 for each committee meeting attended
telephonically. Directors also are reimbursed for expenses incurred to attend
meetings of the Board of Directors and its committees. Mr. Witlin also has been
granted an option, contingent upon completion of the Offering, to purchase
35,714 (assuming an initial public offering price of $14.00 per share) shares of
Common Stock on the same terms as the grants to executive officers described
below under "Compensation Pursuant to Plans."
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<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation
earned by the Company's executive officers. As of March 31, 1998, no stock
options or stock appreciation rights had been granted or were outstanding.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION COMPENSATION
- --------------------------------------------------- --------- ---------- ---------- ----------------- -------------
Joseph K. Rensin................................... 1997 $ 150,010 $ 0 $ 0 $ 0
President and Chief Executive Officer
Rick W. Chandler................................... 1997 101,637 22,667 0 0
Vice President, Recovery
John L. Davis...................................... 1997 150,010 16,777 0 1,772
Vice President, Business Development
Jefferson Barnes Moore............................. 1997 138,470 2,000 0 0
Vice President, Acquisitions
Richard J. Palmer.................................. 1997 150,010 118,589 0 188
Vice President and Chief Financial Officer
</TABLE>
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with Messrs. Palmer,
Moore, Chandler and Davis. The employment agreements entitle Messrs. Palmer and
Moore to annual incentive compensation in an amount up to $100,000 in the
discretion of the Compensation Committee, in addition to an annual base
compensation of $150,000. Mr. Davis receives annual compensation of $150,000.
Mr. Chandler receives annual compensation of $100,000 and incentive compensation
based upon the performance of the Recovery Department. Effective April 14, 1998,
Mr. Rensin's annual salary was increased by the Compensation Committee to
$250,000. Mr. Rensin will also be entitled to incentive compensation in an
amount up to $100,000 annually in the discretion of the Compensation Committee.
Messrs. Palmer, Moore, Chandler and Davis are entitled to all Company
benefits to which employees generally are eligible, and each is subject to a
confidentiality agreement that prohibits him from disclosing the Company's
proprietary information, removing Company documents or soliciting other
employees for outside employment for two years after he leaves the Company. In
the event of a breach of the confidentiality agreement, the Company is entitled
to liquidated damages of $100 per day for each day the agreement is violated,
among other remedies.
Messrs. Palmer, Moore, Chandler and Davis each agreed not to compete with
the Company anywhere in the United States for three years from the date he
leaves the Company. Pursuant to their employment agreements, the Company
reimbursed Messrs. Moore and Chandler for $15,000 and $10,000, respectively, in
moving expenses in connection with relocating to Maryland and $10,000 each for
their temporary residence costs during the first several months of their
employment. Mr. Moore also received certain temporary financial assistance in
connection with his relocation. See "Certain Transactions."
COMPENSATION PURSUANT TO PLANS
1998 STOCK INCENTIVE PLAN. The Company has reserved a total of 800,000
shares of Common Stock for issuance pursuant to the Creditrust 1998 Stock
Incentive Plan (the "Stock Plan"). The Stock Plan was
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<PAGE>
established in contemplation of and is contingent upon the completion of this
Offering to provide incentives to motivate and retain key employees of the
Company. The Stock Plan is administered by the Compensation Committee of the
Board of Directors and provides for the grant of incentive stock options and
non-qualified stock options, as well as stock appreciation rights, restricted or
unrestricted stock awards, phantom stock, performance awards, or any combination
of the foregoing. The Compensation Committee is authorized to grant options
under the Stock Plan to all eligible employees of the Company, including
executive officers. Directors who are not also employees of the Company are
eligible for grants under the Stock Plan. Options granted under the Stock Plan
are granted on such terms and at such prices as are determined by the
Compensation Committee, except that the per share exercise price of incentive
stock options granted under the Stock Plan 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 periods specified in the option agreement, but no incentive stock
option may be exercisable after the expiration of 10 years from the date of
grant. No option may be granted under the Stock Plan after April 6, 2008.
Incentive stock options granted to an individual who owns (or is deemed to own)
10% or more 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 Board of Directors has the authority to amend or terminate the Stock Plan,
however certain amendments are subject to stockholder approval.
In connection with the Offering, the Compensation Committee granted options
contingent upon completion of the Offering to purchase certain shares of Common
Stock in an amount to be based on the initial public offering price to Messrs.
Chandler, Davis, Moore, Palmer, Dumser and Elkes and to certain other employees
of the Company. Each of these options is a non-qualified stock option under the
Internal Revenue Code of 1986, as amended (the "Code"), and is contingent upon
the consummation of the Offering. The terms of the options include an exercise
price equal to the initial price to the public at which the shares of Common
Stock are offered hereby, have a 10-year term and vest 20% on the date on which
the Offering is consummated and 20% on the anniversary thereof during each of
the next four years. Upon consummation of the Offering, there will be 800,000
shares of Common Stock available for issuance under the Stock Plan, of which
375,000 shares will be subject to outstanding options.
The following table sets forth certain information with respect to the
non-qualified stock options granted under the Stock Plan in connection with the
Offering (assuming an initial public offering price of $14.00 per share). In
accordance with regulations promulgated by the Securities and Exchange
Commission, the table also describes the hypothetical gains that would exist for
the respective options granted based on assumed rates of annual stock price
appreciation of 5% and 10% from the date of the consummation of the Offering to
the end of the option term. These hypothetical gains are based on assumed rates
of appreciation and, therefore, the actual gains, if any, on stock option
exercises are dependent on the future performance of the Common Stock, overall
stock market conditions, and the continued employment of the named individuals
with the Company. As a result, the amounts reflected in this table may not
necessarily be achieved.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT
INDIVIDUAL GRANTS ASSUMED ANNUAL RATES
-------------------------------------------------------- OF STOCK
NUMBER OF % OF TOTAL PRICE APPRECIATION
SECURITIES OPTIONS FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM
OPTIONS EMPLOYEES PRICE EXPIRATION --------------------
NAME GRANTED IN FISCAL YEAR ($/SH) DATE 5% 10%
- ------------------------------------------ ------------- --------------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Joseph K. Rensin.......................... -- -- -- -- -- --
Rick W. Chandler.......................... 71,429 19.0% $ 14.00 4/6/08 $ 628,575 $1,593,581
John L. Davis............................. 71,429 19.0% $ 14.00 4/6/08 628,575 1,593,581
Jefferson B. Moore........................ 71,429 19.0% $ 14.00 4/6/08 628,575 1,593,581
Richard J. Palmer......................... 71,429 19.0% $ 14.00 4/6/08 628,575 1,593,581
</TABLE>
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STOCK PURCHASE PLAN. The Company has reserved a total of 100,000 shares of
Common Stock for issuance pursuant to the Creditrust 1998 Employee Stock
Purchase Plan (the "Stock Purchase Plan"). The Stock Purchase Plan was
established in contemplation of and is contingent upon the completion of the
Offering to promote the long-term success of the Company by providing employees
of the Company with a convenient opportunity to become stockholders. Options
granted and shares of Common Stock purchased under the Stock Purchase Plan are
intended to qualify for the favorable tax treatment for employees available
under Section 423 of the Code.
The Compensation Committee administers the Stock Purchase Plan. Under the
terms of the Stock Purchase Plan, all eligible employees of the Company on the
date on which the Offering is consummated will be provided the opportunity to
purchase Common Stock through payroll deductions. The purchase price shall be
determined by the Compensation Committee but in no event will it be lower than
85% of the lesser of (i) the fair market value of a share of Company Common
Stock on the offering date; or (ii) the fair market value of a share of Company
Common Stock on the purchase date, provided that the price per share is not less
than par value. The fair market value on any offering date shall be the average
on that date of the high and low prices of a share of Company Common Stock on
the principal national securities exchange on which the shares are trading. The
maximum number of shares for which each employee may purchase options in each
annual period will be determined by the Compensation Committee prior to the
commencement of each offering period. The Stock Purchase Plan limits purchases
to $25,000 per participant for each calendar year. The aggregate amount of
Common Stock that has been reserved is subject to adjustment for
recapitalization, stock dividend, reorganization, merger, consolidation, or
other change in capital affecting the Common Stock.
SMILE PROGRAM. Promptly following the Offering, the Company will implement
as an additional incentive for all employees a Shareholders Make Involved Loyal
Employees ("SMILE") Program. All employees of the Company will participate in
the program. Under the Smile Program, subject to the discretion of the Board of
Directors, the Company will make a cash contribution once in each six month
period in an amount equal to the open market purchase price of 40 shares of
Common Stock per employee to a trust for the benefit of the employees who were
employed at the purchase date. The program trustee will use all contributions to
purchase shares of Company Common Stock in the open market. Thereafter, the
trustee will sell the shares in the open market in four equal installments at
six month intervals and distribute the sale proceeds equally among those
employees participating in the program who remain employed by the Company at
such sale date. It is currently contemplated that all such distributions will be
made in cash.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Pursuant to the Company's Amended and Restated Charter and Bylaws, the
Company is obligated to indemnify each of its directors and officers to the
fullest extent permitted by the MGCL with respect to all liability and losses
suffered and reasonable expenses incurred in any action, suit or proceeding in
which such person was or is made or threatened to be made a party or is
otherwise involved by reason of the fact that such person is or was a director
or officer of the Company. The Company is obligated to pay the reasonable
expenses of the directors or officers incurred in defending such proceedings if
the indemnified party agrees to repay all amounts advanced by the Company if it
is ultimately determined that such indemnified party is not entitled to
indemnification. See "Description of Capital Stock--Limitations on Liability of
Officers and Directors."
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<PAGE>
CERTAIN TRANSACTIONS
Mr. Rensin had unconditionally and personally guaranteed (the "Guaranty")
the Company's bank credit facility, including attorneys fees and expenses,
incurred by the bank in enforcing its rights under the Guaranty. A portion of
the proceeds of the Securitization was used to pay off and terminate this
facility, and, consequently the Guaranty has terminated.
Mr. Rensin also has unconditionally and personally guaranteed (the
"Subordinated Guaranty") the Subordinated Notes. A portion of the proceeds of
the Offering will be used to repay the Subordinated Notes and consequently will
terminate the Subordinated Guaranty. See "Use of Proceeds."
Jefferson B. Moore, who has served as the Company's Vice President,
Acquisitions since January 22, 1997, received a loan of $78,000 on February 28,
1997 pursuant to his employment agreement. The Company issued the loan to Mr.
Moore and his wife to assist with their purchase of a residence in Maryland. Mr.
and Mrs. Moore paid a $38,000 installment on May 30, 1997, leaving a balance of
$40,000 which was repaid in June 1998.
The Company remitted payments on loans due participants (including interest)
of approximately $416,000, $743,000 and $58,000 to Mr. Rensin and various
investment vehicles owned or controlled by Mr. Rensin during the years ended
December 31, 1995, 1996 and 1997, respectively. The remaining amounts due to
participants will be repaid.
The Company also remitted a payment of approximately $66,000 to a
corporation prior to the Offering, of which Mr. Glassberg is an executive
officer, as a finder's fee in connection with the contract for the Serviced
Receivables.
Any future related-party transactions will be on terms at least as favorable
to the Company as available from third parties and will be approved by a
majority of the disinterested directors.
52
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of Common Stock by (i) each person known to the Company to be the
beneficial owner of more than 5% of the outstanding shares of Common Stock, (ii)
each director and executive officer of the Company and (iii) all directors and
executive officers of the Company as a group. Unless otherwise indicated, each
of the shareholders listed below has sole voting and investment power with
respect to the shares beneficially owned.
<TABLE>
<CAPTION>
AMOUNT OF BENEFICIAL PERCENTAGE OWNED
OWNERSHIP ----------------------------------------------
SHARES(1) BEFORE OFFERING(1) AFTER OFFERING(1)(2)(3)
----------------------------- --------------------- -----------------------
<S> <C> <C> <C>
Joseph K. Rensin
7000 Security Blvd.
2nd Floor
Baltimore, MD 21244................. 6,000,000 100% 75.0%
Frederick W. Glassberg................ 714 *% *%
John G. Moran......................... 714 *% *%
Harry G. Pappas, Jr................... 714 *% *%
Michael S. Witlin..................... 7,142 *% *%
Rick W. Chandler...................... 14,286 *% *%
John L. Davis......................... 14,286 *% *%
J. Barry Dumser....................... 3,572 *% *%
David A. Elkes........................ 3,572 *% *%
Jefferson B. Moore.................... 14,286 *% *%
Richard J. Palmer..................... 14,286 *% *%
All directors and executive officers
as a group (11 persons)............. 6,073,572 100% 75.2%
</TABLE>
- ------------------------
* Less than 1%.
(1) Includes in the case of Messrs. Glassberg, Moran, and Pappas shares issuable
as director compensation at the time of the Offering and in the case of
Messrs. Witlin, Chandler, Davis, Dumser, Elkes, Moore and Palmer only the
portion of outstanding employee stock options that will be exercisable upon
the completion of this Offering or within 60 days thereafter. A total of
375,000 shares are subject to outstanding options. Assuming full exercise,
all directors and officers as a group, excluding Mr. Rensin, would
beneficially own 4.5% of the outstanding Common Stock.
(2) Assumes the Underwriters' over-allotment option is not exercised. Exercise
in full of the Underwriters' over-allotment option would reduce Mr. Rensin's
ownership percentage following the Offering to 71.3% and would reduce the
ownership percentage of all directors and executive officers as a group to
71.5%.
(3) Upon the closing of the Offering and assuming an initial public offering
price of $14.00 per share, there will be outstanding Warrants to purchase
396,000 shares at $11.90 per share and employee stock options or Warrants to
purchase 429,000 shares of Common Stock at the initial public offering
price. To the extent that any of the outstanding Warrants are exercised,
there will be further dilution to new investors. See "Shares Eligible for
Future Sale."
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company is authorized to issue 20,000,000 shares of Common Stock, $0.01
par value per share, and 5,000,000 shares of preferred stock, $0.01 par value
per share (the "Preferred Stock"). Upon completion of the Offering, the Company
will have 8,000,000 shares of Common Stock and no shares of Preferred Stock
outstanding. The following description of capital stock of the Company is
qualified in its entirety by reference to the Company's Amended and Restated
Charter, a copy of which is filed as an exhibit to the Registration Statement of
which this Prospectus is a part. Of the total shares of Common Stock authorized,
an additional 1,350,000 shares of Common Stock are reserved for issuance, of
which 450,000 shares are reserved for issuance upon exercise of the Warrants and
900,000 shares are reserved for issuance under employee stock incentive and
stock purchase plans (of which 375,000 shares are reserved for issuance under
outstanding stock options). See "Management--Compensation Pursuant to Plans."
COMMON STOCK
Holders of Common Stock are entitled to one vote per share on all matters
submitted to a vote of stockholders generally. Stockholders have no right to
cumulate their votes in the election of directors. Accordingly, holders of a
majority of the outstanding shares of Common Stock entitled to vote in any
election of directors may elect all of the directors standing for election.
Because Mr. Rensin will own 75% of the aggregate number of shares of Common
Stock outstanding following the Offering, Mr. Rensin will be able to decide all
matters that come before the stockholders. Holders of Common Stock are entitled
to receive dividends and other distributions pro rata when, as and if declared
from time to time by the Board of Directors out of funds legally available
therefor. The Company does not intend to declare or pay any dividends on the
shares of its Common Stock in the near future. See "Dividend Policy." In the
event of a voluntary or involuntary liquidation, dissolution or winding up of
the Company, the holders of Common Stock are entitled to share ratably in all
assets remaining after payment of liabilities, including all distributions to
holders of Preferred Stock having a liquidation preference over the Common
Stock. The Company's Amended and Restated Charter gives the holders of Common
Stock no preemptive or other subscription or conversion rights, and there are no
redemption provisions with respect to such shares. All outstanding shares of
Common Stock are, and the shares offered hereby will be, when issued and paid
for, fully paid and non-assessable. The rights, preferences and privileges of
holders of Common Stock are subject to, and may be adversely affected by, the
rights of holders of shares of any series of Preferred Stock, which the Company
may designate and issue in the future from time to time.
PREFERRED STOCK
Under the Amended and Restated Charter, the Board of Directors is authorized
to issue Preferred Stock, in one or more series, and to fix the number of shares
constituting such series and the designation of such series, the voting powers
(if any) of the shares of such series, and the preferences and relative,
participating, optional or other special rights, if any, and any qualifications,
limitations or restrictions thereof, of the shares of such series. The Company
has no present intention to issue any series of Preferred Stock.
WARRANTS
The Company has issued and outstanding Warrants to purchase 396,000 shares
of Common Stock at an exercise price of $11.90 per share (assuming an initial
public offering price of $14.00 per share) and Warrants to purchase 54,000
shares of Common Stock at the initial public offering price. The Warrants expire
on April 1, 2003 and are subject to customary anti-dilution adjustments upon
dividends and distributions on the Common Stock, subdivisions or
reclassifications of Common Stock, combinations and
54
<PAGE>
reclassifications of the Common Stock, and certain transactions occurring prior
to an initial public offering of Common Stock.
LIMITATIONS ON LIABILITY OF OFFICERS AND DIRECTORS
The Company's Amended and Restated Charter and Bylaws provide for mandatory
indemnification of the officers and directors of the Company to the fullest
extent permitted by the MGCL, including some instances in which indemnification
is otherwise discretionary under MGCL. The Amended and Restated Charter contains
provisions that eliminate the personal liability of the Company's directors and
officers for monetary damages resulting from breaches of their fiduciary duties
as directors or officers other than for a judgment or other final adjudication
adverse to the officer or director that is entered based on a finding of active
or deliberate dishonesty, payment of unlawful distributions, or for any
transaction from which the director or officer derived an improper personal
benefit. The Company believes that these provisions are essential to attracting
and retaining qualified persons as directors and officers.
There is no pending litigation or proceeding involving a director or officer
of the Company as to which indemnification is being sought, and the Company is
not aware of any threatened litigation that may result in claims for
indemnification by any officer or director.
ANTI-TAKEOVER PROVISIONS
BUSINESS COMBINATIONS
Under the MGCL, certain "business combinations" (including a merger,
consolidation, share exchange, or, in certain circumstances, an asset transfer
or issuance or reclassification of equity securities) between a Maryland
corporation and (i) any person who beneficially owns 10% or more of the voting
power of the corporation's shares, (ii) an affiliate or associate of such
corporation who, at any time within the two-year period prior to the date in
question, was the beneficial owner of 10% or more of the voting power of the
then-outstanding voting stock of the corporation (in either case, an "interested
stockholder"), or (iii) any affiliate of an interested stockholder, are
prohibited for five years after the most recent date on which the interested
stockholder became an interested stockholder, and thereafter must be recommended
by the board of directors of the Maryland corporation and approved by the
affirmative vote of at least (a) 80% of the votes entitled to be cast by holders
of its outstanding voting shares, and (b) two-thirds of the votes entitled to be
cast by holders of such outstanding voting shares, other than shares held by the
interested stockholder with whom the business combination is to be effected;
unless, among other things, the corporation's stockholders receive a minimum
price (as defined in the MGCL) for their shares and the consideration is
received in cash or in the same form as previously paid by the interested
stockholder for its shares. These provisions of the MGCL do not apply to
business combinations that are approved or exempted by the board of directors of
the corporation prior to the time that the interested stockholder becomes an
interested stockholder.
The Company generally will be governed by the MGCL's business combinations
statute. However, the stockholders have approved an amendment to the charter of
the Company exempting any business combination with Mr. Rensin or his present or
future affiliates from its application.
CONTROL SHARE ACQUISITIONS
The MGCL provides that "control shares" of a Maryland corporation acquired
in a "control share acquisition" have no voting rights except to the extent
approved by a vote of two-thirds of the votes entitled to be cast by
stockholders, excluding shares of stock as to which the acquiring person,
officers of the corporation and directors of the corporation who are employees
of the corporation are entitled to exercise or direct the exercise of the voting
power of the shares in the election of directors. "Control shares" are voting
shares of stock which, if aggregated with all other shares of stock previously
acquired by such person, would entitle the acquirer to exercise voting power in
electing directors within one of the following
55
<PAGE>
ranges of voting power; (i) one-fifth or more but less than one-third, (ii)
one-third or more but less than a majority, or (iii) a majority of all voting
power. Control shares do not include shares that the acquiring person is
entitled to vote as a result of having previously obtained stockholder approval.
A "control share acquisition" means the acquisition, directly or indirectly, of
control shares, subject to certain exceptions.
A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the board of directors to call a special meeting of stockholders to
be held within 50 days of demand to consider the voting rights of the shares.
If voting rights are not approved at the meeting or if the acquirer does not
deliver an acquiring person statement as required by the statute, then subject
to certain conditions and limitations, the corporation may redeem any or all of
the control shares, except those for which voting rights have previously been
approved, for fair value determined, without regard to voting rights, as of the
date of the last control share acquisition or of any meeting of stockholders at
which the voting rights of such shares are considered and not approved. If
voting rights for control shares are approved at a stockholders' meeting and the
acquirer becomes entitled to vote a majority of the shares entitled to vote, all
other stockholders may exercise appraisal rights. The fair value of the shares
as determined for purposes of such appraisal rights may not be less than the
highest price per share paid in the control share acquisition, and certain
limitations and restrictions generally applicable to the exercise of appraisal
rights do not apply in the context of a control share acquisition.
The control share acquisition statute does not apply to shares acquired in a
merger, consolidation or share exchange if the corporation is a party to the
transaction or to acquisitions approved or excepted by the charter or the bylaws
of the corporation.
The business combination statute and the control share acquisition statute
could have the effect of discouraging unsolicited offers to acquire the Company
and of increasing the difficulty of consummating any such offer.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is American
Stock Transfer & Trust Company.
56
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the Offering, the Company will have 8,000,000 shares of
Common Stock outstanding. Of those shares, the 2,000,000 shares of Common Stock
sold in the Offering will be freely transferable without restriction or
registration under the Securities Act of 1933, as amended (the "Act"), unless
purchased by persons deemed to be "affiliates" of the Company (as that term is
defined in the Act) ("Affiliates"). The remaining 6,000,000 shares of Common
Stock to be outstanding (5,700,000 shares if the Underwriters' over-allotment
option is exercised in full) immediately following the Offering ("Restricted
Shares") may only be sold in the public market if such shares are registered
under the Act or sold in accordance with Rule 144 promulgated under the Act. In
general, under Rule 144 a person (or persons whose shares are aggregated)
including an Affiliate, who has beneficially owned the shares for one year, may
sell in the open market within any three-month period a number of shares that
does not exceed the greater of (i) 1% of the then outstanding shares of the
Company's Common Stock (approximately 80,000 shares immediately after the
Offering), or (ii) the average weekly trading volume in the Common Stock on the
Nasdaq during the four calendar weeks preceding such sale. Sales under Rule 144
are also subject to certain limitations on the manner of sale, notice
requirements and availability of current public information about the Company. A
person (or persons whose shares are aggregated) who is deemed not to have been
an Affiliate of the Company at any time during the 90 days preceding a sale by
such person and who has beneficially owned his shares for at least two years,
may sell such shares in the public market under Rule 144(k) without regard to
the volume limitations, manner of sale provisions, notice requirements or
availability of current information referred to above. Restricted shares
properly sold in reliance upon Rule 144 are thereafter freely tradeable without
restrictions or registration under the Act, unless thereafter held by an
Affiliate of the Company.
The Company has reserved an aggregate of 800,000 shares of Common Stock for
issuance pursuant to the Stock Plan and 100,000 shares for issuance under the
Stock Purchase Plan and the Company intends to register such shares on Form S-8
following the Offering. Subject to restrictions imposed pursuant to the Stock
Plan and the Stock Purchase Plan, shares of Common Stock issued pursuant to the
Stock Plan or Stock Purchase Plan after the effective date of any Registration
Statement on Form S-8 will be available for sale in the public market without
restriction to the extent they are held by persons who are not Affiliates of the
Company, and by Affiliates pursuant to Rule 144.
The Company issued Warrants to purchase 450,000 shares of Common Stock in
connection with its issuance of the Subordinated Notes. The Company has agreed
with the holders of these Warrants to file a shelf registration statement
providing for the resale of the Warrants within 60 days of the effectiveness of
this Registration Statement and to keep the Registration Statement effective
until April 2, 2000. Only Warrant holders who have agreed to a 180-day lock-up
with the Company may include shares of Common Stock in the shelf registration
statement. An affiliate of Boenning & Scattergood, Inc. which purchased Warrants
has agreed for a period of one year commencing April 2, 1998, not to sell or
otherwise dispose, directly or indirectly, of any shares of Common Stock in the
public market.
Prior to the Offering, there has been no trading market for the Common
Stock. No prediction can be made as to the effect, if any, that future sales of
shares pursuant to Rule 144 or otherwise will have on the market price
prevailing from time to time. Sales of substantial amounts of Common Stock into
the public market following the Offering could adversely affect the then
prevailing market price. All of the 6,000,000 shares of Common Stock held by Mr.
Rensin will be eligible for sale under Rule 144 commencing 90 days after
consummation of the Offering. Mr. Rensin has agreed that he will not sell or
otherwise transfer any shares of Common Stock to the public for 180 days after
the Offering without the prior written consent of Ferris, Baker Watts,
Incorporated on behalf of the Underwriters. See "Underwriting."
57
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement,
the Company has agreed to sell to each of the underwriters named below (the
"Underwriters"), for whom Ferris, Baker Watts, Incorporated and Boenning &
Scattergood, Inc. are acting as representatives (the "Representatives"), and
each of the Underwriters has severally agreed to purchase from the Company the
respective number of shares of Common Stock set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
Ferris, Baker Watts, Incorporated................................................
Boenning & Scattergood, Inc......................................................
Total.......................................................................... 2,000,000
----------
----------
</TABLE>
The nature of the respective obligations of the Underwriters is such that
all of the shares of Common Stock must be purchased if any are purchased. The
Underwriting Agreement provides that the obligations of the Underwriters to pay
for and accept delivery of the shares of Common Stock are subject to certain
conditions, including the approval of certain legal matters by counsel.
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock initially at the public offering
price set forth on the cover page of this Prospectus and to certain selected
dealers at such price less a concession not to exceed $ per share; that the
Underwriters may allow, and such selected dealers may reallow, a concession to
certain other dealers not to exceed $ per share; and that after the
commencement of the Offering, the public offering price and the concessions may
be changed.
Mr. Rensin has granted the Underwriters an option to purchase in the
aggregate up to 300,000 additional shares of Common Stock solely to cover
over-allotments, if any. The option may be exercised in whole or in part at any
time within 30 days after the date of this Prospectus. To the extent the option
is exercised, the Underwriters will be severally committed, subject to certain
conditions, to purchase the additional shares of Common Stock in proportion to
their respective purchase commitments as indicated in the preceding table.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, and, where such
indemnification is unavailable, to contribute to payments that the Underwriters
may be required to make in respect of such liabilities.
The Company, the executive officers, directors and stockholder of the
Company, and the holders of the Warrants have agreed that they will not offer,
sell, contract to sell or grant an option to purchase or otherwise dispose of
any shares of the Company's Common Stock, options to acquire shares of Common
Stock or any securities exercisable for, or convertible into Common Stock owned
by them, for a period of 180 days from the date of this Prospectus, without the
prior written consent of Ferris, Baker Watts, Incorporated (except that an
affiliate of Boenning & Scattergood, Inc. will purchase shares at the initial
public offering price per share). The Company also has agreed not to offer, sell
or issue any shares of Common Stock, options to acquire Common Stock or any
securities exercisable for, or convertible into Common Stock, for a period of
180 days from the date of this Prospectus, without the prior written consent of
Ferris, Baker Watts, Incorporated, except that the Company may issue securities
pursuant to the Company's stock option and incentive plans.
The Representatives acted as Placement Agents in the placement of the
Subordinated Notes and Warrants and, in connection therewith, received fees of
$400,000 plus reimbursement of expenses. An affiliate of Boenning & Scattergood,
Inc., one of the Placement Agents, purchased $600,000 in principal amount of the
Subordinated Notes and Warrants to purchase up to 54,000 shares of Common Stock.
Such Warrants are exercisable at a price per share equal to the Price to Public
and cannot be transferred for a
58
<PAGE>
period of one year commencing April 2, 1998, except to Underwriters, selling
group members and their officers and partners. Under Rule 2720 of the Rules of
Conduct of the NASD, when more than 10% of the subordinated debt securities of
the Company are held by a member of the NASD or an affiliate of a member, the
Price to Public of the Shares must be no higher than that recommended by a
"qualified independent underwriter" as that term is defined in Rule 2720.
Boenning & Scattergood, Inc. is a member of the NASD, and an affiliate of
Boenning & Scattergood holds 12% of the Company's Subordinated Notes. In
accordance with Rule 2720, Ferris Baker Watts, Incorporated has agreed to act as
qualified independent underwriter in connection with pricing the Offering and
conducting due diligence. The price to the public of the shares, when sold to
the public at the Price to Public set forth on the cover page of this
Prospectus, will be no higher than that recommended by Ferris, Baker Watts,
Incorporated. Ferris, Baker Watts, Incorporated will receive no additional
compensation for its services as qualified independent underwriter.
Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price for the shares of Common Stock included in
this Offering has been determined by negotiation among the Company, the
Representatives and Ferris, Baker Watts, Incorporated, as qualified independent
underwriter. Among the factors considered in determining such price were the
history of and prospects for the Company's business and the industry in which it
operates, an assessment of the Company's management, past and present revenues
and earnings of the Company, the prospects for growth of the Company's revenues
and earnings and currently prevailing conditions in the securities markets,
including current market valuations of publicly traded companies which are
comparable to the Company. There can be no assurance, however, that the prices
at which the shares of Common Stock will sell in the public market after this
Offering will not be lower than the price at which it is sold by the
Underwriters.
The Representatives have advised the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority.
Certain persons participating in the Offering may over allot or engage in
transactions that stabilize, maintain or otherwise affect the market price of
the Common Stock, including entering stabilizing bids, effecting syndicate
covering transactions or imposing penalty bids. A stabilizing bid means the
placing of any bid or effecting any purchase for the purpose of pegging, fixing
or maintaining the price of the Common Stock. A syndicate covering transaction
means the placing of any bid on behalf of the underwriting syndicate or the
effecting of any purchase to reduce a short position created in connection with
the Offering. A penalty bid means an arrangement that permits the Underwriters
to reclaim a selling concession from a syndicate member in connection with the
Offering when the Common Stock sold by the syndicate member is purchased in
syndicate covering transactions. Any of the transactions described above may
result in the maintenance of the price of the Common Stock at a level above that
which might otherwise prevail in the open market. Such stabilizing activities,
if commenced, may be discontinued at any time.
The Company has also agreed to pay the Representatives a non-accountable
expense allowance equal to 1% of the gross proceeds to the Company for expenses
in connection therewith.
LEGAL MATTERS
Certain legal matters with respect to the validity of the shares of Common
Stock are being passed upon for the Company by Piper & Marbury L.L.P.,
Baltimore, Maryland. Certain legal matters will be passed upon for the
Underwriters by Venable, Baetjer, Howard & Civiletti, LLP, Washington, DC.
EXPERTS
The financial statements for each of the years ended December 31, 1995, 1996
and 1997 included in this Prospectus have been audited by Grant Thornton LLP,
independent certified public accountants, as
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<PAGE>
stated in their reports thereon appearing elsewhere herein, and are included in
reliance on their authority as experts in accounting and auditing.
CHANGE IN INDEPENDENT PUBLIC ACCOUNTANTS
On November 11, 1997, the Audit Committee of the Board of Directors
recommended the appointment of Grant Thornton LLP as the Company's auditors for
the years ended December 31, 1995, 1996 and 1997 and determined not to engage
Arthur Andersen L.L.P. ("Andersen") as the Company's auditors for the year ended
December 31, 1997. The Board had previously appointed Andersen as auditors for
the 1995 and 1996 financial statements. The reports of Andersen on the financial
statements of the Company for each of the two years in the period ended December
31, 1996, did not contain any adverse opinion or disclaimer of an opinion and
were not qualified or modified as to uncertainty, audit scope or accounting
principles. During the two fiscal years in the period ended December 31, 1996,
and the subsequent interim periods preceding the Company's decision, there were
no disagreements with Andersen on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure or any
reportable events (as that term is used in Regulation S-K, Item 304).
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 under the Securities Act with
respect to the Common Stock offered hereby. This Prospectus, which is a part of
the Registration Statement, does not contain all of the information set forth in
the Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and the Common Stock, reference is
hereby made to the Registration Statement and the exhibits and schedules filed
as a part thereof. Statements contained in the Prospectus concerning the
provisions or contents of any contract, agreement or any other document referred
to herein are not necessarily complete. With respect to each such contract,
agreement or document filed as an exhibit to the Registration Statement,
reference is made to such exhibit for a more complete description of the matters
involved, and each statement shall be deemed qualified in its entirety by such
reference to the copy of the applicable document filed with the Commission. A
copy of the Registration Statement, including the exhibits and schedules
thereto, may be inspected without charge at the Public Reference Section of the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the following Regional Offices of the Commission: New York
Regional Office, 7 World Trade Center, 13th Floor, New York, New York 10048; and
Chicago Regional Office, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. Copies of the Registration Statement and the exhibits and schedules
thereto can be obtained from the Public Reference Section of the Commission upon
payment of prescribed fees. The Commission maintains an Internet web site that
contains reports, proxy and information statements and other information
regarding issuers that file electronically with the Commission. The address of
that site is http://www.sec.gov.
Prior to filing the Registration Statement of which this Prospectus is a
part, the Company was not subject to the reporting requirements of Section 13 or
15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Upon effectiveness of the Registration Statement, the Company will become
subject to the informational and periodic reporting requirements of the Exchange
Act, and in accordance therewith, will file periodic reports, proxy statements
and other information with the Commission. Such periodic reports, proxy
statements and other information will be available for inspection and copying at
the public reference facilities and other regional offices referred to above.
The Company intends to register the securities offered by the Registration
Statement under the Exchange Act simultaneously with the effectiveness of the
Registration Statement and to furnish its shareholders with annual reports
containing audited financial statements and quarterly reports for the first
three fiscal quarters of each fiscal year containing unaudited interim financial
information.
60
<PAGE>
CREDITRUST CORPORATION
CONTENTS
<TABLE>
<S> <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS.............................. F-2
FINANCIAL STATEMENTS............................................................
Balance Sheets as of December 31, 1995, 1996 and 1997, and Unaudited Balance
Sheet as of March 31, 1998.................................................. F-3
Statements of Earnings for the years ended December 31, 1995, 1996 and 1997,
and Unaudited Statements of Earnings for the quarters ended March 31, 1997
and 1998.................................................................... F-4
Statements of Stockholder's Equity for the years ended December 31, 1995,
1996, and 1997, and Unaudited Statement of Stockholder's Equity for the
quarter ended March 31, 1998................................................ F-5
Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997,
and
Unaudited Statements of Cash Flows for the quarters ended March 31, 1997 and
1998........................................................................ F-6
Notes to Financial Statements................................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Creditrust Corporation
We have audited the accompanying balance sheets of Creditrust Corporation (the
Company) as of December 31, 1995, 1996 and 1997, and the related statements of
earnings, stockholder's equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above, present fairly, in
all material respects, the financial position of Creditrust Corporation as of
December 31, 1995, 1996 and 1997, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
Grant Thornton LLP
Vienna, Virginia
February 24, 1998
F-2
<PAGE>
CREDITRUST CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
---------------------------------------- ------------
<S> <C> <C> <C> <C>
1995 1996 1997 1998
------------ ------------ ------------ ------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Cash..................................................... $ 548,234 $ 475,635 $ 769,576 $ 912,787
Accounts Receivable...................................... 90,000 13,250 55,766 57,641
Income Taxes Receivable.................................. -- 6,414 200,163 200,163
Finance Receivables...................................... 1,852,110 6,603,735 5,049,839 4,642,561
Prepaid Expenses......................................... 17,215 2,813 59,122 45,240
Property and Equipment................................... 221,312 469,001 1,434,218 1,478,476
Deferred Costs........................................... -- -- 534,700 661,332
Other Assets............................................. 9,380 2,700 100,852 81,470
------------ ------------ ------------ ------------
Total Assets............................................. $ 2,738,251 $ 7,573,548 $ 8,204,236 $ 8,079,670
------------ ------------ ------------ ------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Due to Participants...................................... $ 947,454 $ 84,131 $ 51,181 $ 55,293
Servicing Remittances Due................................ -- -- 101,358 441,633
Income Taxes Payable..................................... 109,038 -- -- --
Accounts Payable and Accrued Expenses.................... 112,176 457,186 653,065 879,825
Notes Payable............................................ -- 3,792,842 2,105,972 1,558,151
Capitalized Lease Obligations............................ 61,749 40,744 972,342 1,021,419
Deferred Income.......................................... -- 895,449 895,449 --
Lease Incentives......................................... -- 72,000 266,630 300,300
Deferred Tax Liability................................... 373,715 623,177 1,093,846 1,343,556
------------ ------------ ------------ ------------
Total Liabilities........................................ 1,604,132 5,965,529 6,139,843 5,600,177
Stockholder's Equity
Preferred stock, $.01 par value; 5,000,000 shares
authorized, none issued and outstanding.............. -- -- -- --
Common stock, $.01 par value; 20,000,000 shares
authorized, 6,000,000 shares issued and
outstanding.......................................... 60,000 60,000 60,000 60,000
Paid-in capital........................................ 52,824 52,824 52,824 52,824
Retained earnings...................................... 1,021,295 1,495,195 1,951,569 2,366,669
------------ ------------ ------------ ------------
Total Stockholder's Equity............................... 1,134,119 1,608,019 2,064,393 2,479,493
------------ ------------ ------------ ------------
Total Liabilities and Stockholder's Equity............... $ 2,738,251 $ 7,573,548 $ 8,204,236 $ 8,079,670
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
CREDITRUST CORPORATION
STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, QUARTER ENDED MARCH 31,
---------------------------------------- --------------------------
1995 1996 1997 1997 1998
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
REVENUE
Income on finance receivables............ $ 4,559,542 $ 5,521,063 $ 7,245,744 $ 1,940,475 $ 1,502,985
Servicing fees........................... -- -- 2,580,200 -- 1,242,347
Gain on sale............................. -- -- -- -- 657,630
------------ ------------ ------------ ------------ ------------
4,559,542 5,521,063 9,825,944 1,940,475 3,402,962
EXPENSES
Personnel................................ 1,846,605 2,617,862 5,922,172 938,065 1,712,444
Contingency legal and court costs........ 374,492 212,530 320,104 101,586 104,445
Communications........................... 404,021 573,118 911,508 143,841 277,793
Rent and other occupancy................. 239,603 382,020 853,344 122,828 302,511
Professional fees........................ 117,094 155,754 504,003 104,483 191,686
General and administrative............... 132,244 193,221 270,509 132,052 83,818
Portfolio repurchase costs............... -- 383,736 -- -- --
------------ ------------ ------------ ------------ ------------
3,114,059 4,518,241 8,781,640 1,542,855 2,672,697
------------ ------------ ------------ ------------ ------------
EARNINGS FROM OPERATIONS................... 1,445,483 1,002,822 1,044,304 397,620 730,265
OTHER INCOME (EXPENSE)
Interest and other....................... 20,533 74,307 14,755 152 10,815
Interest expense......................... (269,634) (287,530) (377,410) (112,435) (75,970)
------------ ------------ ------------ ------------ ------------
EARNINGS BEFORE INCOME TAXES............... 1,196,382 789,599 681,649 285,337 665,110
PROVISION FOR INCOME TAXES................. 462,759 315,699 225,275 111,282 250,010
------------ ------------ ------------ ------------ ------------
NET EARNINGS............................... $ 733,623 $ 473,900 $ 456,374 $ 174,055 $ 415,100
------------ ------------ ------------ ------------ ------------
EARNINGS PER COMMON SHARE.................. $ 0.12 $ 0.08 $ 0.08 $ 0.03 $ 0.07
------------ ------------ ------------ ------------ ------------
WEIGHTED-AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING DURING THE PERIOD............ 6,000,000 6,000,000 6,000,000 6,000,000 6,000,000
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
CREDITRUST CORPORATION
STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ADDITIONAL
COMMON COMMON PAID-IN PREFERRED PREFERRED RETAINED
SHARES STOCK CAPITAL SHARES STOCK EARNINGS TOTAL
---------- --------- ----------- ------------- ------------- ------------ ------------
Balance at January 1, 1995 6,000,000 $ 60,000 $ 52,824 -- $ -- $ 287,672 $ 400,496
Net Earnings -- -- -- -- -- 733,623 733,623
--
---------- --------- ----------- --- ------------ ------------
Balance at December 31,
1995 6,000,000 60,000 52,824 -- -- 1,021,295 1,134,119
Net Earnings 473,900 473,900
--
---------- --------- ----------- --- ------------ ------------
Balance at December 31,
1996 6,000,000 60,000 52,824 -- -- 1,495,195 1,608,019
Net Earnings 456,374 456,374
--
---------- --------- ----------- --- ------------ ------------
Balance at December 31,
1997 6,000,000 60,000 52,824 -- -- 1,951,569 2,064,393
Net Earnings (unaudited) 415,100 415,100
--
---------- --------- ----------- --- ------------ ------------
Balance at March 31, 1998
(unaudited) 6,000,000 $ 60,000 $ 52,824 -- $ -- $ 2,366,669 $ 2,479,493
--
--
---------- --------- ----------- --- ------------ ------------
---------- --------- ----------- --- ------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
CREDITRUST CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
QUARTER ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------- --------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
INCREASE (DECREASE) IN CASH
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings........................................ $ 733,623 $ 473,900 $ 456,374 $ 174,055 $ 415,100
Adjustments to reconcile net earnings to net cash
provided by operating activities
Depreciation.................................... 72,189 84,463 208,643 22,800 81,622
Deferred tax expense............................ 321,247 249,462 470,670 98,541 249,710
Loss on abandoned property...................... 28,880 -- -- -- --
Gain on sale.................................... -- -- -- -- (657,630)
Changes in assets and liabilities
(Increase) decrease in accounts receivable.... (90,000) 76,750 (42,516) (78,000) (1,875)
(Increase) decrease in other assets........... (9,380) 6,680 (98,152) (78,393) 9,575
(Increase) decrease in prepaid expenses....... (12,895) 14,402 (56,309) (7,011) 13,882
(Decrease) increase in accounts payable and
accrued expenses............................ (109,319) 345,010 195,879 405,652 226,760
Increase in servicing remittances due......... -- -- 101,358 -- 340,275
Increase in lease incentives.................. -- 72,000 194,630 -- 33,670
Increase (decrease) in current income taxes
payable/receivable.......................... 47,512 (115,452) (193,749) 5,443 --
---------- ---------- ---------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES............. 981,857 1,207,215 1,236,828 543,087 711,089
---------- ---------- ---------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Collections applied to principal on finance
receivables....................................... 669,770 831,505 2,111,394 417,427 407,278
Purchases of property and equipment................. (75,051) (332,151) (122,668) (120,750) (14,151)
Acquisitions of finance receivables................. (1,179,430) (5,583,130) (557,498) (459,447) --
Deferred gain on sale of finance receivables........ -- 895,449 -- -- --
Net cost of portfolios sold......................... -- -- -- -- (237,819)
---------- ---------- ---------- --------- ---------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES... (584,711) (4,188,328) 1,431,228 (162,770) 155,308
---------- ---------- ---------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings from participants.......... 956,563 -- -- -- --
(Principal payments) accrued interest on borrowings
from participants, net............................ (1,086,865) (863,323) (32,950) 11,527 4,112
(Payments on) proceeds from notes payable, net...... (7,705) 3,771,837 (1,806,465) (48,660) (610,473)
Deferred costs...................................... -- -- (534,700) (269,800) (116,824)
---------- ---------- ---------- --------- ---------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES... (138,007) 2,908,514 (2,374,115) (306,933) (723,185)
---------- ---------- ---------- --------- ---------
NET INCREASE (DECREASE) IN CASH....................... 259,139 (72,599) 293,941 73,384 143,212
---------- ---------- ---------- --------- ---------
CASH AT BEGINNING OF PERIOD........................... 289,095 548,234 475,635 475,635 769,576
---------- ---------- ---------- --------- ---------
CASH AT END OF PERIOD................................. $ 548,234 $ 475,635 $ 769,576 $ 549,019 $ 912,787
---------- ---------- ---------- --------- ---------
---------- ---------- ---------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
CREDITRUST CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE A--ORGANIZATION AND BUSINESS
Creditrust Corporation (the Company), formerly Oxford Capital Corporation,
was incorporated in Maryland on October 17, 1991. The Company acquires and
liquidates consumer finance receivables originated and charged off by national
financial and retail institutions. The Company's customers are located
throughout the United States. The Company does not currently extend credit or
originate loans. Acquisitions are financed by operations and through loans from
third parties.
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING
The Company's accounts are presented on the accrual basis of accounting in
accordance with generally accepted accounting principles.
INTERIM REPORTING
The accompanying condensed financial information as of March 31, 1998, and
for the quarters ended March 31, 1997 and 1998, including such information
included in the notes to the financial statements and disclosures regarding
matters occurring after December 31, 1997, is unaudited. In the opinion of
management, all adjustments, consisting only of normal recurring adjustments,
considered necessary for a fair presentation have been included. Operating
results for any interim period are not necessarily indicative of the results for
any other interim period or for an entire year.
SIGNIFICANT ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenue and expenses during the reporting period. Actual results could differ
from those estimates.
Significant estimates have been made by management with respect to the
collectibility of future cash flows of portfolios. Actual results could differ
from these estimates making it reasonably possible that a change in these
estimates could occur within one year. On a quarterly basis, management reviews
the estimate of future collections, and it is reasonably possible that its
assessment of collectibility may change based on actual results and other
factors.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid securities purchased with a maturity
of three months or less to be cash equivalents.
FINANCE RECEIVABLES/INTEREST INCOME
The Company accounts for its investment in finance Receivables on an accrual
basis under the guidance of Practice Bulletin 6 "Amortization of Discounts on
Certain Acquired Loans" using unique and exclusive static pools. Static pools
are established with accounts having similar attributes, usually based on
acquisition timing and/or by seller. Once a static pool is established the
receivables in the pool are not changed. The discount between the cost of each
static pool and the contractual receivable of the accounts
F-7
<PAGE>
CREDITRUST CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
in the static pools is not recorded since the Company expects to collect a
relatively small percentage of each static pool's contractual receivable
balance. Each static pool is initially recorded at cost.
Accrual accounting for each static pool is measured as a unit for the
economic life of the static pool (similar to one loan) for recognition of income
on finance receivables, or collections applied to principal on finance
receivables, and for provision for loss or impairment. The effective interest
rate for each static pool is estimated based on the estimated monthly
collections over the estimated economic life of each pool, currently five years
based on the Company's collection experience. Income on finance receivables is
accrued monthly based on each static pool's effective interest rate applied to
each static pool's monthly opening carrying value. Monthly collections received
for each static pool reduce each static pool's carrying value. To the extent
collections exceed the interest accrual, the carrying value is reduced and the
reduction is recorded as collections applied to principal. If the accrual is
greater than collections, then the carrying value accretes. Accretion arises as
a result of collection rates lower in the early months of ownership than the
estimated effective yield which reflects collections for the entire economic
life of the static pool. Measurement of impairment and any provision for loss is
based on each static pool. To the extent the estimated future cash flow,
discounted at the estimated yield increases or decreases, the Company adjusts
the yield accordingly. To the extent that the carrying amount of a particular
static pool exceeds its fair value, a valuation allowance would be recognized in
the amount of such an impairment. The estimated yield for each static pool is
based on estimates of future cash flows from collections, and actual cash flows
may vary from current estimates.
SERVICING REVENUE
Servicing fees are recognized when earned based on a percentage of monthly
net collections from a servicing contract. Net collections due the owner under
the servicing contract are paid after month-end and are recorded as servicing
remittances due. The Company does not service accounts for third parties except
in connection with one significant portfolio.
INVESTMENTS IN DEBT AND EQUITY SECURITIES
The Company accounts for investments in accordance with Statement of
Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". As such investments are recorded as
either trading, available-for-sale, or held-to-maturity. The Company will record
its debt securities related to securitizations (see Note R) as
available-for-sale. Such securities are recorded at fair value, and unrealized
holding gains and losses, net of the related tax effect, are not reflected in
earnings but are recorded as a separate component of stockholder's equity until
realized. A decline in the value of an available-for-sale security below cost
that is deemed other than temporary is charged to earnings and results in the
establishment of a new cost basis for the security.
DEFERRED COSTS
The Company accounts for expenditures, principally legal and accounting fees
in connection with its preparation to sell stock in an initial public offering
as capitalized and deferred until an offering occurs. At that time, the costs
will be netted against the capital raised in the offering. The Company accounts
for legal and professional fees in connection with its initial securitization
efforts as capitalized and deferred until it closes a securitization. When a
securitization is accounted for as a sale under SFAS No. 125, all transaction
costs, including legal and accounting fees, are expensed when the gain on sale
is recognized.
F-8
<PAGE>
CREDITRUST CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company capitalized legal and accounting costs incurred in connection
with its placement of senior subordinated notes. These costs will be allocated
between the financing costs of the notes and the paid in capital of the
warrants. The debt financing costs will be amortized over the note period.
DUE TO PARTICIPANTS DEBT/INTEREST EXPENSE
The Company sold rights to a portion of the future proceeds from receivable
collections to certain related parties and third parties. The Company accounted
for the financings as loans. The loans are repaid using only the future
collections of the portfolios. The Company has no obligation to repay the loans
from funds outside the collections on the portfolios. Using the Company's
internally developed cash flow model, future payments on loans were projected.
These projections have been utilized to impute an effective interest rate on
each loan. Monthly interest expense is calculated based on the imputed rates.
The projections of future payments are based on estimates, and ultimate payments
may vary from current estimates.
DEPRECIATION
Property and equipment, consisting of computer equipment, furniture and
fixtures and leasehold improvements, are stated at cost and are depreciated
using a straight-line method of depreciation (using a half-year assumption for
the year of purchase) over the lives of the assets, which range from five to
seven years. Leasehold improvements are amortized over the shorter of the lease
term or estimated useful life. Accelerated methods are used for tax purposes.
ACCOUNTING FOR TRANSFERS OF FINANCIAL ASSETS
In 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." This
Statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. These
standards are based on consistent application of a financial-components approach
that focuses on control. Under this approach, after a transfer of financial
assets, an entity recognizes the financial and servicing assets it controls and
the liabilities it has incurred, derecognizes financial assets when control has
been surrendered, and derecognizes liabilities when extinguished. This Statement
provides consistent standards for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings. The Company adopted
SFAS No. 125 for the year ended December 31, 1997. The adoption of SFAS No. 125
did not have a material effect on the 1997 financial statements.
REPORTING COMPREHENSIVE INCOME
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income,"
effective for fiscal years beginning after December 15, 1997. This Statement
establishes standards for reporting and display of comprehensive income and its
components (revenue, expenses, gains and losses) in a full set of
general-purpose financial statements. This Statement requires all items required
to be recognized under accounting standards as components of comprehensive
income, to be reported in a financial statement that is displayed with the same
prominence as other financial statements. SFAS No. 130 does not require a
specific format for that financial statement but requires that an enterprise
display an amount representing total comprehensive
F-9
<PAGE>
CREDITRUST CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
income for the period in that financial statement. The Statement requires that
an enterprise classify items of other comprehensive income by their nature in a
financial statement and display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in capital in the
equity section of a statement of financial position. Reclassification of
financial statements for earlier periods provided for comparative purposes is
required. The Company will comply with the disclosure requirements of SFAS No.
130 in fiscal year 1998. For the quarters ended March 31, 1997 and 1998, the
Company had no sources of other comprehensive income.
STOCK SPLIT/AUTHORIZATION
On February 19, 1998, the Company effected a 60,000-for-1 stock split of its
common stock in the form of a stock dividend. Pursuant to the split, the Company
increased the number of shares of common stock authorized for issuance from
1,000 to 20,000,000. The stated par value of each common share was changed from
no par to $0.01. In addition, the Company authorized 5,000,000 shares of
preferred stock, with a par value of $0.01.
The accompanying financial statements, including stockholder's equity and
per share amounts, give retroactive effect to the stock split.
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings per Share" (EPS). The Statement replaces the presentation of
primary EPS with a presentation of basic EPS. It also requires dual presentation
of basic and diluted EPS on the face of the income statement for all entities
with complex capital structures and requires a reconciliation of the numerator
and denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS calculation. At December 31, 1997 and March 31, 1998 the Company
had no common stock equivalents.
NOTE C--FINANCE RECEIVABLES
The Company acquires charged off consumer receivables at a discount from the
actual contractual receivable balance. The following summarizes the change in
finance receivables as of:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
---------------------------------------------- --------------
1995 1996 1997 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Balance, at beginning of period................ $ 1,342,450 $ 1,852,110 $ 6,603,735 $ 5,049,839
Acquisitions of finance receivables.......... 1,179,430 5,583,130 557,498 --
Collections applied to principal on finance
receivables................................ (669,770) (831,505) (2,111,394) (407,278)
-------------- -------------- -------------- --------------
Balance, at end of period...................... $ 1,852,110 $ 6,603,735 $ 5,049,839 $ 4,642,561
-------------- -------------- -------------- --------------
<CAPTION>
(unaudited)
<S> <C> <C> <C> <C>
Unrecorded discount............................ $ 175,511,601 $ 426,121,742 $ 403,307,742 $ 403,308,925
-------------- -------------- -------------- --------------
</TABLE>
To the extent that the carrying amount of a static pool exceeds its fair
value, a valuation allowance would be recognized in the amount of such
impairment. As of December 31, 1995, 1996 and 1997 and March 31, 1997 and 1998,
no provision for loss has been recorded.
F-10
<PAGE>
CREDITRUST CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE C--FINANCE RECEIVABLES (CONTINUED)
CHANGE IN ESTIMATE
The Company monitors its projection models with a view towards enhancing
predictability of both the amount and timing of collections. In 1995 and 1996,
the principal model relied on the best available information at the time,
largely based on the past performance characteristics of the aggregate static
pools. After extensive statistical analysis of individual static pool
performances in 1997, the Company implemented a refinement in its analysis of
projected collections used to compute the effective interest rate for income
recognition. The refinement included individual static pool estimates and had
the effect of reducing total static pools future projected cash flows.
Management believes the change reflects a more predictable and conservative
estimate. The total aggregate effect on the specific static pools of the change
in estimate was to decrease net income for 1997 by approximately $700,000.
NOTE D--FAIR VALUE OF FINANCIAL INSTRUMENTS
The accompanying financial statements include various estimated fair value
information as of December 31, 1995, 1996 and 1997, and as of March 31, 1998 as
required by SFAS No. 107, "Disclosures About Fair Value of Financial
Instruments." Such information, which pertains to the Company's financial
instruments, is based on the requirements set forth in the Statement and does
not purport to represent the aggregate net fair value of the Company.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
fair value.
CASH
The carrying amount approximates fair value.
ACCOUNTS RECEIVABLE
Accounts receivable at December 31, 1996 and 1997 and the quarter ended
March 31, 1998 represent loans to non-stockholder employees of the Company. The
carrying amount of such loans approximates the fair value because of the nature
of the transactions and the rates of interest corresponding to quoted market
prices available to the Company.
FINANCE RECEIVABLES
The Company records finance receivables at cost, which is discounted from
the actual principal balance. The fair value of finance receivables was
estimated based upon discounted expected cash flows. Finance receivable
portfolios are reviewed by management on a quarterly basis to ensure the
discount rate reflects management's best estimate of expected future cash flows.
The discount rate is based upon an acceptable rate of return adjusted for
specific risk factors inherent in each individual finance receivable portfolio.
The carrying value of finance receivables approximates fair value at December
31, 1995, 1996 and 1997 and March 31, 1998.
DUE TO PARTICIPANTS
Due to participants represents loans to the Company from selling the rights
to a portion of the future income on certain finance receivable portfolios. The
Company accounts for these transactions as loans,
F-11
<PAGE>
CREDITRUST CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE D--FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
imputing the interest rate using the amounts financed and the projected future
payments on the debt. At December 31, 1995, 1996, and 1997 and March 31, 1998,
the carrying amount of due to participants approximates fair value.
NOTES PAYABLE
Quoted market prices for the same or similar issues or the current rate
offered to the Company for debt of the same remaining maturities are used to
estimate the fair value of the Company's notes payable. At December 31, 1996 and
1997 and March 31, 1998, the carrying amount of the notes payable approximates
fair value.
NOTE E--PROPERTY AND EQUIPMENT
Property and equipment consist of the following at:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------- MARCH 31,
1995 1996 1997 1998
---------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Computer equipment.......................................... $ 142,552 $ 198,710 $ 845,215 $ 947,577
Furniture and fixtures...................................... 152,565 410,240 855,631 879,149
Leasehold improvements...................................... -- 13,145 95,109 95,109
---------- ----------- ------------ ------------
295,117 622,095 1,795,955 1,921,835
Less accumulated depreciation and amortization.............. (73,805) (153,094) (361,737) (443,359)
---------- ----------- ------------ ------------
$ 221,312 $ 469,001 $ 1,434,218 $ 1,478,476
---------- ----------- ------------ ------------
</TABLE>
NOTE F--DEFERRED COSTS
The Company has deferred certain costs related to ongoing securitization,
initial public offering and senior subordinated notes placement efforts.
Deferred costs consist of the following at:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------ ----------
<S> <C> <C>
1997 1998
------------ ----------
Securitization......................................................................... $ 331,595 $ 351,785
Initial public offering................................................................ 203,105 216,748
Senior subordinated notes.............................................................. -- 92,799
------------ ----------
$ 534,700 $ 661,332
------------ ----------
</TABLE>
NOTE G--DUE TO PARTICIPANTS
The Company periodically finances purchases of finance receivables by
selling rights to a portion of the future collections on the receivables. The
Company accounts for the financings as loans, imputing the interest rate using
the amounts financed and the projected future payments on the debt. As of
December 31, 1995, 1996 and 1997 and March 31, 1998, the balance of due to
participants was $947,454, $84,131, $51,181 and $55,293, respectively, which
represents the fair value of estimated future payments to participants. Interest
expense due to participants was $269,634, $204,448, $20,574, $7,469 and $4,112
for
F-12
<PAGE>
CREDITRUST CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE G--DUE TO PARTICIPANTS (CONTINUED)
the years ended December 31, 1995, 1996 and 1997 and the quarters ended March
31, 1997 and 1998, respectively.
Payments to participants are allocated between interest and principal. The
interest portion was imputed based upon the initial contributed amount and the
portion of the projected future collections on the participant portfolios based
upon their participation percentages over a five year term. The difference
between the total payment and the imputed interest amount is recorded as a
reduction against principal.
NOTE H--ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following at:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------- MARCH 31,
1995 1996 1997 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Accounts payable................................................. $ 43,504 $ 216,215 $ 238,684 $ 190,020
Accrued other liabilities........................................ 22,908 68,425 105,350 333,381
Accrued salaries, taxes and fringe benefits...................... 45,764 172,546 309,031 356,424
---------- ---------- ---------- ----------
$ 112,176 $ 457,186 $ 653,065 $ 879,825
---------- ---------- ---------- ----------
</TABLE>
NOTE I--NOTES PAYABLE
On September 23, 1996, the Company entered into a credit facility with a
commercial bank to provide acquisition financing for finance receivables. As of
December 31, 1996 and 1997 and March 31, 1998, the Company had borrowed
$3,792,842, $2,105,972 and $1,558,151, respectively, net of principal payments
made, pursuant to this facility. Each advance is repayable over 24 equal monthly
installments. All the advances have final installments due between October 1998
and March 1999. Interest is payable monthly at 1% over the bank's prime rate,
which was 9.25% at December 31, 1996 and 9.5% at December 31, 1997 and March 31,
1998. The Company has pledged all its receivables, property and intangible
assets to secure the facility which is guaranteed by the Company's stockholder.
The facility contains certain covenants, the most restrictive ones of which
stipulate a minimum level of net worth, cash flow to current funded debt and a
debt service coverage ratio. The Company had complied with all covenants as of
December 31, 1996 and 1997 and March 31, 1998. As of December 31, 1996, 1997 and
March 31, 1997 and 1998, interest expense associated with this facility totaled
$59,827, $296,189, $87,250 and $42,477, respectively. As of December 31, 1996,
the amount available to the Company under this agreement totaled $207,158. There
was no amount available to the Company under this agreement as of December 31,
1997 and March 31, 1998.
F-13
<PAGE>
CREDITRUST CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE I--NOTES PAYABLE (CONTINUED)
For the year ended December 31, 1997, required principal payments were as
follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- --------------------------------------------------------------------------------
<S> <C>
1998............................................................................ $ 2,011,838
1999............................................................................ 94,134
------------
$ 2,105,972
------------
</TABLE>
NOTE J--CAPITALIZED LEASE OBLIGATIONS
The Company has entered into capital lease obligations to finance the
purchase of computer equipment and furniture. The terms of these leases range
from 36 to 48 months. The balance due on the leases was $61,749, $40,744,
$972,342 and $1,021,419 as of December 31, 1995, 1996 and 1997 and March 31,
1998, respectively. Interest rates range from 7% to 12.7%; and interest expense
was $739, $3,629, $60,647, $684 and $26,728 in 1995, 1996 and 1997 and the first
quarter of 1997 and 1998, respectively.
For the year ended December 31, 1997, future minimum annual lease payments
under capital leases together with their present value were as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- --------------------------------------------------------------------------------
<S> <C>
1998............................................................................ $ 325,324
1999............................................................................ 305,534
2000............................................................................ 305,534
2001............................................................................ 239,307
------------
Total minimum lease payments.................................................... 1,175,699
Amount representing interest.................................................... (203,357)
------------
Present value of minimum lease payments......................................... $ 972,342
------------
</TABLE>
NOTE K--INCOME TAXES
Deferred income taxes are recognized for the tax consequences of temporary
differences by applying enacted statutory tax rates applicable to future years
to differences between the financial statement carrying amounts and the tax
bases of existing assets and liabilities, following the guidance of SFAS No.
109, "Accounting for Income Taxes." These differences are primarily the result
from the use of the cost recovery method of accounting for finance receivables
for income tax purposes versus the effective interest rate method for financial
reporting purposes.
F-14
<PAGE>
CREDITRUST CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE K--INCOME TAXES (CONTINUED)
The provision for income taxes consists of the following for the years ended
December 31:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------------
1995 1996 1997
---------- ---------- -----------
<S> <C> <C> <C>
Current expense (refund)................................
Federal............................................... $ 115,811 $ 52,794 $ (161,050)
State................................................. 25,701 13,443 (39,113)
---------- ---------- -----------
141,512 66,237 (200,163)
Deferred
Federal............................................... 263,020 204,246 346,519
State................................................. 58,227 45,216 78,919
---------- ---------- -----------
321,247 249,462 425,438
---------- ---------- -----------
Total................................................... $ 462,759 $ 315,699 $ 225,275
---------- ---------- -----------
</TABLE>
The net deferred tax liability consists of the following as of December 31:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ------------ ------------
<S> <C> <C> <C>
Deferred tax assets
Due to/from participants............................ $ 323,714 $ 29,213 $ 7,378
Deferred income..................................... -- 345,822 345,822
Net operating loss carryforward..................... -- -- 230,674
Other............................................... 43,534 71,340 147,308
---------- ------------ ------------
Gross deferred tax assets............................. 367,248 446,375 731,182
Deferred tax liabilities
Finance receivables................................. 712,430 1,026,765 1,733,864
Other............................................... 28,533 42,787 91,164
---------- ------------ ------------
Gross deferred tax liabilities........................ 740,963 1,069,552 1,825,028
---------- ------------ ------------
Net deferred tax liability............................ $ 373,715 $ 623,177 $ 1,093,846
---------- ------------ ------------
</TABLE>
The differences between the total income tax expense and the income tax
expense computed using the federal income tax rate were as follows for the years
ended December 31:
<TABLE>
<CAPTION>
1995 1996 1997
------------ ---------- ----------
<S> <C> <C> <C>
Pretax income.......................................... $ 1,196,382 $ 789,599 $ 681,649
------------ ---------- ----------
Computed federal income taxes at 34%................... 406,770 268,464 231,761
Computed state income taxes, net of federal benefits... 55,272 36,479 31,492
Permanent differences.................................. 717 10,756 7,366
Other adjustments...................................... -- -- (45,344)
------------ ---------- ----------
Income tax expense..................................... $ 462,759 $ 315,699 $ 225,275
------------ ---------- ----------
</TABLE>
F-15
<PAGE>
CREDITRUST CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE K--INCOME TAXES (CONTINUED)
The permanent differences are primarily due to contributions, penalties, and
meals and entertainment expenses that are not deductible for income tax
purposes. Other adjustments include the 1997 adjustments to the deferred tax
liability. The 1997 adjustment to the deferred tax liability is due to the
Company's current year analysis of its 1996 and prior tax returns compared to
the respective deferred tax liabilities. The Company's analysis resulted in 1996
and prior differences which were adjusted through the 1997 deferred tax
liability. In 1997, the Company generated a net operating loss of approximately
$1,114,000 for tax purposes, of which approximately $517,000 will be carried
back to prior years resulting in a refund of approximately $200,000. The
remaining tax loss of approximately $597,000 is available to offset future
taxable earnings of the Company and expires on December 31, 2012.
NOTE L--DEFERRED INCOME
Occasionally, the Company purchases portfolios with commitments from a third
party to purchase a portion of the newly acquired portfolio. During 1996, a
complaint was filed against the Company by a buyer. On June 16, 1997, management
settled the litigation which resulted in the complaint being dismissed, and the
Company will repurchase the portfolio for $1,037,819, as adjusted for
collections until execution of the repurchase. As a result, management has
deferred the gain on the transaction totaling $895,449.
On February 9, 1998, the Company purchased the portfolio that was the
subject of the deferral of income in 1996 for $1,037,819, and immediately resold
the portfolio for $800,000 to an unrelated major credit card issuer.
Consequently, in the first quarter of 1998, the Company recorded a gain on sale
net of taxes on the resale and recognition of previously deferred income as
follows:
<TABLE>
<S> <C>
Proceeds from resale............................................ $ 800,000
Deferred income recognized...................................... 895,449
Cost of portfolio............................................... (1,037,819)
----------
Gain on sale.................................................... 657,630
Deferred taxes.................................................. (253,976)
----------
Gain on sale after taxes........................................ $ 403,654
----------
</TABLE>
NOTE M--COMMITMENTS AND CONTINGENCIES
LEASES
The Company's former headquarters was leased until December 31, 1996. Rent
expense under this lease for the years ended December 31, 1995 and 1996, was
$131,275 and $120,983, respectively.
In January 1996, the Company entered into an agreement to lease a new
headquarters and collection facility to accommodate future expansion. The lease
commenced on May 1, 1996. The lease also provided reimbursement to the Company
of $10,000 per month to cover rent expense at the former headquarters from the
date of occupancy through December 31, 1996, which totaled $80,000 for the year.
The Company recorded this amount as a lease incentive and is amortizing it
straight-line over the term of the new lease. Rent expense for this lease for
the years ended December 31, 1996 and 1997 and the quarters ended March 31, 1997
and 1998, net of the offset amortized, was $140,027, $210,040, $52,510 and
$54,175, respectively.
F-16
<PAGE>
CREDITRUST CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE M--COMMITMENTS AND CONTINGENCIES (CONTINUED)
In September 1997, the Company entered into an agreement to lease additional
office space for its operations center to accommodate future expansion. The
lease required no payments for the first six months. The Company recorded the
free rent period as a lease incentive and is amortizing it straight-line over
the term of the lease. The Company issued a $250,000 letter of credit as a
deposit on the lease. This letter of credit expires January 10, 1999, unless
renewed. Rent expense for this lease for 1997 was $331,932 including $204,541 of
accrued lease incentive. Rent expense for this lease for the quarter ended March
31, 1997 and 1998 was $29,955 and $99,292, respectively, including $10,522 of
additional accrued lease incentive in 1998.
Future minimum operating lease commitments, net of reimbursements, are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- --------------------------------------------------------------------------------
<S> <C>
1998............................................................................ $ 641,229
1999............................................................................ 667,953
2000............................................................................ 695,948
2001............................................................................ 725,219
2002............................................................................ 756,127
------------
$ 3,486,476
------------
</TABLE>
LITIGATION
The Company is involved in various litigation incurred in the ordinary
course of business. Management believes these items, individually or in
aggregate, will not have a material, adverse impact on the Company.
NOTE N--SERVICING REVENUE
In June 1997, the Company arranged for a commercial bank to acquire, under
an exclusive purchasing agent agreement, a portfolio of approximately $737
million of charged-off balances of Visa and Mastercard accounts originated by a
major money center bank. In August 1997, the Company closed the acquisition for
the bank and acquired the exclusive rights to the servicing, re-marketing and
securitization of, and a majority interest in the underlying recoverable value
of the portfolio. Under the contract, the Company receives servicing income of
85% of net collections through February 1998, 60% of collections until the bank
receives a required amount under the contract which reduces over time by
collections remitted to the bank estimated to be for 18 to 24 months, and 90% of
net collections thereafter in perpetuity. The Company may also cause the resale
or securitization of the portfolio and earns disposition fees of 90% of proceeds
over the bank's required amount. The bank owns the receivables, and the Company
is under no obligation to acquire the portfolio. The contract contains servicer
performance provisions, the most restrictive of which require minimum cumulative
owner's remittance targets until the bank receives its targeted remittances.
Should the servicer fail to meet these provisions, the bank could remove the
Company as servicer.
F-17
<PAGE>
CREDITRUST CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE O--RELATED PARTY TRANSACTIONS
The Company remitted payments on loans due participants (including interest)
of approximately $416,000, $743,000, $58,000, $26,000 and $11,000 to related
parties during the years ended December 31, 1995, 1996 and 1997 and the quarters
ended March 31, 1997 and 1998, respectively.
Additionally, included in accounts receivable are amounts due from
non-stockholder employees of $13,250, $55,766 and $59,641 as of December 31,
1996, 1997 and March 31, 1998, respectively.
The Company also remitted a payment of $66,329 to a non-stockholder related
party as a finder's fee in connection with the servicing contract during the
year ended December 31, 1997.
NOTE P--RETIREMENT PLAN
The Company has a profit-sharing retirement plan which conforms to the
provisions of Section 401(a) of the Internal Revenue Code. The plan covers all
full-time employees after one year of service and allows employees voluntarily
to defer a certain percentage of their income through contributions to the plan.
The Company matches up to 25% of the first 10% of an employee's deferral. For
the years ended December 31, 1995, 1996 and 1997 and for the quarters ended
March 31, 1997 and 1998, the Company's contribution was $5,203, $4,379, $3,168,
$252 and $4,169, respectively.
NOTE Q--SUPPLEMENTAL CASH FLOWS INFORMATION
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
The Company paid the following amounts for interest and income taxes during
the period ended:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
---------------------------------- ----------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Interest......................... $ 269,634 $ 287,530 $ 377,410 $ 112,435 $ 75,970
---------- ---------- ---------- ---------- ----------
Income taxes..................... $ 94,000 $ 181,681 $ 8,000 $ 8,000 $ 300
---------- ---------- ---------- ---------- ----------
</TABLE>
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES
The Company financed the following purchases of property and equipment with
capitalized lease obligations during the periods ended:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
---------------------------------- ----------------------
1995 1996 1997 1997 1998
--------- --------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
Equipment and furniture
purchases...................... $ 64,081 $ -- $ 1,051,193 $ -- $ 111,728
--------- --------- ------------ ---------- ----------
</TABLE>
NOTE R--SUBSEQUENT EVENTS (UNAUDITED)
ISSUANCE OF THE SENIOR SUBORDINATED NOTES AND ATTACHED WARRANTS
In April 1998, the Company sold $5,000,000 aggregate principal amount of
senior subordinated notes, Series 1998, together with common stock purchase
warrants exercisable for an aggregate of 450,000 shares of the Company's common
stock. Each of the 50 units was sold for $100,000 principal amount for the note
and a warrant exercisable for 9,000 shares.
F-18
<PAGE>
CREDITRUST CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE R--SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
The notes currently bear an annual interest rate of 10%, payable quarterly;
beginning January 1, 1999, the interest rate increases to 15% annually, payable
monthly. The principal payments on each note will be paid in eight equal
quarterly installments beginning March 31, 1999. Upon the closing of the initial
public offering or change in control of the Company, the notes plus accrued
interest become immediately redeemable. The notes are unsecured, are
subordinated to the Company's existing and future credit facilities and
guaranteed by the Company's sole stockholder.
Each warrant is exercisable, at the option of the holder, at the lesser of
$12 or 85% of the Company's initial public offering price for 396,000 shares and
100% of the initial public offering price for 54,000 shares. The warrants expire
five years after their issuance.
The Company recorded the fair value of the subordinated notes at $4.5
million and recorded as additional paid-in capital the remaining consideration
of $494,000 before expenses attributable to the fair value of the warrants. The
effective interest rate on the subordinated notes based on this allocation is
12.8%. Upon the conclusion of the initial public offering, the Company will be
required to repay the subordinated notes at $5.0 million plus accrued interest
to the date of repayment. This will result in the Company recording an
extraordinary charge for the early repayment of indebtedness which, including
debt issuance costs, will result in an extraordinary charge of approximately
$659,000 after-tax, ignoring any amortization of financing costs and original
issue discount that will have been expensed between April 2, 1998 and the date
of pay-off.
SECURITIZATION
In June 1998, a special-purpose finance company formed by the Company
issued, through a trust created under an indenture and servicing agreement with
an independent trustee, $14.5 million principal amount of 6.43% Creditrust
Receivables-Backed Notes, Series 1998-1 (the "Securitization Notes"). The
Securitization Notes are secured by a trust estate, consisting of, among other
things, consumer receivables owned by the Company with a carrying value as of
March 31, 1998 of approximately $4.6 million and all of the serviced
receivables. The Company purchased the serviced receivables included in the
securitization for $6.5 million. After payment of the purchase price of the
serviced receivables, retirement of the Company's credit facility (see Note I),
and payment of transaction costs, the Company received cash of $5.6 million and
recognized gain on sale of $6.1 million and recorded a residual investment in
securitization of $4.2 million, all of which will be recognized in the second
quarter of 1998. The residual investment in securitization will be treated as a
debt security classified as available-for-sale in accordance with SFAS 115. The
Company will receive a servicing fee of 20% of the collections of the
receivables in the securitization, and will be entitled to all future recoveries
on these receivables above the debt service on the securitization notes and
trustee and other fees. To the extent that the Company determines in the future
that collections will be less than the carrying value of the residual, the
Company would be required to record an impairment charge. Payment of principal
and interest on the Securitization Notes is insured by a financial guaranty
insurer with a "AA" rating from Standard & Poor's Corporation.
The Company accounted for the securitization as a sale in accordance with
SFAS No. 125 (see Note B). In summary, the securitization qualified as a sale
because it met the following provisions of SFAS No. 125: (i) the sold
receivables were put beyond the reach of the Company and its creditors through a
number of means, including completion of the securitization in a two-step
structure, (ii) the buyer of the receivables is a qualifying special-purpose
entity and(iii) there does not exist an agreement between the
F-19
<PAGE>
CREDITRUST CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE R--SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
Company and the qualifying special purpose entity that maintains the Company's
control over the sold receivables.
The securitization has affected the Company's balance sheet by, among other
things, (i) increasing cash by approximately $5.6 million; (ii) reducing the
investment in finance receivables by approximately $4.6 million; (iii) creating
a residual investment in securitization of approximately $4.2 million; (iv)
eliminating certain deferred costs and similar assets that were recognized in
the transaction; (v) eliminating notes payable and other liabilities that were
retired with a portion of the proceeds of the securitization; (vi) increasing
deferred tax liabilities by approximately $2.4 million, due to the fact that the
securitization is treated as a sale for financial statement purposes but a
financing for income tax purposes; and (vii) increasing retained earnings by
approximately $3.7 million as the result of the net after-tax effect of the
securitization.
EMPLOYEE STOCK PURCHASE PLAN
In conjunction with the initial public offering, the Company has reserved a
total of 100,000 shares of common stock for issuance pursuant to the 1998
Creditrust Employee Stock Purchase Plan. The plan is administered by the Board
of Directors and is open to all eligible employees, who will be able to purchase
shares at a 15% discount to the fair market value subject to certain annual
limitations. As permitted by Statement of Financial Accounting Standards (SFAS)
No. 123, "Accounting for Stock-Based Compensation", the Company will account for
stock-based compensation on the intrinsic value-based method of Accounting
Principles Board Opinion No. 25 (APB 25). As the plan is non-compensatory in
nature, no compensation expense will be recorded for stock purchased pursuant to
the plan.
STOCK INCENTIVE PLAN
In conjunction with the initial public offering, the Company has reserved a
total of 800,000 shares of common stock for issuance pursuant to the Creditrust
1998 Stock Incentive Plan. The Stock Incentive Plan is administered by the Board
of Directors and provides for the grant of stock options and other stock grants
to directors and to all eligible employees of the Company, including executive
officers and directors. Options granted under the plan are granted on such terms
and at such prices as determined by the Board of Directors, except the per share
exercise price may not be less than the fair market value of the common stock on
the date of the grant. The Board of Directors has the authority to amend or
terminate the plan, provided no such amendment or termination adversely affects
the rights of any holder of any outstanding option without the written consent
of such holder.
In connection with the initial public offering, the Board of Directors
granted nonqualified options to key executives and employees which options are
contingent upon the consummation of the offering.
REVISION TO EMPLOYMENT AGREEMENTS
In conjunction with the initial public offering, the Company revised
employment agreements with two executive officers in April 1998. The employment
agreements entitle each officer to incentive compensation up to $100,000 at the
discretion of the Board of Directors, in addition to annual base compensation.
Each agreement contains non-compete and confidentiality clauses.
F-20
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES OTHER THAN THE SHARES OF COMMON STOCK TO WHICH IT RELATES OR AN OFFER
TO, OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary.............................. 3
Risk Factors.................................... 7
Recent Developments--Securitization............. 14
Use of Proceeds................................. 16
Dividend Policy................................. 16
Capitalization.................................. 17
Dilution........................................ 18
Selected Financial Data......................... 19
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 20
Business........................................ 33
Management...................................... 46
Certain Transactions............................ 52
Principal Stockholders.......................... 53
Description of Capital Stock.................... 54
Shares Eligible for Future Sale................. 57
Underwriting.................................... 58
Legal Matters................................... 59
Experts......................................... 59
Change in Independent Public Accountants........ 60
Available Information........................... 60
Index to Financial Statements................... F-1
</TABLE>
------------------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
2,000,000 SHARES
[LOGO]
COMMON STOCK
---------------------
PROSPECTUS
---------------------
FERRIS, BAKER WATTS
Incorporated
BOENNING & SCATTERGOOD, INC.
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following are the estimated expenses in connection with the distribution
of the securities being registered hereunder, other than underwriting discounts
and commissions:
<TABLE>
<S> <C>
Securities and Exchange Commission Fee............................ $ 11,897+
NASD filing fee................................................... 3,950+
Blue Sky fees and expenses*....................................... 5,000
Printing and engraving expenses*.................................. 120,000
Legal fees and expenses*.......................................... 250,000
Accounting fees and expenses*..................................... 150,000
Transfer agent and registrar's fees*.............................. 5,000
Miscellaneous expenses*........................................... 4,153
---------
Total*........................................................ $ 550,000
---------
---------
</TABLE>
- ------------------------
+ Previously paid
* Estimated
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Amended and Restated Charter of the Company provides that, to the
fullest extent permitted by the MGCL, the Company shall indemnify current and
former directors and officers of the Company against any and all liabilities and
expenses in connection with their services to the Company in such capacities.
The Amended and Restated Charter further mandate that the Company shall advance
expenses to its directors and officers to the full extent permitted by the MGCL.
The Articles of Incorporation also permit the Company, by action of its Board of
Directors, to indemnify its employees and agents with the same scope and effect
as the foregoing indemnification of directors and officers.
The Amended and Restated Charter of the Company provides that, to the
fullest extent permitted by the MGCL, no director or officer of the Company
shall be personally liable to the Company or its stockholders for monetary
damages. Under current MGCL, the effect of this provision is to eliminate the
rights of the Company and its stockholders to recover monetary damages against a
director or officer except for the director or officer's (a) willful misconduct,
(b) knowing violation of any criminal law or of any federal or state securities
law, including (without limitation), any claim of unlawful insider trading or
manipulation of the market for any security, or (c) payment of unlawful
distributions, including dividends and stock redemptions.
The Amended and Restated Charter of the Company authorizes the Company to
purchase liability insurance for its officers and directors and the Company
currently maintains such insurance coverage on behalf of its officers and
directors.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On April 2, 1998 the Registrant issued in a private placement transaction
$5,000,000 principal amount of Senior Subordinated Notes, Series 1998 and
Warrants to purchase 450,000 shares of Common Stock in a private placement
transaction exempt from registration under Rule 506 of the Securities Act of
1933, as
II-1
<PAGE>
amended. The Placement Agents were Ferris, Baker Watts, Incorporated and
Boenning & Scattergood, Inc. The net proceeds were added to working capital and
may be used to accrue additional consumer Receivables.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement among Creditrust Corporation (the "Company"), Ferris, Baker Watts,
Incorporated and Boenning & Scattergood, Inc.*
3.1 Amended and Restated Charter of the Company.
3.2 By-Laws of the Company.
4.1 Form of stock certificate.
4.2 Form of Senior Subordinated Note, Series 1998.
4.3 Form of Common Stock Purchase Warrant.
4.4 Senior Subordinated Note Series and Common Stock Warrant Purchase Agreement.
4.5 Registration Rights Agreement.
5 Opinion of Piper & Marbury L.L.P.*
10.1 Creditrust 1998 Stock Incentive Plan.
10.2 Creditrust 1998 Employee Stock Purchase Plan.
10.3 Creditrust SMILE Bonus Program.
10.4 Employment Agreement between the Company and Jefferson Moore.
10.5 Employment Agreement between the Company and Richard Palmer.
10.6 Employment Agreement between the Company and Rick Chandler.
10.7 Employment Agreement between the Company and John Davis.
10.8 Agreement dated March 13, 1997 by and between Crystal Hill Advisors and the Company.
10.9 Servicing Agreement, dated August 6, 1997, by and between Creditrust Corporation and Heartland Bank.
10.10 Loan and Security Agreement, dated September 23, 1996, by and between Oxford Capital Corporation and
Signet Bank.
10.11 Lease Agreement, dated January 24, 1996, by and between BRIT Limited Partnership and Oxford Capital
Corporation.
10.12 Lease Agreement, dated January 22, 1997, by and between A&E Partners and Creditrust Corporation.
10.13 First Amendment to Lease, dated February 27, 1997, by and between A&E Partners and Creditrust
Corporation.
10.14 Indenture and Servicing Agreement, dated as of June 1, 1998, by and among Creditrust SPV2, LLC, Norwest
Bank Minnesota, National Association, Creditrust Corporation and Asset Guaranty Insurance Company.
10.15 Operating Agreement of Creditrust SPV2, LLC, dated June 19, 1998.
16 Letter from Arthur Andersen LLP.
21.1 List of Subsidiaries.
23.1 Consent of Grant Thornton LLP.*
23.2 Consent of Piper & Marbury L.L.P. (included in the opinion filed as Exhibit 5).*
24 Powers of Attorney.
</TABLE>
- ------------------------
* Filed herewith.
(b) Financial Statement Schedules:
None.
II-2
<PAGE>
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the provisions of its Amended
and Restated Charter, Bylaws or laws of the State of Maryland or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration in reliance upon Rule 403A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial BONA FIDE offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amendment to the registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Baltimore,
State of Maryland, on July 9, 1998.
<TABLE>
<S> <C> <C>
CREDITRUST CORPORATION
By: /s/ JOSEPH K. RENSIN
-----------------------------------------
Joseph K. Rensin
CHAIRMAN OF THE BOARD PRESIDENT AND CHIEF
EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed by the following persons in the
capacities indicated on this 9th day of July, 1998.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
Chairman of the Board,
/s/ JOSEPH K. RENSIN President and Chief
- ------------------------------ Executive Officer July 9, 1998
Joseph K. Rensin (Principal Executive
Officer)
Vice President, Chief
/s/ RICHARD J. PALMER Financial Officer and
- ------------------------------ Treasurer (Principal July 9, 1998
Richard J. Palmer Financial and Accounting
Officer)
*
- ------------------------------ Director July 9, 1998
Frederick W. Glassberg
*
- ------------------------------ Director July 9, 1998
John G. Moran
*
- ------------------------------ Director July 9, 1998
Harry G. Pappas, Jr.
*
- ------------------------------ Director July 9, 1998
Michael S. Witlin
* By: /s/ JOSEPH K. RENSIN
Joseph K. Rensin July 9, 1998
ATTORNEY-IN-FACT
II-4
<PAGE>
Exhbit 1.1
2,000,000 Shares
CREDITRUST CORPORATION
Common Stock
(Par Value $0.01 Per Share)
UNDERWRITING AGREEMENT
______________, 1998
_____ p.m.
FERRIS, BAKER WATTS, INCORPORATED
BOENNING & SCATTERGOOD, INC.
As Representatives of the
Several Underwriters Identified
In Schedule I Hereto,
c/o Ferris, Baker Watts, Incorporated
1720 Eye Street, N.W.
Washington, D.C. 20006
Ladies and Gentlemen:
Section 1. Introduction. Creditrust Corporation, a Maryland corporation
(the "Company"), proposes, subject to the terms and conditions stated herein, to
issue and sell to the Underwriters named in Schedule I hereto (the
"Underwriters"), for which Ferris, Baker Watts, Incorporated and Boenning &
Scattergood, Inc. are acting as Representatives (the "Representatives"), an
aggregate of 2,000,000 shares of common stock, par value $0.01 per share
("Stock"), of the Company. In addition, Joseph K. Rensin, the sole shareholder
of the Company (the "Selling Shareholder"), proposes, subject to the terms and
conditions stated herein, to sell to the Underwriters, at the election of the
Underwriters, up to 300,000 additional shares of Stock of the Company solely for
the purpose of covering over-allotments. The 2,000,000 shares to be sold by the
Company are herein called the "Firm Shares" and the 300,000 additional shares to
be sold by the Selling Shareholder are herein called the "Optional Shares". The
Firm Shares and any Optional
<PAGE>
Shares that the Underwriters elect to purchase pursuant to Section 3 hereof are
herein collectively called the "Shares".
Section 2. (a) Representations and Warranties of the Company. The
Company represents and warrants to, and agrees with, each of the Underwriters
that:
(i) A registration statement on Form S-1 (File No. 333-50103)
under the Securities Act of 1933, as amended (the "Act"), with respect to the
Shares, including a form of prospectus subject to completion, has been prepared
by the Company in conformity with the requirements of the Act and the rules and
regulations of the Securities and Exchange Commission (the "Commission")
thereunder (the "Rules and Regulations"). The Company has prepared and filed
such amendments thereto, if any, and such amended preliminary prospectuses, if
any, as may have been required to the date hereof, and will file such additional
amendments thereto and such amended prospectuses as may hereafter be required.
If the Company has elected to rely upon Rule 462(b) of the Rules and Regulations
to increase the size of the offering registered under the Securities Act, the
Company will prepare and file with the Commission a registration statement with
respect to such increase pursuant to Rule 462(b).
If the Company has elected not to rely upon Rule 430A of the
Rules and Regulations, the Company has prepared and will promptly file an
amendment to the registration statement and an amended prospectus (including, if
necessary, a term sheet meeting the requirements of Rule 434 of the Rules and
Regulations) if necessary to complete the Prospectus. If the Company has elected
to rely upon Rule 430A of the Rules and Regulations, it will prepare and file a
prospectus (or, if necessary, a term sheet meeting the requirements of Rule 434)
pursuant to Rule 424(b) that discloses the information previously omitted from
the prospectus in reliance upon Rule 430A. Such registration statement, as
amended at the time it is or was declared effective by the Commission, and, in
the event of any amendment thereto after the effective date, such registration
statement as so amended (but only from and after the effectiveness of such
amendment), including a registration statement (if any) filed pursuant to Rule
462(b) of the Rules and Regulations increasing the size of the offering
registered under the Securities Act and information (if any) deemed to be part
of the registration statement at the time of effectiveness pursuant to Rules
430A(b) and 434(d) of the Rules and Regulations, is hereinafter called the
"Registration Statement". The prospectus included in the Registration Statement
at the time it is or was declared effective by the Commission and any related
prospectus supplement or supplements as filed with or promptly hereafter filed
with the Commission pursuant to Rule 424(b) under the Securities Act, is
hereinafter called the Prospectus", except that if any prospectus (including any
term sheet meeting the requirements of Rule 434 of the Rules and Regulations
provided by the Company for use with a prospectus subject to completion within
the meaning of such Rule 434 in order to meet the requirements of Section 10(a)
of the Rules and Regulations) filed by the Company with the Commission pursuant
to Rule 424(b) (and Rule 434, if applicable) of the Rules and Regulations or any
other such prospectus provided to the Underwriters by the Company for use in
connection with the offering of the Shares (whether or not required to be filed
by the Company with the Commission pursuant to Rule 424(b) of the Rules and
Regulations) differs from the prospectus on file at the time the Registration
Statement is or was
2
<PAGE>
declared effective by the Commission, the term "Prospectus" shall refer to such
differing prospectus (including any term sheet within the meaning of Rule 434 of
the Rules and Regulations) from and after the time such prospectus is filed with
the Commission or transmitted to the Commission for filing pursuant to such Rule
424(b) (and Rule 434, if applicable) or from and after the time it is first
provided to the Underwriters by the Company for such use. The term "Preliminary
Prospectus" as used herein means the preliminary prospectus included in any
Registration Statement prior to the time it becomes or became effective under
the Act and any prospectus subject to completion as described in Rule 430A or
434 of the Rules and Regulations.
Copies of the Registration Statement, any amendment thereto
and any Preliminary Prospectus filed with the Commission, including the
exhibits, financial statements and schedules thereto, have been delivered by the
Company to the Representatives on behalf of the Underwriters.
(ii) If the Registration Statement or any post-effective
amendment thereto has been declared effective, the Commission has not issued any
order suspending the effectiveness of the Registration Statement, any
post-effective amendment thereto or Rule 462(b) Registration Statement, if any,
or preventing or suspending the use of any Preliminary Prospectus, the
Prospectus, the Registration Statement or any amendment or supplement thereto or
suspending the registration of the Shares, nor has the Commission instituted or
threatened to institute any proceedings with respect to such an order. Each
Preliminary Prospectus, at the time of filing thereof, the Registration
Statement and the Prospectus and any amendments or supplements thereto contains
or will contain, as the case may be, all statements that are required to be
stated therein by, and conformed or will conform, as the case may be, in all
material respects to, the requirements of the Act and the Rules and Regulations
thereunder.
(iii) Neither the Registration Statement nor any amendment
thereto, as of its effective date, and neither the Prospectus nor any amendment
or supplement thereto, contains or will contain, as the case may be, an untrue
statement of a material fact or omit or will omit, as the case may be, to state
a material fact required to be stated therein or necessary to make the
statements therein not misleading; provided, however, that the foregoing
representation and warranty shall not apply to any statements or omissions made
in reliance upon and in conformity with information furnished in writing to the
Company by an Underwriter through the Representatives expressly for use therein,
and no event will have occurred which should have been set forth in an amendment
or supplement to the Registration Statement or the Prospectus pursuant to the
requirements of the Act and the Rules and Regulations thereunder which has not
then been set forth in such an amendment or supplement.
(iv) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of Maryland, its
jurisdiction of incorporation, and has been duly qualified as a foreign
corporation for the transaction of business and is in good standing under the
laws of each other jurisdiction in which it owns or leases properties or
conducts any business so as to require such qualification, and has all power and
authority necessary to own or hold its properties and assets and to conduct the
business in which it is engaged as described in or
3
<PAGE>
contemplated by the Registration Statement and the Prospectus. The Company does
not have any subsidiaries.
(v) The Company has the capitalization set forth in the
Prospectus and will have the adjusted capitalization set forth therein at the
Closing Date (as defined in Section 5 hereof), based on the assumptions set
forth therein. All of the shares of capital stock of the Company issued and
outstanding have been duly and validly authorized and issued, are fully paid and
non-assessable, without personal liability attaching to the ownership thereof,
and none of such shares have been issued or are owned or held in violation of
any preemptive or other rights of securityholders or other persons to acquire
securities of the Company. The securities of the Company including, without
limitation, the Shares and the Stock, conform in all material respects to all
statements relating thereto contained in the Registration Statement and the
Prospectus. Other than as disclosed in the Prospectus, there are no holders of
the securities of the Company having rights to registration thereof or
preemptive rights to purchase capital stock of the Company and neither the
filing of the Registration Statement nor the offering or sale of the Shares as
contemplated by this Agreement gives rise to any rights (other than have been
waived or satisfied) for or relating to the registration of any securities of
the Company. Except as created hereby or described in the Prospectus, there are
no commitments, plans or arrangements to issue, and no outstanding options,
warrants or other rights, calling for issuance of, any shares of capital stock
of the Company or other instrument which, by its terms, is convertible into, or
exercisable or exchangeable for, capital stock of the Company. Except as
described in the Prospectus, there is no outstanding security or other
instrument which, by its terms, is convertible into, exercisable for, or
exchangeable for capital stock of the Company.
(vi) The Shares have been duly and validly authorized. When
the Shares are issued and delivered against payment therefor as provided herein,
such Shares will be duly and validly issued, fully paid and non-assessable, will
not have been issued in violation of any preemptive or other rights of
securityholders or other persons to acquire securities of the Company and will
conform in all material respects to all statements relating thereto in the
Registration Statement and the Prospectus. Good and marketable title to the
Shares will pass to the Underwriters on the Closing Date or any Option Closing
Date, as the case may be, free and clear of any lien, encumbrance, security
interest, claim or other restriction whatsoever. The Company has received,
subject to notice of issuance, approval to have the Shares listed on The Nasdaq
National Market ("NNM") and the Company knows of no reason or set of facts which
is likely to adversely affect such approval.
(vii) The financial statements and the related notes and
schedules thereto included in the Registration Statement and the Prospectus
comply in all material respects with the requirements of the Securities Act and
the Rules and Regulations to be shown therein at the dates and for the periods
indicated, are accurate in all material respects and fairly present the
financial condition, results of operations, stockholders' equity and cash flows,
and the other information of the Company at the respective dates and for the
respective periods specified therein. Such financial statements and the related
notes and schedules thereto have been prepared in accordance with generally
accepted accounting principles consistently applied throughout the periods
involved
4
<PAGE>
(except as otherwise noted therein) and have been properly derived from the
books and records of the Company and such financial statements as are audited
have been examined by Grant Thornton LLP, who are independent public accountants
within the meaning of the Act and the Rules and Regulations, as indicated in
their reports filed therewith. The selected financial information and
statistical data set forth under the captions "Prospectus Summary--Summary
Financial Data," "Capitalization," "Selected Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business" in the Prospectus fairly present the information set forth therein,
have been properly derived from the financial statements and other operating
records of the Company and have been compiled on a basis consistent with that of
the audited financial statements in the Registration Statement and the
Prospectus. No other financial statements or financial information, except that
which is contained in the Registration Statement, or the Prospectus (or the most
recent Preliminary Prospectus), required by Form S-1, the Rules and Regulations,
or otherwise, to be included in the Registration Statement, or the Prospectus.
(viii) Since the respective dates as of which information is
given in the Prospectus, and except as otherwise may be stated therein (A) the
Company has not entered into any transaction or incurred any liability or
obligation, contingent or otherwise, which is material to the Company and was
not entered into in the ordinary course; (B) there has not been any change in
the outstanding capital stock of the Company, or any issuance of options,
warrants or rights to purchase the capital stock of the Company, or any material
increase in the long-term debt of the Company, or the occurrence of any event or
circumstances that would, individually or in the aggregate, have a Material
Adverse Effect (as hereinafter defined); (C) the Company has not sustained any
loss or damage (whether or not insured) which has resulted in or reasonably
could be expected, individually or in the aggregate, to result in a Material
Adverse Effect ; (D) there has not been any interference with the business of
the Company from any labor dispute or court or governmental action, order or
decree; (E) the Company has not paid or declared any dividend or other
distribution with respect to its capital stock; and (F) there has not been any
change, contingent or otherwise, in the direct or indirect control of the
Company nor, to the best knowledge of the Company, do there exist any
circumstances which would reasonably be expected to result in such a change.
"Material Adverse Effect" means, when used in connection with the Company, any
development, change or effect that is materially adverse to the business,
properties, assets, net worth, condition (financial or other), or results of
operations of the Company or that reasonably could be expected to be materially
adverse to the prospects of the Company. The Company has no material contingent
liabilities which are not disclosed in the Prospectus.
(ix) The Company has filed all foreign, federal, state and
local income, franchise and other material tax returns required to be filed (or
has obtained extensions with respect thereto) and has paid all taxes shown as
due thereunder and all assessments received by it to the extent that payment has
become due, the Company has made all necessary payroll tax payments. All tax
liabilities have been adequately provided for in the financial statements of the
Company and the Company has no knowledge of any tax deficiency which might be
assessed against the Company which, if so assessed, would have a Material
Adverse Effect.
5
<PAGE>
(x) The Company maintains insurance of the types and in
amounts which it reasonably believes to be adequate for the conduct of its
business and the value of its properties and in such amounts and with such
deductibles as are customary for companies in the same or similar business, all
of which insurance is in full force and effect
(xi) Other than as set forth in the Prospectus, there are no
pending actions, suits, proceedings, or investigations or, to the best knowledge
of the Company, threatened or contemplated actions, suits, proceedings or
investigations before any court, regulatory body, administrative agency or other
governmental body that (A) challenge the validity of the capital stock of the
Company or this Agreement, or of any action taken or to be taken by the Company
pursuant to or in connection herewith; (B) are required to be disclosed in the
Registration Statement or the Prospectus that is not so disclosed; (C) if
determined adversely to the Company, reasonably could be expected, individually
or in the aggregate, to have a Material Adverse Effect; and (D) could reasonably
be expected to materially and adversely affect the consummation of the
transactions contemplated by this Agreement. Any such proceedings that are set
forth in the Prospectus are fairly and accurately summarized therein.
(xii) The Company has full right, power and authority to enter
into, execute and deliver this Agreement and to consummate the transactions
provided for, and perform its obligations as provided, herein. All necessary
corporate proceedings of the Company have been duly taken to authorize the
execution, delivery and performance by the Company of this Agreement. This
Agreement has been duly authorized, executed and delivered by the Company and
constitutes a legal, valid and binding agreement of the Company enforceable
against the Company in accordance with its terms (except as such enforceability
may be limited by applicable bankruptcy, insolvency, reorganization, moratorium
or other laws of general application relating to or affecting the enforcement of
creditors' rights and by the application of equitable principles relating to the
availability of remedies, and except as rights to indemnity or contribution may
be limited by federal or state securities laws and the public policy underlying
such laws).
(xiii) The Company is not in default in the performance or
observance of any obligation, agreement, covenant or condition contained in any
contract, indenture, mortgage, loan agreement, note, franchise, license, lease,
bond, other evidence of indebtedness or other agreement or instrument to which
it is a party or by which it may be bound or to which any of its assets,
properties or businesses are or may be subject, except for such defaults that
would not, individually or in the aggregate, have a Material Adverse Effect. The
Company's execution and delivery of this Agreement and the consummation, by the
Company, of the transactions contemplated hereby, including, without limitation,
the issuance and sale of the Firm Shares, the application of the net proceeds of
the offering as described in the Prospectus under the caption "Use of Proceeds"
and the conduct of its business as described in or contemplated by the
Prospectus will not violate any provision of the Charter or Bylaws of the
Company, and will not result in the breach of, or be in contravention of,
constitute a default under, cause (or permit) the maturation or acceleration of
any liability or the termination of any rights under, or result in the creation
or imposition of any lien, charge or encumbrance upon, any property or assets of
the Company pursuant to the terms of any
6
<PAGE>
contract, indenture, mortgage, loan agreement, note, franchise, license, lease,
bond, other evidence of indebtedness or other agreement or instrument to which
the Company is a party or by which it may be bound or to which any of its
properties, assets or businesses are or may be subject, or any statute,
judgment, decree, order, rule or regulation applicable to the Company of any
government, arbitrator, court, regulatory body or administrative agency or other
governmental body, except those, if any, that are described in the Prospectus or
those which would not, individually or in the aggregate, have a Material Adverse
Effect.
(xiv) All agreements filed as exhibits to the Registration
Statement (whether executed or copies of executed documents) to which the
Company is a party or by which it is or may be bound or to which any of its
assets, properties or businesses are or may be subject have been duly and
validly authorized, executed and delivered by the Company and each constitutes
the legal, valid and binding agreement of the Company, enforceable against it in
accordance with its terms (except as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization or other laws of general
application relating to or affecting enforcement of creditors' rights, and by
the application of equitable principles relating to the availability of
remedies, and except as rights to indemnity or contribution may be limited by
federal or state securities laws and the public policy underlying such laws).
The descriptions and summaries contained in the Registration Statement and the
Prospectus of contracts and other documents are accurate and fairly present in
all material respects the information required to be disclosed with respect
thereto by the Act and the Rules and Regulations, and there are no contracts or
other documents which are required by the Act or the Rules and Regulations to be
described in the Registration Statement or filed as exhibits thereto which are
not so described or filed. The exhibits which have been filed are complete and
correct copies of the documents of which they purport to be copies.
(xv) The Company has good and marketable title in fee simple
to all real property and good and marketable title to all other property and
assets owned by it as set forth in the Prospectus, in each case free and clear
of all liens, security interests, pledges, charges, mortgages and other defects
or encumbrances of any kind or nature, except such as are described in the
Prospectus or such as do not materially affect the value of any such property,
and do not interfere with the use made and proposed to be made of such property
by the Company. Any real properties held or used by the Company under lease are
held or used under valid, subsisting and enforceable leases, such leases are in
full force and effect, the Company is not in default in respect of any material
terms of any such leases and to the best knowledge of the Company there are no
claims that have been asserted by any party adverse to the Company's right as
lessee under any such lease or affecting or challenging the Company's right to
continue possession of the premises subject to any such lease which,
individually or in the aggregate, would have a Material Adverse Affect. No real
property owned, leased, licensed or used by the Company is situated in an area
which is, or to the best knowledge of the Company, will be subject to zoning,
use, or building code restrictions which would prohibit (and no state of facts
relating to the actions or inaction of another person or entity or his or its
ownership, leasing, licensing, or use of any real or personal property exists or
will exist which would prevent) the continued effective ownership, leasing,
licensing, or use of such real property in the business of the Company as
described in or contemplated by the Prospectus.
7
<PAGE>
(xvi) All legally required proceedings in connection with the
authorization, issue and sale of the Shares in accordance with this Agreement
have been taken and no consent, authorization, approval, order, registration,
license, certificate, declaration or permit of or from, or filing with, any
court, regulatory body, administrative agency or other governmental body, is
required for the issue and sale of the Shares by the Company or the execution,
delivery or performance by the Company of this Agreement, except for the
registration under the Act of the Shares and the registration of the Stock under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), each of
which has been made or obtained, and such consents, approvals, authorizations,
registrations or qualifications as may be required under state securities or
Blue Sky laws in connection with the purchase and distribution of the Shares by
the Underwriters, such approval as may be required from the NNM to have the
Shares listed thereon, and such approval as may be required by the National
Association of Securities Dealers, Inc. (the "NASD") in connection with the
terms and conditions set forth in this Agreement. No consent of any party to any
contract, indenture, mortgage, loan agreement, note, franchise, license, lease,
bond, other evidence of indebtedness or other agreement or instrument, or any
arrangement or understanding, to which the Company is a party, by which it may
be bound or to which any of its properties, assets or businesses are or may be
subject, is required for the execution, delivery or performance of this
Agreement by the Company.
(xvii) The Company and the conduct of its business as
described in or contemplated by the Prospectus are not in violation of any
federal, state or local statute, administrative regulation or other law
including, without limitation, the Fair Debt Collections Practices Act, the
Federal Truth-In-Lending Act (and the Federal Reserve Board's Regulation S
issued thereunder), the Fair Debt Billing Act, the Equal Credit Opportunity Act
(and the Federal Reserve Board's Regulation B issued thereunder), the Fair
Credit Reporting Act or the Electronic Fund Transfer Act and, comparable state
statutes, the consequence of which violation(s) would, individually or in the
aggregate, have a Material Adverse Effect.
(xviii) The Company is not in violation of its Charter or
Bylaws or similar constitutive documents; the Company is not (or, as a result of
the passage of time or based on its projected plans of operations, will be) in
default in the performance or observance of any obligation, agreement, covenant
or condition contained in any contract, indenture, mortgage, loan agreement,
note, franchise, license, lease, bond, other evidence of indebtedness or other
agreement or instrument to which it is a party or by which it may be bound or to
which any of its properties, assets or businesses are or may be subject, which
would, individually or in the aggregate have a Material Adverse Effect, or which
would in any way, individually or in the aggregate, impair or delay the
consummation of the transactions contemplated by this Agreement or the offering
of the Shares in the manner contemplated hereby and by the Registration
Statement and the Prospectus, and each contract, indenture, mortgage, loan
agreement, note, franchise, license, lease, bond, other evidence of indebtedness
or other agreement or instrument is in full force and effect and is a legal,
valid and binding obligation of the Company, and to the best knowledge of the
Company, of each other party thereto.
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(xix) The statements set forth in the Prospectus under the
caption "Description of Capital Stock," insofar as they purport to constitute a
summary of the terms of the Company's securities, and under the captions "Shares
Eligible for Future Sale," "Business-Analysis of Receivables to Acquire,"
"Business-Servicing Organization," "Business-Competition," "Business-Trademarks
and Proprietary Information," "Business-Government Regulation,"
"Business-Properties," "Business-Employees," "Business-Legal Proceedings,"
"Management-Compensation of Directors," "Management-Employment Agreements,"
"Management-Compensation Pursuant to Plans," "Management-Indemnification of
Directors and Officers," and "Underwriting" (except, with respect to the
statements under the caption "Underwriting," for information furnished in
writing to the Company by the Underwriters through the Representatives expressly
for use therein), insofar as they purport to describe the provisions of the laws
and the provisions of documents referred to therein, are accurate and fairly
summarize such provisions and there are no other provisions of law or of
documents which are required by the Act or the Rules and Regulations to be
described therein.
(xx) The Company is not and, after giving effect to the
offering and sale of the Shares, will not be, an "investment company" or an
entity "controlled" by an "investment company," as such terms are defined in the
Investment Company Act of 1940 (the "Investment Company Act").
(xxi) The Company owns or is licensed or otherwise has
sufficient right to use, the proprietary knowledge, inventions, patents, patent
applications, trademarks, service marks, trade names, trademark registrations,
service mark registrations, logo marks, copyrights, licenses, inventions and
rights ("Intellectual Property") necessary for the conduct of its business as
described in or contemplated by the Prospectus and the Registration Statement.
To the best knowledge of the Company, none of the activities engaged in by the
Company infringes upon or otherwise conflicts with Intellectual Property rights
of others. No claims have been asserted against the Company by any person with
respect to the use of any such rights or challenging or questioning the validity
or effectiveness of any such rights.
(xxii) No labor disturbance(s) by, or labor dispute(s) with,
the employees of the Company exists or is threatened or imminent which would,
individually or in the aggregate, have a Material Adverse Effect.
(xxiii) The Company (A) is in compliance with all applicable
environmental, safety, health or similar laws or regulations relating to the
protection of human health and safety, the environment or hazardous or toxic
substances or wastes, pollutants or contaminants ("Environmental Laws")
applicable to its business; (B) has received all permits, licenses or other
approvals required under applicable Environmental Laws to conduct its business;
and (C) is in compliance with all terms and conditions of any such permit,
license or approval; except where such noncompliance, failure to receive such
license or approval or failure to comply would not, individually or in the
aggregate, have a Material Adverse Effect.
(xxiv) The Company is in compliance with all applicable
federal or state laws, including the rules and regulations promulgated
thereunder, relating to discrimination in the hiring, promotion or pay of
employees, any applicable federal or state wages and hours law, and the
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provisions of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), applicable to its business, except where such noncompliance would
not, individually or in the aggregate, have a Material Adverse Effect.
(xxv) The employee benefit plans, including employee welfare
benefit plans, of the Company (the "Employee Plans") have been operated in
compliance with the applicable provisions of ERISA, the Internal Revenue Code of
1986, as amended (the "Code"), all regulations, rulings and announcements
promulgated or issued thereunder and all other applicable governmental laws and
regulations (except to the extent such noncompliance would not, individually or
in the aggregate, have a Material Adverse Effect). No reportable event under
Section 4043(b) of ERISA or any prohibited transaction under Section 406 of
ERISA has occurred with respect to any employee benefit plan maintained by the
Company. There are no pending or, to the Company's best knowledge, threatened
claims by or on behalf of any Employee Plan, by any employee or beneficiary
covered under any such Plan or by any governmental authority or otherwise
involving such Plans or any of their respective fiduciaries (other than for
routine claims for benefits). All Employee Plans that are group health plans
have been operated in compliance with the group health plan continuation
coverage requirements of Section 4980B of the Code in all material respects.
(xxvi) The Company has full right, power and authority and has
obtained and holds all licenses, consents, authorizations, approvals, orders,
certificates and permits of and from, and has made all declarations and filings
with all courts, regulatory bodies, administrative agencies, or other
governmental bodies, necessary to own, lease, license and use its properties and
assets and to conduct its business in the manner described in or contemplated by
the Prospectus, except as otherwise described therein, and except where the
failure(s) to so obtain or hold or to so make or file would not, individually or
in the aggregate, have a Material Adverse Effect. The Company has not received
any notice of proceedings relating to the Registration Statement, and to its
best knowledge no governmental body is considering limiting, suspending,
modifying or revoking, any such consent, authorization, approval, order,
certificate or permit which would, individually or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, have a Material Adverse
Effect. The Prospectus fairly and accurately describes each license, consent,
authorization, approval order, certificate and permit the absence of which
would, individually or in the aggregate, have a Material Adverse Effect, or
which would materially and adversely affect the Company's ability to acquire and
collect on the Receivables (as such term is defined in the Prospectus) and
otherwise to expand the business operations of the Company as described in or
contemplated by the Prospectus. The Company has filed with the appropriate
governmental authorities each and every statement, report, information or form
required to be filed by it pursuant to any applicable law, regulation or order,
except where the failure(s) to so file would not, individually or in the
aggregate, have a Material Adverse Effect, and all such filings or submissions
were in compliance with applicable laws and regulations in all material respects
when filed, and no deficiencies have been asserted by any regulatory commission,
agency or authority with respect to such filings or submissions, except where
the failure(s) to so file or cure would not, individually or in the aggregate,
have a Material Adverse Effect. To the Company's best knowledge, except as
disclosed in the Registration Statement and the Prospectus, there are not
pending any changes under any law, regulation, license
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or permit that would have, individually or in the aggregate, a Material Adverse
Effect. The Company has not received any notice of, and to the best knowledge of
the Company, has not been threatened with and/or has not been sued and is not
under investigation with respect to a violation or a possible violation of any
provision of any law, regulation or order, except such violation(s) as would
not, individually or in the aggregate, have a Material Adverse Effect.
(xxvii) Neither the Company nor, to the Company's best
knowledge, any other person acting on behalf of the Company including, without
limitation, any director, officer, agent, or employee of the Company has,
directly or indirectly, while acting on behalf of the Company has (A) used any
corporate funds for unlawful contributions, gifts, entertainment, or other
unlawful expenses relating to political activity; (B) made any unlawful
contribution to any candidate for foreign or domestic office, or to any foreign
or domestic government officials or employees or other person charged with
similar public or quasi-public duties, other than payments required or permitted
by the laws of the United States or any jurisdiction thereof or to foreign or
domestic political parties or campaigns from corporate funds, or failed to
disclose fully any contribution in violation of law; (C) violated any provision
of the Foreign Corrupt Practices Act of 1977, as amended; or (D) made any other
payment of funds of the Company or received or retained any funds which
constitutes a violation by the Company of any law, rule or regulation or is
required to be disclosed in the Prospectus pursuant to the requirements of the
Act and the Rules and Regulations.
(xxviii) The books, records and accounts and systems of
internal accounting controls of the Company currently comply with the
requirements of Section 13(b)(2) of the Exchange Act in all material respects.
(xxix) The minute books of the Company are current and contain
a correct and complete record of all corporate action taken by the Board of
Directors and shareholder of the Company in all material respects and all
signatures contained therein are true signatures of the persons whose signatures
they purport to be.
(xxx) Except as described in the Prospectus, to the best
knowledge of the Company there is no loss or threatened loss of any one or more
customer, supplier, or account which loss(es) would, individually or in the
aggregate, result in a Material Adverse Effect.
(xxxi) The Company has not incurred, directly or indirectly,
any liability for a fee, commission or other compensation on account of the
employment of a broker or finder in connection with the offering and sale of the
Shares contemplated by this Agreement, except for fees and other compensation
owed to the Underwriters.
(xxxii) There are no business relationships or related party
transactions of the nature described in Item 404 of Regulation S-K of the Rules
and Regulations involving the Company and any person referred to in Items 401 or
404 of such Regulation S-K, except as required to be described, and as so
described, in the Prospectus.
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(xxxiii) Since its inception, the Company has not incurred any
liability arising under or as a result of the application of the provisions of
the Act. Without limiting the generality of the foregoing, all offers and sales
of the Company's capital stock prior to the date hereof were at all relevant
times exempt from the registration requirements of the Act, and were the subject
of an available exemption from the registration requirements of all applicable
state securities or Blue Sky laws; and any offering materials prepared in
connection therewith did not include any untrue statement of a material fact or
omit to state any material fact necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
(b) Representations and Warranties of the Selling
Shareholder. The Selling Shareholder represents and warrants to, and agrees
with, each of the Underwriters that:
(i) The Selling Shareholder has received and is familiar with
the Prospectus and the Registration Statement as originally filed with the
Commission and each Prospectus and has no knowledge of any material fact,
condition or information not disclosed in any such Prospectus (preliminary or
other) and the Registration Statement which has or could have a Material Adverse
Effect on the Company; the Selling Shareholder is not prompted to sell the
Optional Shares by any information concerning the Company which is not set forth
in each such Prospectus and the Registration Statement; and to the best
knowledge of the Selling Shareholder, the representations and warranties of the
Company contained in Section 2(a) hereof are true and correct.
(ii) The Selling Shareholder has the legal capacity to enter
into this Agreement and the full right, power and authority to consummate the
transactions provided for hereby, and perform his obligations as provided. This
Agreement has been duly executed and delivered by the Selling Shareholder, and
constitutes the valid, legal and binding agreement of the Selling Shareholder,
enforceable against the Selling Shareholder in accordance with its terms (except
as such enforcement may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application relating to or
affecting the enforcement of creditors' rights and the application of equitable
principles relating to the availability of remedies, and except as rights to
indemnity or contribution may be limited by federal or state securities laws and
the public policy of such laws).
(iii) No consent, authorization, approval, order,
registration, license, certificate, declaration or permit of or from, or filing
with any court, regulatory body, administrative agency or other governmental
body is required for the sale of the Optional Shares by the Selling Shareholder
or the execution, delivery or performance by the Selling Shareholder of this
Agreement, except for the registration under the Act of the Shares and the
registration of the Stock under the Exchange Act, each of which has been made or
obtained, and such consents, approvals, authorizations, registrations or
qualifications as may be required under state securities or Blue Sky laws in
connection with the purchase and distribution of the Shares by the Underwriters,
such approval as may be required from the NNM to have the Shares listed thereon,
such approval as may be required by the NASD in connection with the terms and
conditions set forth in this Agreement.
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(iv) The execution and delivery of this Agreement by the
Selling Shareholder and the consummation, by the Selling Shareholder, of the
transactions contemplated hereby will not (A) result in a breach or constitute a
default under any material agreement or instrument or any decree, judgment or
order to which the Selling Shareholder is a party or by which the Selling
Shareholder may be bound or to which any of the properties or assets of the
Selling Shareholder are or may be subject or (B) violate any law, rule or
regulation applicable to the Selling Shareholder or to which his properties or
assets are or may be subject (other than for the securities or Blue Sky laws of
the various states and the rules and regulations of the NASD and assuming
compliance with the federal securities laws by the other parties hereto).
(v) The Selling Shareholder has and will, just prior to the
closing of the transactions contemplated by the Agreement, have good and
marketable title to the Optional Shares, free and clear of any pledge, lien,
security interest, charge, claim equity or encumbrance of any kind, other than
pursuant to this Agreement. The Selling Shareholder has full right, power and
authority to sell, transfer and deliver the Optional Shares pursuant to the
Agreement and upon delivery of such Optional Shares and payment of the purchase
price therefor as contemplated by this Agreement, each of the Underwriters will
receive good and marketable title to the Optional Shares purchased by it from
the Selling Shareholder, free and clear of any pledge, lien, security interest,
charge, claim, equity or encumbrance of any kind. Except as created hereby,
there are no outstanding options, warrants, rights or other agreements or
arrangements requiring the Selling Shareholder at any time to transfer any of
the Optional Shares.
(vi) For a period of one hundred eighty (180) calendar days
after the date hereof, the Selling Shareholder will not, without the prior
written consent of the Representatives, directly or indirectly, offer to sell,
sell, grant any option for the sale of, or otherwise dispose of, any shares of
Stock or any securities convertible into or exercisable for shares of Stock
owned by the Selling Shareholder or with respect to which the Selling
Shareholder has the power of disposition, other than to the Underwriters
pursuant to this Agreement.
(vii) Certificates in negotiable form for all Optional Shares
have been placed in custody with the Company for the purpose of effecting
delivery hereunder.
(viii) The Selling Shareholder will not take, directly or
indirectly, any action designed to, or that might be reasonably expected to,
cause or result in stabilization or manipulation of the price of the Stock; and
the Selling Shareholder has not distributed and will not distribute any
prospectus or other offering material in connection with the offering and sale
of the Shares other than any Preliminary Prospectus filed with the Commission or
the Prospectuses or other material permitted by the Act or the Rules and
Regulations.
(ix) Neither the Registration Statement nor any amendment
thereto, as of the applicable effective date or dates, and neither the
Prospectus nor any amendment or supplement thereto contains or will not contain
an untrue statement of a material fact regarding the Selling
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Shareholder or omit to state a material fact regarding the Selling Shareholder
required to be stated therein or necessary to make the statements therein not
misleading.
(c) Adequacy of Certificates. Any certificate signed by any
officer of the Company or by the Selling Shareholder and delivered to you or to
your counsel shall be deemed a representation and warranty by the Company or the
Selling Shareholder, as the case may be, to you as to the matters covered
thereby.
Section 3. Purchase of Securities by the Underwriters. On the basis of
the representations, warranties, covenants and agreements herein contained, and
subject to the terms and conditions herein set forth (i) the Company agrees to
sell to each of the Underwriters, and each of the Underwriters agrees, severally
and not jointly, to purchase from the Company, at a price to the public per
share of $_________, less underwriting discounts and commissions per share of
$_____ for a net purchase price per share to the Company of $_____, the number
of Firm Shares set forth opposite the name of such Underwriter in Schedule I
hereto and (ii) in the event and to the extent that the Underwriters shall
exercise the election to purchase Optional Shares as provided below, the Selling
Shareholder agrees to sell to each of the Underwriters, and each of the
Underwriters agrees, severally and not jointly, to purchase from the Selling
Shareholder, at the purchase price per share set forth in clause (i) of this
Section 3, its proportionate share of the number of Optional Shares as to which
such election shall have been exercised (based on the monetary obligation of the
several Underwriters hereunder on account of the purchase of Firm Shares).
The Selling Shareholder hereby grants to the Underwriters the
right to purchase at their election up to 300,000 shares of Stock constituting
the Optional Shares, at the purchase price per share set forth in the paragraph
above, for the sole purpose of covering over-allotments, if any, in the sale of
the Firm Shares. Each such election to purchase Optional Shares may be exercised
only by written notice from the Representatives to the Selling Shareholder,
given within a period of thirty (30) calendar days after the date of this
Agreement and setting forth the aggregate number of Optional Shares to be
purchased and the date on which such Optional Shares are to be delivered, as
determined by you but in no event earlier than the Closing Date or, unless you
and the Selling Shareholder otherwise agree in writing, no earlier than two (2)
nor later than ten (10) business days after the date of such notice.
Section 4. Offering of the Shares by the Underwriters. Upon the
authorization by the Representatives of the release of the Firm Shares, the
several Underwriters propose to make a public offering of the Firm Shares upon
the terms and conditions set forth in the Prospectus.
Section 5. Delivery of and Payment for the Shares.
(a) The Firm Shares to be purchased by each Underwriter
hereunder, in definitive form, and in such authorized denominations and
registered, in such names as the Representatives may request upon at least
forty-eight (48) hours prior notice to the Company, shall be delivered by
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or on behalf of the Company to the Representatives, for the account of such
Underwriter, against payment by or on behalf of such Underwriter of the purchase
price therefor by a wire transfer of immediately available funds to an account
designated by the Company. The Company will cause the certificates representing
the Firm Shares to be made available for checking and packaging at least
twenty-four (24) hours prior to the Closing Date (as defined below) with respect
thereto at the office of Ferris, Baker Watts, Incorporated, 1720 Eye Street, NW,
Washington, D.C. 20006 or such other location as the Representatives may
designate (the "Designated Office"). The time and date of such delivery and
payment shall be, with respect to the Firm Shares, at 10:00 a.m., Washington, DC
time, on ___________, 1998 or such other time and date as the Representatives
and the Company may agree. Such time and date for delivery of the Firm Shares is
herein called the "Closing Date".
(b) Delivery of and payment for any Optional Shares to be
purchased by each Underwriter pursuant hereto shall be made at the Designated
Office at 10:00 a.m., Washington, DC time, on the date specified by the
Representatives in the written notice of the Underwriters' election to purchase
such Optional Shares, or such other time and date as the Representatives and the
Company may agree. Payment of the purchase price for the Optional Shares shall
be made by the Underwriters by a wire transfer of immediately available funds to
an account designated by the Selling Shareholder. Such time and date for
delivery of Optional Shares, if not the Closing Date, is herein called the
"Option Closing Date".
(c) The documents to be delivered on the Closing Date or any
Option Closing Date, as the case may be, by or on behalf of the parties hereto
pursuant to Section 8 hereof, including the cross-receipt for the Shares and any
additional documents requested by the Underwriters, will be delivered at the
offices of Venable, Baetjer & Howard, LLP, 1800 Mercantile Bank & Trust
Building, 2 Hopkins Plaza, Baltimore, Maryland 21201, or such other location as
the Representatives may designate (the "Closing Location"), and the Shares will
be delivered at the Designated Office, on the Closing Date or the Option Closing
Date, as the case may be.
(d) A meeting will be held at the Closing Location at 2:00
p.m., Washington, DC time, on the business day next preceding Closing Date or
any Option Closing Date, as the case may be, or at such other time as is
mutually agreed upon by the parties hereto, at which meeting the final drafts of
the documents to be delivered pursuant to the preceding paragraph will be
available for review by the parties hereto.
Section 6. Covenants of the Company. The Company covenants and agrees
with each of the Underwriters as follows:
(a) The Company will use its best efforts to cause the
Registration Statement, if not effective at the time of execution of this
Agreement, and any amendments thereto, to become effective as promptly as
practicable. If required, the Company will file the Prospectus and any
amendments or supplements thereto with the Commission in the manner and within
the time period required by Rule 424(b) under the Act. During any time when a
prospectus relating to the Shares is required to be delivered under the Act, the
Company will comply with all requirements imposed
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upon it by the Act and the Rules and Regulations to the extent necessary to
permit the continuance of sales of or dealings in the Shares in accordance with
the provisions hereof and of the Prospectus, as then amended or supplemented.
With respect to any registration statement, prospectus, amendment (including any
post-effective amendment), or supplement to be filed with the Commission in
connection with the Shares, the Company will provide a copy of each such
document to each of the Representatives a reasonable time prior to the date such
document is proposed to be filed with the Commission and will not file any such
document without the consent of the Representatives. Any such registration
statement, prospectus, amendment or supplement, when filed, will comply with the
Act and the Rules and Regulations. In the event that the Registration Statement
is effective at the time of execution of this Agreement, but the total number of
Shares subject to this Agreement exceeds the number of Shares covered by the
Registration Statement, the Company will promptly file with the Commission on
the date hereof a registration statement pursuant to Rule 462(b) in accordance
with the requirements of such Rule and will make payment of the filing fee
therefor in accordance with the requirements of Rule 111(b) under the Act.
(b) The Company will advise the Representatives promptly (i)
when the Registration Statement, as amended, has become effective; (ii) if the
provisions of Rule 430A promulgated under the Act will be relied upon, when
the Prospectus has been filed in accordance with said Rule 430A; (iii) when
any post-effective amendment to the Registration Statement becomes effective;
(iv) of any request made by the Commission for amendments or supplements to
the Registration Statement, any Preliminary Prospectus or Prospectus or for
additional information; (v) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement or any
post-effective amendment thereto or any order preventing or suspending the use
of any Preliminary Prospectus or Prospectus or any amendment or supplement
thereto or the institution or threat of any investigation or proceeding for
that purpose; and (vi) of the receipt of any comments from the Commission
regarding the Registration Statement, any post-effective amendment thereto,
the Preliminary Prospectus, the Prospectus, or any amendment or supplement
thereto. The Company will use its best efforts to prevent the issuance of any
stop order by the Commission, and if at any time the Commission shall issue
any stop order, the Company will use its best efforts to obtain the withdrawal
of such stop order at the earliest possible moment.
(c) The Company will cooperate with the Representatives,
their counsel and the Underwriters in qualifying or registering the Shares for
sale, or obtaining an exemption therefrom, under the Blue Sky laws of such
jurisdictions as the Representatives shall designate, and will continue such
qualifications or registrations or exemptions in effect so long as requested by
the Representatives to complete the distribution of the Shares. Notwithstanding
the foregoing, the Company shall not be required to qualify as a foreign
corporation or to file a general consent to service of process in any such
jurisdiction where it is not presently qualified.
(d) The Company consents to the use of the Prospectus (and
any amendment or supplement thereto) by the Underwriters and all dealers to whom
the Shares may be sold, in connection with the offering or sale of the Shares
and for such period of time thereafter as the Prospectus is required by law to
be delivered in connection therewith. If, at any time when a
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prospectus relating to the Shares is required to be delivered under the Act, any
event occurs as a result of which the Prospectus, as then amended or
supplemented, would include any untrue statement of a material fact or omit to
state a material fact necessary to make the statements therein not misleading,
or if it becomes necessary at any time to amend or supplement the Prospectus to
comply with the Act or the Rules and Regulations, the Company promptly will so
notify the Representatives and will prepare and file with the Commission an
amendment to the Registration Statement or an amendment or supplement to the
Prospectus which will correct such statement or omission or effect such
compliance; each such amendment or supplement to be reasonably satisfactory to
counsel to the Underwriters.
(e) As soon as practicable, but in any event not later than
forty-five (45) calendar days after the end of the twelve (12) month period
beginning on the day after the end of the fiscal quarter of the Company during
which the effective date of the Registration Statement occurs ninety (90)
calendar days in the event that such quarter is the Company's last fiscal
quarter), the Company will make generally available to its securityholders, in
the manner specified in Rule 158(b) of the Rules and Regulations, and will
deliver to each of the Representatives, an earnings statement which will be in
the detail required by, and will otherwise comply with, the provisions of
Section 11(a) of the Act and Rule 158(a) of the Rules and Regulations, which
statement need not be audited unless required by the Act or the Rules and
Regulations, covering a period of at least twelve (12) consecutive months after
the effective date of the Registration Statement.
(f) During the period of five (5) years commencing with the
date hereof, the Company will deliver to the Representatives:
(i) within ninety (90) calendar days after the end of
each fiscal year, financial statements for the Company, certified by the
Company's independent certified public accountants, including a balance sheet,
statement of operations, statement of stockholders' equity and statement of cash
flows, with supporting schedules, prepared in accordance with generally accepted
accounting principles, as at the end of such fiscal year and for the twelve (12)
months then ended, accompanied by a copy of the certificate or report thereon of
such independent certified public accountants; provided that if, during such
five-year period, the Company has active subsidiaries, the foregoing financial
statements will be on a consolidated basis to the extent that the accounts of
the Company and its subsidiaries are consolidated, and will be accompanied by
similar financial statements for any significant subsidiary which is not so
consolidated;
(ii) as soon as practicable after filing with the
Commission, all such reports, forms or other documents as may be required from
time to time, under the Act, the Rules and Regulations, the Exchange Act and the
rules and regulations thereunder;
(iii) as soon as they are available, copies of all
information (financial or other) mailed to stockholders;
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(iv) as soon as they are available, copies of all
reports and financial statements furnished to or filed with the NASD, the NNM or
any other securities exchange or market;
(v) promptly following release by the Company, every
press release and every material news item or article of interest to the
financial community in respect of the Company or its affairs which was released
or prepared by the Company; and
(vi) as soon as possible following receipt of a
request, any additional information of a public nature concerning the Company or
its business which the Representatives may reasonably request.
(g) The Company will maintain a transfer agent and, if
necessary under the jurisdiction of incorporation of the Company, a registrar
(which may be the same entity as the transfer agent) for the Stock.
(h) The Company will furnish, without charge, to the
Representatives or on the Representatives' order, at such place as the
Representatives may designate, copies of each Preliminary Prospectus, the
Registration Statement and any amendments thereto, any registration statement
filed pursuant to Rule 462(b) (of which copies three (3) will be signed and will
include all financial statements and exhibits) and the Prospectus, and all
amendments and supplements thereto, in each case as soon as available and in
such quantities as the Representatives may reasonably request.
(i) Except pursuant to this Agreement, the Company will not,
directly or indirectly, without the prior written consent of the
Representatives, issue, offer, sell, offer to sell, contract to sell, grant any
option to purchase, pledge or otherwise dispose (or announce any issuance,
offer, sale, offer of sale, contract of sale, grant of any option to purchase,
pledge or other disposition) of any shares of Stock or any securities
convertible into, or exchangeable or exercisable for, shares of Stock for a
period of one hundred eighty (180) calendar days after the date hereof, other
than issuances pursuant to the exercise of stock options or pursuant to a stock
option or other employee benefit plan in existence on the date hereof or
described in the Registration Statement. With respect to securities issued or
issuable under stock option plans and employee benefit plans, the Company will
not file any registration statement on Form S-8 (or other applicable form) for a
period of one hundred eighty (180) calendar days after the date hereof.
(j) The Company will use its reasonable efforts to cause the
Shares to be duly approved for listing on the NNM prior to the Closing Date and
shall take all reasonably necessary and appropriate action such that the Shares
remain so listed for at least thirty-six (36) months.
(k) None of the Company, any of its officers or directors,
or affiliates, or any affiliates of any of them (within the meaning of the Rules
and Regulations) will take, directly or
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indirectly, any action designed to, or which might reasonably be expected to,
cause or result in stabilization or manipulation of the price of any securities
of the Company.
(l) The Company will apply the net proceeds of the offering
in the manner set forth under the caption "Use of Proceeds" in the Prospectus.
The Company will operate its business in such a manner and, pending application
of the net proceeds of the offering for the purposes and in the manner set forth
under the caption "Use of Proceeds" in the Prospectus, will invest such net
proceeds in such securities so as not to become an "investment company" as such
term is defined under the Investment Company Act.
(m) The Company will timely file all such reports, forms or
other documents as may be required from time to time, under the Act, the Rules
and Regulations, the Exchange Act and the rules and regulations thereunder, and
all such reports, forms and documents so filed will comply as to form and
substance with the applicable requirements under the Act, the Rules and
Regulations, the Exchange Act and the rules and regulations thereunder which may
from time to time be applicable to the Company. The Company shall comply with
the provisions of all undertakings contained in the Registration Statement.
(n) Except as described in the Prospectus, the Company will
not, until the earlier to occur of (i) thirty (30) calendar days following the
date of this Agreement or (ii) the Option Closing Date immediately after which
all Optional Shares shall have been so purchased (the "Final Option Closing
Date"), incur any liability or obligation, direct or contingent, or enter into
any material transaction, other than in the ordinary course of business.
(o) Except as described in the Prospectus, until the later
to occur of (i) thirty (30) calendar days following the date of this Agreement
or (ii) the Final Option Closing Date, the Company will not acquire any of the
Company's Stock, declare or pay any dividend or make any other distribution upon
its Stock payable to its holders of record on a date prior such occurrence.
(p) The Company will comply or cause to be complied with the
conditions to the Underwriters' obligations set forth in Section 8 hereof.
(q) During the period of thirty (30) calendar days
commencing with the date of this Agreement, the Company shall neither issue any
press release or other communication, directly or indirectly, nor hold any press
conference with respect to the offering of the Shares, the Company, or its
business, results of operations, condition (financial or other), property,
assets, liabilities or prospects, without the prior written consent of the
Representatives, which consent shall not unreasonably be denied or delayed;
provided, however, that if counsel to the Company is of the opinion that the
issuance of a press release or other communication or a press conference is
required to comply with or avoid a violation of applicable law, and having been
so informed the Representatives decline to consent thereto, the Company shall be
permitted to issue such press release or other communication or hold such press
conference in the manner advised by its counsel.
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(r) The Company will not, and will cause each of its
officers, directors and certain shareholders designated by the Representatives
to enter into agreements with the Representatives to the effect that such
officer, director or shareholder, as the case maybe, will not, without the prior
written consent of Ferris, Baker Watts, Incorporated, sell, contract to sell,
sell short or otherwise dispose of any Shares or other capital stock of the
Company or any other securities exchangeable for or convertible into Shares for
a period of one hundred eighty (180) calendar days after the date hereof,
provided however, that transfers or other dispositions of shares of Common Stock
for the purpose of estate planning shall be permitted to the extent that the
person(s) obtaining shares as a consequence of any such transfer or disposition
takes such shares subject to the 180 calendar day restriction described above.
Section 7. Expenses.
(a) If the Underwriters purchase the Firm Shares, in
accordance with the terms of this Agreement, the Company will pay the
Representatives, out of the first proceeds of the offering contemplated by this
Agreement, a non-accountable expense allowance of one percent (1%) of the gross
proceeds raised, in order to compensate the Representatives for their expenses
in connection with the transactions contemplated hereby The costs and expenses
of registration, filings and fees of all counsel in completing the applications
and in clearing the offering contemplated by this Agreement through the state
securities commissions or similar regulatory authorities of the various states
or other jurisdictions and of listing the Shares of the NNM shall be borne and
paid by the Company in addition to the non-accountable expense allowance
referred to in the immediately preceding sentence.
(b) If the purchase of the Firm Shares as herein
contemplated is not consummated for any reason other than the Underwriters'
default under this Agreement or other than by reason of Section 11(a) hereof,
the Company shall reimburse the several Underwriters, for their out-of-pocket
expenses (including but not limited to counsel fees and disbursements) in
connection with any investigation made by them, and any preparation made by them
in respect of marketing of the Shares or in contemplation of the performance by
them of their obligations hereunder.
Section 8. Conditions of the Underwriters' Obligations. The obligations
of each Underwriter to purchase and pay for the Shares set forth opposite the
name of such Underwriter in Schedule I are subject to the continuing accuracy of
the representations and warranties of the Company and the Selling Shareholder
herein as of the date hereof, as of the Closing Date, and as of each Option
Closing Date, if any, as if they had been made on and as of the Closing Date or
Option Closing Date, as the case may be; the accuracy on and as of the Closing
Date, and each Option Closing Date, if any, of the statements of officers of the
Company made pursuant to the provisions hereof; the performance by the Company
and the Selling Shareholder on and as of the Closing Date, and each Option
Closing Date, as the case may be, of their respective covenants and agreements
hereunder; and the following additional conditions:
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(a) The Registration Statement shall have been declared
effective, and the Prospectus (containing the information omitted pursuant to
Rule 430(A)) shall have been filed with the Commission not later than the
Commission's close of business on the second business day following the date
hereof or such later time and date to which the Representatives shall have
consented. No stop order suspending the effectiveness of the Registration
Statement or any amendment thereto shall have been issued, and no proceedings
for that purpose shall have been instituted or threatened or, to the best
knowledge of the Company or the Representatives, shall be contemplated by the
Commission. The Company shall have complied with any request of the Commission
for additional information (to be included in the Registration Statement or the
Prospectus or otherwise).
(b) The Representatives shall not have advised the Company
that the Registration Statement, or any amendment thereto, contains an untrue
statement of fact which, in the Representatives' opinion, is material, or omits
to state a fact which, in the Representatives' opinion, is material and is
required to be stated therein or is necessary to make the statements therein not
misleading, or that the Prospectus, or any amendment or supplement thereto,
contains an untrue statement of fact which, in the Representatives' opinion, is
material, or omits to state a fact which, in the Representatives' opinion, is
material and is required to be stated therein or is necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading
(c) On or prior to the Closing Date, and any Option Closing
Date, as the case may be, the Representatives shall have received from counsel
to the Underwriters, such opinion or opinions with respect to the issuance and
sale of the Firm Shares, the Registration Statement and the Prospectus and such
other related matters as the Representatives reasonably may request and such
counsel shall have received such documents and other information as they request
to enable them to pass upon such matters.
(d) On the Closing Date, the Underwriters shall have
received the opinion, dated the Closing Date, of Piper & Marbury L.L.P., counsel
to the Company and the Selling Shareholder to the effect set forth below:
(i) The Company has been duly incorporated and is
validly existing as a corporation in good standing under the laws of Maryland,
its jurisdiction of incorporation, and has been duly qualified as a foreign
corporation for the transaction of business and is in good standing under the
laws of each other jurisdiction in which it owns or leases properties or
conducts any business so as to require such qualification.
(ii) The Company has all power and authority
necessary to own or hold its properties and assets, and to conduct its business
in the manner described in or contemplated by the Registration Statement and the
Prospectus.
(iii) The Company has the duly authorized capital
stock set forth in the Prospectus and will have the adjusted capitalization set
forth therein at the Closing Date, based on
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the assumptions set forth therein. All of the shares of capital stock of the
Company issued and outstanding immediately prior to the Closing Date or an
Option Closing Date, as the case may be, have been duly and validly authorized
and issued, are fully paid and non-assessable, without personal liability
attaching to the ownership thereof, and, to such counsel's knowledge, none of
such shares have been issued or are owned or held in violation of any preemptive
or other rights of securityholders or other persons to acquire securities of the
Company. The securities of the Company including, without limitation, the Shares
and the Stock, conform to all statements relating thereto appearing under the
caption "Description of Capital Stock" section in the Prospectus. Other than as
disclosed in the Prospectus, to such counsel's knowledge, there are no holders
of the securities of the Company having rights to registration thereof or
pre-emptive rights to purchase capital stock of the Company and neither the
filing of the Registration Statement nor the offering and sale of the Shares as
contemplated by this Agreement give rise to any rights (other than have been
waived or satisfied) for or relating to the registration of any securities of
the Company. Except as created hereby or described in the Prospectus, to such
counsel's knowledge, there are no commitments, plans or arrangements to issue,
and no outstanding options, warrants or other rights, calling for issuance of,
any shares of capital stock of the Company or any security or other instrument
which, by its terms, is convertible into, exercisable for, or exchangeable for
capital stock of the Company.
(iv) The Shares have been duly and validly
authorized and, when issued and delivered against payment therefor as provided
herein, will be duly and validly issued and fully paid and non-assessable, to
such counsel's knowledge, will not have been issued in violation of any
preemptive or other rights of securityholders or other persons to acquire
securities of the Company and will conform to all statements relating thereto
appearing under the caption "Description of Capital Stock" in the Prospectus; no
holder thereof is or will be subject to personal liability by reason of being
such a holder. Good and marketable title to the Shares will pass to the
Underwriters on the Closing Date, or any Option Closing Date, as the case may
be, free and clear of any lien, encumbrance, security interest, claim or other
restriction whatsoever.
(v) The Shares have been duly approved for
listing on the NNM.
(vi) The Registration Statement is effective under
the Act. Any required filing of a registration statement pursuant to Rule 462(b)
has been made in the manner and within the time period required by Rule 462(b).
The Prospectus has been filed with the Commission pursuant to the appropriate
subparagraph of Rule 424(b) under the Act and no stop order suspending the
effectiveness of the Registration Statement or any amendment thereto has been
issued, and no proceedings for that purpose have been instituted or are pending
or, to the best knowledge of such counsel, are threatened or contemplated under
the Act.
(vii) The Registration Statement, as amended, and
the Prospectus (except for the financial statements, schedules and other
financial data included therein, as to which such counsel need not express any
opinion), contains all statements that are required to be stated therein
22
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by, and complies as to form in all material respects with, the requirements of
the Act and the Rules and Regulations.
(viii) The descriptions and summaries contained in
the Prospectus of contracts, agreements and other documents are accurate and
fairly represent, in all material respects, the information required to be
disclosed with respect thereto by the Act and the Rules and Regulations. To the
best knowledge of such counsel, all contracts, agreements and other documents
which are required by the Act or the Rules and Regulations to be described in
the Prospectus or to be filed as exhibits to the Registration Statement have
been so described or filed.
(ix) To the best knowledge of such counsel, there
is not pending or threatened against the Company any action, suit or proceeding
by any person or any action, suit, proceeding or investigation before or by any
court, regulatory body, administrative agency or other governmental body,
required to be disclosed in the Registration Statement or the Prospectus which
is not so disclosed. Any such proceedings that are set forth in the Prospectus
are fairly and accurately summarized therein.
(x) The statements set forth under the captions
"Risk Factors," "Use of Proceeds," "Business," "Management," "Shares Eligible
for Future Sale," and "Description of Capital Stock" in the Prospectus, insofar
as such statements constitute summaries of the legal matters, documents or
proceedings referred to therein, fairly and accurately summarize such legal
matters, documents and proceedings.
(xi) The Company has full right, power, and
authority to enter into this Agreement and to consummate the transactions
provided for, and perform its obligations as provided, herein. All necessary
corporate proceedings of the Company have been taken to authorize the execution,
delivery and performance, by the Company, of this Agreement. This Agreement has
been duly authorized, executed and delivered by the Company and, assuming due
authorization, execution and delivery by each other party hereto, constitutes
the valid and binding agreement of the Company, enforceable against the Company
in accordance with its terms (except as such enforcement may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other laws of
general application relating to or affecting creditors' rights and by the
application of equitable principles relating to the availability of remedies and
except as rights to indemnity or contribution may be limited by federal or state
securities laws and the public policy underlying such laws).
(xii) All required consents from any party to any
material contract, indenture, mortgage, loan agreement, note, franchise,
license, lease, bond, other evidence of indebtedness or other agreement or
instrument, or any arrangement or understanding to which the Company is a party,
or to which any of the property, assets or businesses of the Company are or may
be subject, is required for the execution, delivery and performance of this
Agreement have been obtained. None of the Company's execution and delivery of
this Agreement, performance of its obligations hereunder, consummation of the
transactions contemplated herein, including, without
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limitation, the issuance and sale of the Firm Shares, the application of the net
proceeds of the offering in the manner set forth under the caption "Use of
Proceeds" in the Prospectus will conflict with or be in contravention of,
constitute a default under, or entitle any other party to terminate or call a
default under, cause (or permit) the maturation or acceleration of any liability
or result in the creation or imposition of any lien, charge or encumbrance upon,
any property or asset of the Company pursuant to the terms of (A) the Charter or
Bylaws of the Company; (B) the terms of any contract, indenture, mortgage, loan
agreement, note, franchise, license, lease, bond, other evidence of indebtedness
or other agreement or instrument to which the Company is a party or by which the
Company is or may be bound or to which any of its properties, assets or
businesses are or may be subject; (C) any statute, rule or regulation of any
regulatory body, administrative agency or other governmental body, having
jurisdiction over the Company or any of its properties; assets, or businesses,
(D) any order or decree of any government, arbitrator, court, regulatory body or
administrative agency or other governmental agency or body, domestic or foreign,
having such jurisdiction.
(xiii) All legally required proceedings in
connection with the authorization, issue and sale of the Shares by the Company
in accordance with this Agreement have been taken and no consent, approval,
authorization, order, license, certificate, declaration or permit from or of, or
filing with, any court, regulatory body, administrative agency or other
governmental body, has been or is required for the Company's performance of this
Agreement or the consummation of the transactions contemplated hereby, except
such as may be required under federal or state securities laws in connection
with the purchase and distribution by the Underwriters of the Shares.
(xiv) The Company is not in violation or breach of
its Charter or Bylaws. Except as disclosed in the Prospectus, neither the
Company, nor, to such counsel's best knowledge, any other party is in violation
or breach of, or in default with respect to, any material provision of any
contract, indenture, mortgage, loan agreement, note, franchise, license, lease,
bond, other evidence of indebtedness or other agreement or instrument, or
arrangement or understanding which is material to the Company, and each such
contract, indenture, mortgage, loan agreement, note, franchise, license, lease,
bond, other evidence of indebtedness or other agreement or instrument,
arrangements or understanding is in full and force and is the legal, valid and
binding obligation of the Company.
(xv) The Company does not own or have title to any
real property. Any real properties held or used by the Company under lease are
held or used under valid, subsisting and enforceable leases, such leases are in
full force and effect, the Company is not in default in respect of any material
terms of any such leases and to such counsel's best knowledge there are no
claims that have been asserted by any party adverse to the Company's right as
lessee under any such lease or affecting or challenging the Company's right to
continue possession of the premises subject to any such lease which,
individually or in the aggregate, would have a Material Adverse Affect. No real
property owned, leased, licensed or used by the Company is situated in an area
which is, or to the best knowledge of such counsel, will be subject to zoning,
use, or building code restrictions which would prohibit (and no state of facts
relating to the actions or inaction of another person or entity or
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his or its ownership, leasing, licensing, or use of any real or personal
property exists or will exist which would prevent) the continued effective
ownership, leasing, licensing, or use of such real property in the business of
the Company as described in or contemplated by the Prospectus.
(xvi) The Company is not and, after giving effect
to the offering and sale of the Shares, will not be an "investment company," or
an entity "controlled" by an "investment company," as such terms are defined in
the Investment Company Act.
(xvii) To the best knowledge of such counsel, since
the effective date of the Registration Statement or the later effective date of
any amendment thereto, no event has occurred which should have been set forth in
an amendment or supplement to the Registration Statement or Prospectus which has
not been so set forth.
(xviii) The Company has full right, power and
authority and has obtained and holds all licenses, consents, authorizations,
approvals, orders, certificates and permits of and from, and has made all
declarations and filings with all courts, regulatory bodies, administrative
agencies, or other governmental bodies, necessary to own, lease, license and use
its properties and assets and to conduct its business in the manner described in
or contemplated by the Prospectus, except as otherwise described therein. The
Company has not received any notice of proceedings relating to the Registration
Statement, and to its best knowledge no governmental body is considering
limiting, suspending, modifying or revoking, any such consent, authorization,
approval, order, certificate or permit which would, individually or in the
aggregate, if the subject of an unfavorable decision, ruling or finding, have a
Material Adverse Effect. The Company has filed with the appropriate governmental
authorities each and every statement, report, information or form required to be
filed by it pursuant to any applicable law, regulation or order, except where
the failure(s) to so file would not, individually or in the aggregate, have a
Material Adverse Effect, and all such filings or submissions were in compliance
with applicable laws and regulations when filed, and no deficiencies have been
asserted by any regulatory commission, agency or authority with respect to such
filings or submissions, except where the failure(s) to so file or cure would
not, individually or in the aggregate, have a Material Adverse Effect. The
Company has not received any notice of, and to the best knowledge of the
Company, has not been threatened with and/or has not been sued and is not under
investigation with respect to a violation or a possible violation of any
provision of any law, regulation or order, except such violation(s) as would
not, individually or in the aggregate, have a Material Adverse Effect.
(xix) This Agreement has been duly executed and
delivered by the Selling Shareholder, and assuming due authorization, execution
and delivery by each other party hereto, constitutes the valid and binding
agreement of the Selling Shareholder, enforceable against the Selling
Shareholder in accordance with its terms (except as such enforcement may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other laws of general application relating to or affecting creditors' rights and
by the application of equitable principles relating to the availability of
remedies and except as rights to indemnity or contribution may be limited by
federal or state securities laws and the public policy underlying such laws).
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(xx) No consent, authorization, approval, order,
registration, license, certificate, declaration or permit of, or filing with,
any court or governmental or regulatory body, administrative agency or other
governmental body is required for the sale of the Optional Shares by the Selling
Shareholder or the execution, delivery and performance of this Agreement, except
for the registration under the Act of the Shares and the registration of the
Stock under the Exchange Act, each of which has been made or obtained, and such
consents, approvals, authorizations, registrations or qualifications as may be
required under state securities or Blue Sky laws in connection with the purchase
and distribution of the Shares by the Underwriters, such approval as may be
required from the NNM to have the Shares listed thereon, such approval as may be
required by the NASD in connection with the terms and conditions set forth in
this Agreement.
(xxi) The Selling Shareholder has the legal
capacity to enter into this Agreement and the full right, power and authority to
consummate the transactions provided for hereby, and perform his obligations as
provided. This Agreement has been duly executed and delivered by the Selling
Shareholder, and constitutes the valid, legal and binding agreement of the
Selling Shareholder, enforceable against the Selling Shareholder in accordance
with its terms (except as such enforcement may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other laws of general
application relating to or affecting the enforcement of creditors' rights and
the application of equitable principles relating to the availability of
remedies, and except as rights to indemnity or contribution may be limited by
federal or state securities laws and the public policy of such laws).
(xxii) The execution and delivery of this Agreement
by the Selling Shareholder and the consummation hereby, by the Selling
Shareholder, of the transactions contemplated will not (A) result in a breach
of, or constitute a default under, any material agreement or instrument or any
decree, judgment or order to which the Selling Shareholder is a party or by
which the Selling Shareholder may be bound or to which any of the properties of
the Selling Shareholder are or may be subject or (B) violate any law, rule or
regulation applicable to the Selling Shareholder or to which his properties are
or may be subject (other than for the securities or Blue Sky laws of the various
states and the rules and regulations of the NASD and assuming compliance with
the federal securities laws by the other parties hereto).
(xxiii) To the best knowledge of such counsel, the
Selling Shareholder has good and marketable title to the Optional Shares to be
sold by the Selling Shareholder hereunder and full power, right and authority to
sell such Optional Shares, and upon the delivery of and payment for the Shares
as herein contemplated, each of the Underwriters will receive good and
marketable title to the Shares purchased by it from the Selling Shareholder,
free and clear of any lien, encumbrance, security interest, claim or other
restriction whatsoever.
(xxiv) To the best knowledge of such counsel, there
is not pending or threatened any action, suit, or proceeding by any person or
any action, suit, proceeding or investigation before any court, regulatory body,
or administrative agency or any other governmental
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body against the Company or the Selling Shareholder, or to which the business or
properties or assets of the Company or the Selling Shareholder is subject or by
which such business, properties or assets may be bound, which seeks to restrain,
enjoin, prevent consummation of or otherwise challenge this Agreement or any of
the transactions contemplated hereby.
(xxv) To such counsel's best knowledge, the written
information provided by the Selling Shareholder for use in the Prospectus did
not and does not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein not misleading and the information contained under the
caption "Principal Stockholders" in the Prospectus or any amendment or
supplement thereto with respect to the Selling Shareholder does not contain any
untrue statement of a material fact or omits to state a material fact necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading.
In addition, such counsel shall state that in the course of the
preparation of the Registration Statement and the Prospectus, such counsel has
participated in conferences with officers and representatives of the Company and
the Selling Shareholder, with the Company's independent public accountants, and
with the Representatives, at which conferences such counsel made inquiries of
such officers, representatives and accountants and discussed the contents of the
Registration Statement and the Prospectus and on the basis of the foregoing,
nothing has come to such counsel's attention that would lead such counsel to
believe that either the Registration Statement or any amendment thereto, as of
the date the Registration Statement or such amendment is or was declared
effective, and as of the Closing Date or any Option Closing Date, as the case
may be, or the Prospectus as of the date thereof and as of the Closing Date or
any Option Closing Date, as the case may be, contained or contains any untrue
statement of a material fact or omitted or omits to state a material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading (it
being understood that such counsel need not express any belief with respect to
the financial statements, and the notes and schedules related thereto and other
financial information or statistical data included in the Registration
Statement, any amendment thereto, or the Prospectus).
In rendering any such opinions, such counsel may rely, (i) as to
matters of fact, to the extent such counsel deems proper, on certificates of
responsible officers of the Company provided that copies of any such
certificates shall be delivered to counsel for the Underwriters and (ii) to the
extent such counsel deems proper, upon written statements or certificates of
public officials, provided that copies of any such statements or certificates
shall be delivered to counsel for the Underwriters.
References to the Registration Statement and the Prospectus in
this paragraph (d) shall include any amendment or supplement thereto at the date
of such opinion.
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(e) On the Closing Date, the Underwriters shall have
received the opinion, dated the Closing Date, of J. Barry Dumser, Vice President
and General Counsel of the Company to the effect set forth below:
(i) The Company and the conduct of its business
as described in or contemplated by the Prospectus are or will not be, as the
case may be, in violation of any federal, state or local statute, administrative
regulation or other rule or law including, without limitation, the Fair Debt
Collections Practices Act, the Federal Truth-In-Lending Act (and the Federal
Reserve Board's Regulation S issued thereunder), Fair Debt Billing Act, Equal
Credit Opportunity Act (and the Federal Reserve Board's Regulation B issued
thereunder), the Fair Credit Reporting Act and the Electronic Fund Transfer Act,
and comparable state statutes, the consequence of which violation(s) would no,
individually or in the aggregate, have a Material Adverse Effect, or which could
in any way, individually or in the aggregate, impair or delay the consummation
of the transactions contemplated by this Agreement or the offering of the Shares
in the manner contemplated by the Prospectus.
(ii) The Prospectus fairly and accurately describes
each license, consent, authorization, approval order, certificate and permit the
absence of which would, individually or in the aggregate, have a Material
Adverse Effect, or which would materially and adversely affect the Company's
ability to acquire and collect on the Accounts (as such term is defined in the
Prospectus) and otherwise to expand the business operations of the Company as
described in or contemplated by the Prospectus.
(iii) Except as disclosed in the Registration
Statement and the Prospectus, there are not pending any changes under any law,
regulation, license or permit that would have, individually or in the aggregate,
a Material Adverse Effect.
(f) On or prior to the Closing Date or any Option Closing
Date, as the case may be, counsel to the Underwriters shall have been furnished
such documents, certificates and opinions as they may reasonably require in
order to evidence the accuracy, completeness or satisfaction of any of the
representations or warranties of the Company or the Selling Shareholder or
conditions herein contained.
(g) On the date hereof the Representatives shall have
received a letter from Grant Thornton LLP, independent certified public
accountants, dated the such date and addressed to the Underwriters, in form and
substance satisfactory to the Representative, stating that (i) they are
independent public accountants as required by the Securities Act and the
Securities Act Regulations; (ii) it is their opinion that the financial
statements included in the Registration Statement and covered by their opinion
therein comply as to form in all material respects with the applicable
accounting requirements of the Securities Act and the applicable rules and
regulations thereunder, including without limitation, Regulation S-X of the
Commission; (iii) based upon limited procedures set forth in detail in such
letter, nothing has come to their attention which causes them to believe that
during the period from December 31, 1997 to a specified date not
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more than five (5) calendar days prior to the date of this Agreement, there has
been any decrease in the capital stock or increase in long-term debt of the
Company or any decrease in total assets of the Company as compared with the
amounts shown in the December 31, 1997 consolidated balance sheet included in
the Registration Statement, or any decrease, as compared with the corresponding
period in the preceding year, in net income of the Company, except in each case
as set forth or contemplated in the Registration Statement; (iv) they have read
the Registration Statement and certain dollar amounts, percentages and other
financial information specified by the Representatives which is included in the
Registration Statement and have performed the procedures set forth in detail in
such letter and have found such amounts, percentages or other financial
information to be in agreement with the relevant accounting and financial
records of the Company.
(h) On the Closing Date, the Underwriter shall have received
from Grant Thornton LLP a letter, dated as of the Closing Date, to the effect
that they reaffirm the statements made in the letter furnished pursuant to
paragraph (f) of this Section, except that the "specified date" referred to
shall be a date not more than five (5) days prior to the Closing Date.
(i) On the Closing Date and any Option Closing Date, the
Underwriters shall have received a certificate, dated the Closing Date or such
Option Closing Date, as the case may be, of the principal executive officer and
the principal financial or accounting officer of the Company to the effect that
each such person has carefully examined the Registration Statement and the
Prospectus and any amendments or supplements thereto and this Agreement, and
that:
(i) the representations and warranties of the
Company in this Agreement are true and correct, as if made on and as of the
Closing Date or the Option Closing Date, as the case may be, and the Company has
complied with all agreements and covenants and satisfied all conditions
contained in this Agreement on its part to be performed or satisfied at or prior
to the Closing Date or such Option Closing Date;
(ii) No stop order suspending the effectiveness of
the Registration Statement has been issued, and no proceedings for that purpose
have been instituted or are pending or, to the best knowledge of each such
person, are contemplated or threatened under the Act and any and all filings
required by Rule 424, Rule 430A and Rule 462(b) have been timely made;
(iii) The Registration Statement and Prospectus
and, if any, each amendment and each supplement thereto, contain all statements
and information required by the Act or the Rules and Regulations to be included
therein, and neither the Registration Statement or the Prospectus nor any
amendment or supplement thereto includes any untrue statement of a material fact
or omits to state any material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading; and
(iv) Subsequent to the respective dates as of
which information is given in the Registration Statement and the Prospectus or
any amendment or supplement thereto, up to and
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including the Closing Date or the Option Closing Date, as the case may be, the
Company has not incurred, other than in the ordinary course of its business or
as described in the Prospectus or in an amendment or a supplement thereto, any
material liabilities or obligations, direct or contingent; the Company has not
purchased any of its outstanding capital stock or paid or declared any dividends
or other distributions on its capital stock; the Company has not entered into
any transactions not in the ordinary course of business; and there has not been
any change in the capital stock or long-term debt or any increase in the
short-term borrowings (other than any increase in short-term borrowings in the
ordinary course of business) of the Company or any material adverse change to
the business, properties, assets, net worth, condition (financial or other),
results of operations or prospects of the Company; the Company has not sustained
any material loss or damage to its property or assets, whether or not insured;
there is no litigation which is pending or threatened against the Company which
is required under the Act or the Rules and Regulations to be set forth in an
amended or supplemented Prospectus which has not been set forth; and there has
not occurred any event required pursuant to the requirements of the Act and the
Rules and Regulations to be set forth in an amended or supplemented Prospectus
which has not been set forth or which would have, individually or in the
aggregate, a Material Adverse Effect.
References to the Registration Statement and the Prospectus in
this paragraph (h) are to such documents as amended and supplemented at the date
of the certificate required hereby.
(j) On the Closing Date, and the Option Closing Date, if
any, the Underwriters shall have received a certificate, dated the Closing Date
or the Option Closing Date, as applicable, from the Selling Shareholder to the
effect that the Selling Shareholder has carefully examined the Registration
Statement and the Prospectus and any amendments or supplements thereto and this
Agreement, and the representations and warranties of the Selling Shareholder set
forth in Section 2(b) of the Agreement shall be accurate as though expressly
made on and as of the Closing Date or Option Closing Date, as the case may be
and the Selling Shareholder has complied with all agreements and covenants and
satisfied all conditions contained in this Agreement on its part to be performed
or satisfied at or prior to the Closing Date or such Option Closing Date;.
(k) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus up to and
including the Closing Date or any Option Closing Date, as the case may be, there
has not been (A) any change in the letter or letters referred to in paragraphs
(g) and (h) of this Section 8 or (B) any change, or any development involving a
prospective change, in the business or properties of the Company which change in
the case of clause (i) or change or development in the case of clause (B) makes
it impractical or inadvisable in the Representatives' judgment to proceed with
the public offering or the delivery of the Shares as contemplated by the
Prospectus.
(l) No order suspending the sale of the Shares in any
jurisdiction designated by you pursuant to Section 6(c) hereof has been issued
on or prior to the Closing Date or any Option Closing Date, as the case may be,
and no proceedings for that purpose have been instituted or, to the best
knowledge of the Company or the Selling Shareholder, have been or are
contemplated.
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(m) The Representatives shall have received from the Selling
Shareholder, each person who is a director or officer of the Company, each
shareholder, and each other person, if any, who has the right to acquire more
than five percent (5%) or more of the outstanding shares of Stock, assuming
exercise of currently exercisable stock options on a fully diluted basis, an
agreement to the effect that such person will not, directly or indirectly,
without the prior written consent of the Representatives, on behalf of the
Underwriters, offer, sell, offer to sell, contract to sell, grant any option to
purchase, pledge or otherwise dispose (or announce any offer, sale, offer of
sale, contract of sale, grant of an option to purchase, pledge or other
disposition) of any shares of Common Stock or any securities convertible into,
or exchangeable or exercisable for, shares of Common Stock for a period of one
hundred eighty (180) calendar days after the date of this Agreement; provided,
however, that transfers or other dispositions of shares of Common Stock for the
purpose of estate planning shall be permitted to the extent that the person(s)
obtaining shares as a consequence of any such transfer or disposition takes such
shares subject to the 180 calendar day restriction described above.
(n) The Shares shall have been duly authorized for listing
on the NNM.
(o) The NASD, upon review of the terms of the public
offering of the Shares contemplated hereby, shall have indicated that it has no
objection to the underwriting arrangements pertaining to the sale of the Shares
and the Underwriters' participation in the sale of the Shares as so
contemplated.
(p) The Company shall have furnished the Underwriters with
such further opinions, letters, certificates or documents as the Representatives
or counsel for the Underwriters may reasonably request.
All opinions, certificates, letters and documents to be furnished
by the Company will comply with the provisions hereof only if they are
reasonably satisfactory in all material respects to the Underwriters and to
counsel for the Underwriters. The Company shall furnish the Underwriters with
manually signed or conformed copies of such opinions, certificates, letters and
documents in such quantities as you reasonably request. The certificates
delivered under this Section 8 shall constitute representations, warranties and
agreements of the Company as to all matters set forth therein as fully and
effectively as if such matters had been set forth in Section 2 of this
Agreement.
If any condition to the Underwriters' obligations hereunder to
be satisfied prior to or at either the Closing Date or any Option Closing Date
is not so satisfied, this Agreement, at the Representatives' election, will
terminate upon notification to the Company without liability on the part of any
Underwriter (including the Representatives) or the Company, except for the
expenses to be paid by the Company pursuant to Section 7 hereof and except to
the extent provided in Section 9 hereof.
Section 9. Indemnification.
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(a) The Company and the Selling Shareholder, jointly and
severally, agree to indemnify and hold harmless each Underwriter (including,
without limitation, in its capacity as a QIU (as defined in Section 10)), and
its officers, directors, partners, employees, agents and counsel, and each
person, if any, who controls such Underwriter within the meaning of Section 15
of the Act or Section 20 of the Exchange Act, against any and all losses,
claims, damages, liabilities or expenses whatsoever (which shall include, for
all purposes of this Section 9, but not be limited to, reasonable attorneys'
fees and any and all fees and expenses whatsoever reasonably incurred in
investigating, preparing or defending against any litigation, commenced or
threatened, or any claim whatsoever and any and all amounts paid in settlement),
joint or several (and actions in respect thereof), to which such Underwriter
(including, without limitation, in its capacity as a QIU (as defined in Section
10), officer, director, partner, employee, agent, counsel or controlling person
may become subject, under the Act or other federal or state statutory law or
regulation, at common law or otherwise, insofar as such losses, claims, damages,
liabilities, expenses or actions arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in the
Registration Statement or the Prospectus or any Preliminary Prospectus, or any
amendment or supplement thereto, or any Blue Sky application or other document
executed by the Company or the Selling Shareholder specifically for the purposes
of qualifying, or based upon written information furnished by the Company or the
Selling Shareholder in any state or other jurisdiction in order to qualify, any
or all of the Shares under the securities or Blue Sky laws thereof (any such
application, document or information being hereinafter called a "Blue Sky
Application"), or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and will reimburse, as
incurred, expenses of such Underwriter, partner, employee, agent, counsel or
controlling person in connection with investigating, defending or appearing as a
third party witness in connection with any such loss, claim, damage, liability,
expense or action; provided, however, that neither the Company nor the Selling
Shareholder will be liable in any such case to the extent that any such loss,
claim, damage, liability, expense or action arises out of or is based upon any
untrue statement or alleged untrue statement or omission or alleged omission
made in any of such documents in reliance upon and in conformity with
information furnished in writing to the Company on behalf of such Underwriter
through the Representatives expressly for use therein, and provided, further,
that such indemnity with respect to any Preliminary Prospectus shall not inure
to the benefit of any Underwriter (or to the benefit of any person controlling
such Underwriter) from whom the person asserting any such loss, claim, damage,
liability or action purchased Shares which are the subject thereof to the extent
that any such loss, claim, damage, liability or action (i) results from the fact
that such Underwriter failed to send or give a copy of the Prospectus (as
amended or supplemented) to such person at or prior to the confirmation of the
sale of such Shares to such person in any case where such delivery is required
by the Act and (ii) arises out of or is based upon an untrue statement or
omission of a material fact contained in such Preliminary Prospectus that was
corrected in the Prospectus (as amended and supplemented), unless such failure
resulted from non-compliance by the Company with Section 6(h) hereof. The
indemnity agreement in this paragraph (a) shall be in addition to any liability
which the Company or the Selling Shareholder may otherwise have. The Company and
the Selling Shareholder may agree, as between themselves and without limiting
the rights of the
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Underwriters under this Agreement, as to the respective amounts of such
liability for which they each shall be responsible. In no event, however, shall
the aggregate liability of the Selling Shareholder for indemnification or
contribution under this Section 9 or otherwise at law or in equity (other than
claims based in whole or in part on fraud) exceed the gross proceeds received by
such Selling Shareholder in respect of the Optional Shares.
(b) Each of the Underwriters agrees severally, but not
jointly, to indemnify and hold harmless the Company, each of its directors, each
of its officers who has signed the Registration Statement, each person, if any,
who controls the Company within the meaning of Section 15 of the Act or Section
20 of the Exchange Act and the Selling Shareholder against any and all losses,
claims, damages, liabilities or expenses whatsoever (which shall include, for
all purposes of this Section 9, but not be limited to, attorneys' fees and any
and all fees and expenses whatsoever incurred in investigating, preparing or
defending against any litigation, commenced or threatened, or any claim
whatsoever and any and all amounts paid in settlement), (and actions in respect
thereof) to which the Company, or any such director, officer, or controlling
person or the Selling Shareholder may become subject, under the Act or other
federal or state statutory law or regulation, at common law or otherwise,
insofar as such losses, claims, damages, liabilities, expenses or actions arise
out of or are based upon (i) any untrue statement or alleged untrue statement of
any material fact contained in the Registration Statement or the Prospectus or
any Preliminary Prospectus, or any amendment or supplement thereto or in any
Blue Sky Application, or arise out of or are based upon the omission or the
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements not misleading, in each case to the extent,
but only to the extent, that such untrue statement or alleged untrue statement
or omission or alleged omission was made in reliance upon and in conformity with
information furnished in writing by that Underwriter through the Representatives
to the Company expressly for use therein or (ii) the failure of any Underwriter
at or prior to the written confirmation of the sale of shares to send or deliver
a copy of an amended Preliminary Prospectus or the Prospectus (or the Prospectus
as amended or supplemented) to the person asserting any such losses, claims,
damages, liabilities or expenses who purchased the Shares which is the subject
thereof and the untrue statement or omission of a material fact contained in
such Preliminary Prospectus was corrected in the amended Preliminary Prospectus
or Prospectus (or the Prospectus as amended or supplemented). The Company and
the Selling Shareholder acknowledge that the statements with respect to the
public offering of the Shares set forth in the ______ and ______ paragraphs
under the caption "Underwriting" and the stabilization legend in the Prospectus
have been furnished by the Underwriters to the Company expressly for use therein
and constitute the only information furnished in writing by or on behalf of the
Underwriters for inclusion in the Prospectus. The indemnity agreement contained
in this paragraph (b) shall be in addition to any liability which the
Underwriters may otherwise have.
(c) Promptly after receipt by an indemnified party under
this Section 9 of notice of the commencement of any action, such indemnified
party will, if a claim in respect thereof it to be made against one or more
indemnifying parties under this Section 9, notify such indemnifying party or
parties of the commencement thereof; but the failure so to notify the
indemnifying party shall not relieve it from any liability which it may have to
any indemnified party otherwise than under
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paragraph (a) or (b) of this Section 9 to the extent that the indemnifying party
was not actually prejudiced by such omission. In case any such action is brought
against an indemnified party and it notifies an indemnifying party or parties of
the commencement thereof, the indemnifying party or parties against which a
claim is to be made will be entitled to participate therein and, to the extent
that it or they may wish, to assume the defense thereof, with counsel reasonably
satisfactory to such indemnified party; provided, however, that if the
defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party has reasonably concluded that there
may be legal defenses available to it and/or other indemnified parties which are
different from or additional to those available to the indemnifying party, the
indemnified party or parties shall have the right to select separate counsel to
assume such legal defenses and otherwise to participate in the defense of such
action on behalf of such indemnified party or parties (it being understood,
however, that the indemnifying party shall not be liable for the expenses of
more than one separate counsel representing the indemnified party or parties who
are parties to such action). Upon receipt of notice from the indemnifying party
to such indemnified party of its election so to assume the defense of such
action and approval by the indemnified party of counsel, the indemnifying party
will not be liable to such indemnified party under this Section 9 for any legal
or other expenses (other than the reasonable costs of investigation)
subsequently incurred by such indemnified party in connection with the defense
thereof unless (i) the indemnified party has employed such counsel in connection
with the assumption of such different or additional legal defenses in accordance
with the proviso to the immediately preceding sentence, (ii) the indemnifying
party has not employed counsel reasonably satisfactory to the indemnified party
to represent the indemnified party within a reasonable time after notice of
commencement of the action, or (iii) the indemnifying party has authorized in
writing the employment of counsel for the indemnified party at the expense of
the indemnifying party.
(d) If the indemnification provided for in this Section 9 is
unavailable or insufficient to hold harmless an indemnified party under
paragraph (a) or (b) above in respect of any losses, claims, damages,
liabilities or expenses (or actions in respect thereof) referred to therein,
then each indemnifying party shall contribute to the amount paid or payable by
such indemnified party as a result of such losses, claims, damages, liabilities
or expenses (or actions in respect thereof) (i) in such proportion as is
appropriate to reflect the relative benefits received by each of the
contributing parties, on the one hand, and the party to be indemnified, on the
other hand, from the offering of the Shares or (ii) if the allocation provided
by clause (i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of each of the contributing parties, on the
one hand, and the party to be indemnified, on the other hand in connection with
the statements or omissions that resulted in such losses, claims, damages or
liabilities, as well as any other relevant equitable considerations. In any case
where the Company and/or the Selling Shareholder is a contributing party and the
Underwriters are the indemnified party, the relative benefits received by the
Company and/or the Selling Shareholder on the one hand, and the Underwriters, on
the other hand, shall be deemed to be in the same proportion as the total net
proceeds from the offering of the Shares (before deducting expenses) bear to the
total underwriting discounts received by the Underwriters hereunder, in each
case as set forth in the table on the cover page of the Prospectus. Relative
fault shall be determined
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by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company and/or the Selling
Shareholder or the Underwriters and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such untrue
statement or omission. The amount paid or payable by an indemnified party as a
result of the losses, claims, damages, liabilities or expenses (or actions in
respect thereof) referred to above in this paragraph (d) shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this paragraph (d), the Underwriters shall not
be required to contribute any amount in excess of the underwriting discounts
applicable to the Shares purchased by the Underwriters hereunder. The
Underwriters' obligations to contribute pursuant to this paragraph (d) are
several in proportion to their respective underwriting obligations, and not
joint. No person guilty of fraudulent misrepresentations (within the meaning of
Section 11(f) of the Act) shall be entitled to contribution from any person who
was not guilty of such fraudulent misrepresentation. Notwithstanding the
provisions of this paragraph (d), the Selling Shareholder shall not be required
to contribute any amount in excess of the gross proceeds received by the Selling
Shareholder in respect of the Optional Shares. For purposes of this paragraph
(d), (i) each person, if any, who controls an Underwriter within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act shall have the same
rights to contribution as such Underwriter and (ii) each director of the
Company, each officer of the Company who has signed the Registration Statement,
and each person, if any, who controls the Company within the meaning of Section
15 of the Act or Section 20 of the Exchange Act shall have the same rights to
contribution as the Company. Any party entitled to contribution will, promptly
after receipt of notice of commencement of any action, suit or proceeding
against such party in respect to which claim for contribution may be made
against another party or parties under this paragraph (d), notify such party or
parties from whom contribution may be sought, but the omission so to notify such
party or parties shall not relieve the party or parties from whom contribution
may be sought from any other obligation (x) it or they may have hereunder or
otherwise than under this paragraph (d) or (y) to the extent that such party or
parties were not actually prejudiced by such omission. The contribution
agreement set forth above shall be in addition to any liabilities which any
indemnifying party may otherwise have.
Section 10. Qualified Independent Underwriter. The Company hereby
confirms that at its request Ferris, Baker Watts, Incorporated has agreed to
render services, without compensation, as "qualified independent underwriter"
(in such capacity, the "QIU" within the meaning of Section2720 of the Conduct
Rules of the National Association of Securities Dealers, Inc.) with respect to
the offering and sale of the Shares. The Company will indemnify and hold
harmless the QIU against any losses, claims, damages or liabilities, joint or
several, to which the QIU may become subject, under the Securities Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon the QIU's acting (or alleged
failing to act) as such "qualified independent underwriter" and will reimburse
the QIU for any legal or other expenses reasonably incurred by the QIU in
connection with investigating or defending any such loss, claim, damage,
liability or action as such expenses are incurred; provided, however, that the
Company will have no obligation to indemnify the QIU under this Section 10 to
the extent that
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any such loss, claim, damage or liability (or action in respect thereof) shall
have been determined by a court of competent jurisdiction (which determination
has become final and non-appealable) to have been due to the willful misconduct
or gross negligence of the QIU. The obligations of the Company under this
Section 10 shall be in addition to any liability which the Company may otherwise
have and shall extend, upon the same terms and conditions to each person, if
any, who controls the QIU within the meaning of the Securities Act.
Section 11. Representations, Etc. to Survive Delivery. The respective
representations, warranties, agreements, covenants, indemnities and statements
of, and on behalf of, the Company and its officers, the Selling Shareholder and
the Underwriters, respectively, set forth in or made pursuant to this Agreement
will remain in full force and effect, regardless of any investigation made by or
on behalf of the Underwriters, and will survive delivery of and payment for the
Shares. Any successors to the Underwriters shall be entitled to the benefit of
the indemnity, contribution and reimbursement agreements contained in this
Agreement.
Section 12. Effective Date and Termination.
(a) This Agreement shall become effective at 9:00 a.m.,
Washington, DC time, on the first business day following the date hereof, or at
such earlier time after the Registration Statement becomes effective as the
Representatives, in their sole discretion, shall release the Shares for the sale
to the public, unless prior to such time the Representatives shall have received
written notice from the Company that it elects that this Agreement shall not
become effective, or the Representatives shall have given written notice to the
Company that the Representatives on behalf of the Underwriters elect that this
Agreement shall not become effective; provided, however, that the provisions of
this Section 12 and of Section 7 and Section 9 hereof shall at all times be
effective. For purposes of this Section 12(a), the Shares to be purchased
hereunder shall be deemed to have been so released upon the earlier of
notification by the Representatives to securities dealers releasing such Shares
for offering or the release by the Representatives for publication of the first
newspaper advertisement which is subsequently published relating to the Shares.
(b) This Agreement (except for the provisions of Sections 7
and 9 hereof) may be terminated by the Representatives by notice to the Company
in the event that the Company has failed to comply in any respect with any of
the provisions of this Agreement required on its part to be complied with at or
prior to the Closing Date or any Option Closing Date, as the case may be, or if
any of the representations or warranties of the Company are not accurate in any
respect or if the covenants, agreements or conditions of, or applicable to, the
Company herein contained have not been complied with in any respect or satisfied
within the time specified on the Closing Date or any Option Closing Date, as the
case may be, or if prior to the Closing Date or any such Option Closing Date:
(i) the Company shall have sustained a loss by
strike, fire, flood, accident or other calamity of such a character as to
interfere materially with the conduct of the business and operations of the
Company regardless of whether or not such loss was insured;
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(ii) trading in securities generally on the New
York Stock Exchange or the NNM shall have been suspended or a material
limitation on such trading shall have been imposed or minimum or maximum prices
shall have been established on either such exchange or market;
(iii) a banking moratorium shall have been declared
by New York or United States authorities;
(iv) there shall have been an outbreak or
escalation of hostilities between the United States and any foreign power or an
outbreak or escalation of any other insurrection or armed conflict involving the
United States;
(v) there shall have been commenced any action,
suit or proceeding at law or in equity against the Company, or by any federal,
state or other commission, board or agency, wherein any unfavorable decision
would materially adversely affect the business, properties or financial
condition of the Company;
(vi) there shall have occurred any material
adverse market conditions, of which the Representatives shall be the sole judge;
(vii) Company's independent public accountants
shall have imposed qualifications in certifying to, or its attorneys in opining
upon, material items including, without limitation, information in the footnotes
to the financial statements or matters incident to the issuance and sale of the
Shares, corporate proceedings or other subjects; or
(viii) there shall have been a material adverse
change in (i) general economic, political or financial conditions or (ii) the
present or prospective business or condition (financial or other) of the Company
that, in each case, in the Representatives' sole judgment makes it impracticable
or inadvisable to make or consummate the public offering, sale or delivery of
the Shares on the terms and in the manner contemplated in the Prospectus and the
Registration Statement.
(c) Termination of this Agreement under this Section 12 or
Section 13 after the Firm Shares have been purchased by the Underwriters
hereunder shall be applicable only to the Optional Shares. Termination of this
Agreement shall be without liability of any party to any other party other than
as provided in Sections 7 and 9 hereof.
Section 13. Substitution of Underwriters. If one or more of the
Underwriters shall fail or refuse (otherwise than for a reason sufficient to
justify the termination of this Agreement under the provisions of Section 8 or
12 hereof) to purchase and pay for (a) in the case of the Closing Date, the
number of Firm Shares agreed to be purchased by such Underwriter or Underwriters
upon tender to the Representatives such Firm Shares in accordance with the terms
hereof or (b) in the case of any Option Closing Date, the number of Optional
Shares agreed to be purchased by such
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Underwriter or Underwriters upon tender to the Representatives of such Optional
Shares in accordance with the terms hereof, and the number of such Shares shall
not exceed ten percent (10%) of the Firm Shares or Optional Shares required to
be purchased on the Closing Date or such Option Closing Date, as the case may
be, then, each of the non-defaulting Underwriters shall purchase and pay for (in
addition to the number of such Shares which it has severally agreed to purchase
hereunder) its proportionate share (based on the monetary obligations of the
several Underwriters hereunder on account of the purchase of Firm Shares,
excluding the Firm Shares allocable to the defaulting Underwriter or
Underwriters) which the defaulting Underwriter or Underwriters shall have so
failed or refused to purchase on such Closing Date or Option Closing Date, as
the case may be. In such case, the Representatives, on behalf of the
Underwriters, shall have the right to postpone the Closing Date or the Option
Closing Date, as the case may be, to a date not exceeding seven (7) full
business days after the date originally fixed as such Closing Date or the Option
Closing Date, as the case may be, pursuant to the terms hereof in order that any
necessary changes in the Registration Statement, the Prospectus or any other
documents or arrangements may be made.
If one or more of the Underwriters shall fail or refuse (otherwise than
for a reason sufficient to justify the termination of this Agreement under the
provisions of Section 8 or 12 hereof) to purchase and pay for (a) in the case of
the Closing Date, the number of Firm Shares agreed to be purchased by such
Underwriter or Underwriters upon tender to you of such Firm Shares in accordance
with the terms hereof or (b) in the case of the Option Closing Date, the number
of Optional Shares agreed to be purchased by such Underwriter or Underwriters
upon tender to you of such Optional Shares in accordance with the terms hereof,
and the number of such Shares shall exceed ten percent (10%) of the Firm Shares
or Optional Shares required to be purchased by all the Underwriters on the
Closing Date or the Option Closing Date, as the case may be, then (unless within
forty-eight (48) hours after such default arrangements to your satisfaction
shall have been made for the purchase of the defaulted Shares by an Underwriter
or Underwriters) and subject to the provisions of Section 12(b) hereof, this
Agreement will terminate without liability on the part of any non-defaulting
Underwriter or on the part of the Company except as otherwise provided in
Sections 7 and 9 hereof. As used in this Agreement, the term "Underwriter"
includes any person substituted for an Underwriter under this paragraph. Nothing
in this Section 13, and no action taken hereunder, shall relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
Section 14. Notices. All communications hereunder shall be in writing
and if sent to the Representatives shall be mailed or delivered or sent by
facsimile transmission and confirmed by letter to Ferris, Baker Watts,
Incorporated at 1720 Eye Street, N.W., Washington, D.C. 20006, Attention: Steven
L. Shea (facsimile number: (410) 659-4632) or, if sent to the Company, shall be
mailed or delivered or sent by facsimile transmission and confirmed by letter to
the Company at 7000 Security Boulevard, Baltimore, Maryland 21244, attention:
Joseph K. Rensin (facsimile number: (410) 594-9620).
Section 15. Successors. This Agreement shall inure to the benefit of
and be binding upon the Company, the Selling Shareholder and each Underwriter
and the Company's, the Selling
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Shareholder's and each Underwriter's respective successors and legal
representatives, and nothing expressed or mentioned in this Agreement is
intended or shall be construed to give any other person any legal or
equitable right, remedy or claim under or in respect of this Agreement, or
any provisions herein contained, this Agreement and all conditions and
provisions hereof being intended to be and being for the sole and exclusive
benefit of such persons and for the benefit of no other person, except that
the representatives, warranties, indemnities and contribution agreements of
the Company and the Selling Shareholder contained in this Agreement shall
also be for the benefit of the partners, employees agents of each Underwriter
and any person or persons, if any, who control any Underwriter within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act, and
except that the Underwriters' indemnity and contribution agreements shall
also be for the benefit of the directors of the Company, the officers of the
Company who have signed the Registration Statement, any person or persons, if
any, who control the Company within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act and the Selling Shareholder. No purchaser of
Shares from the Underwriters will be deemed a successor because of such
purchase.
Section 16. Applicable Law; Jurisdiction. This Agreement shall be
governed by and construed in accordance with the laws of the State of Maryland,
without giving effect to the choice of law or conflict of law principles
thereof. Each party hereto consents to the jurisdiction of each court in which
any action is commenced seeking indemnity or contribution pursuant to Section 9
above and agrees to accept, either directly or through an agent, service of
process of each such court.
Section 17. Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be deemed to be an original, and all
of which together shall be deemed to be one and the same instrument.
39
<PAGE>
If the foregoing is in accordance with your understanding,
please sign and return to us three (3) counterparts hereof, and upon the
acceptance hereof by you, on behalf of each of the Underwriters, this letter and
such acceptance hereof shall constitute a binding agreement among each of the
Underwriters, the Company and the Selling Shareholder.
Very truly yours,
CREDITRUST CORPORATION
By:
---------------------------------
Name:
Title:
SELLING SHAREHOLDER:
--------------------------------------
Joseph K. Rensin
Accepted as of the date hereof
FERRIS, BAKER WATTS, INCORPORATED
1720 Eye Street, N.W.
Washington, D.C. 20006
BOENNING & SCATTERGOOD, INC.
500 North Gulph Road, Suite 110
King of Prussia, PA 19406
By: FERRIS, BAKER WATTS, INCORPORATED
On behalf of each of the Underwriters
By:
------------------------------------
Name:
Title:
40
<PAGE>
SCHEDULE I
NUMBER OF SHARES TO BE
PURCHASED BY EACH UNDERWRITER
<TABLE>
<CAPTION>
Number of Firm
Shares to be Purchased
Name of Underwriter Percentage from the Company
------------------- ---------- ----------------
<S> <C> <C>
Ferris, Baker Watts, Incorporated....
Boenning & Scattergood, Inc..........
</TABLE>
41
<PAGE>
Exhibit 5
PIPER & MARBURY
L.L.P.
CHARLES CENTER SOUTH WASHINGTON
36 SOUTH CHARLES STREET NEW YORK
BALTIMORE, MARYLAND 21201-3018 PHILADELPHIA
410-539-2530 EASTON
FAX: 410-539-0489
July 2, 1998
Creditrust Corporation
7000 Security Boulevard
Baltimore, Maryland 21244
Re: Registration Statement on Form S-1
Dear Sirs:
We have acted as counsel to Creditrust Corporation, a Maryland corporation
(the "Company"), in connection with the Company's Registration Statement filed
with the Securities and Exchange Commission (the "Commission") under the
Securities Act of 1933, as amended (the "Act"). The Registration Statement
relates to up to 2,300,000 shares of the Company's Common Stock, par value $.01
per share (the "Common Stock").
In this capacity, we have examined the Company's Charter and By-Laws, the
proceedings of the Board of Directors of the Company relating to the issuance of
the Common Stock and such other documents, instruments and matters of law as we
have deemed necessary to the rendering of this opinion. In such examination, we
have assumed the genuineness of all signatures, the authenticity of all
documents submitted to us as originals, and the conformity with originals of all
documents submitted to us as copies.
Based upon the foregoing, we are of the opinion and advise you that each of
the shares of Common Stock described in the Registration Statement has been duly
authorized and, upon sale of such Common Stock as contemplated by the
Registration Statement, will be validly issued, fully paid and nonassessable.
<PAGE>
PIPER & MARBURY
L.L.P.
Creditrust Corporation
July 2, 1998
Page 2
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement. In giving our consent, we do not thereby admit that we
are in the category of persons whose consent is required under Section 7 of the
Act of the Rules and Regulations of the Commission thereunder.
Very truly yours,
/s/ Piper & Marbury L.L.P.
<PAGE>
Exhibit 23.1
Suite 375
2070 Chain Bridge Road
Vienna, VA 22182-2536
703 847-7500
FAX 703 848-9580
Grant Thornton
Grant Thornton LLP Accountants and
Management Consultants
The U.S. Member Firm of
Grant Thornton International
Consent of Independent Certified Public Accountants
We have issued our report dated February 24, 1998, accompanying the financial
statements of Creditrust Corporation contained in the Registration Statement
and Prospectus. We consent to the use of the aforementioned report in the
Registration Statement and Prospectus, and to the use of our name as it
appears under the caption "Experts."
Grant Thornton LLP
Vienna, Virginia
July 9, 1998
