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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 12, 1999
Registration No. _________________
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM SB-2
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
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AUSTIN FUNDING.COM CORPORATION
(Name of small business issuer in its charter)
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<S> <C> <C>
Nevada 6162 74-2923677
(State or other jurisdiction (Primary Standard Classification (I.R.S. Employer
of incorporation) Code Number) Identification No.)
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823 Congress Avenue, Suite 515
Austin, Texas 78701
(512) 481-8000
(Address and telephone number of Registrant's principal executive offices)
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GLENN A. LAPOINTE
PRESIDENT
AUSTIN FUNDING.COM CORPORATION
823 Congress Avenue, Suite 515
Austin, Texas 78701
(512) 481-8000
(Name, address and telephone number of agent for service)
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Please send copies of all communications to:
JACK A. SELMAN
SELMAN & MUNSON, P.C.
111 CONGRESS AVENUE, SUITE 1000
AUSTIN, TEXAS 78701
(512) 505-5955
FAX (512) 505-5956
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APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. _________________ [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. _________________ [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. _________________ [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS OF SECURITIES TO BE AMOUNT TO BE PROPOSED OFFERING PRICE PROPOSED MAXIMUM AMOUNT OF
REGISTERED REGISTERED PER UNIT AGGREGATE OFFERING PRICE REGISTRATION FEE
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<S> <C> <C> <C> <C>
8% Secured Subordinated Debentures......... $10,000,000 $5,000 $10,000,000 $2,780
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TOTAL...................................... $10,000,000 $2,780
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The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended or until the Registration Statement shall
become effective on such date as the Commission, acting pursuant to said Section
8(a), may determine.
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CROSS REFERENCE SHEET
PURSUANT TO REGULATION S-B
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FORM SB-2 ITEM NUMBER AND CAPTION LOCATION IN PROSPECTUS BY CAPTION
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1. Front of Registration Statement Front Cover Page of Registration Statement
and Outside Front Cover Page of and Front Cover Page of the Prospectus
Prospectus..................................
2. Inside Front and Outside Back Inside Front and Outside Back Cover Pages
Cover Pages of the Prospectus...............
3. Summary Information and Risk Factors........ Prospectus Summary; Risk Factors; Summary
Financial Information
4. Use of Proceeds............................. Use of Proceeds
5. Determination of Offering Price............. Determination of the Offering Price,
Description of Marketing and Underwriting
Arrangements; Underwriting; Risk Factors
6. Dilution.................................... Not Applicable
7. Selling Security Holders.................... Not Applicable
8. Plan of Distribution........................ Front Cover Page; Marketing and Underwriting
Arrangements; Plan of Distribution
9. Legal Proceedings........................... Legal Proceedings
10. Directors, Executive Officers,
Promoters and Control Persons............... Management
11. Security Ownership of Certain Security Ownership of Certain Beneficial
Beneficial Owners and Management............ Owners and Management; Management
12. Description of Securities................... Description of Securities
13. Interest of Named Experts and Counsel....... Not Applicable
14. Disclosure of Commission Management-Indemnification
Position on Indemnification for
Securities Act Liabilities..................
15. Organization within Last Five Years......... Management-Certain Relationships and Related
Transactions
16. Description of Business..................... Prospectus Summary; Risk Factors; Use of
Proceeds; Business of the Company;
Capitalization; Selected Financial Data;
Management's Discussion and Analysis or Plan
of Operations; Management; Financial
Statements
17. Management's Discussion and Analysis........ Management's Discussion and Analysis or Plan
of Operation
18. Description of Property..................... Description of Property
19. Certain Relationships and Certain Relationships and Related Transactions
Related Transactions........................
20. Market for Common Equity and Risk Factors; Description of Securities; Market
Related Stockholder Matters................. for Common Equity and Related Stockholder
Matters
21. Executive Compensation...................... Executive Compensation
22. Financial Statements........................ Financial Statements
23. Changes in and Disagreements
with Accountants on Accounting
and Financial Disclosure.................... Not Applicable
</TABLE>
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Information contained herein is subject to completion or amendment. A
Registration Statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the Registration Statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
PRELIMINARY PROSPECTUS DATED ___________, 1999
SUBJECT TO COMPLETION
AUSTIN FUNDING.COM CORPORATION
$10,000,000 8% SECURED SUBORDINATED DEBENTURES DUE 2015
We are offering up to $10,000,000 of our 8% Secured Subordinated
Debentures due 2015 at par to be distributed by Choice Investments, Inc. on a
best efforts basis. We must sell the minimum number of $10,000,000 of the
debentures if any are to be sold.
Prior to this offering, there has been no public market for the
debentures. It is anticipated that the debentures will be traded in the
over-the-counter market and listed on the "yellow sheets" published by the
National Quotation Bureau, LLC.
For information on how to subscribe, call the sales center at (512)
_____________ and ask for a sales representative. Sale of debentures will only
be made in connection with this Prospectus.
FOR A DISCUSSION OF MATERIAL RISKS RELATING TO THIS OFFERING, SEE "RISK
FACTORS" BEGINNING ON PAGE 4.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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PRICE TO UNDERWRITING DISCOUNTS
PUBLIC AND COMMISSIONS PROCEEDS TO COMPANY
<S> <C> <C> <C>
Per Subordinated Debentures ...... 100% 6.96% 93.04%
Total ............................ $10,000,000 $695,830 $9,304,170
</TABLE>
We have engaged Choice Investments, Inc. as marketing agent to consult,
advise and assist in the distribution of the debentures, on a best efforts
bases. We and Choice Investments, Inc. must sell $10,000,000 of the debentures
if any are to be sold. Choice is required to use only its best efforts to sell
the debentures. Subscription funds will be placed in an Escrow Account with
Compass Bank, N.A. and will earn interest from the date of receipt until
completion or termination of the offering. If $10,000,000 of debentures have not
been sold by the termination of this offering, all funds received from
subscribers will be promptly refunded, with interest. No person, together with
associates of or persons acting in concert with such person, may purchase more
than $1,000,000 of the debentures offered in the offering. The minimum purchase
is $5,000. The purchase limitations described herein are subject to increase or
decrease at the sole discretion of the Company.
CHOICE INVESTMENTS, INC.
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NO DEALER, SALES PERSON OR ANY OTHER PERSON IS AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THIS OFFERING AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN GIVEN OR
MADE BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL, OR THE SOLICITATION OF ANY OFFER TO BUY, ANY OF THE SECURITIES
OFFERED HEREBY TO ANY PERSON TO WHOM, OR IN ANY JURISDICTION IN WHICH SUCH OFFER
OR SOLICITATION IS NOT AUTHORIZED OR IS UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL CREATE ANY IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF
THIS PROSPECTUS.
TABLE OF CONTENTS
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PAGE
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Prospectus Summary............................................................. 1
Risk Factors................................................................... 5
Use of Proceeds................................................................ 10
Business of the Company........................................................ 11
Management Discussion and Analysis of Results of Operations and Financial
Condition............................................................. 21
Management..................................................................... 28
Description of Securities...................................................... 36
Market for Company Securities and Related Stockholder Matters.................. 56
Executive Compensation......................................................... 58
Plan of Distribution........................................................... 61
Legal Matters.................................................................. 66
Experts........................................................................ 66
How to Get More Information.................................................... 67
Index to Financial Statements ................................................. 68
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UNTIL _________________, ALL DEALERS EFFECTING TRANSACTIONS IN THE
REGISTERED SECURITIES, 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 AS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR SOLD ALLOTMENTS OR SUBSCRIPTIONS.
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PROSPECTUS SUMMARY
THE COMPANY
We are the parent company for Austin Funding Corporation ("AFC").
Through our subsidiary, we are a licensed mortgage lender active in acquiring,
holding and ultimately selling first liens secured by residential real estate.
These mortgages are acquired individually at a discount from their ultimate
secondary market pooled values. We operate exclusively on a wholesale basis
through a network of approved correspondent brokers that bring loans to us for
consideration. Using debt secured by the mortgages in order to pool these loans,
we sell the mortgages directly to various private and institutional investors at
a price greater than our acquisition cost. Primarily, we receive income from
sources in connection with our sub-prime mortgage lending activities. We charge
certain non-refundable mortgage application fees to potential borrowers and,
upon closing a loan, receive additional fees payable by the borrower or
investor, which fees are based upon a percentage of the loan and/or the interest
rates charged.
Our subsidiary, AFC, is a Texas corporation, which has been in the
mortgage business since its incorporation in 1997. In an effort to reorganize
AFC into a holding company form of ownership, we were organized and recently
acquired AFC. Prior to acquiring AFC, we were a wholly-owned subsidiary of
Innovation International, Inc. On June 7, 1999, as a result of a declared stock
distribution by Innovation International, we became separate from and no longer
a subsidiary of Innovation International. We entered into a Reorganization Plan
and Agreement dated May 26, 1999 and its subsequent amendment dated June 12,
1999 with the shareholders of AFC, pursuant to which AFC became our wholly-owned
subsidiary, and the AFC shareholders became our shareholders. The Reorganization
Plan distributed 1,600,000 shares of our stock to the shareholders of Innovation
International in the ratio of one of our shares for each 25 shares of Innovation
International, thereby spinning us off from Innovation International. We then
issued 19,733,333 shares of our common stock to the shareholders of AFC in the
same proportion as the shareholder's then current holdings in AFC, in exchange
for 100% of the stock in AFC owned by them, thereby making AFC our wholly-owned
subsidiary.
Our executive offices are located at 823 Congress Avenue, Suite 515,
Austin, Texas 78701, and our telephone number is (512) 481-8000.
1
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THE OFFERING
Debentures ................... $10,000,000 in aggregate principal amount of
8% secured subordinated debentures due 2015.
Debentures will only be issued in a minimum
amount of $5,000.
Maturity date.................. December 31, 2015.
Interest and interest
payment dates.................. The debentures accrue interest at an annual
rate of 8%. Interest is payable monthly on
the first day of the month. All principal
and interest is due and payable in full on
December 31, 2015.
Redemption..................... We may redeem the debentures at our option,
in whole or in part, at any time after
December 31, 2001.
Redemption prices are equal to the principal
amount plus accrued and unpaid interest to
the date of redemption. See the discussion
under the caption entitled "Redemption of
Subordinated Debentures."
Security....................... Our obligation to pay the principal of and
interest on the debentures will be secured
by a pledge of a non-callable United States
Government or Government Agency Zero Coupon
Bond in the face amount of $10,000,000 due
December ___, 2015 (the "Zero Coupon Bond")
owned by us and pledged to the Trustee as
security for the debentures.
Subordination.................. The debentures are junior in right of
repayment to all of our existing and future
senior indebtedness. The debentures are also
effectively subordinate in right of payment
to all of our subsidiaries' indebtedness and
other liabilities, including AFC. At June
30, 1999, we and our subsidiary had
outstanding approximately $3.3 million of
senior indebtedness.
This number includes trade and other
payables outstanding. It does not include
intercompany liabilities and liabilities
that are not required to be reflected on a
balance sheet by generally accepted
accounting principles. See the discussion
under the caption entitled "Description of
Debentures-Subordination of Debentures."
Trustee........................ Norwest Bank Texas, N.A.
Market maker................... The debentures are not listed on any
securities exchange or included for
quotation on any quotation system, and no
established trading market exists. Choice
Investments, Inc.
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intends to make a market in the debentures
but is under no obligation to do so, and
such market making, if commenced, may be
terminated at any time.
Use of Proceeds................ We intend to use the net proceeds of this
offering to fund the expansion of lending
activities; acquire residential mortgage
businesses; repay outstanding indebtedness;
and for working capital and general
corporate purposes. Approximately $3.3
million of the gross proceeds of the
offering will be used to purchase the Zero
Coupon Bond being used as security in the
debenture. See "Use of Proceeds."
Risk Factors................... The debentures offered hereby are
speculative and involve a high degree of
risk and should not be purchased by
investors who cannot afford the loss of
their entire investment. See "Risk Factors."
Please remember that these securities:
o are not bank accounts or deposit accounts;
o are not federally insured by the FDIC;
o are not insured by any other state or federal agency; and
o are secured only by the zero coupon bonds, as provided in the
subordinated security agreement.
FORWARD-LOOKING STATEMENTS
This Prospectus includes forward-looking statements within the meaning
of Section 21E of the Securities Exchange Act of 1934 (the "Act"). These
statements are based on management's beliefs and assumptions and on information
currently available to management. Forward-looking statements include statements
in which words such as "expect," "anticipate," "intend," "plan," "believe,"
"estimate," "consider" or similar expressions are used.
Forward-looking statements are not guarantees of future performance.
They involve risks, uncertainties and assumptions. Our future results and
stockholder values may differ materially from those expressed in these
forward-looking statements. Many of the factors that will determine these
results and values are beyond our ability to control or predict. In addition, we
do not have any intention or obligation to update forward-looking statements
after the effectiveness of this Prospectus even when new information, future
events or other circumstances have made them incorrect or misleading. For these
statements, we claim the protection of the safe harbor for forward-looking
statements contained in Section 21E of the Act.
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SELECTED FINANCIAL DATA
This selected financial data should be read in conjunction with and are
qualified by reference to our financial statements and the related notes hereto
included elsewhere in this Prospectus. See "Management's Discussion and Analysis
of Results of Operations and Financial Condition."
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At or For the Three
Months Ended June 30, At or For the Years
(unaudited) Ended March 31,
1999 1998 1999 1998
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SELECTED INCOME STATEMENT DATA: (Dollars in thousands, excluding per share data)
Income:
Gain on sales of loans (gross profit) .................... $ 168 $ 362 $ 1,116 $ 592
Other income ............................................. 12 2 42 10
------- ------- ------- -------
Total income .................................... 180 364 1,258 602
Expenses:
Salaries and benefits ..................................... 141 207 866 261
General and administrative ................................ 128 85 416 142
Occupancy ................................................. 14 7 42 13
Other ..................................................... 64 30 74 49
------- ------- ------- -------
Total expenses ................................... 347 329 1,398 465
------- ------- ------- -------
Gain on sale of property .................................. -- -- -- 47
Income tax expense (benefit) .............................. -- -- (45) 47
Net income (loss) ............................................. (167) 35 (195) 137
======= ======= ======= =======
Per share data:
Pro forma net income (loss) per share (1, 2) .............. (0.04) 17.17 (97.46) 235.63
Pro forma weighted average shares outstanding (1) .........
Operating data:
Production volume - brokered .............................. 3,863 11,956 20,548 10,346
Average principal balance per loan,
wholesale and retail ........................................ 107 102 107 98
SELECTED BALANCE SHEET DATA:
Cash and equivalents ..................................... 59 37 4 116
Mortgage loans held for sale (inventory) ................. 3,860 1,954 1,853 1,288
Property, plant and equipment ............................ 34 17 34 15
Receivables .............................................. 536 194 90 1,661
Investment in limited partnership ........................ 510 -- 485 --
Long term debt ........................................... 15 -- 17 --
Deferred taxes ........................................... -- -- -- 3
Other assets ............................................. 205 3 6 2
------- ------- ------- -------
Total assets .................................... 5,204 2,205 2,472 3,082
======= ======= ======= =======
Warehouse notes payable .................................. 3,356 1,953 1,823 2,790
Accounts payable and other accrued expenses .............. 311 31 199 126
------- ------- ------- -------
Total liabilities .............................. 3,682 1,984 2,039 2,919
======= ======= ======= =======
Shareholders equity ...................................... 1,522 221 433 163
======= ======= ======= =======
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(1) Gives effect to the formation of the Company as a holding company for
AFC through the exchange and the issuance of shares related thereto.
(2) Pro Forma net income per share has been computed by dividing pro form
net income by the pro forma weighted average number of common shares
and share equivalents outstanding.
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RISK FACTORS
Your investment in the debentures involves a high degree of risk. You
should carefully consider, together with the other information contained in this
prospectus, the following factors in evaluating us and our business before
purchasing the debentures.
RISKS ASSOCIATED WITH THE COMPANY
Because we have a limited operating history, we may not be able to
successfully manage our business or achieve profitability. We were originally
organized in April 1997 and have a limited operating history. Our operations are
subject to all of the risks inherent in the establishment of a young business
enterprise. The likelihood of our success must be considered in light of the
problems, expenses, complications and delays frequently encountered in
connection with the development of a new business and the competitive
environment in which we operate. We may not be able to operate profitably in the
future. Our financial objectives must therefore be considered very speculative.
Accordingly, our limited operating history prohibits an effective evaluation of
our potential success. Our viability and continued operations depend upon future
profitability, the ability to generate cash flow from uncertainties related to
the mortgage industry, and other business opportunities.
The proceeds from this offering may not satisfy our needs for the next
twelve months; therefore, we may need additional financing. We may require
additional working capital or other funds within the next 12 months for the
expansion of our operations. Management is considering the sale of additional
securities, such as subordinated debentures and preferred stock to increase our
working capital. We may not be successful in obtaining additional financing or
such financing may not be available upon acceptable terms to us. See
"Management's Discussion and Analysis of Plan of Operations-Liquid and Capital
Resources."
A conflict of interest of one of our directors or officers may benefit
him or his company at our expense. Our directors and officers are or may become,
in their individual capacities, officers, directors, controlling shareholders
and/or partners of other entities engaged in a variety of businesses. Thus,
there exist potential conflicts of interest including, among other things, time,
effort and corporate opportunity involved in participation with other business
entities. See "Certain Relationships and Related Transactions."
Volatile interest rates may affect our ability to originate loans.
Prevailing market interest rates, which impact borrower decisions to obtain new
loans or to refinance existing loans, affect our ability to originate mortgage
loans. When interest rates decrease, the economic advantages of refinancing
mortgage loans increase. However, when interest rates decrease, increases in the
rate of prepayments of mortgage loans may reduce the period during which we earn
servicing income from loan servicing activities. We believe that these effects
should be offset by increased loan origination and a related increase in the
size of our servicing portfolio. Furthermore, as a result of our strategy of
maintaining continuing customer
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relationships, we historically have been able to recapture a substantial amount
of refinanced loans and home purchase mortgages from prior customers.
If we fail to assemble a strong management team, we may not be able to
operate successfully. Our ability to operate successfully depends to a
substantial degree upon our management and consultants. The assembly of a strong
management team is critical to the success of the business.
The keyman life insurance policy we hold on our chief executive officer
may not be enough to cover his loss. While we have obtained keyman insurance on
our Chief Executive Officer in the sum of $1,000,000, the insurance may not be
enough in the event of the loss of such officer. The loss of the Chief Executive
Officer would have an adverse affect on us.
Increased competition in the mortgage industry may adversely affect our
business. We may face direct competition from other mortgage companies in the
area, and it is possible that additional competitors will enter the same markets
in which we currently operate. The competitors may offer lower interest rates
than the rates we offer and, in some instances, may have products superior to
those of ours. See "Competition."
Losses from material inaccuracies in the representations and warranties
provided by us in association with the sale of a loan or servicing rights could
adversely affect our business and results of operations. When a mortgage loan
originator (retail or wholesale) sells a mortgage loan to its investors, it
makes certain representations and warranties as to the compliance by the
originator with applicable underwriting guidelines. A loan originator or the
purchaser of loan servicing rights generally becomes obligated to the investor
with respect to the accuracy of those representations and warranties, and if
those representations and warranties are incorrect, the investor may require the
servicer or the lender who originated the loan to repurchase the mortgage loan.
Consequently, any loss resulting from a material inaccuracy in the
representations and warranties would fall on the servicer as the originating
seller/servicer of the loan. We will attempt to limit our exposure to repurchase
risks (i) through quality control requirements imposed on its origination staff,
both internally and through third party quality control experts, and (ii) by
negotiating appropriate representations and warranties and indemnification from
entities from which we acquire mortgage loans. In addition, with respect to
mortgage loans originated by us, we will be required in the ordinary course of
business to make representations and warranties to the purchasers of servicing
rights and investors and insurers of such loans. Losses resulting from a
material inaccuracy in those representations and warranties would fall on us.
From time to time, we could be obligated to repurchase loans as a result of the
breach of such representations and warranties. A breach or breaches of
representations and warranties could have a material adverse affect upon our
financial condition.
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Existing officers and directors control us, including the election of
our directors and appointment of our officers. Our officers and directors
currently own approximately 88% of our outstanding Common Stock. Accordingly,
our Board and the officers will exercise control over us, including control over
the election of directors and the appointment of our officers.
Competition for wholesale brokers is very high, which could lead to
higher costs and adversely affect our business and results of operations. We may
depend on independent mortgage brokers, and to a lesser extent, on correspondent
lenders, for the origination and purchase of our mortgage loans. These
independent mortgage brokers deal with multiple lenders for each prospective
borrower. We compete with these lenders for the independent brokers' business on
the basis of price, service, loan fees, costs and other factors. Our competitors
also seek to establish relationships with such brokers, who are not obligated by
contract or otherwise to do business with us.
Periodic declines in property values may reduce our loan originations.
Our business may be adversely affected by periods of economic slowdown or
recession, which may be accompanied by declining property values. Any material
decline in property values reduces the ability of borrowers to use equity in the
property to support any borrowings and increases the loan-to-value ratios of
mortgage loans previously made, thereby weakening collateral coverage and
increasing the possibility of a loss in the event of default.
Because there has been no prior public market for our securities, we
may experience market volatility and have difficulty establishing an active
trading market. Prior to this registration, there has been no public market for
our securities. Although we intend that the debentures will be traded in the
over-the-counter market and listed on the "yellow sheets" published by the
National Quotation Bureau, LLC., there can be no assurance that our securities
will be so listed or published or, if they are, that we will be able to maintain
such listing and/or publication. There also can be no assurance that an active
trading market will develop after listing and publication or that, if developed,
it will be sustained. Recent history relating to the market prices of newly
public companies indicates that there may be significant volatility in the
market for such securities because of factors unrelated, as well as related, to
such company's operating performance. It is unlikely that an active trading
market will develop for the debentures.
The Year 2000 computer problem may have a significant effect on our
ability to originate loans and conduct our business. We do not anticipate any
problems with Year 2000 Compliance. We have been in contact with our accountant,
bankers and loan purchasers and have been assured that all are in Year 2000
Compliance. However, if these entities are not in compliance, we may experience
limited business interruptions. Should noncompliance be an issue, we may need to
change our accountant, banking relationship, title companies or transfer agent.
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RISKS ASSOCIATED WITH THE DEBENTURES
The debentures are subordinate to other debts we owe and investors will
not be entitled to payment until all senior indebtedness is satisfied. The
debentures are subordinated to all senior indebtedness of the Company. As of
June 30, 1999, we had approximately $3.3 million of senior indebtedness. The
indenture does not limit our ability to incur additional indebtedness, including
senior indebtedness, or additional indebtedness by AFC or our other
subsidiaries.
The debentures are only our obligations and are not obligations of our
subsidiary, AFC. Because we are a holding company, our rights and the rights of
our creditors, including the holders of the debentures, to participate in any
distribution of the assets of AFC (either as a shareholder or as a creditor),
upon a liquidation, reorganization or insolvency of AFC (and the consequent
right of the holders of the debentures to participate in those assets) is
subject to the claims of the creditors of AFC. Our claims would be subject to
any prior security interest in the assets of AFC and any indebtedness of AFC
senior to our interest in the assets. As of June 30, 1999, AFC had approximately
$3.7 million of liabilities (including the $3.3 million of senior indebtedness
described above) and stockholders' equity of approximately $1.5 million.
The source of payments to holders of our securities is limited to
dividends paid by our subsidiary. As previously discussed, there is a risk that
our subsidiary, AFC, will be unable to pay sufficient dividends to us. Our
ability to pay interest on the debentures will significantly depend on AFC's
ability to pay dividends to us in amounts sufficient to service our obligations.
Our obligations include making payments on our outstanding mortgage loan
facilities.
We may also become obligated to make other payments on securities that
we issue in the future that are pari passu or have a preference over the
debentures with respect to the payment of principal, interest or dividends. Our
obligations include making payments on outstanding other borrowings-aggregating
approximately $3.3 million in principal amount at June 30, 1999.
Due to the discount of the zero coupon bond on its purchase, the
debentures may not be fully secured. The Zero Coupon Bond is discounted on
purchase. Therefore, bond proceeds may not be sufficient to fund all principal
and interest owing with respect to the debentures if we default and the bond is
sold prior to its maturity.
Our securities are not insured. The debentures are not insured by the
Bank Insurance Fund or the Savings Association Insurance Fund of the FDIC or by
any other governmental agency.
We may issue additional securities in the future. There is generally no
restriction on our ability to issue securities which are pari passu or have a
preference over the debentures. Likewise, there is also no restriction on the
ability of AFC to issue additional capital stock or incur additional
indebtedness, or in our ability to guarantee indebtedness of AFC or a third
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<PAGE> 13
party. At June 30, 1999, we had 21,333,333 shares of our common stock issued and
outstanding. We have 58.5 million shares of common stock and 20 million shares
of preferred stock, authorized and available for issuance from time to time in
the discretion of our board of directors. In addition, at June 30, 1999, AFC had
56,587 shares of common stock, and 1.0 million shares of preferred stock
authorized and available for issuance from time to time in the discretion of its
board of directors.
We do not anticipate that we will seek shareholder approval in
connection with any future issuances of our stock unless we are required by law
or the rules of any stock exchange on which our securities are listed. In
addition, our Articles of Incorporation also provide our board of directors with
the authority without first obtaining shareholder approval to issue up to
20,000,000 shares of preferred stock, and to fix the relative rights and
preferences of the preferred stock. There are no limitations on our ability to
incur additional debt or issue additional notes or debentures.
There has been no prior market for the debentures and we do not expect
an active trading market to develop, which may limit the debentures' resale. The
debentures have no prior market. We expect that the debentures will be traded in
the over-the-counter market and listed on the "yellow sheets" published by the
National Quotation Bureau, LLC. It is unlikely that an active trading market
will develop for the debentures.
Although it has no obligation to do so, Choice Investments, Inc.
intends to make a market in the debentures as long as the volume of trading and
other market-making considerations justify such an undertaking. However, a
public market having depth, liquidity and orderliness depends on the presence in
the marketplace of a sufficient number of buyers and sellers at any given time;
neither we nor market makers have control over such a marketplace. In the event
that Choice or any other entity does not make a market in the debentures,
holders of those securities would be limited to selling them in privately
negotiated transactions. If an active trading market does develop for either of
those securities, there can be no assurance that such a trading market will
continue. If a trading market does not develop, or is not maintained, holders of
debentures may experience difficulty in reselling them or may be unable to sell
them at all. Additionally, since the prices of securities generally fluctuate,
there can be no assurance that purchasers of those securities will be able to
sell those securities at or above the purchase price paid for them.
Holders of our senior indebtedness have priority over the payment to
holders of the debentures. The debentures are subordinated to all of our current
or future senior indebtedness or liabilities which are not expressly by their
terms made subordinate or equal in right of payment to the debentures. The
debentures may also be subordinated to obligations of AFC. As of June 30, 1999,
we had:
o $3.3 million of senior indebtedness, and
o $109,000 of indebtedness ranking equally with debentures.
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<PAGE> 14
The indenture relating to the debentures does not limit our ability to
incur additional indebtedness, including senior indebtedness, or additional
indebtedness by AFC or our other subsidiaries.
The indenture provides for limited covenants which do not protect the
holders of debentures or impact our obligations under these securities. The
covenants in the indenture are limited and do not protect holders of debentures
in the event of a material adverse change in our financial condition or results
of operations. In addition, payment of principal of and interest on the
debentures can only be accelerated if we:
o fail to pay principal on the debentures at maturity or upon
redemption,
o fail to pay interest on any of the debentures and such failure
continues for a 30-day period,
o breach any of the provisions of the indenture and such breach
continues for a 60-day period after receipt of notice, or
o reorganize or become bankrupt or insolvent in certain events.
The indenture does not require us to:
o adhere to any financial ratios or specified levels of
liquidity, or
o repurchase, redeem or modify the terms of the debentures upon
a change in control or other events involving us that may
adversely affect the creditworthiness of the debentures.
Therefore, neither the covenants nor the other provisions of the
indenture should be a significant factor in evaluating our obligations under the
debentures.
Our underwriter has participated in a limited number of initial public
offerings. This is one of the first public offerings in which Choice
Investments, Inc. has participated. Prospective purchasers of the debentures
offered hereby should consider the limited experience of Choice Investments,
Inc. in evaluating this offering.
USE OF PROCEEDS
The primary purposes of this offering are to obtain additional working
capital, repay outstanding indebtedness of AFC and to provide funds for Austin
Funding.com Corporation (the "Company") to acquire related financial services
business. The funds raised from the offering will be used to purchase the Zero
Coupon Bond which will be the security for the Debentures and pay Choice
Investment, Inc.'s ("Choice") commissions and the expenses of the
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<PAGE> 15
offering. It is estimated that the Zero Coupon Bond will cost the Company
approximately $3.3 million of the proceeds of this offering. The net proceeds
from the sale of the Debentures in the offering (after purchase of the Zero
Coupon Bond) is estimated at $6.0 million.
The Company will retain all of the net proceeds as its working capital.
The Company intends to lend a portion of the net proceeds retained by it to AFC
for AFC to repay part of its residential warehouse credit facilities. The
warehouse credit facility is a $10.0 million line of credit with lenders of
which $3.3 million was outstanding as of June 30, 1999. The warehouse credit
facilities are secured by mortgage loans held for sale. The interest rate on the
warehouse credit facilities is at Chase Bank of Texas prime rate plus 2.0% on
non-agency mortgage loans held for sale. The loan to AFC to repay a part of the
warehouse credit facility would be $3.0 million. The remainder of the proceeds
will be invested on an interim basis in short- and intermediate-term securities.
These funds would be available for general corporate purposes that may include
expansion of operations through acquisitions of other mortgage businesses,
financial service organizations and diversification into other related and
unrelated businesses, or for investment purposes. Currently. there are no
specific plans being considered for the expansion of the business of the
Company. In addition, the funds may be used to infuse additional capital to AFC
when and if appropriate.
While the foregoing represents the Company's present intention with
respect to the use of the offering proceeds, capital requirements or business
opportunities, none of which are currently anticipated, could cause management
to elect to use proceeds for other general corporate purposes and for other
purposes not contemplated at this time. Notwithstanding the foregoing, the
Company reserves the right to use the proceeds in any manner authorized by law.
BUSINESS OF THE COMPANY
The Company through its subsidiary is a licensed mortgage lender active
in acquiring, holding and ultimately selling Mortgages. Mortgages are acquired
individually at a discount from their ultimate secondary market pooled values.
The Company operates exclusively on a wholesale basis through a network of
approved correspondent brokers that bring loans to the Company for
consideration. Using debt secured by the Mortgages in order to pool these loans,
the Mortgages are sold directly to various private and institutional investors
at a price greater than the Company's acquisition cost. Primarily, the Company
receives income from sources in connection with its sub-prime mortgage lending
activities. The Company charges certain non-refundable mortgage application fees
to potential borrowers and, upon closing a loan, receives additional fees
payable by the borrower or investor, which fees are based upon a percentage of
the loan and/or the interest rates charged.
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<PAGE> 16
TRADITIONAL UNITED STATES MORTGAGE MARKET
The Mortgage Bankers Association estimates the United States mortgage
market to total over $4.3 trillion in terms of loans outstanding and projects
mortgage originations to be $1.2 trillion in 1999.
The mortgage industry is divided broadly into four major segments
today:
o mortgage origination -- sourcing, verification and
documentation of mortgage loans, typically done by mortgage
brokers and single-source lenders;
o mortgage funding -- underwriting, funding and selling closed
loans to mortgage loan purchasers;
o securitization -- aggregating loans for sale into the
secondary market; and
o servicing -- ongoing billing, collection and
foreclosure/collateral management.
Over the past two decades, the mortgage industry has evolved
dramatically. Until the late 1970's, the mortgage market was primarily a captive
banking market where retail banks and savings and loan institutions originated
loans through their branches, underwrote and closed loans internally, funded
loans from their own customer deposits and then serviced the loans themselves.
This internal chain of production was broken by the emergence of the pure
mortgage bank that could buy mortgages from mortgage brokers and sell to
government sponsored mortgage investors, such as FNMA and FHLMC and the
development of a large, liquid secondary funding and trading market for mortgage
debt. This efficient new market for mortgage funding made it viable for the
first time to uncouple from the large retail banks both the front-end functions
of mortgage origination and mortgage funding and the back-end function of
servicing.
A significant transformation of the mortgage origination, banking and
servicing businesses into specialized functions conducted primarily by
independent companies has also occurred during the last two decades. This
transformation has created both a large, concentrated and efficient secondary
mortgage market and a large, fragmented and inefficient mortgage origination and
banking market. There are over 20,000 mortgage brokerage operations in the
United States, according to the National Association of Mortgage Brokers.
CURRENT MARKET ENVIRONMENT
Financing plays an integral part in real estate sales and is
generally handled in one of three ways. One way is conventional financing where
the borrower obtains a loan from a financial institution, such as a bank,
savings and loan or mortgage company. Conventional lending's stringent criteria
create loans which conform to FNMA guidelines. The primary focus of this type of
lending is the creation of loans that may be readily sold to FNMA. The
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<PAGE> 17
second possibility is when the seller provides financing on the sale of a
property. This seller financed method is a financial agreement between the buyer
and the seller whereby the parties agree to the sale of the real estate
predicated on the seller "taking back" a real estate secured note as part of the
purchase price. The third method of real estate financing is non-conforming, or
"sub-prime" mortgage lending. Sub-prime lending takes a more common sense
approach to underwriting and makes allowances for unusual circumstances that do
not conform to FNMA underwriting criteria.
In recent years, the sub-prime lending market has grown as the
institutional appetite for high yielding asset backed investments has increased.
These non-conforming mortgages have commanded a greater presence in the market.
The amount and types of alternative loan products in the future will depend
largely upon several factors. These include interest rates, allowable lending
criteria, regional market conditions and money available at any given time in
the conventional financing marketplace. Generally, as interest rates rise,
alternative financing becomes more prevalent because fewer buyers meet the debt
ratios required by conventional lenders. Even with low interest rates,
conventional lending criteria often eliminate potential borrowers with unusual
circumstances (self-employed, recently moved, career change, etc.). According to
the U.S. Department of Housing and Urban Development ("HUD") reports, it is
estimated that over $210 billion in sub-prime single-family mortgage loans were
originated in 1998.
BUSINESS STRATEGY
The Company has developed a specific strategy for the future. The
strategy addresses several key needs.
o Management believes that by assuming a role as educator in the
marketplace, the Company will generate extensive credibility
as well as assist its broker network in generating new
business. This will be accomplished by presenting seminars to
real estate professionals on deal structuring and effective
use of sub-prime mortgage products in the marketplace. Joe
Shaffer and Glenn LaPointe of the Company have conducted
dozens of seminars for mortgage brokers across Texas in the
past. In calendar 1997 they conducted two such seminars in
Austin, in 1998 they put on seminars in El Paso, Dallas, and
McAllen, and in 1999 they have had such seminars in Corpus
Christi, Austin and Las Vegas, Nevada. In addition to creating
goodwill in the industry, these seminars give employees of the
Company direct contact with brokers who will be the source of
loan referrals. Management intends to build on those previous
successes to expand the Company's correspondent broker base.
o The Company will aggressively seek out and recruit those
individuals who demonstrate capability in sourcing and closing
loan purchases. The Company will emphasize quality over
quantity, only dealing with successful correspondents. One of
the most difficult tasks facing management is that of
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<PAGE> 18
determining which sources of product (loans) are profitable
and which are not. A cost/benefit analysis will be performed
in which the Company will evaluate individuals by reviewing
ratios of the percentage of closings to loan submissions, the
dollar volume of revenues to loan submissions and several
intangible factors including teamwork with the employees of
the Company. Those brokers or sources of transactions that are
not profitable will be eliminated. In other words, management
intends to occasionally "fire" customers that are not viable.
Those brokers with a demonstrated ability to package and provide
quality product will be frequently contacted and encouraged to do business with
the Company.
In order to have greater control over loan packaging and still maintain
adequate production, the Company intends to market to quasi-retail sources of
loans, such as realtors, title companies and real estate professionals other
than mortgage brokers.
MARKETING
The sub-prime mortgage market place is structured as an imitation of
the conforming market place with regard to marketing techniques. The traditional
approach of sending representatives with no underwriting experience or decision
making authority into mortgage brokers' offices can create an environment of
mistrust and resentment. The Company's approach is to have in-house marketing
representatives with complete underwriting knowledge and discretionary authority
over pricing and purchase transactions. This should give mortgage brokers and
their clients a dependable, responsive resource for which they will ultimately
be willing to pay higher fees and interest rates.
The Company's marketing efforts are currently focused on existing
mortgage brokers. These brokers are contacted and encouraged to do business with
the Company in several ways. Faxes promoting the Company's loan programs are
sent weekly to the Company's database of over 8,000 mortgage brokers nationwide.
In addition, the Company has sponsored a number of local seminars on home equity
lending, participated in various tradeshows, and been active in several industry
organizations to help create a market presence.
In addition, the Company has produced a number of regional seminars
specifically educating brokers on the use of the Company's loan products. These
seminars are free to the broker and held in exclusive private clubs in various
cities. These have historically brought a large attendance as well as attention
to the Company.
Starting in the third quarter of 1999, a similar campaign will be
conducted with realtors. The plan was to have them encourage their mortgage
brokers to send loans to the Company or to submit the clients directly to the
Company.
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<PAGE> 19
Because of events in the asset backed markets in the last quarter of
1998, the types of loan products available in the marketplace have become
restricted. Many brokers developed their businesses over the past several years
by "bottom feeding" as lower and lower quality products became available.
Because of quality concerns surrounding these lower quality mortgage products,
management is developing avenues to bypass brokers and package files directly,
thus ensuring the quality and contents of loan files.
For the fiscal year ended March 31, 1999, the Company expended
approximately $33,000 for sales and marketing activities. In 1999 the Company is
seeking to expand its marketing activities to consistently include nationwide
advertising of its sub-prime effort, and expects to invest more than $80,000 in
marketing and advertising costs.
The Company will focus heavily on providing education as a means to
achieve further market penetration. The Company believes quality of service is a
priority over growth if the Company is to remain a viable enterprise in the long
run. The Company may consider creating strategic alliances with larger
competitors/investors with which the Company may "piggy-back" warehousing, bulk
sales and securitizations.
The Company also may pursue the securitization of the mortgages it
purchases and broker/dealers to sell the Company's securities offerings. This
will allow the Company to control its future to a greater degree than some of
its competition.
PRICING
The Company originates or purchases individual loans at a desired
interest rate of approximately 11.5% or more, which is typically in excess of
the sub-prime loan secondary market rate. The Company then sells these loans to
various investors in pools of $1 million or more at or below the secondary
market rate (for instance, 9.5%) resulting in a gain for the Company.
Historically, the market has paid a 5-10% differential between the sales price
of loans the Company has pooled versus the acquisition price of individual loans
acquired by the Company. This gain is expected to provide the primary source of
profits for the Company. There will likely be changes in the Company's cost of
funds as various factors affect interest rates, including monetary policies of
the Federal Reserve Board, national and international economic conditions and
housing demand, to name a few. The Company will adjust its desired yield range
in order to maintain profitability and competitiveness over time.
The Company invests in loans at prices less than their pooled secondary
market value. The acquisition price varies in any given transaction depending
upon the loan's characteristics and the Company's yield requirements at the time
of purchase. Yield requirements are established in light of capital costs,
market conditions, the characteristics of particular classes or types of loans
and the risk of default by the payor on any given loan. The risk of default can
be affected by changes in general or local economic conditions, neighborhood
values, the value of the specific real estate collateral and by changes in
zoning, land use, and environmental laws.
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<PAGE> 20
The Company establishes the yield requirements for its loans by
assuming that all payments on the Mortgages will be paid as scheduled. However,
to the extent that loans are paid off earlier than anticipated (e.g., within 12
months of purchase), the Company may be responsible for partial or full
repayment of any premium received from the investor, thereby reducing the
Company's profits. For example, if the Company sells a loan to an investor in
which a premium is paid on the loan and the loan is prepaid in full within six
months after the date of purchase, typically the Company will be responsible for
repayment of one-half of the premium received by the Company on that loan.
The second method of generating revenues for the Company is to sell
loans into a securitization conduit and receive income in the form of the
interest arbitrage between the loan coupon and the conduit's cost of funds.
While this approach generates substantially greater profits, the Company
receives these profits over time as the loans perform. This creates a greater
potential for recourse and a restriction of immediate cash flow. Diligent
underwriting and the more than doubled profit potential would offset these
risks.
The following table consolidates the approximate loan production and
fee income for the Company during the periods indicated.
<TABLE>
<CAPTION>
Fiscal Years Ended June 30,
1999 1998
----------- -----------
<S> <C> <C>
Total dollars funded $17,160,047 $11,166,102
Number of Loans 294 226
Gross fee revenue $18,161,192 $11,955,998
</TABLE>
LOAN PROCESSING AND UNDERWRITING
The Company's loan application and approval process generally is
conducted over the telephone with applications usually received from mortgage
bankers, mortgage brokers and consumers at the Company's centralized processing
facility in Austin, Texas. After receiving an application, the information is
entered into the Company's system and processing begins. The information
provided in loan applications is first verified by, among other things, the
following:
o written confirmations of the applicant's income and, if
necessary, bank deposits,
o a formal credit bureau report on the applicant from a credit
reporting agency,
o a title report,
o a real estate appraisal, if necessary, and
o evidence of flood insurance, if necessary.
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Loan applications are then reviewed to determine whether or not they
satisfy the Company's underwriting criteria, including loan-to-value ratios,
occupancy status, borrower income qualifications, employment stability,
purchaser requirements and necessary insurance and property appraisal
requirements.
The Company has developed its credit index profile ("CIP") as a
statistical credit based tool to predict likely future performance of a
borrower. Its CIP is similar to other CIP's in the mortgage banking industry,
but since the Company is holding most of its loans for a period of time before
it sells them, the Company underwrites them as though it is the end purchaser. A
significant component of the CIP system is the credit evaluation score
methodology developed by Fair Isaacs Company ("FICO"), a consulting firm
specializing in creating default predictive models using a number of variable
components. A FICO score is calculated by a system of scorecards. FICO uses
actual credit data on millions of consumers, and applies complex mathematical
methods to perform extensive research into credit patterns that attempt to
forecast consumer credit performance. The principal components of the FICO
predictive model include a consumer's credit payment history, outstanding debt,
availability and pursuit of new credit and types of credit in use. Through this
scorecard process, FICO identifies distinctive credit patterns, which correspond
to a likelihood that consumers will make their future loan payments. The score
is based on all the credit-related data in the credit report. The other major
components of the CIP include debt-to-income analysis, employment stability,
self employment criteria, residence stability and whether the applicants use the
premises as their primary residence. By using both scoring models together, all
applicants are considered on the basis of their ability to repay the loan
obligation while allowing the Company to price the loan based on the extent of
the evaluated risk.
The Company's underwriters review the applicant's credit history, based
on the information contained in the application and reports available from
credit reporting bureaus and the Company's CIP score, to determine whether the
applicant meets the Company's underwriting guidelines. Based on Choice's
approval authority level, certain exceptions to the guidelines may be made when
there are compensating factors subject to approval from a more senior designated
authority. Choice's decision is communicated to the broker, banker or consumer
depending on the source of the loan and, if approved, the proposed loan terms
are explained.
FUNDING SOURCES
The Company needs substantial cash flow to facilitate the funding and
closing of the originated and purchased loans. These funds are provided on a
short-term basis by financial institutions that specialize in providing lines of
credit known as warehouse lines.
The amount of the warehouse line provided by a lender is based on the
Company's net worth. Typically, the warehouse lender applies a leverage factor
of fifteen to twenty. As of the date of this filing, the Company has several
warehouse agreements in place which provide
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<PAGE> 22
warehouse lines with funding capabilities in the aggregate of $10 million. The
warehouse agreements have various financial and operational covenants with which
the company must comply. In addition, the warehouse agreements are personally
guaranteed by one or more of the existing stockholders. The Company submits the
mortgage loan to the warehouse bank for funding along with the investor
commitment to purchase the loan. The warehouse bank receives a per loan fee from
the Company plus interest at two percent over the financial institution's prime
rate on the unpaid principal balance of the loan for the time the loan is in the
warehouse.
In the future, the Company will seek to eliminate the personal
guarantees of certain stockholders of the Company from the warehouse agreements.
In accordance with industry practice, the warehouse lines are renewable by the
lenders annually.
LOAN SALES
The Company originates and purchases all of its mortgage loans with the
intent to sell the mortgage loans, without retaining any interest therein, and
the related servicing rights into the secondary market. The mortgage loans are
sold without recourse primarily to institutional investors, national banks and
mortgage lenders. As part of the sale, the Company provides representations and
warranties which are customary to the industry and cover such things as
compliance with program standards, laws and regulations as well as the accuracy
of the information. In the event of a breach of these representations and
warranties, the Company may be required to repurchase these mortgage loans
and/or may be liable for certain damages. Normally, any repurchased mortgage
loan can be corrected and resold back to the original investor. Since 1997 when
the Company began its business, the Company has had to repurchase only two
mortgage loans.
The Company holds the originated or purchased mortgage loan for sale
from the time that the mortgage loan application is submitted by the borrower
until the time the mortgage loan is sold to an investor. During that time, the
interest rate on the mortgage loan might be higher or lower than the market rate
at which price the Company can sell the mortgage loan to an investor.
Therefore, a market gain or loss results on the mortgage loan.
COMPETITION
The Company faces intense competition in the business of sub-prime
mortgage loans. The Company's competitors in the industry include consumer
finance companies, mortgage banking companies, savings banks, commercial banks,
credit unions, thrift institutions, credit card issuers, insurance companies,
FHLMC and other entities engaged in mortgage lending. The largest direct
competitors are mortgage banking entities specifically formed to engage in
sub-prime lending. Many of these competitors are substantially larger and have
considerably greater financial, technical and marketing resources than the
Company. In addition, many financial services organizations that are much larger
than the Company have formed national loan origination networks or purchased
home equity lenders. While competition is a factor,
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<PAGE> 23
these larger entities also create public awareness and acceptance of these loan
products. Competition among industry participants can take many forms, including
convenience in obtaining a loan, customer service, marketing and distribution
channels, amount and term of the loan, loan origination fees and interest rates.
To the extent any of these competitors significantly expand their activities in
the Company's market, the business of the Company could be materially adversely
affected. Fluctuations in interest rates and general economic conditions may
also affect the Company and its competition. During periods of rising rates,
competitors that have locked in lower rates to potential borrowers may have a
competitive advantage.
Starting in late 1998, several of the Company's competitors either
became bankrupt or withdrew from the market due to a collapse in liquidity in
asset backed markets. These companies included Southern Pacific Funding
Corporation, First Plus Financial, Inc. and Pacific Investments Corporation. A
number of these companies were engaging in loan practices which paid little
regard to the likelihood of collateral recovery, in the event of default, and
even to the likelihood of loan repayment by borrowers. In addition, many
companies were using gain on sale accounting techniques which booked long term
interest gains which were never achieved in most cases. The Company does not
engage in either of these practices.
SEASONALITY
The mortgage loan origination business is generally subject to seasonal
trends. These trends reflect the general pattern of sale and resale of homes.
Loan origination typically peaks during the spring and summer seasons, and
declines to lower levels from mid-November through January. The mortgage
servicing business is generally not subject to seasonal trends.
REGULATION
The Company's operations are subject to extensive regulation,
supervision and licensing by federal, state and local governmental authorities
and are subject to various laws and judicial and administrative decisions
imposing requirements and restrictions on part or all of its operations. The
Company's consumer lending activities are subject to the Federal
Truth-in-Lending Act and Regulation Z (including the Home Ownership and Equity
Protection Act of 1994), the Federal Equal Credit Opportunity Act, as amended,
and Regulation B, the Fair Credit Reporting Act of 1970, as amended, the Federal
Real Estate Settlement Procedures Act and Regulation X, the Home Mortgage
Disclosure Act, the Federal Debt Collection Practices Act and the National
Housing Act of 1934, as well as other federal and state statutes and regulations
affecting the Company's activities.
The Company is also subject to the rules and regulations of, and
examinations by, state and federal regulatory authorities with respect to
originating and processing loans. These rules and regulations, among other
things, impose licensing obligations on the Company; establish eligibility
criteria for mortgage loans; prohibit discrimination; govern inspections and
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<PAGE> 24
appraisals of properties and credit reports on loan applicants; regulate
assessment, collection, foreclosure and claims handling, investment and interest
payments on escrow balances and payment features; mandate certain disclosures
and notices to borrowers; and, in some cases, fix maximum interest rates, fees
and mortgage loan amounts. Failure to comply with these requirements can lead to
loss of approved status, certain rights of rescission for mortgage loans, class
action lawsuits and administrative enforcement action.
In Spring 1999, the Texas Legislature approved Senate Bill 1074 which
provides for licensing of residential mortgage brokers. The Texas Savings and
Loan Department will be the licensing and regulatory agency. A mortgage broker
or a mortgage broker's loan officer must meet continuing education requirements
in order to maintain that license. The law took effect on September 1, 1999, but
an individual brokering mortgage loans is not required to be licensed until
January 1, 2000. Mortgage bankers and their employees are exempt from this
mortgage broker licensing legislation. A mortgage banker is defined as any
individual or entity who is a HUD approved mortgagee with direct endorsement
underwriting authority or an approved seller or servicer for either FNMA or
FHLMC or an approved issuer for GNMA. The Company has recently become a HUD
approved mortgagee and is therefore exempt from any licensing requirements under
the new law.
There can be no assurance that the Company will maintain compliance
with these requirements in the future or receive the necessary FNMA or State of
Texas approvals without additional expenses, or that more restrictive local,
state or federal laws, rules and regulations will not be adopted or that
existing laws and regulations will not be interpreted in a more restrictive
manner, which would make compliance more difficult and more expensive for the
Company.
EMPLOYEES
At June 30, 1999, the Company employed approximately 13 persons,
substantially all of whom were full-time employees. All of these are employed at
the Company's Austin, Texas headquarters. None of the Company's employees are
represented by a union. The Company considers its relations with its employees
to be good.
DESCRIPTION OF PROPERTY
All of the operations of the Company are conducted from office space
leased from a non-affiliated landlord. The following table sets forth
information concerning the facility:
<TABLE>
<CAPTION>
Location Tenant Approx. Size Lease Expiration Monthly Rent
- --------------- ------------ ---------------- ------------
<S> <C> <C> <C>
823 Congress Avenue, Suite 515 3,293 square feet February 28, 2001 $3,842 to April 30, 2000
Austin, Texas 78701 then $4,391
</TABLE>
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The lease provides for rent escalations tied to increases in operating
expenses or fluctuations in the consumer price index. The Company's management
believes this office space is satisfactory for all of its needs for the
foreseeable future and that the property is adequately covered by insurance.
LEGAL PROCEEDINGS
On June 14, 1999, the Company, holder of a defaulted $160,000 real
estate lien note and beneficiary of a deed of trust to Lot 9, Ridge Haven
Estates, in Rockwall County, Texas, securing payment of the note, posted through
its Substitute Trustee a notice of foreclosure on Lot 9. On June 30, 1999, an
action was filed in the 382nd Judicial District Court of Rockwall County, Texas,
by Vernon Oland Hogue, Jr., and Judy Hogue, as Plaintiffs, against Richard
Franks, Laurie I. Davis, LaSalle Anders, SAFECO Land Title of Collin County,
SAFECO Land Title of Plano, the Company and IMC Mortgage Company, as Defendants.
The complaint alleges, among other things, that the Company has no interest in
Lot 9 due to a gap in the chain of title and may not proceed with a scheduled
Substitute Trustee's sale. The Plaintiffs sought, and received, a temporary
injunction that restrains the Substitute Trustee sale on the property. The
Plaintiffs seek a permanent injunction restraining foreclosure, ask the Court to
void the Company's liens and deed of trust on Lot 9, request a declaration that
the Plaintiffs have a first lien against Lot 9 in the amount of $55,000, and
seek an unspecified amount of damages for fraud, costs, attorney's fees and such
other relief as the Court may grant. The parties to the action are conducting
discovery and no trial date has been set. The Company believes that it has
meritorious defenses to this lawsuit and that resolution of this matter will not
have a material adverse effect on the business or financial condition of the
Company.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion should be read in conjunction with the
Consolidated Financial Statements and the other financial data included
elsewhere in this Prospectus. The statements which are not historical facts
contained in this section are forward-looking statements that involve risks and
uncertainties, including those described under "Risk Factors." The Company's
actual results may differ materially from the results discussed in the
forward-looking statements.
FINANCIAL CONDITION
o June 30, 1999, Compared to March 31, 1999: Total assets
increased by $2.7 million or 110% from March 31, 1999, to June
30, 1999. This increase is accounted for by two main factors.
Loan production increased during this period resulting in
increased inventory of loans of $2.0 million. Additionally,
$1.2 million of cash and other assets were contributed to the
Company in exchange for Common Stock.
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<PAGE> 26
o March 31, 1999, Compared to March 31, 1998: The Company's
total assets at March 31, 1999, were $2.5 million, a decrease
of $610,000, or 20%, as compared to March 31, 1998. This
decrease was primarily the result of a decrease of $1.0
million in accounts receivable and inventory due to decreases
in loan production netted with a $485,000 contributed
investment in a limited partnership exchange for Preferred
Stock.
Retained earnings decreased by $215,000 from $137,000 at March 31,
1998, to a loss of $78,000 at March 31, 1999. The decrease was due primarily to
a net loss for the year caused by reduced loan production with tighter spreads.
RESULTS OF OPERATIONS
Comparison of Operating Results for the Three Months Ended June 30,
1999, and June 30, 1998. Sales decreased from $5.9 million for the three months
ended June 30, 1998 to $3.9 million for the three months ended June 30, 1999.
This percentage decrease of approximately 34% is the result of a decline in loan
originations causing a reduction in loan sales for the three month period. Loan
originations decreased due to uncertainty in the sub-prime loan secondary market
which resulted from fewer sub-prime loan securitization going to market, changes
in underwriting standards of investors of sub-prime loans, and a general
unwillingness of investors in the sub-prime loan market to take investment risk.
On a dollar basis, 74.5% of the Company's loan inventory was sold after the
balance sheet date.
Additionally, gross profit as a percentage of cost of goods sold
declined from 6.48% for the three months ended June 30, 1998 to 4.49% for the
three months ended June 30, 1999. This decrease is the result of a severe shake
out of the market for sub-prime loans. Starting in late 1998, many of the large
investors in the sub-prime loan market withdrew or went into bankruptcy due to a
collapse in the liquidity in the asset backed markets. Some of these companies
were engaging in loan practices not followed by the Company, which paid little
regard to the likelihood of collateral recovery in the event of default or full
loan payment by the borrowers. The resulting flight by investors away from
sub-prime loans made it difficult for the Company to sell its loan inventory and
generate revenue. See "Business-Competition."
Selling and administrative expense remained relatively flat for the two
periods. Salaries and wages had the largest change, declining from $207,000 for
the three months ended June 30, 1998 to $141,000 for the three months ended June
30, 1999. The decline was the result of decreased loan production and overall
profitability of the Company.
As a result of the foregoing, net income decreased from $34,000 for the
three months ended June 30, 1998 to a loss of $166,000 for the three months
ended June 30, 1999.
Comparison of Operating Results for Fiscal Years Ended March 31, 1999
and March 31, 1998. Sales increased from $10.3 million for the year ended March
31, 1998 to $20.5 million for the year ended March 31, 1999. This percentage
increase of approximately
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<PAGE> 27
99% is primarily the result of an increase in loans acquired coupled with the
recognition that the year ended March 31, 1998 was the first year of operation
of the Company.
Selling and administrative expenses increased from $465,000 for the
year ended March 31, 1998, to $1.4 million for the year ended March 31, 1999.
The across the board increase in selling and administrative expenses between
years is, again, reflective of the fact that March 31, 1998, was the first year
of operation of the Company.
As loan production increased, additional employees were hired, and,
correspondingly, other selling and administrative expenses increased.
Net income decreased from $137,000 for the year ended March 31, 1998,
to a loss of $195,000 for the year ended March 31, 1999.
Liquidity and Capital Resources. Cash flow from operating activities
decreased from cash flow generation of $115,000 for the year ended March 31,
1998, to cash flow used of $111,000 for the year ended March 31, 1999.
Capital expenditures for the year ended March 31, 1999, were
approximately $29,000 principally in computer technology and to a lesser extent
for the expansion of sales organization facilities. The Company believes it will
continue to make investments in computer technology in the near future to
upgrade and maintain its product and service offerings. The Company believes
that such investments could aggregate $50,000 to $100,000 over the next two
years, but has no specific plans at present for such expenditures.
The Company may consider acquisitions of other mortgage businesses as
part of implementing its strategies. There are no specific plans at present for
such expenditures.
Cash flow requirements depend on the level and timing of the Company's
activities in loan originations in relation to the timing of the sale of such
loans. In addition, the Company requires cash flow for the payment of operating
expenses, interest expense and capital expenditures. Currently, the Company's
primary sources of funding are borrowings under warehouse lines of credit,
proceeds from the sale of loans in the secondary market and internally generated
funds.
Historically, the Company has funded its growth, in large part, from
its access to lines of credit and its operating activities. The Company has been
additionally capitalized by the stockholders of AFC purchasing securities of
AFC. See "Certain Relationships and Related Transactions." There can be no
assurance that the Company will be able to employ the additional capital and
credit resources to fund transactions that result in a profit to the Company.
The success of the Company's mortgage origination business depends upon the
availability of mortgage funding at reasonable rates. Although there has been no
limitation on the availability of mortgage funding in the last few years, there
can be no assurance that mortgages at attractive rates will continue to be
available.
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<PAGE> 28
The Company also plans, in the long-term, to engage in the business of
servicing mortgage loans. In order to engage in this business, the Company will
be required to retain the servicing rights on the loans which it originates.
Such retention will result in a reduction in the revenue available to the
Company upon the sale of such mortgage loans. In such event, the Company will be
required to employ capital to finance the retention of servicing rights. Such
capital principally would be expended to pay the costs associated with loan
origination, such as loan officer compensation and related overhead expenses.
However, the retention of servicing rights also creates an asset on the
Company's balance sheet.
The Company will be required to obtain additional capital to achieve
its long-term objectives. The Company has no commitments to obtain such capital,
and there can be no assurance that such capital will be available to the Company
in the future or, if available, will be on terms acceptable to the Company.
The Company expects that its existing capital and its credit
facilities, as well as cash flow expected to be generated from operations, will
satisfy the Company's cash requirements for at least the next 12 months, and
principally will be applied to originate loans. However, management believes
that the Company will require additional credit over the next three years in
order to expand its loan origination capabilities and loan servicing business.
The Company is presently in discussions with various lenders for additional
lines of credit. If such additional credit is not available to the Company, the
Company could be required to reduce the scope of its operations, which could
adversely affect the Company's results of operation.
The Company ended its fiscal year at March 31, 1999, with $4,000 in
cash and cash equivalents, compared to $115,000 for fiscal year ended March 31,
1998. The Company has generated cash (to cover its operating losses) through the
sale of its Common Stock.
Disclosure About Market Risk. The Company's business will be adversely
affected by periods of economic slowdown or recession, which may be accompanied
by decreased demand for consumer credit and declining real estate values. Any
material decline in real estate values results in increased loan-to-value ratios
thereby weakening collateral coverage and increasing the possibility of a loss
in the event of default. To the extent that prospective borrowers do not meet
the Company's underwriting criteria, the volume of loans originated by the
Company could decline. A decline in loan origination volumes could have a
material adverse effect on the Company's business, prospects, financial
condition and results of operations. Changes in the level of consumer
confidence, real estate values, prevailing interest rates and investment returns
expected by the financial community could make mortgage loans of the types
originated by the Company less attractive to borrowers or investors because,
among other things, the actual rates of delinquencies and foreclosures on such
loans could be higher under adverse economic conditions than those currently
experienced in the mortgage lending industry in general.
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<PAGE> 29
In addition, the Company could experience losses on its inventory of
loans due to changes in economic or financial conditions, including changes in
interest rates, that may be beyond the Company's control.
Interest rate movements may significantly impact the Company's volume
of closed loans. As such, interest rate movements represent a major component of
market risk to the Company. In a higher interest rate environment, consumer
demand for mortgage loans, particularly refinancing of existing mortgages,
declines. Interest rate movements affect the interest income earned on loans
held for sale, interest expense on the warehouse lines payable, the value of
mortgage loans held for sale and ultimately the gain on sale of mortgage loans.
In addition, in an increasing interest rate environment, the Company's mortgage
loan brokerage volume is adversely affected.
The Company currently does not engage in any hedging activities.
Therefore, a rise in interest rates may adversely affect the earnings of the
Company.
The Company currently does not maintain a trading portfolio. As a
result, the Company is not exposed to market risk as it relates to trading
activities. The majority of the Company's portfolio is held for sale that
requires the Company to perform market valuations of its pipeline, its mortgage
portfolio held for sale and related forward sale commitments in order to
properly record the portfolio and the pipeline at the lower of cost or market.
Therefore, the Company monitors the interest rates of its loan portfolio as
compared to prevailing interest rates in the market.
The Company typically does not pre-sell the mortgages it originates
when the Company establishes the borrower's interest rate and therefore has
interest rate exposure on such loans. The Company's future operating results are
more sensitive to interest rate movements than a mortgage lender who pre-sells
the mortgage loans it originates.
Industry Trends. The growth in volume that the mortgage industry has
seen over the past few years has resulted from a general downward trend in
interest rates. The Company believes that mortgage volume may tend to decrease
on a relative basis in higher interest environments, but higher interest rates
generally result in smaller mortgage companies leaving the market resulting in
potentially larger market shares for continuing mortgage bankers. The Company
believes that it will be able to realize the opportunities in such an
environment, but there can be no assurance that it will be able to do so.
The Company also believes that the industry will continue to offer
broader and more diversified product offerings and that technology will play an
increasing part in real estate transactions, including expanded use of Internet
capabilities. The Company has begun preliminary work to make the necessary
investments in these technologies. Management believes that the Company should
fully automate its accounting and loan underwriting functions and then establish
a website which facilitates electronic commerce between the Company and
25
<PAGE> 30
its customers, investors and brokers. The Company may need to raise additional
capital to complete these necessary investments in technology.
Although the Company is expanding its business on a national basis, the
Company's business base is concentrated principally in the State of Texas and to
a lesser degree in the States of California and Colorado. As a result, the
Company's business may be subject to the effects of economic conditions and real
estate markets specific to such locales.
Inflation And Seasonality. The Company believes the effect on
inflation, other than its potential effect on market interest rates, has been
insignificant. Seasonal fluctuations in mortgage originations generally do not
have a material effect on the financial condition or results of operations of
the Company.
Accounting Developments. In June 1996, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS No. 125"). SFAS No. 125, among other
things, provides accounting and reporting standards for transfers and servicing
of financial assets and extinguishments of liabilities. SFAS No. 125 requires
that after a transfer of financial assets, an entity recognize 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. SFAS No. 125 also requires that liabilities and derivatives
incurred or obtained by transferors as part of a transfer of financial assets be
initially measured at fair value. SFAS No. 125 is effective for transfers and
servicing of financial assets and extinguishment of liabilities occurring after
December 31, 1996, and is to be applied prospectively. The Company expects that
the impact of SFAS No. 125 on the results of operations, financial condition, or
liquidity will be immaterial.
On June 15, 1998, the FASB issued SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133 is effective for all
fiscal quarters of all fiscal years beginning after June 15, 1999. SFAS No. 133
requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction. The Company is in the process of evaluating the impact of
SFAS No. 133 on its financial statements.
In October 1998, the FASB issued SFAS No. 134, Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise. SFAS No. 134 amends SFAS No. 65,
Accounting for Certain Mortgage Backed Securities, to require that after an
entity engaged in mortgage banking activities has securitized mortgage loans
that are held for sale, it must classify the resulting retained mortgage-backed
securities or other retained interests based on its ability and intent to sell
or hold those investments. This statement is effective for the first fiscal
quarter beginning after
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<PAGE> 31
December 15, 1998, with earlier application encouraged. At this time, the
Company does not anticipate any impact from the adoption of this standard.
Year 2000. As with all financial related businesses, the Company's
operations depend almost entirely on computer systems. Many currently installed
computer systems and software products only accept two digits to identify the
year in any date. Thus, the year 2000 will appear as "00", which the system
might consider to be the year 1900 rather than the year 2000. This could result
in system failures, delays or miscalculations. Computer systems and software
that have not been developed or enhanced recently may need to be upgraded or
replaced to comply with Year 2000 requirements.
The Company believes that each of its software systems on a stand-alone
basis is currently Year 2000 compliant. Testing of the Company's software for
compliance has been completed and was found to be Year 2000 compliant. The
Company also uses multiple software systems and products developed by third
party vendors, including systems and products used in operations and finance,
and systems that operate the office of the Company. The Company is currently in
the process of requesting compliance certificates from these vendors to certify
their Year 2000 readiness. The Company has requested and received compliance
certificates or other assurances from these vendors to certify their Year 2000
readiness.
The operations of many of the Company's customers, investors and
suppliers may be affected by Year 2000 complications. The failure of the
Company's customers, investors or suppliers to ensure that their systems are
Year 2000 compliant could have an adverse effect on the Company's customers,
investors and suppliers, resulting in decreased Internet usage or the Company's
inability to obtain necessary data communication and telecommunication capacity,
which in turn could have an adverse effect on the Company's business, results of
operations and financial condition.
The potential worst case scenario includes:
o slowdown in the communications for some applications due to a
general failure of the Internet;
o corruption of data in the Company's internal information
systems;
o delays in the Company's processing capabilities that depend on
third-party systems;
o financial losses associated with delays in closing loans; and
o failure of infrastructure services provided by third parties,
including public utilities and Internet service providers.
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<PAGE> 32
The Company has not incurred significant costs to date complying with
Year 2000 requirements and does not believe that it will incur significant costs
for such purposes in the foreseeable future. Because the Company's loan business
is highly diversified with regard to individual borrowers and types of business
and its primary market area is not significantly dependent on one employer or
industry, the Company does not expect any significant or prolonged difficulties
that could affect net earning or cash flow. However, if the Company discovers
any Year 2000 errors or defects in the Company's internal systems, it could
incur substantial costs in making repairs. The resulting disruption of the
Company's operations could seriously damage the Company's business.
MANAGEMENT
The Board of Directors of the Company currently consists of eight
members. The current members of the Board of Directors and the executive
officers of the Company are:
<TABLE>
<CAPTION>
Director Term
Name Position(s) Held with the Company Age(1) Since Expires
- ---- --------------------------------- ------ -------- -------
<S> <C> <C> <C> <C>
Glenn A. LaPointe Chairman, President, Chief Executive 36 1999 2002
Officer and Director
Terry G. Hartnett Chief Financial Officer and Director 56 1999 2000
Bradley J. Farley(2) Director 36 1999 2002
Glenn G. Farley(2) Director 42 1999 2002
L.H. Hardy, Jr. Director 44 1999 2001
Shannon D. Stewart Vice President and Director 34 1999 2001
Karen R. Heller Vice President and Director 38 1999 2000
Jennifer Ann V. Bullock Vice President and Director 28 1999 2000
</TABLE>
- ----------
(1) At June 30, 1999.
(2) Messrs. Bradley J. Farley and Glenn G. Farley are brothers.
The following is a brief description of the business experience of the
directors and executive officers of the Company:
GLENN A. LAPOINTE has been Chief Executive Officer and President of the
Company since its inception in 1997. From September 1985 to May 1987, Mr.
LaPointe was employed as a trader's assistant in institutional equities with the
securities brokerage firm of Smith, Barney, Harris Upham & Company in Tampa,
Florida. From June 1987 to June 1988 he was a broker for Kimmins Securities,
Inc., a subsidiary of a publicly held NYSE listed company
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<PAGE> 33
located in Tampa, Florida. His duties included syndicating equity capital for
over $15,000,000 of multi-family units in Florida and directing a rights
offering of $11,000,000 of subordinated debentures for the parent company. From
1988 to September 1992, Mr. LaPointe was Sole Director of Financial Resource
Group, a marketing and consulting company that assisted accountants and CPAs in
expanding their client base. From October, 1992 to April, 1994, Mr. LaPointe
served as Executive Vice President of Marketing for Capital South Mortgage
Investments, Inc., an Austin, Texas based mortgage lending and investment
company. His duties included generating new business and new sources of funding,
effectively negotiating loan acquisitions both directly with borrowers as well
as with brokers as intermediaries, structuring the creation of mortgages so as
to create viable loan programs for the buyers and sellers of real estate,
packaging mortgage acquisitions so that they may be successfully presented to
investors, evaluating the validity and accuracy of appraisals on the underlying
property, ordering and evaluating title policies and meeting conditions of those
policies to insure clear first lien positions, evaluating and gathering
necessary documentation on potential mortgage acquisitions, securing and
servicing end investors and disposing of non-performing mortgages, both through
renegotiations and repossession and liquidation of the underlying real estate.
From May 1994 to present, Mr. LaPointe developed a start up company that
ultimately became Texas Financial Corporation. As Chief Executive Officer of
Texas Financial Corporation, Mr. LaPointe was instrumental in developing a
$10,000,000 revolving line of credit to purchase non-conforming mortgages and
subsequently package them for resale. In March 1997, Mr. LaPointe sold his
interest in Texas Financial to the remaining partners in order to organize the
Company.
TERRY G. HARTNETT has been Chief Financial Officer and Treasurer of the
Company since its inception in 1997. From 1965 to 1973 Mr. Hartnett served as a
Supervising Senior Accountant for the accounting firm of Peat, Marwick, Mitchell
& Co., in the Peoria, Illinois office. From 1973 to 1982, Mr. Hartnett served as
Vice-President and Secretary of American Savings & Loan Association, in Pekin,
Illinois. His duties included overseeing all mortgage origination and collection
activity for the S&L. From 1982 to 1984, Mr. Hartnett worked with several
investment banking firms, helping to develop additional asset backed products as
well as expanding their client base. In 1984, Mr. Hartnett co-founded Capitol
Securities, an Austin, Texas based investment banking firm which specialized in
asset based securitizations and was the first firm in the country to securitize
student loans, a now common practice. In 1993, Capitol Securities Group was sold
to Morgan, Keegan Securities, Inc., a Memphis, Tennessee based regional
investment banking firm. Mr. Hartnett and two other partners from Capitol
Securities subsequently formed Tejas Asset Management, Inc., and Tejas
Securities Group, Inc. In 1995, the original partners of Tejas accepted a
buy-out offer from firm employees. Since 1995, Mr. Hartnett has acted as an
investment banking consultant to various companies engaged in asset backed
transactions.
BRADLEY J. FARLEY has been the owner of Farley Financial Services since
1988. Services provided there include counsel on investments, personal and
corporate finance, and risk management. He also advises businesses in the
correct implementation of 401(k), pension plans, and employee benefits. The
Mortgage Division of Farley Financial Services
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<PAGE> 34
concentrates on funding commercial ventures and residential housing. From 1994
to the present Farley has also been the owner of Seminars for Adult Education, a
subsidiary of Farley Financial Services. The company's primary focus is on
financial competencies with specialization in personal learning in corporate and
private settings. Additionally, Farley is a franchisee of Successful Money
Management Seminars, corporate and public seminars to equip individuals with the
knowledge for personal financial planning. From 1989 to 1995 Farley was owner of
ADA Staff, a company whose primary service was to provide human resource
capacities to small businesses. Farley was responsible for 400 employees,
consolidation of payrolls, reduction of worker's compensation expenses, and
streamlining the cost of employee benefits.
GLENN G. FARLEY has been a director of the Company since 1999. Since
1994, Mr. Farley has worked as an independent business and financial consultant
for various companies and managed his personal investments. Prior to that, he
served as Vice President and Local Recording Agent/Commercial Lines/Office
Manager at Casso-Farley & Quinn Insurance Agency, Inc. from 1988 to 1994. Prior
to that he was Secretary/Treasurer and Local Recording Agent/Commercial
Lines/Office Manager of the company. From 1980 to 1987 Farley was Local
Recording Agent/Office Manager at Austin Insurance Agency, Inc. in Austin,
Texas.
L.H. "RICK" HARDY, JR. has served as a Director of the Company since
March 1998. From February 1998 to January 1999, Mr. Hardy was employed by the
Company to provide strategic and financial consulting. Concurrently, he has
served, since its founding, as the managing partner of Westridge Mortgage, Ltd.,
a privately held financial services company, purchasing sub-prime loans and
seller carried back notes for its own account. Mr. Hardy's primary
responsibilities are in the areas of financial analysis, loan servicing and the
acquisition of mortgage backed securities. Since 1979 Mr. Hardy has successfully
directed the acquisition of real estate investments, real estate secured notes
and a variety of real estate construction opportunities as a principal and as a
consultant or employee for numerous clients and employers. His employment
experience includes City Planner for the City of Galveston, Texas from May 1978
through May 1979; Business Development for Cleveland, Ohio based APCOA, Inc.
from May 1979 through April 1981; Real Estate Acquisitions for Houston, Texas
public traded company National Convenient Stores, Inc. from April 1981 through
September 1983; Taggart, Marryott, Reardon Co. in Columbus, Ohio from January
1988 through September 1988; and Metropolitan Mortgage & Securities, Inc. out of
Spokane, Washington from April 1992 through March 1993. From March 1993 until
March 1998, Mr. Hardy worked exclusively as the managing partner of Westridge
Mortgage, Ltd. He has lectured at numerous seminars and authored training
material for the sub-prime and seller carried back industry. He currently holds
a real estate brokers license in Texas and has previously held brokers license
in the States of Ohio and Oklahoma. His formal education was at the University
of Oklahoma where he received his BS in 1976 and Masters in 1978.
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<PAGE> 35
SHANNON D. STEWART has served as Vice President of Marketing Operations
at AFC since 1998. His work there involves developing marketing strategies and
organizing a marketing team. Prior to his work at AFC, Stewart was area
supervisor for American Greetings in Corpus Christi from 1997 to 1998. He was
responsible for account operations and for gaining additional growth within the
accounts. He also managed 40 merchandisers, a talk that included hiring and
training new merchandisers. From 1992 to 1997 Stewart was a marketing associate
for Sysco Services in San Antonio, Texas where he was responsible for developing
the customer base, customer service and new account development and was involved
in the laptop computer conversion and training for all marketing associates.
KAREN HELLER has been a Senior Acquisition Analyst with the Company
since July 1997. From June 1988 to December 1989, Mrs. Heller worked at Barclays
Bank of North Carolina in Charlotte, North Carolina, as a loan servicing
supervisor. While in Charlotte, Mrs. Heller supervised a team of five customer
service employees. From December 1989 to August 1992, Mrs. Heller worked at
Citizens Federal Bank in Ft. Lauderdale, Florida, as a loan servicing
supervisor. Her duties included supervising a team of 15 customer service
representatives and servicing residential and installment loans in five states.
From August 1992 to April 1994 Mrs. Heller worked at Michael WM Mead, Attorney
in Ft. Walton Beach, Florida, as a real estate closer. Her duties included
closing residential and commercial real estate closings. From April 1994 to June
1995, Mrs. Heller worked at Destin Bank in Destin, Florida, as a mortgage
closing officer. Her duties included originating secondary market residential
mortgage loans and coordinating conventional and VA loans from initial
application and disclosure through closing, funding, and shipping. From October
1995 to March 1996, Mrs. Heller worked at Ontra, Inc., in Austin, Texas, as a
disposition contracts specialist. While at Ontra, Mrs. Heller was responsible
for resolving title problems and closing sales on REO properties in numerous
states, which requires coordination with buyers, sellers, real estate agents,
attorneys, and title companies. From March 1996 to July 1997, Mrs. Heller worked
at Towne and Country Title, Inc. in Austin, Texas as an Escrow Officer. Her
duties there included coordinating and closing all residential real estate sales
for a National Builder account. Mrs. Heller was involved in all aspects of
settlement including title review, document execution, recording, balancing,
funding, and shipping.
JENNIFER ANN V. BULLOCK has been a Senior Acquisition Analyst with the
Company since June 1997. She worked as a loan processing Officer at Savings of
America from 1993 to 1995. Her duties included processing conventional
residential mortgage loans and contacting applicants to request information and
documentation throughout the loan process. Mrs. Bullock was then promoted to
Senior Loan Processing Officer and Office Manager at Savings of America in
Austin, Texas. She held this position from 1995 to 1996. Her duties included
assisting in the start-up of a new office and acting as liaison between Loan
Consultants and Underwriters. Mrs. Bullock functioned as the initial point of
contact for telephone inquiries between brokers and applicants and coordinated
and processed conventional, VA, and FHA mortgage loans. In 1997, Mrs. Bullock
worked at First Equity Corp. in Austin, Texas, as a Loan Processor. Her duties
included second lien mortgage lending and coordinating closings
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<PAGE> 36
with first lien mortgage lenders and title companies. Mrs. Bullock processed and
closed Home Improvement Loans and shipped closed loans to investors.
Directors of the Company serve three-year staggered terms so that
approximately one-third of the directors are elected at each annual meeting of
shareholders. The initial terms of five of the eight directors on the classified
Board of Directors may be viewed as inhibiting a change in control of the
Company and having possible anti-takeover effects. The Company does not
currently compensate its directors for their service in such capacity. The Board
of Directors acting as a nominating committee nominates directors to be elected
to the Board.
The executive officers of the Company are elected annually and hold
office until their respective successors have been elected and qualified or
until death, resignation or removal by the Board of Directors. The executive
officers of the Company are as set forth in the above table. Executive officers
of the Company receive no remuneration in their capacity as the Company's
executive officers. For information regarding compensation of directors and
executive officers of AFC, see "Executive Compensation."
BOARD COMMITTEES
The Board of Directors has established an Executive and Policy
Committee, Audit Committee, Compensation Committee and Stock Plan Committee. The
Executive and Policy Committee has Glenn A. LaPointe, Terry G. Hartnett, L.H.
Hardy, Jr. and Bradley J. Farley as its members. During intervals between
meetings of the Board, that Committee exercises all of the power of the Board in
the management of the Company. The Audit Committee, consisting of L. H. Hardy,
Jr. and Glenn G. Farley, reviews the adequacy of internal controls and results
and scope of the audit and other services provided by the Company's independent
auditors. The Compensation Committee and the Stock Plan Committee each consist
of Bradley J. Farley and L.H. Hardy, Jr. The Compensation Committee establishes
and recommends salaries, incentives and other forms of compensation for officers
and other key employees. The Stock Plan Committee administers the 1999 Stock
Option and Incentive Plan, including the selection of participants and the
granting of awards.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of June 30, 1999, the beneficial
ownership of the Company's 21,333,333 outstanding shares of Common Stock by (1)
the only persons who own of record or are known to own, beneficially, more than
5% of the Company's Common Stock; (2) each director and executive officer of the
Company; and (3) all directors and officers as a group.
<TABLE>
<CAPTION>
Name and Address Percent of
of Beneficial Owners Relationship with Company No. of Shares(1) Class(%)(1)
-------------------- ------------------------- ---------------- -----------
<S> <C> <C> <C>
Glenn A. LaPointe Chairman, President, Chief 6,783,872 32%
9002 Jolly Hollow Drive Executive Officer and Director
Austin, Texas 78750
Bradley J. Farley Director 3,391,936 16%
1202 Hallmark
San Antonio, Texas 78216
Glenn G. Farley Director 3,391,936 16%
709 East Calton Road, Suite 101
Laredo, Texas 78041
L.H. Hardy, Jr. Director 2,261,291 11%
325 South Commons Ford
Austin, Texas 78733
Terry G. Hartnett Chief Financial Officer and 2,261,291 11%
6000 Shepherd Mountain Director
Cove, No. 106
Austin, Texas 78730
Shannon D. Stewart Officer and Director 529,994 2%
1901 Aster Way
Round Rock, Texas 78664
Karen R. Heller Officer and Director 106,007 --
17206 Reed Park Road
Jonestown, Texas 78645
Jennifer Ann V. Bullock Officer and Director 106,007 --
6049 Abilene Trail
Austin, Texas 78749
Officers and directors, as a group 18,832,334 88%
(8 persons)
</TABLE>
- ----------------
(1) Does not include options granted to the above persons in the amount of
5,000 shares each.
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<PAGE> 38
INDEMNIFICATION
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Company has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Company 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 Company 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.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In 1998, Glenn LaPointe, Terry Hartnett, L.H. Hardy, Jr. and an officer
of the Company organized a business named CalTex Funding Corporation ("CalTex")
for the initial purpose of purchasing seller-financed mortgage notes and then
selling such notes to investors of the Company. After six months, CalTex
discontinued that business. CalTex next served as a vehicle to acquire mobile
homes and put them on real estate for sale to home buyers. On May 5, 1998 the
Company began making advances to CalTex in order to fund its operations. At
March 31, 1999, the Company had advances of $28,830. As homes were sold, the
Company would make loans to borrowers who were purchasing the homes. In an
effort to close out sales of certain homes, employees of the Company and their
family members purchased some homes and borrowed money from the Company to
finance those purchases. As a result, the Company holds six loans aggregating
approximately $500,000 to employees and their family members secured by homes
sold by CalTex.
In October 1998, Director Hardy had a limited partnership interest in
CertAustin, Ltd., a Texas limited partnership, which owned loans and other
financial assets. In an effort to enhance AFC's financial position, AFC
exchanged 500 shares of its Class A Preferred Stock for a 98% limited
partnership interest in CertAustin, Ltd. owned by L.H. Hardy, Jr. The Company
participated in the partnership until April 1999 when the Company assigned the
limited partnership interest back to Mr. Hardy for the cancellation of the 500
shares of preferred stock. At the same time, Mr. Hardy conveyed his 1,000 shares
of Common Stock back to AFC.
In April 1999, AFC issued 500 shares of its Class B Preferred Stock to
Bradley J. Farley and Glenn G. Farley in exchange for a $500,000 certificate of
deposit and the assignment of a $500,000 note receivable. The $500,000 note
receivable is from Banks International Global Services, Inc., an affiliate of
Mr. Glenn G. Farley. As a part of the Class B Preferred Stock transaction, AFC
entered into a consulting agreement with Bradley J.
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<PAGE> 39
Farley to pay him a monthly consulting fee of $15,000. See "Executive
Compensation-Consulting Agreements with Directors." Under the terms of the
Preferred Stock Purchase Agreement, either of the Farleys could at their
election cause the Company to purchase the 500 shares or the Company could cause
the Farleys to sell such shares. In May 1999, the Farleys converted their 500
shares of Class B Preferred Stock to 324,324 shares of Common Stock of AFC,
which was then exchanged for 6,783,872 of the Company Common Stock.
Since its organization in 1997, the Company from time to time has
borrowed monies from and sold loans to L.H. Hardy, Jr. and Bradley J. Farley. In
one such transaction, Mr. Hardy provided through affiliated entities short term
lines of credit to AFC in amounts up to $267,000 charging back to AFC interest
on funds advanced short term. Total interest collected from the Company for
fiscal 1998 was approximately $10,000. These loans and purchase arrangements
were on terms favorable to the Company and not in excess of then market rates.
None of these loans are outstanding and none of the directors or executive
officers have any agreement with or obligation to purchase loans from the
Company.
Glenn LaPointe, Terry Hartnett, Joe Shaffer, Bradley J. Farley and
Glenn G. Farley have each guaranteed the indebtedness of the Company on one or
more loan agreements. LaPointe and Hartnett have each jointly and severally
guaranteed the payment by the Company of a $500,000 line of credit with a
financial institution. LaPointe, Hartnett, Glenn Farley and Brad Farley have
each jointly and severally guaranteed two separate $5,000,000 warehouse
facilities. In addition, LaPointe, Hartnett and Shaffer have guaranteed the
lease of office space for the Company. Each of these guarantees have been in an
effort to assist the Company and none of these guarantors have been compensated
for their assurances.
During the period ended March 31, 1998, the Company purchased a
contract to sell property from a relative of Glenn A. LaPointe, the President of
the Company, for approximately $89,000. The property was subsequently sold to an
unrelated third party resulting in a net gain of $47,258 to the Company.
L.H. "Rick" Hardy, Jr. has had various business involvements with AFC
since its foundation. Initially he provided a personal guarantee and pledged the
required collateral consisting of $250,000 in mortgage notes to secure a
warehouse line of credit. Mr. Harry's personal guarantee and the initial
collateral pledged continue as of this filing. Under a business arrangement with
AFC, Mr. Hardy received 1,000 shares of Common Stock and participated in the
profits of the Company with total amount received for fiscal year 1997 being
$76,928.09 and for 1998 being $21,854.05. The profit sharing arrangement was
discontinued after February 1998 and Mr. Hardy became the holder of 1,000 shares
of Common Stock and was paid a salary.
On September 30, 1999, Mr. Bradley G. Farley purchased 1,500,000 shares
of the Company's 1999 Series A Preferred Stock in exchange for approximately
$1,433,000 in advances that he has made to the Company. The Preferred Stock sold
to Farley pays no dividend, nor has any conversion or voting rights. The Company
may redeem the 1999
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<PAGE> 40
Series A Preferred Stock for $1.00 per share upon giving Farley ten days advance
notice. Such shares were issued without registration pursuant to an exemption
from registration under Regulation D of the Securities Act of 1933.
DESCRIPTION OF SECURITIES
DESCRIPTION OF THE DEBENTURES
The 8% Secured Subordinated Debentures offered in this Prospectus (the
"Debentures"), will be issued under an indenture dated as of _____________,
1999, between the Company and Norwest Bank Texas, N.A., as Trustee. The
Debentures are not savings accounts or deposits and are not insured by the FDIC
or any other governmental agency. The terms and provisions of the Debentures
include those stated in the indenture and those made part of the indenture by
reference to the Trust Indenture Act of 1939 as in effect on the date of the
indenture. References in this section to the Company are solely to Austin
Funding.com Corporation and not to its subsidiaries.
THE FOLLOWING IS A DESCRIPTION OF THE MATERIAL TERMS OF THE DEBENTURES.
THIS SUMMARY OF THE INDENTURE IS NOT COMPLETE AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO THE INDENTURE, INCLUDING THE DEFINITIONS IN THE INDENTURE OF
CERTAIN TERMS USED BELOW. YOU SHOULD READ THE ENTIRE INDENTURE AND THE TRUST
INDENTURE ACT OF 1939 FOR A COMPLETE UNDERSTANDING OF THE TERMS OF THE
DEBENTURES.
General. The Debentures:
o are general obligations of ours limited to $10 million in
aggregate principal amount,
o are secured by a non-callable U.S. government or government
agency zero coupon bond due in December 2015 (sometimes
referred to as the "Zero Coupon Bond"),
o do not have the benefit of a sinking fund for the retirement
of principal,
o rank equal to all of our subordinated indebtedness,
o are subordinated in right of payment to all of our current or
future Senior Indebtedness or liabilities which are not
expressly by their terms subordinate or equal in right of
payment to the Debentures, and which may include our
obligations to AFC, and
o interest on the Debentures will cease to accrue on the
Debentures upon redemption under the terms and subject to the
conditions of the indenture.
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<PAGE> 41
The Principal Amount at maturity of each Debenture, and all interest
accrued and payable, is payable by the Company at the office or agency of the
paying agent, initially the Trustee, in Lakewood, Colorado, or any other office
of the paying agent maintained for this purpose. Debentures in definitive form
may be presented for exchange for other debentures or registration of transfer
at the office of the registrar. Initially, the Trustee will be the paying agent
and the registrar. The Company will not charge a service charge for any
registration, transfer or exchange of debentures. However, the Company may
require the holder to pay for any tax, assessment or other governmental charge
to be paid in connection with any registration, transfer or exchange of
Debentures.
The Debentures mature on December 31, 2015, unless redeemed earlier,
which we may do at our option. See "Redemption of Subordinated Debentures." The
Debentures bear interest at the rate of 8% per year. We will pay interest
monthly on the first day of each month commencing on the first day of the first
full calendar month after the date of issuance to the person in whose name the
Debenture (or any predecessor Debenture) is registered at the close of business
on the first day of the preceding calendar month, as the case may be. We will
compute interest on the Debentures on the basis of a 360-day year of twelve
30-day months. The Trustee will pay the principal and interest on the Debentures
when due by check mailed to the person entitled to payment.
The Debentures are denominated in U.S. dollars, and payments of
principal and interest on the Debentures are in U.S. dollars. The Debentures
were issued only in fully registered form, without coupons, in denominations of
$5,000 and integral multiples thereof. The Debentures may be presented for
registration of transfer or exchange and shall be duly endorsed or accompanied
by a written instrument of transfer in form satisfactory to the registrar duly
executed by the holder thereof or his attorney duly authorized in writing. The
registered holder of a Debenture will be treated as its owner for all purposes.
Money for the payment of principal or interest upon redemption remaining
unclaimed for two years will be paid back to the Company at its request.
Our primary source of funds for the payment of principal and interest
on the Debentures is dividends from AFC. From time to time while the Debentures
are outstanding, AFC may be subject to regulatory or contractual constraints
that restrict its ability to pay dividends to us.
Security. The Company's obligations to pay the principal of and
interest on the Debentures will be secured by a pledge of a non-callable United
States government or government agency zero coupon bond due in December 2015
with a face amount of $10,000,000 which will be purchased by the Company from
Choice at the closing of the offering and will be pledged as security in
repayment of the Debentures.
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<PAGE> 42
Zero coupon bonds are bonds that do not pay interest periodically in
the fashion of conventional types of bonds, but instead sell at discounts of par
until their final maturity, when payment of principal at par plus all of the
interest accumulated at the rate specified at the time of original issuance of
the bonds is paid in a lump sum.
For the Company, the attraction of the zero coupon bond is the locking
in of the prevailing interest rate, to accumulate compounded and to be paid at
final maturity along with the full principal at par. Thus a combination of
interest income (based on the specified interest rate at issuance) and the
capital gain from discount price at issuance to full par at maturity would be
indicated. Nevertheless, the Company will be paying taxes on the portion of the
interest that accrues each year on the zero coupon bond, although no cash would
be received until final maturity.
Redemption Of Subordinated Debentures. We may redeem the Debentures at
our option, in whole or in part, at any time after December 31, 2001, by payment
of all principal and interest accrued thereon. The Company may redeem the
Debentures for cash as a whole at any time, or from time to time in part by
giving by mail to holders of Debentures not less than 20 days' nor more than 60
days' notice of redemption for an amount in cash equal to the sum of (1) the
Principal Amount to be redeemed, and (2) accrued but unpaid interest thereon
through the date of redemption. At the same time, Company will provide public
notice of redemption through certain financial news services. The Debentures
will be redeemable in multiples of $l,000 Principal Amount. No sinking fund is
provided for the Debentures.
If less than all of the outstanding Debentures held are to be redeemed,
the Trustee will select the Debentures to be redeemed in Principal Amounts of
$1,000 or integral multiples thereof by lot, pro rata or by another method the
Trustee considers fair and appropriate.
Subordination. The Debentures will be issued under an indenture dated
as of _________, 1999, between the Company and Norwest Bank Texas, N.A., as
Trustee.
As set forth in the indenture, the Debentures are subordinate in right
of payment to the holders of all existing and future Senior Indebtedness.
Subordination of the Debentures will not prevent the occurrence of any event of
default under the indenture. Upon any distribution of assets of the Company upon
any:
o dissolution,
o winding up,
o voluntary or involuntary bankruptcy,
o insolvency,
o liquidation,
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<PAGE> 43
o reorganization,
o receivership,
o similar proceeding relating to the Company or its property, or
o an assignment for the benefit of creditors or any marshaling
of the Company's assets or liabilities,
the holders of Senior Indebtedness will be entitled to receive payment in full
before the holders of Debentures will be entitled to receive any payment in
respect of the Debentures.
By reason of the subordination, if any of the events described above
occur, holders of Senior Indebtedness may receive more, ratably, than the
Company's other creditors. For the same reason, the holders of Debentures may
receive less, ratably, than the Company's other creditors.
If the Debentures are declared due and payable prior to maturity
because of an event of default, then the Company must promptly notify holders of
Senior Indebtedness of the acceleration. The Company may not pay amounts owed
pursuant to the Debentures until five days have passed after acceleration
occurs. After 5 days have passed, the Company may pay amounts owed pursuant to
the Debentures only if the terms of the indenture otherwise permit payment at
that time. The Company also may not make any payment on the Debentures if:
o a default in any payment obligations in respect of Senior
Indebtedness occurs and is continuing, without regard to any
applicable period of grace, whether at maturity or at a date
fixed for payment or by declaration or otherwise (provided,
the bond is non-callable and the Trustee may not dispose of,
or disburse the proceeds of, the bond until its maturity in
2015 and, provided further, the Trustee may not undertake any
action which could impair the value of the bond); or
o any other default occurs and is continuing with respect to
Senior Indebtedness that permits holders of the Senior
Indebtedness as to which the default relates to accelerate its
maturity and the Trustee receives a notice of the default,
also referred to as a payment blockage notice, from a
representative for any issue of Senior Indebtedness.
Payments on the Debentures may be resumed:
o in case of a payment default, the earlier of the date on which
the default is cured or waived or ceases to exist; and
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<PAGE> 44
o in case of a nonpayment default, the earlier of the date on
which the non-payment default is cured or waived or ceases to
exist or 179 days after the date on which the applicable
payment blockage notice is received by the Trustee, if the
maturity of the Senior Indebtedness has not been accelerated,
and in either case only if the terms of the indenture
otherwise permit payment at that time.
No new period of payment blockage with respect to a nonpayment default
may be commenced pursuant to a payment blockage notice until 365 days have
elapsed since the initial effectiveness of the immediately prior payment
blockage notice. A nonpayment default that existed or was continuing on the date
of delivery of any payment blockage notice to the Trustee will not be the basis
for a subsequent payment blockage. Any action of the Company or any of its
subsidiaries occurring subsequent to delivery of a payment blockage notice that
would give rise to any event of default under Senior Indebtedness under which an
event of default previously existed or was continuing at the time of delivery of
the payment blockage notice will constitute a new event of default for this
purpose. Any breach of a financial covenant giving rise to a nonpayment default
for a period ending subsequent to the date of delivery of the respective payment
blockage notice constitutes a new event of default for this purpose.
In the event that, notwithstanding the foregoing, the Trustee or any
holder of the Debentures receives any payment of any kind in contravention of
the subordination provisions of the indenture before full payment of the Senior
Indebtedness, then the payment will be held by the recipient in trust for the
benefit of, and paid over to, holders of Senior Indebtedness or their
representatives. These payments can be made in any form of consideration but
must take into account any concurrent payment or distribution to the holders of
Senior Indebtedness.
The Trustee or the holders may accelerate the maturity of the
debentures because the Company fails to make any payments due and owing on the
debentures during a period of payment blockage. The holders of a majority in
principal amount at maturity of the then outstanding Debentures may rescind an
acceleration and its consequences by sending notice of the rescission to the
Trustee if the rescission would not conflict with any judgment or decree and if
all existing events of default (except nonpayment of principal or interest, if
any, that has become due wholly because of the acceleration) have been cured or
waived.
The Debentures are obligations exclusively of the Company. Since
substantially all of the operations of the Company are conducted through
subsidiaries, the cash flow and the consequent ability to service debt,
including the Debentures, are dependent upon the earnings of its subsidiaries
and the distribution of those earnings to, or upon loans or other payments of
funds by those subsidiaries to, the Company. The subsidiaries are separate and
distinct legal entities and have no obligation, contingent or otherwise, to pay
any amount pursuant to the Debentures or to make any funds available therefor,
whether by dividends, loans or other payments. Because the Company's
subsidiaries are regulated, the payment of dividends and making of loans and
advances to the Company's by its subsidiaries are subject to statutory
restrictions. In addition, the payment of dividends and making of loans and
advances are
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<PAGE> 45
contingent upon the earnings of those subsidiaries and are subject to various
business considerations.
Any right of the Company to receive assets of any of its subsidiaries
upon their liquidation or reorganization, and the consequent right of the
holders of the Debentures to participate in those assets, will be effectively
subordinated to the claims of that subsidiary's creditors. The only exception
would be if the Company is itself recognized as a creditor of the subsidiary. In
that case, the Company's claims would still be subordinate to any security
interests in the assets of the subsidiary and any Indebtedness of the subsidiary
senior to that held by the Company.
At June 30, 1999, the Company and its subsidiaries had approximately
$3.3 million of Indebtedness and other liabilities, including trade and other
payables, outstanding, but excluding intercompany liabilities and liabilities of
a type not required to be reflected on a balance sheet in accordance with
generally accepted accounting principles, to which the debentures would have
been effectively subordinated.
The indenture does not limit the amount of additional Indebtedness,
including Senior Indebtedness, which the Company can incur, assume or guarantee.
Furthermore, the indenture does not limit the amount of Indebtedness which any
subsidiary can incur, assume or guarantee.
Certain Covenants. The indenture contains certain customary covenants
found in indentures under the Trust Indenture Act, including covenants with
respect to paying principal and interest and maintaining an office or agency for
administering the Debentures.
Mergers and Sales of Assets by the Company. The Company may not
consolidate with or merge into any other person or convey, transfer or lease its
properties and assets substantially as an entirety to another person, unless,
among other items:
o the resulting, surviving or transferee person, if other than
the Company, is organized and existing under the laws of the
United States, any state thereof or the District of Columbia;
o the successor person assumes all of the Company's obligations
under the Debentures and the indenture; and
o the Company or the successor person will not immediately
thereafter be in default under the indenture.
Upon the assumption of the Company's obligations by a successor as described
above, subject to certain exceptions, the Company will be discharged from all
obligations under the Debentures and the indenture.
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<PAGE> 46
Defaults And Remedies. The indenture provides that, if an event of
default specified in the indenture has happened and is continuing, either the
Trustee or the holders of not less than 25% in aggregate principal amount at
maturity of the Debentures then outstanding may declare due and payable:
o the Principal Amount of the Debentures, plus
o interest on the Debentures, accrued and unpaid to the date of
the declaration.
In the case of certain events of bankruptcy or insolvency, the
Principal Amount plus interest on the Debentures accrued to the occurrence of
the event will automatically become and be immediately due and payable.
Under certain circumstances, the holders of a majority in aggregate
principal amount at maturity of the outstanding Debentures may rescind any
acceleration with respect to the Debentures and its consequences.
Under the indenture, events of default are defined as:
(1) default in payment of:
o the Principal Amount at maturity,
o accrued interest on the Debentures (if the default continues
for 30 days), or
o redemption price
with respect to any Debenture when it becomes due and payable, whether or not
payment is prohibited by the provisions of the indenture;
(2) the Company's failure to comply with any of its other
agreements in the Debentures or the indenture upon the receipt by Company of
notice of the default by the Trustee or by holders of not less than 25% in
aggregate principal amount at maturity of the Debentures then outstanding and
the Company's failure to cure the default within 60 days after receipt by the
Company of the notice; or
(3) certain events of bankruptcy or insolvency.
The Trustee will give notice to holders of the Debentures of any
continuing default known to the Trustee within 90 days after the occurrence;
provided, except in the case of a default as described in clause (1) above, the
Trustee may withhold notice if it determines in good faith that withholding the
notice is in the interests of the holders.
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<PAGE> 47
The holders of a majority in aggregate principal amount at maturity of
the outstanding Debentures may direct the time, method and place of conducting
any proceeding for any remedy available to the Trustee or exercising any trust
or power conferred on the Trustee; provided, the direction may not conflict with
any law or the indenture and will be subject to certain other limitations.
Before proceeding to exercise any right or power under the indenture at the
direction of the holders, the Trustee will be entitled to receive from the
holders reasonable security indemnity satisfactory to it against the costs,
expenses and liabilities incurred by it in complying with the direction. No
holder of any Debenture will have any right to pursue any remedy with respect to
the indenture or the Debentures unless:
o the holder will have previously given the Company and the
Trustee written notice of a continuing event of default;
o the holders of at least 25% in aggregate principal amount at
maturity of the outstanding Debentures have made a written
request to the Trustee to pursue the remedy;
o the holder or holders have offered to the Trustee reasonable
indemnity satisfactory to the Trustee;
o the holders of a majority in aggregate principal amount at
maturity of the outstanding Debentures have not given the
Trustee a direction inconsistent with the request within 60
days after receipt of the request;
o the Trustee has failed to comply with the request within the
60-day period; and
o the Trustee may not undertake any action which could impair
the value of the zero coupon bond without the prior, written
consent of holders of at least 66% in aggregate Principal
Amount of the Debentures at the time outstanding.
However, the right of any holder to receive payment of:
o the principal amount at maturity,
o accrued but unpaid interest on the Debentures,
o redemption price, and
o any interest in respect of a default in the payment of any
amounts due in respect of a Debenture, on or after the due
date of the Debenture
will not be impaired or adversely affected without the holder's consent.
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<PAGE> 48
The holders of at least a majority in aggregate principal amount at
maturity of the outstanding Debentures may waive an existing default and its
consequences, other than:
o any default in any payment on the Debentures; or
o any default in respect of certain covenants or provisions in
the indenture which may not be modified without the consent of
the holder of each Debenture as described under the caption
entitled "Modification of the Indenture" below.
The Company will be required to furnish to the Trustee annually a
statement as to any default by the Company in the performance and observance of
its obligations under the indenture.
Satisfaction, Discharge And Defeasance. The indenture provides that if
the Company seeks to pay interest and/or Principal Amount when due to the record
address of the holder located within the United States and such interest and/or
Principal Amount is returned undeliverable to the Trustee, then we, at our
option, may:
o pay such interest and/or Principal Amount on any Special
Record Date;
o pay such interest and/or Principal Amount in any other lawful
manner not inconsistent with the requirements of any
securities exchange on which the Debentures may be listed; or
o pay such interest and/or Principal Amount with the proceeds of
the zero coupon bond. Notwithstanding the foregoing to the
contrary, the Zero Coupon Bond is non-callable and the Trustee
may not dispose of, or disburse the proceeds of, the Zero
Coupon Bond until its maturity in 2015 and, provided further,
the Trustee shall not undertake any action which could impair
the value of the Zero Coupon Bond.
The indenture further provides that the Trustee shall remit to the Company all
monies held by it with respect to the Securities, including, without limitation,
Defaulted Interest, Defaulted Principal and the Bond, on the earlier to occur of
(i) the Discharge Date, or (ii) as of June 30, 2016.
Modification of the Indenture. Modification and amendment of the
indenture or the Debentures may be effected by the Company and the Trustee with
the consent of the holders of not less than a majority in aggregate principal
amount at maturity of the Debentures then outstanding. Notwithstanding the
foregoing, no amendment may, without the consent of each holder affected:
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<PAGE> 49
o reduce the Principal Amount at maturity, redemption price or
extend the stated maturity of any Debenture or alter the
manner or rate of accrual of interest, or make any Debenture
payable in money or securities other than that stated in the
Debenture;
o make any change to the principal amount at maturity of
Debentures whose holders must consent to an amendment or any
waiver under the indenture or modify the indenture provisions
relating to amendments or waivers with respect to the payment
of principal at maturity; or
o modify the provisions of the indenture relating to the
subordination of the Debentures in a manner adverse to the
holders of the Debentures.
The indenture also provides for certain modifications of its terms
without the consent of the holders.
Form, Denomination and Registration. The Debentures are issuable in
fully registered form, without coupons, in denominations of $5,000 principal
amount at maturity and multiples of $5,000. The Company may not reissue a
Debenture that has matured, been redeemed or otherwise canceled, except for the
transfer, exchange or replacement of the Debenture.
Information Concerning the Trustee. The Company has appointed Norwest
Bank Texas, N.A., as Trustee under the indenture, and as paying agent, registrar
and custodian with regard to the Debentures.
Certain Definitions. Set forth below are certain defined terms used in
the prospectus.
"Indebtedness" means, with respect to any Person and without
duplication:
(1) all indebtedness, obligations and other liabilities,
contingent or otherwise, of such person for borrowed
money;
(2) all reimbursement obligations and other liabilities,
contingent or otherwise, of such person with respect
to letters of credit, bank guarantees or bankers'
acceptances;
(3) all obligations and liabilities, contingent or
otherwise, in respect of leases of such person;
(4) required, in conformity with generally accepted
accounting principles, to be accounted for as
capitalized lease obligations on the balance sheet of
such person, or required, in conformity with
generally accepted accounting principles to be
accounted for as an operating lease, provided, either
(i) such operating lease requires, at the end of the
term
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<PAGE> 50
thereof, that such person make any payment other than
accrued periodic rent in the event that such person
does not acquire the leased real property and related
fixtures subject to such lease, or (ii) such person
has an option to acquire the leased real property and
related fixtures, whether such option is exercisable
at any time or under specified circumstances;
(5) all obligations of such person, contingent or
otherwise, with respect to an interest rate swap, cap
or collar agreement or other similar instrument or
agreement;
(6) all direct or indirect guaranties or similar
agreements by such person in respect of, and
obligations or liabilities, contingent or otherwise,
of such person to purchase or otherwise acquire or
otherwise assure a creditor against loss in respect
of, indebtedness, obligations or liabilities of
another person of the kind described in clauses (1)
through (4) above;
(7) any indebtedness or other obligations described in
clauses (1) through (4) above secured by any
mortgage, pledge, lien or other encumbrance existing
on property which is owned or held by such person,
regardless of whether the indebtedness or other
obligation secured thereby will have been assumed by
such person; and
(8) any and all deferrals, renewals, extensions and
refundings of, or amendments, modifications or
supplements to, any indebtedness, obligation or
liability of the kind described in clauses (1)
through (7).
"Principal Amount" means the principal amount at the stated maturity of
the Debenture as set forth on its face.
"Sale Price of the Common Stock" means, on any date, the closing per
share sale price, or if no closing sale price is reported, the average bid and
ask prices or, if more than one, in either case, the average of the average bid
and average ask prices, on such date as reported in the composite transactions
for the principal United States securities exchange on which the common stock is
traded or, if the common stock is not listed on a United States national or
regional stock exchange, as reported by The NASDAQ National Market.
"Senior Indebtedness" means the principal of, premium, if any,
interest, including all interest accruing subsequent to the commencement of any
bankruptcy or similar proceeding, whether or not a claim for post-petition
interest is allowable as a claim in any such proceeding, rent and end of term
payments payable on or in connection with, and, to the extent not included in
the foregoing, all amounts payable as fees, costs, expenses, liquidated damages,
indemnities, repurchase and other put obligations and other amounts to the
extent accrued or due on or in connection with Indebtedness of the Company,
whether outstanding on the date of the indenture or thereafter created,
incurred, assumed, guaranteed or in effect guaranteed by
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<PAGE> 51
the Company, including all deferrals, renewals, extensions or refundings of, or
amendments, modifications or supplements to, the foregoing. Notwithstanding the
foregoing, the term Senior Indebtedness does not include:
(1) Indebtedness evidenced by the Debentures;
(2) Indebtedness of the Company to any subsidiary of the Company,
a majority of the voting stock of which is owned, directly or
indirectly, by the Company;
(3) accounts payable or other Indebtedness to trade creditors
created or assumed by the Company in the ordinary course of
business; and
(4) any particular Indebtedness in which the instrument creating
or evidencing the same or the assumption or guarantee thereof
expressly provides that such Indebtedness will not be senior
in right of payment to, or is pari passu with, or is
subordinated or junior to, the Debentures.
Material U.S. Federal Income Tax Considerations. The following is a
general discussion of material U.S. federal income tax considerations relating
to the initial purchase, ownership and disposition of the Debentures, and
certain material U.S. federal income and estate tax considerations relating to
the purchase, ownership and disposition of the Debentures to non-U.S. holders.
The discussion is a summary only and does not purport to be a complete analysis
of all the potential tax considerations relating to the purchase, ownership and
disposition of the Debentures. We have based this summary on the U.S. federal
income tax laws on the date of this prospectus. These laws may change, possibly
retroactively. There can be no assurance that the IRS will not challenge one or
more of the tax consequences described herein, and we have not obtained, nor do
we intend to obtain, a ruling from the IRS or an opinion of counsel with respect
to the U.S. federal tax consequences of purchasing, owning or disposing of
Debentures.
The discussion does not address all tax consequences that may be
important to you in light of your specific circumstances. For instance, this
discussion does not address the alternative minimum tax provisions of the tax
code, or special rules applicable to certain categories of investors, such as
certain financial institutions, insurance companies, tax-exempt organizations,
dealers in securities, or persons who hold Debentures as part of a hedge,
conversion or constructive sale transaction, straddle or other risk reduction
transaction, that may be subject to special rules. This discussion is limited to
purchasers of Debentures who acquire the Debentures from the Company in the
initial offering of the Debentures, and will not apply unless the holder holds
the Debentures as capital assets. This discussion also does not address the tax
consequences arising under the laws of any foreign, state or local jurisdiction
or U.S. estate and gift tax law as applicable to U.S. holders.
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<PAGE> 52
Persons considering the purchase of a Debenture should consult their
own tax advisors as to the particular tax consequences to them of acquiring,
holding or otherwise disposing of the Debentures, including the effect and
applicability of state, local or foreign tax laws.
As used in this discussion, the term U.S. holder means a holder of a
Debenture that is:
o for United States federal income tax purposes, a citizen or
resident of the United States;
o a corporation, partnership or other entity created or
organized in or under the laws of the United States or of any
political subdivision thereof;
o an estate, the income of which is subject to United States
federal income taxation regardless of its source; or
o a trust, the administration of which is subject to the primary
supervision of a court within the United States and which has
one or more United States persons with authority to control
all substantial decisions, or if the trust was in existence on
August 20, 1996, and has elected to continue to be treated as
a United States trust.
A non-U.S. holder is any holder other than a U.S. holder.
U.S. Holders. Upon the sale or exchange of a Debenture, a U.S. holder
will generally recognize gain or loss equal to the difference between the sale
or redemption proceeds and the U.S. holder's adjusted tax basis in the
Debenture.
The terms of the Debentures may be modified upon the consent of a
specified percentage of holders and, in some instances, without consent of the
holders. In addition, the Debentures may be assumed upon certain transactions
involving Company. The modification or assumption of a Debenture could, in
certain instances, give rise to a deemed exchange of a Debenture for a new
Debenture for U.S. federal income tax purposes. If an exchange is deemed to
occur by reason of a modification or assumption, the amount and timing of
taxable income required to be recognized by a U.S. holder with respect to a
Debenture could be affected.
Information reporting will apply to payments of interest on or the
proceeds of the sale or other disposition of the Debentures with respect to
certain non-corporate U.S. holders, and backup withholding at a rate of 31% may
apply to such payments unless the recipient of such payment supplies a taxpayer
identification number, certified under penalties of perjury, as well as certain
other information or otherwise establishes an exemption from backup withholding.
Any amount withheld under the backup withholding rules is allowable as a credit
against the U.S. holder's federal income tax, provided that the required
information is provided to the IRS on a timely basis.
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<PAGE> 53
Non-U.S. Holders. The following discussion is a summary of the
principal U.S. federal income and estate tax consequences resulting from the
ownership of the Debentures by non-U.S. holders.
The payment of principal of a Debenture by us or any of our paying
agents to any non-U.S. holder will not be subject to U.S. federal withholding
tax; provided, in the case of payment of cash in respect of original issue
discount (i) the non-U.S. holder does not actually or constructively own 10% or
more of the total voting combined power of all classes of our stock, (ii) the
non-U.S. holder is not a controlled foreign corporation that is related to us
within the meaning of the tax code, and (iii) either (A) the beneficial owner of
the Debenture certifies to the applicable payor or its agent, under penalties of
perjury, that it is not a U.S. holder and provides its name and address on
United States Treasury Form W-8, or a suitable substitute or successor form, or
(B) a securities clearing organization, bank or other financial institution that
holds customers' securities in the ordinary course of its trade or business, and
holds the Debenture certifies under penalties of perjury that such a Form W-8,
or suitable substitute form, has been received from the beneficial owner by it
or by a financial institution between it and the beneficial owner and furnishes
the payor with a copy thereof.
A non-U.S. holder generally will not be required to pay U.S. federal
income tax on gain realized on the sale or redemption of a Debenture unless:
o in the case of an individual non-U.S. holder, such holder is
present in the United States for 183 days or more in the year
of such sale or redemption and either (A) has a tax home in
the United States and certain other requirements are met, or
(B) the gain from the disposition is attributable to an office
or other fixed place of business in the United States;
o the non-U.S. holder is required to pay tax pursuant to the
provisions of U.S. tax law applicable to certain U.S.
expatriates; or
o the gain is effectively connected with the conduct of a U.S.
trade or business of or, if a tax treaty applies, is
attributable to a U.S. permanent establishment of, the
non-U.S. holder.
A Debenture held by an individual who at the time of death is not a
citizen or resident of the United States, as specially defined for U.S. federal
estate tax purposes, will not be required to pay U.S. federal estate tax if the
individual did not actually or constructively own 10% or more of the total
combined voting power of all classes of our stock and, at the time of the
individual's death, payments with respect to such Debenture would not have been
effectively connected with the conduct by such individual of a trade or business
in the United States. Common stock held by an individual who at the time of
death is not a citizen or resident of the United States, as specially defined
for U.S. federal estate tax purposes, will be
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<PAGE> 54
included in such individual's estate for U.S. federal estate tax purposes,
unless an applicable estate tax treaty otherwise applies.
Under current Treasury Regulations, backup withholding and information
reporting will not apply to payments of principal, including cash payments in
respect of the Debentures by us or our agent to a non-U.S. holder if the
non-U.S. holder certifies as to its non-U.S. holder status under penalties of
perjury or otherwise establishes an exemption, provided that neither we nor our
agents have actual knowledge that the holder is a U.S. person or that the
conditions of any other exemptions are not in fact satisfied. The payment of the
proceeds on the disposition of Debentures to or through the United States office
of a United States or foreign broker will be subject to information reporting
and backup withholding unless the owner provides the certification described
above or otherwise establishes an exemption. The proceeds of the disposition by
a non-U.S. holder of Debentures to or through a foreign office of a broker will
not be subject to backup withholding or information reporting. However, if such
broker is a U.S. person, a controlled foreign corporation for U.S. tax purposes,
or a foreign person, 50% or more of whose gross income from all sources for
certain periods is from activities that are effectively connected with a U.S.
trade or business, or, in the case of payments made after December 31, 2000, a
foreign partnership with certain connections to the United States, information
reporting requirements will apply unless such broker has documentary evidence in
its files of the holder's non-U.S. status and has no actual knowledge to the
contrary or unless the holder otherwise establishes an exemption.
The Treasury Department recently promulgated final regulations
regarding the withholding and information reporting rules discussed above. In
general, these regulations do not significantly alter the substantive
withholding and information reporting requirements but rather unify current
certification procedures and forms and clarify reliance standards. In addition,
these regulations impose more stringent conditions on the ability of financial
intermediaries acting for a non-U.S. holder to provide certifications on behalf
of the holder, which may include entering into an agreement with IRS to audit
certain documentation with respect to such certifications. These regulations are
generally effective for payments made after December 31, 2000, subject to
certain transition rules. You should consult your own tax advisor to determine
the effects of the application of these regulations to your particular
circumstances.
COMMON STOCK
The Company is authorized to issue 80,000,000 shares of Common Stock,
$.001 par value. The holders of Common Stock are entitled to one vote for each
share held of record on all matters to be voted on by stockholders. There is no
cumulative voting with respect to the election of directors, with the result
that the holders of more than 50% of the shares voting for the election of
directors can elect all of the directors then up for election. The holders of
Common Stock are entitled to receive dividends when, as and if declared by the
Board of Directors out of funds legally available. In the event of liquidation,
dissolution or winding up of the Company, the holders of Common Stock are
entitled to share ratably in all assets
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<PAGE> 55
remaining which are available for distribution to them after payment of
liabilities and after provision has been made for each class of stock, if any,
having preference over the Common Stock. Holders of shares of Common Stock, as
such, have no conversion, preemptive or other subscription rights, and there are
no redemption provisions applicable to the Common Stock. All of the outstanding
shares of Common Stock are fully paid and nonassessable.
PREFERRED STOCK
The Company is authorized to issue 20,000,000 shares of Preferred
Stock with rights, preferences and limitations to be determined by the Board of
Directors. As of June 30, 1999, no shares of Preferred Stock have been issued.
RESTRICTIONS ON ACQUISITIONS AND RELATED TAKEOVER DEFENSIVE PROVISIONS
The following discussion is a summary of material provisions of the
Company's Articles and Bylaws and certain other state law provisions, which may
be deemed to have an "anti-takeover" effect and could potentially discourage or
even prevent a bid for the Company which might otherwise result in stockholders
receiving a premium for their stock. Further, ownership restrictions imposed by
state and federal law could potentially serve as a basis to invalidate or
otherwise restrict the use or exercise by management or others of revocable
proxies. The following description of certain of these provisions is necessarily
general and, with respect to provisions contained in the Company's Articles and
Bylaws, reference should be made in each case to the document in question.
Provisions of the Company's Articles and Bylaws Affecting a Change in
Control. Certain provisions of the Articles and Bylaws may provide the Board
with more negotiating leverage by delaying or making more difficult unsolicited
acquisitions or changes of control of the Company. It is believed that such
provisions will enable the Company to develop its business in a manner that will
foster its long-term growth without disruption caused by the threat of a
takeover not deemed by the Board to be in the best interests of the Company and
its stockholders. Such provisions could have the effect of discouraging third
parties from making proposals involving an unsolicited acquisition or change of
control of the Company, although such proposals, if made, might be considered
desirable by a majority of the Company's stockholders. Such provisions may also
have the effect of making it more difficult for third parties to cause the
replacement of the management of the Company without the concurrence of the
Board. These provisions include (i) the availability of capital stock for
issuance from time to time at the discretion of the Board, (ii) the
classification of the Board into three classes, each of which serves for a term
of three years, (iii) requirements for advance notice for raising business or
making nominations at stockholders' meetings and (iv) the requirement of a
super-majority vote to remove directors with or without cause.
Classified Board; Removal of Directors. The Articles provide that the
Board's membership is divided into three classes as nearly equal in number as
possible, each of which serves until the third succeeding annual meeting with
one class being elected at each annual
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meeting of stockholders. As a result, at least two annual meetings of
stockholders may be required for the Company's stockholders to change a majority
of the members of the Board. In addition, directors may be removed, with or
without cause, only by the affirmative vote of the holders of at least 70% of
the voting power of all shares of voting stock of the Company, voting together
as a single class. The Articles contain a provision requiring the affirmative
vote of the holders of at least 70% of the voting power of all shares of voting
stock of the Company, voting together as a single class, to alter, amend, repeal
or adopt provisions inconsistent with the classified board provision of the
Articles, and the provision requiring a 70% vote to remove directors. The Bylaws
prohibit increases in the size of the Board that have the effect of delaying the
ability of stockholders to change a majority of the directors for more than two
annual meetings.
The classified board provision and the requirement of a 70%
supermajority vote to remove directors may make it more difficult to change the
composition of the Board.
The Company believes that a classified board of directors will assure
continuity and stability of the Company's management and policies, without
diminishing accountability to stockholders. The Company's classified Board will
ensure that a majority of directors at any given time will have experience in
the business, competitive affairs and regulatory environment of the Company's
business. The Company believes that an experienced board is best situated to
enhance the value of the Company's business. A classified board and the
continuity it fosters will be important in developing, refining and executing
the Company's long-term strategic plan. The Company's classified Board will be
better positioned to make fundamental decisions that are in the best interests
of the Company. A classified board will also prevent an abrupt change in the
composition of the Board and will therefore eliminate delays inherent in the
familiarization by the new Board with the Company and its business and will
moderate changes in corporate policies, decisions and strategies that may not be
in the best interests of the Company and its stockholders and other appropriate
constituencies. At the same time, stockholders have the power to propose and
elect their own nominees for the class of directors to be elected at each annual
meeting, and in that manner change the Board's composition. By reducing the
threat of an abrupt change in the composition of the entire board,
classification of directors will give the Board sufficient time to review any
takeover proposal, study appropriate alternatives and achieve the best results
for all stockholders and other appropriate constituencies. The Company believes
that a classified board will enhance the Company's ability to resist an abusive
takeover attempt or to negotiate a fair price and appropriate protections for
other constituencies. The Company does not expect the classified Board
necessarily to discourage takeover offers or ultimately prevent a hostile
acquisition at a fair price and with appropriate protections for other corporate
constituents. The Company believes that a classified board of directors is fully
accountable to stockholders. To ensure this accountability, the Bylaws prohibit
increases in the size of the Board that have the effect of delaying the ability
of stockholders to change a majority of the directors for more than two annual
meetings. The classified board provision also will not prevent persons from
making unsolicited proposals to acquire the Company. The Company believes that a
classified board of
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<PAGE> 57
directors thus remains accountable to stockholders. Moreover, directors are
bound by fiduciary duty to serve stockholders' interests throughout their term
of office.
Advance Notice for Raising Business or Making Nominations at Meetings.
The Bylaws establish an advance notice procedure for stockholder proposals to be
brought before an annual meeting of stockholders and for nominations by
stockholders of candidates for election as directors at an annual or special
meeting at which directors are to be elected. Only such business may be
conducted at an annual meeting of stockholders as has been brought before the
meeting by, or at the direction of, the Board, or by a stockholder who has given
to the Secretary of the Company timely written notice, in proper form, of the
stockholder's intention to bring that business before the meeting. The chairman
of such meeting has the authority to make the determination of whether business
has been properly brought before such meeting. Only persons who are nominated
by, or at the direction of, the Board, or who are nominated by a stockholder who
has given timely written notice, in proper form, to the Secretary prior to a
meeting at which directors are to be elected will be eligible for election as
directors of the Company.
To be timely, notice of business to be brought before an annual meeting
or nominations of candidates for election as directors at an annual meeting must
be personally delivered or sent by United States mail, postage prepaid, to the
Secretary of the Company not less than 90 nor more than 120 days prior to the
anniversary date of the immediately preceding annual meeting; provided, however,
that in the event the date of the annual meeting is more than 30 days earlier or
more than 60 days later than such anniversary date, notice by the stockholder
must be so delivered or received not earlier than the 120th day prior to such
annual meeting and not later than the close of business on the later of the 90th
day prior to such annual meeting or the tenth day following the day on which
public announcement of the scheduled date of such meeting is first made.
Similarly, notice of nominations to be brought before a special meeting must be
received by the Secretary not earlier than the 90th day prior to such special
meeting and not later than the close of business on the 60th day prior to such
special meeting or the tenth day following the date on which notice of such
meeting is first given to stockholders.
The notice of business to be brought before an annual meeting by a
stockholder must set forth, as to each matter the stockholder proposes to bring
before the annual meeting, a brief description of the business desired to be
brought before the meeting and the reasons for conducting such business at the
meeting and, in the event that such business includes a proposal to amend either
the Articles or the Bylaws, the text of the proposed amendment; the name and
address, as they appear on the Company's books, of the stockholder proposing
such business; a representation that the stockholder is a holder of record of
stock of the Company entitled to vote at such meeting and intends to appear in
person or by proxy at the meeting to propose such business; any material
interest of the stockholder in such business; and if the stockholder intends to
solicit proxies in support of such stockholder's proposal, a representation to
that effect.
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The notice of any nomination for election as a director must set forth
the name and address of the stockholder who intends to make the nomination and
of the person or persons to be nominated; a representation that the stockholder
is a holder of record of stock of the Company entitled to vote at such meeting
and intends to appear in person or by proxy at the meeting to nominate the
person or persons specified in the notice; a description of all arrangements or
understandings between the stockholder and each nominee and any other person or
persons (naming such person or persons) pursuant to which the nomination or
nominations are to be made by the stockholder; such other information regarding
each nominee proposed by such stockholder as would have been required to be
included in the proxy statement filed pursuant to the proxy rules of the
Commission had each nominee been nominated, or intended to be nominated, by the
Board; the consent of each nominee to serve as a director if so elected; and, if
the stockholder intends to solicit proxies in support of such stockholder's
nominee(s) without such stockholder having made the foregoing representation, a
representation to that effect.
The Company expects to hold its first annual meeting of stockholders in
August 2000. Each stockholder will have until the close of business on the tenth
day following the day on which the first public disclosure of the date of such
first annual meeting is made to give notice to the Company, in proper form, of
such stockholder's intention to bring any matter before such first annual
meeting.
Nevada General Corporation Law ("NGCL"). The terms of Chapter 78 of the
NGCL apply to the Company since it is a Nevada corporation. Under certain
circumstances, the following selected provisions of the NGCL may delay or make
more difficult acquisitions or changes of control of the Company. The Articles
and By-laws do not exclude the Company from such provisions of the NGCL. Such
provisions also may have the effect of preventing changes in the management of
the Company. It is possible that such provisions could make it more difficult to
accomplish transactions that stockholders may otherwise deem to be in their best
interests.
Control Share Acquisitions. Pursuant to Sections 78.378 to 78.3793 of
the NGCL, an "acquiring person" who acquires a "controlling interest" in an
"issuing corporation" may not exercise voting rights on any "control shares"
unless such voting rights are conferred by a majority vote of the disinterested
stockholders of the issuing corporation at a special meeting of such
stockholders held upon the request and at the expense of the acquiring person.
In the event that the control shares are accorded full voting rights and the
acquiring person acquires control shares with a majority or more of all the
voting power, any stockholder, other than the acquiring person, who does not
vote in favor of authorizing voting rights for the control shares is entitled to
demand payment for the fair value of his or her shares, and the corporation must
comply with the demand. For purposes of the above provisions, "acquiring person"
means (subject to certain exceptions) any person who, individually or in
association with others, acquires or offers to acquire, directly or indirectly,
a controlling interest in an issuing corporation. "Controlling interest" means
the ownership of outstanding voting shares of an issuing corporation sufficient
to enable the acquiring person, individually or in association with
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others, directly or indirectly, to exercise (i) one-fifth or more but less than
one-third, (ii) one-third or more but less than a majority and/or (iii) a
majority or more of the voting power of the issuing corporation in the election
of directors. Voting rights must be conferred by a majority of the disinterested
stockholders as each threshold is reached and/or exceeded. "Control shares"
means those outstanding voting shares of an issuing corporation that an
acquiring person acquires or offers to acquire in an acquisition or within 90
days immediately preceding the date when the acquiring person became an
acquiring person. "Issuing corporation" means a corporation which is organized
in Nevada, has 200 or more stockholders (at least 100 of whom are stockholders
of record and residents of Nevada) and does business in Nevada directly or
through an affiliated corporation. The above provisions do not apply if the
articles of incorporation or bylaws of the corporation in effect on the 10th day
following the acquisition of a controlling interest by an acquiring person
provide that said provisions do not apply. As noted above, the Articles and
Bylaws do not exclude the Company from the restrictions imposed by such
provisions.
Certain Business Combinations. Sections 78.411 to 78.444 of the NGCL
restrict the ability of a "resident domestic corporation" to engage in any
combination with an "interested stockholder" for three years after the
interested stockholder's date of acquiring the shares that cause such
stockholder to become an interested stockholder, unless the combination or the
purchase of shares by the interested stockholder on the interested stockholder's
date of acquiring the shares that cause such stockholder to become an interested
stockholder is approved by the board of directors of the resident domestic
corporation before that date. If the combination was not previously approved,
the interested stockholder may effect a combination after the three-year period
only if such stockholder receives approval from a majority of the disinterested
shares or the offer meets certain fair price criteria. For purposes of the above
provisions, "resident domestic corporation" means a Nevada public corporation
that has 200 or more stockholders. "Interested stockholder" means any person,
other than the resident domestic corporation or its subsidiaries, who is (i) the
beneficial owner, directly or indirectly, of 10% or more of the voting power of
the outstanding voting shares of the resident domestic corporation or (ii) an
affiliate or associate of the resident domestic corporation and, at any time
within three years immediately before the date in question, was the beneficial
owner, directly or indirectly, of 10% or more of the voting power of the then
outstanding shares of the resident domestic corporation. The above provisions do
not apply to corporations that so elect in a charter amendment approved by a
majority of the disinterested shares. Such a charter amendment, however, would
not become effective for 18 months after its passage and would apply only to
stock acquisitions occurring after its effective date. As noted above, the
Articles and Bylaws do not exclude the Company from the restrictions imposed by
such provisions.
Rights and Options. Section 78.200 of the NGCL provides that a
corporation may create and issue, whether in connection with the issue and sale
of any shares of stock or other securities of the corporation, rights or options
for the purchase of shares of stock of any class of the corporation, to be
evidenced by such instrument as is approved by the board of directors. The terms
upon which, the time or times, which may be limited or unlimited in duration, at
or within which, and the price at which, any such shares may be purchased from
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the corporation upon the exercise of any such right or option must be fixed and
stated in the Articles or in a resolution adopted by the board of directors
providing for the creation and issuance of such rights or options, and, in every
case, set forth or incorporated by reference in the instrument evidencing the
rights or options.
Directors' Duties. Section 78.138 of the NGCL allows directors
and officers, in exercising their respective powers with a view to the interests
of the corporation, to consider the interests of the corporation's employees,
suppliers, creditors and customers, the economy of the state and the nation, the
interests of the community and of society and the long and short-term interests
of the corporation and its stockholders, including the possibility that these
interests may be best served by the continued independence of the corporation.
Directors may resist a change or potential change in control if the directors,
by a majority vote of a quorum, determine that the change or potential change is
opposed to or not in the best interest of the corporation upon consideration of
the interests set forth above or if the board has reasonable grounds to believe
that, within a reasonable time, the debt created as a result of the change in
control would cause the assets of the corporation or any successor to be less
than the liabilities or would render the corporation or any successor insolvent
or would lead to bankruptcy proceedings.
MARKET FOR COMPANY SECURITIES
AND RELATED STOCKHOLDER MATTERS
Prior to this offering, there has been no public market for the
Debentures. The Company intends to apply to have the Debentures traded on the
over-the-counter market and listed on the "yellow sheets" published by the
National Quotation Bureau, LLC. No assurance can be given that such listing will
be approved and, if approved, that an active trading market for the Debentures
will be established or maintained. Although the Company expects that Choice will
assist in making a market in the Debentures, Choice will not be obligated to do
so and any such market making may be discontinued at any time. Since the prices
of securities generally fluctuate, there can be no assurance that purchasers of
the Debentures will be able to sell the Debentures at or above the purchase
price paid for them.
On November ___, 1999, the Common Stock of the Company was approved for
trading on the OTCBB. The following table sets forth, for the period indicated,
the range of the high and low bid quotations (as reported by NASDAQ). The bid
quotations set forth below reflect inter-dealer prices, without retail mark-up,
marked-down or commission and may not reflect actual transactions:
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
Fiscal Year Ended March 31, 2000
Second Quarter (from October ___, 1999
</TABLE>
No assurance can be given that such application will be approved and,
if approved, that an active trading market for the Common Stock will be
established or maintained.
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Except for the stock options for 80,000 shares issued to employees and
directors under the 1999 Stock Option and Incentive Plan, there are no
outstanding options or warrants to purchase, or securities convertible into,
shares of Common Stock. See "Executive Compensation."
When the Company was spun off from Innovation International,
shareholders of Innovation International received the rights to 1,600,000 shares
of common stock of the Company. Shareholders of Innovation International are
free to trade their shares upon effectiveness of the registration statement
filed on Form 10-SB with the SEC on July 23, 1999. The remaining shareholders of
the Company who acquired their shares in the Company as a part of an acquisition
of the Company's subsidiary will have their shares eligible for sale on the
first anniversary of their issuance, subject to the restrictions and volume
limitations of Rule 144.
In general, under Rule 144, a person (or persons whose shares are
aggregated) who has beneficially owned his or her restricted shares for at least
one year, including persons who may be deemed "affiliates" of the Company, as
that term is defined under the Act, would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of 1% of
the then-outstanding shares of the Company's Common Stock or the average weekly
trading volume in the over-the-counter market during the four calendar weeks
preceding such sale. A person 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 or her restricted shares for at least two years,
would be entitled to sell such shares under Rule 144 at any time and without
regard to the volume limitations described above.
The Company intends to file a registration statement under the Act by
December 31, 1999 to register the 2,000,000 shares of Common Stock reserved
under the Company's stock option programs. See "Executive Compensation - Stock
Option and Incentive Plan." Such registration statement is expected to be filed
shortly after the date of this filing and to become effective as promptly as
practicable thereafter. This registration is not being done for the purpose of
securing capital. Shares issued upon exercise of outstanding stock options after
the effective date of such registration statement generally will be available
for sale in the open market.
None of the holders of any shares of Common Stock of the Company are
entitled to any registration rights.
The Company has not paid any dividends on its Common Stock and intends
to retain all earnings for use in its operations and to finance the development
and the expansion of its business. It does not anticipate paying any dividends
on the Common Stock in the foreseeable future. The payment of dividends is
within the discretion of the Company's Board of Directors. Any future decision
with respect to dividends will depend on future earnings, future capital needs
and the Company's operation and financial condition, among other factors.
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<PAGE> 62
As of September 30, 1999, there were approximately 360 holders of
record of the Company's common stock and no holders of record of the Company's
preferred stock.
EXECUTIVE COMPENSATION
COMPENSATION
During the year ended March 31, 1999, the Company did not pay
compensation to its executive officers separate from the compensation they
received as employees of the Subsidiary. The Company has a small group of
officers who do not have substantial duties with the Company. These officers
also hold positions with the Subsidiary and each officer has substantial duties
with the Subsidiary. Each officer is compensated by the Subsidiary for the
duties performed for the Subsidiary. Separate compensation will not be paid to
the officers of the Company until such time as the officers of the Company
devote significant time to separate management of Company affairs, which is not
expected to occur until the Company becomes actively involved in additional
significant business beyond that of its subsidiary, AFC.
The following table sets forth information concerning the
compensation paid or granted to AFC's Chief Executive Officer in fiscal years
ended March 31, 1999 and 1998. No other executive officer of AFC had an
aggregate salary and bonus which exceeded $100,000 in fiscal 1999.
Summary Compensation Table(4)
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation Awards
-------------------- ------------ All Other
Name and Fiscal Other Annual Options/ Compen-
Principal Position Year(3) Salary($) Bonus($) Compensation($) SAR's(2)(#) sation(1)($)
- ------------------ ------- --------- -------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Glenn A. LaPointe, 1999 $ 92,000 $ -- $ -- -- $9,073
President and Chief 1998 31,000 -- -- -- 1,512
Executive Officer
Terry G. Hartnett, 1999 108,000 -- -- -- 8,362
Executive Vice President 1998 57,500 -- -- -- 1,394
and Chief Financial Officer
L. H. Hardy, Jr., 1999 100,000 -- -- -- 6,800
Consultant 1998 -- -- -- -- --
</TABLE>
- ----------
(1) Taxable fringe benefits including value of personal use of the Company
provided automobile.
(2) The term "SAR" refers to stock appreciation rights.
(3) For the fiscal years ended March 31, 1999 and 1998.
(4) Director Bradley J. Farley entered into a consulting agreement with the
Company in April 1999 by which he is to receive a monthly payment of
$15,000 for his financial and business development consulting services.
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<PAGE> 63
The following table provides information regarding stock options
granted to AFC's officers on July 23, 1999. No stock options or stock
appreciation rights ("SAR's") were granted during fiscal 1999.
<TABLE>
<CAPTION>
OPTION\SAR GRANTS
-----------------
Individual Grants
-----------------
Number of % of Total
Securities Options/SAR's Exercise
Underlying Granted to or Base
Options/SAR's Employees in Price Expiration
Name Granted (#) Fiscal Year ($/Sh) Date
- ------------------------- ------------- ------------- --------- -------------
<S> <C> <C> <C> <C>
Glenn A. LaPointe 5,000 8.0% $1.10 June 30, 2004
Terry G. Hartnett 5,000 8.0% $1.10 June 30, 2004
</TABLE>
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement with Glenn A.
LaPointe providing for an initial term of three years. The employment agreement
will become effective upon July 31, 1999 and provide for an annual base salary
of $180,000 and a bonus based on a profit sharing formula. The agreement
provides for an annual extension, subject to the performance of an annual
evaluation by disinterested members of the Board of Directors. The agreement
also provides for termination upon the employee's death or for cause. The
employment agreement is also terminable by the employee upon 90 days' notice to
the Company.
In the event Mr. LaPointe is involuntarily terminated without cause, he
will receive his salary and insurance benefits for a period of 12 months. In
addition, in the event employment involuntarily terminates in connection with a
"change in control" of the Company or within twelve months thereafter, the
employment agreement provides for the payment to LaPointe of an amount equal to
299% of his five-year average annual base compensation. If the employment of
LaPointe had been terminated as of July 31, 1999 under circumstances entitling
him to a change in control severance payment as described above, he would have
been entitled to receive a lump sum cash payment of approximately $538,200. The
agreement also provides for the continued payment to LaPointe of health benefits
for the remainder of the term of his contract in the event he is terminated in
connection with a change in control.
CONSULTING AGREEMENTS WITH DIRECTORS
Directors Bradley J. Farley and L.H. Hardy, Jr. each have consulting
agreements with the Company. Beginning in April 1999, Director Farley has been
acting as a financial and business development consultant to the Company. He has
a written Consulting Agreement
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<PAGE> 64
under which Mr. Farley is paid $15,000 a month for his services. The Agreement
continues until such time as Mr. Farley sells his shares of common stock in the
Company.
Director L.H. Hardy, Jr. is also serving as a consultant to the Company
where he assists the President with certain operational matters and provides
strategic and financial consulting. The Company pays Director Hardy a monthly
consulting fee of $10,000 per month. In addition to his consulting fee, the
Company leases an automobile for Mr. Hardy at a cost of approximately $680 per
month. The Company does not have a written consulting agreement with Mr. Hardy
and the Company may terminate his services at any time.
From time to time in the past, the Company has asked Mr. Hardy to
assist the President or other officers on special projects. Since 1997, Mr.
Hardy has served in this capacity as a consultant on some occasions and as an
employee on others. During fiscal year ended March 31, 1999, Mr. Hardy was
employed by the Company from April 1998 to January 1999. He was paid a total
salary of $100,000 during fiscal year 1999.
STOCK OPTION AND INCENTIVE PLAN
The stockholders and the Board of Directors of the Company have adopted
a Stock Option and Incentive Plan as set forth in Exhibit 6(a) (the "Stock
Option Plan"). Under the terms of the proposed Stock Option Plan, stock options
covering shares representing an aggregate of up to 2,000,000 shares of Common
Stock may be granted to directors, officers and employees of the Company or its
subsidiaries under the Stock Option Plan. The shares covered by the Stock Option
Plan if granted and exercised would equal approximately 10% of the issued and
outstanding shares of the Company.
Options granted under the Stock Option Plan may be either options that
qualify under the Internal Revenue Code as "incentive stock options" (options
that afford preferable tax treatment to recipients upon compliance with certain
restrictions and that do not normally result in tax deductions to the employer)
or options that do not so qualify. The exercise price of stock options granted
under the Stock Option Plan is required to be at least equal to the fair market
value per share of the stock on the date of grant. All grants are made in
consideration of past and future services rendered to the Company, and in an
amount deemed necessary to encourage the continued retention of the officers and
directors who are considered necessary for the continued success of the Company.
The proposed Stock Option Plan provides for the grant of stock
appreciation rights ("SAR's") at any time, whether or not the participant then
holds stock options, granting the right to receive the excess of the market
value of the shares represented by the SAR's on the date exercised over the
exercise price. SAR's generally will be subject to the same terms and conditions
and exercisable to the same extent as stock options.
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<PAGE> 65
Limited SAR's may be granted at the time of, and must be related to,
the grant of a stock option or SAR. The exercise of one will reduce to that
extent the number of shares represented by the other. Limited SAR's will be
exercisable only for the 45 days following the expiration of the tender or
exchange offer, during which period the related stock option or SAR will be
exercisable. However, no SAR or Limited SAR will be exercisable by a 10%
beneficial owner, director or senior officer within six months of the date of
its grant. The Company has no present intention to grant any SAR's or Limited
SAR's.
The proposed Stock Option Plan will be administered by a Stock Plan
Committee of the Company which will consist of at least two disinterested
directors. The Stock Plan Committee will select the recipients and terms of
awards made pursuant to the Stock Option Plan.
The Committee currently intends to grant options in the amount of 5,000
shares to each employee of AFC (13 persons). In addition, under the terms of the
Stock Option Plan, each non-employee director of the Company at the time of
stockholder ratification of the Stock Option Plan will be granted an option to
purchase 5,000 shares of Common Stock (3 persons). The remaining balance of the
available awards is unallocated and reserved for future use. All options will
expire 10 years after the date such option was granted, provided that options to
persons who hold more than 10% of the outstanding stock will expire in five
years. All proposed option grants to officers are subject to modification by the
Stock Plan Committee based upon its performance evaluation of the option
recipients at the time of stockholder ratification of the Stock Option Plan.
The Stock Option Plan will be funded either with shares purchased in
the open market or with authorized but unissued shares of Common Stock. The use
of authorized but unissued shares to fund the Stock Option Plan could dilute the
holdings of stockholders who own Common Stock in the Company.
Under SEC regulations, so long as certain criteria are met, an optionee
may be able to exercise the option at the Purchase Price and immediately sell
the underlying shares at the then-current market price without incurring
short-swing profit liability. This ability to exercise and immediately resell,
which under the SEC regulations applies to stock option plans in general, allows
the optionee to realize the benefit of an increase in the market price for the
stock without the market risk which would be associated with a required holding
period for the stock after payment of the exercise price. Under SEC regulations,
the short-swing liability period now runs for six months before and after the
option grant.
PLAN OF DISTRIBUTION
OFFERING OF DEBENTURES
Debentures in the amount of $10,000,000 will be offered for sale,
subject to certain restrictions described below, through an offering to the
general public. The price at which the Debentures are sold in the offering will
be at par.
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<PAGE> 66
The offering will expire at 4:00 p.m. Austin, Texas time, on
_____________, 1999 (the "Expiration Date") unless extended by the Company. The
offering may be extended by the Company until ______________, 2000. If the
offering is extended beyond ____________, 1999, all subscribers will be
permitted to modify or cancel their subscriptions and to have their subscription
funds returned promptly with interest. In the event of such an extension, all
subscribers will be notified in writing of the time period within which the
subscriber must notify the Company of his intention to maintain, modify or
rescind his subscription. In the event the subscriber does not respond in any
manner to the Company's notice, the funds will be refunded to the subscriber
with interest and/or the subscriber's withdrawal authorizations will be
terminated. The Company may terminate or withdraw the offering prior to the
Expiration Date. The Company reserves the right to withdraw the offer of
Debentures and close the offering prior to _____________, 1999 upon the sale of
all of the Debentures. In the event that the offering is not effected, all funds
submitted and not previously refunded pursuant to the offering will be promptly
refunded to subscribers with interest, and all withdrawal authorizations will be
terminated. In the event of an oversubscription, the Debentures will be
allocated first pro rata among the subscribers in the offering based on the
amount of their subscriptions. The opportunity to subscribe for Debentures in
the offering is subject to the right of the Company, in its sole discretion, to
accept or reject any such orders in whole or in part either at the time of
receipt of an order or as soon as practicable following the Expiration Date.
The minimum purchase is $5,000. Pursuant to the terms of this offering,
no person (which includes a natural person, company or other entity) or group of
persons acting together for the purpose of acquiring, holding or disposing of
the Debentures, may purchase more than $1,000,000 of the shares being offered
hereby if such person would be deemed the beneficial owner of such Debentures
within the meaning of Rule 13(d)(3) promulgated under the Securities Exchange
Act of 1934.
Choice will be available to answer questions about the offering and may
also hold informational meetings with interested persons where licensed
executive officers and directors of the Company may participate. Such officers
and directors will not be permitted to make statements about the Company unless
such information is also set forth in the Prospectus, nor will they render
investment advice. All purchasers of the shares offered hereby will be
instructed to send payment directly to Choice, where such funds will be
delivered to a special escrow account with Compass Bank, N.A. ("Compass") and
not released until the Debentures are sold or the offering is terminated.
Depending upon market and financial conditions, the Board of Directors
of the Company, without approval of the subscribers, may increase or decrease
any of the above purchase limitations at any time. Factors the Company may
consider in increasing or decreasing the purchase limitations include, among
other things, (i) changes in market conditions, (ii) an oversubscription of
shares or (iii) the failure to sell a minimum number of shares. Subscribers will
be notified by mail in the event of an increase in the purchase
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<PAGE> 67
limitations. In the event of a decrease in the purchase limitations, subscribers
will be notified, to the extent their orders are affected at the time they
receive final confirmation of their orders.
Debentures purchased in the offering will be freely transferable except
as described below. In addition, under National Association of Securities
Dealers, Inc. ("NASD") guidelines, members of the NASD and their associates are
subject to certain restrictions on transfer of securities purchased in
accordance with this offering and to certain reporting requirements upon
purchase of such securities.
The Debentures received in the offering by persons who are not
"affiliates" of the Company may be resold without registration. Debentures
received by affiliates of the Company (primarily the directors, officers and
principal shareholders of the Company) will be subject to the resale
restrictions of Rule 144 under the Act, which are discussed below. Rule 144
generally requires that there be publicly available certain information
concerning the Company, and that sales thereunder be made in routine brokerage
transactions or through a market maker. If the conditions of Rule 144 are
satisfied, each affiliate (or group of persons acting in concert with one or
more affiliates) is entitled to sell in the public market, without registration,
in any three-month period, a number of Debentures which does not exceed the
greater of (i) 1% of the number of outstanding Debentures of the Company or (ii)
if the Debentures are admitted to trading on a national securities exchange or
reported through the automated quotation system of a registered securities
association the average weekly reported volume of trading during the four weeks
preceding the sale.
The Company will make reasonable efforts to comply with the securities
laws of all states in the United States in which Choice and the Board desires to
offer the Debentures.
MARKETING AND UNDERWRITING ARRANGEMENTS
The Company has retained Choice, which is a broker-dealer registered
with the SEC and a member of the NASD, to consult with and advise the Company
and to assist in the distribution of Debentures in the offering on a best
efforts basis. Choice will have no obligation to take or purchase any
Debentures. Choice will assist the Company in the offering as follows: (1) in
conducting informational meetings for subscribers and other potential
purchasers; (2) in keeping records of all subscriptions; and (3) in training and
educating the Company's employees regarding the mechanics and regulatory
requirements of the offering process. For its services, Choice will receive a
financial advisory fee of $50,000 and a sales fee equal to 5.0% of the aggregate
Purchase Price of the Debentures sold in the offering by Choice. Depending upon
market conditions, the Debentures may be offered for sale in the offering on a
best efforts basis by a selling group of selected broker dealers agreed upon by
Choice and the Company. In addition, the Company will reimburse Choice for all
reasonable out-of-pocket expenses (including expenses related to attorneys' fees
and expenses) not to exceed $22,500.
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<PAGE> 68
Choice was formed in 1983 as a registered securities broker-dealer.
Since that time, Choice has served its customers as broker-dealers but has not
acted as an underwriter in any public offerings. Although Choice's principals
have extensive experience in the securities industry, there can be no assurance
that Choice's limited operating history will not have an adverse effect on the
offering or the market for the Company's securities.
The Company has agreed to indemnify Choice against certain liabilities,
including liabilities under the Securities Act, and to contribute to payments
Choice may be required to make in respect thereof. It is the opinion of the
Securities and Exchange Commission that such indemnification is contrary to
public policy and unenforceable.
The foregoing does not purport to be complete statements of the terms
and conditions of the Marketing Agreement and related documents, copies of which
are on file at the offices of Choice, the Company and the Securities and
Exchange Commission, forms of which have been filed as an exhibit to the
Registration Statement of which this Prospectus forms a part.
In addition, directors and executive officers of the Company may
participate in the solicitation of offers to purchase Debentures. Other
employees of the Company may participate in the offering in administrative
capacities, providing clerical work in effecting a sales transaction or
answering questions of a potential purchaser provided that the content of the
employee's responses is limited to information contained in the Prospectus or
other offering document. Other questions of prospective purchasers will be
directed to registered representatives of Choice. Company employees have been
instructed not to solicit offers to purchase Debentures or provide advice
regarding the purchase of Debentures. Sales of Debentures will be made from the
Sales Center. Until final approval of the appropriate Texas dealer registrations
are obtained, officers, directors and employees of the Company will not be
allowed to participate in the sale of the Debentures. Assuming such
registrations are received, the Company will rely on Rule 3a4-1 under the
Exchange Act, and sales of Debentures will be conducted within the requirements
of Rule 3a4-1, so as to permit officers, directors and employees to participate
in the sale of Debentures under federal law. No officer, director or employee of
the Company will be compensated in connection with his participation by the
payment of commissions or other remuneration based either directly or indirectly
on the transactions in the Debentures.
DEBENTURE PRICING
Prior to this offering, there has been no public market for the
Company's Debentures and therefore no public market price. The public offering
price of par for the Debentures has been determined by negotiation between the
Company and Choice. Among the factors considered in determining the public
offering price were the earnings and certain other financial and operating
information of the Company in recent periods, the future prospects of the
Company and its industry in general and the price-earning ratios, price-book
value ratios, market prices of securities and certain financial and operating
information of companies engaged in activities similar to those of the Company.
The Company and Choice also
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<PAGE> 69
considered the Company's desire to (i) conduct the offering in a manner to
achieve the widest distribution of the Debentures, and (ii) promote liquidity in
the Debentures subsequent to the offering.
METHOD OF PAYMENT FOR SUBSCRIPTIONS
Subscribers must, before the appropriate expiration date (or such
extensions thereof), return an original order form to the Company, properly
completed, together with cash, checks or money orders in an amount equal to the
purchase price. Subscriptions which are returned by mail must be received by the
Company by the Expiration Date. All funds will be placed in an Escrow Account
with Compass and will earn interest from the date of receipt until completion or
termination of the offering. Compass may invest the escrow funds in short-term
Government securities or money market investments. Subscriptions received by the
Company may not be modified, withdrawn or canceled by the subscriber without the
consent of the Company and, if accepted by the Company, are final unless the
offering is extended as described above. Subscriptions which are not received by
the appropriate expiration date or are not in compliance with the stock order
form instructions may be deemed void by the Company. The Company has the right
to extend the offering Expiration Date or to waive or permit correction of
incomplete or improperly executed order forms, but does not represent that it
will do so. If $10,000,000 of the Debentures have not been sold by the
termination of this offering, all funds received from subscribers will be
promptly refunded, with interest.
In addition to the foregoing, if a selected dealer arrangement is
utilized, a purchaser may pay for his Debentures with funds held by or deposited
with a selected dealer. If a stock order form is executed and forwarded to the
selected dealer or if the selected dealer is authorized to execute the order
form on behalf of a purchaser, the selected dealer is required to promptly
forward the order form and funds to Choice for deposit in the Escrow Account on
or before noon, Austin, Texas time on the business day following receipt of the
stock order form or execution of the order form by the selected dealer.
Alternatively, selected dealers may solicit indications of interest from their
customers to place orders for shares. Such selected dealers shall subsequently
contact their customers who indicated an interest and seek their confirmation as
to their intent to purchase. Those indicating an intent to purchase shall
execute order forms and forward them to their selected dealer or authorize the
selected dealer to execute such forms. With the exception of "non-customer
carrying broker-dealers," the selected dealer will acknowledge receipt of the
order to its customer in writing on the following business day and will debit
such customer's account on the fifth business day after the customer has
confirmed his intent to purchase (the "debit date") and on or before noon,
Austin, Texas time, on the next business day following the debit date will
promptly send stock order forms and funds to the Company for deposit in the
Escrow Account. If such alternative procedure is employed, purchasers' funds are
not required to be in their accounts with selected dealers until the debit date.
In the case of a non-customer carrying broker-dealer, checks will be made
payable to the Company and promptly transmitted to the Company by the
broker-dealer by noon of the day after receipt of the check.
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<PAGE> 70
RISK OF DELAYED OFFERING
In the event that all shares of the Debentures are not sold in the
offering, the Company may extend the offering until __________, 2000. Until the
termination of the offering, the subscription funds will be invested by Compass
as Escrow Agent in short-term U.S. Government securities and money market
investments. The actual rate of interest on these investments is not known
because they fluctuate as often as daily. The interest that such subscription
funds may earn, while in escrow, may be lower than those otherwise available to
subscribers.
A material delay in the completion of the sale of all Debentures in the
offering may result in a significant increase in the costs of completing the
offering. Significant changes in the Company's operations and financial
condition, the aggregate market value of the Debentures to be issued in the
offering and general market conditions may occur during such material delay. In
the event the offering is not consummated before _____________, 2000, the
Company would charge accrued offering costs to then current period operations.
PRICE STABILIZATION
Certain persons participating in the offerings may engage in
transactions that stabilize, maintain or otherwise affect the price of the
debentures and the common stock, including overallotment, entering stabilization
bids, effecting syndicate covering transactions and imposing penalty bids.
In connection with this offering, certain underwriters may engage in
passive market making transactions in the debentures and the common stock in
accordance with rule 103 of Regulation M.
LEGAL MATTERS
The validity of the issuance of the Debentures offered hereby will be
passed upon for the Company by the firm of Selman & Munson, P.C., 111 Congress
Avenue, Austin, Texas 78701. Certain legal matters regarding the offering will
be passed upon for Choice by Jack W. Ledbetter & Associates, P.C., 3563 Far West
Boulevard, Suite 107, Austin, Texas 78731.
EXPERTS
The financial statements of the Company included in this Prospectus
have been audited by Sprouse & Winn, L.L.P., independent accountants, to the
extent and for the periods indicated in their report appearing elsewhere herein,
and are included herein in reliance upon the authority of said firm as experts
in accounting and auditing.
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HOW TO GET MORE INFORMATION
The Company has filed with the Securities and Exchange Commission a
registration statement on Form SB-2 under the Securities Act for the shares of
Common Stock being offered by this prospectus. This prospectus does not contain
all of the information set forth in the registration statement and the exhibits.
For further information about the Company and the Common Stock offered, see the
registration statement and the exhibits thereto. Statements contained in this
prospectus regarding the contents of any contract or any other document to which
reference is made are not necessarily complete, and, in each instance where a
copy of a contract or other document has been filed as an exhibit to the
registration statement, reference is made to the copy so filed, each of those
statements being qualified in all respects by that reference. A copy of the
registration statement and the exhibits may be inspected without charge at the
Commission's offices at Judiciary Plaza, 450 Fifth Street, Washington, D.C.
20549, and copies of all or any part of the registration statement may be
obtained from the Public Reference Room of the Commission, Washington, D.C.
20549 upon the payment of the fees prescribed by the Commission. The public may
obtain information on the operation of the Public Reference Room by calling the
Commission at 1-800-SEC-0330. The Commission maintains a web site ( that
contains reports, proxy and information statements and other information
regarding registrants, such as the Company, that file electronically with the
Commission. The Company is subject to the information and reporting requirements
of the Securities Exchange Act of 1934, as amended, and it will file periodic
reports, proxy statements and other information with the Commission. The Company
intends to furnish the holders of the Debentures and its stockholders with
annual reports containing audited financial statements and with quarterly
reports for the first three quarters of each year containing unaudited interim
financial information, pursuant to the Securities Exchange Act of 1934.
No dealer, salesman or any other person has been authorized to give any
information which is not contained in this Prospectus or to make any
representation in connection with this offering other than those which are
contained in the Prospectus, and if given or made, such information or
representation must be relied upon as having been authorized by the Company.
This Prospectus does not constitute an offer to sell or a solicitation
of an offer to buy any of the securities which are offered hereby to any person
in any jurisdiction where such offer or solicitation would be unlawful. Neither
the delivery of this Prospectus nor any sale hereunder shall under any
circumstances create any implications that there has been no change in the
affairs of the Company or the facts which are herein set forth since the date
hereof.
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AUSTIN FUNDING.COM CORPORATION
INDEX TO FINANCIAL STATEMENTS
The following financial statements of the Company are included herein:
<TABLE>
<S> <C>
Austin Asset Management Corporation
Independent Auditors' Report F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Income F-3
Consolidated Statements of Stockholders' Equity F-4
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-6 to F-13
</TABLE>
<PAGE> 73
AUSTIN FUNDING.COM CORPORATION
(FORMERLY AUSTIN ASSET
MANAGEMENT CORPORATION)
AND ITS WHOLLY-OWNED SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 1999 AND 1998 (UNAUDITED),
MARCH 31, 1999 AND 1998
<PAGE> 74
AUSTIN FUNDING.COM CORPORATION
(FORMERLY AUSTIN ASSET MANAGEMENT CORPORATION)
AND ITS WHOLLY-OWNED SUBSIDIARY
AUSTIN, TEXAS
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
----
<S> <C>
INDEPENDENT AUDITORS' REPORT F-1
FINANCIAL STATEMENTS
Consolidated Balance Sheets F-2
Consolidated Statements of Income F-3
Consolidated Statements of Stockholders' Equity F-4
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-6 to F-13
</TABLE>
<PAGE> 75
Austin Funding.com Corporation
(formerly Austin Asset Management Corporation)
And Its Wholly-Owned Subsidiary
Austin, Texas
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance sheets of Austin
Funding.com Corporation (formerly Austin Asset Management Corporation) (AFCC)
and its wholly-owned subsidiary as of March 31, 1999 and 1998, and the related
consolidated statements of income, stockholders' equity and cash flows for the
year ended March 31, 1999 and the period from inception, April 4, 1997, to
March 31, 1998. The consolidated financial statements are the responsibility of
AFCC's management. Our responsibility is to express an opinion on the
consolidated 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 audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Austin Funding.com
Corporation (formerly Austin Asset Management Corporation) and its wholly-owned
subsidiary as of March 31, 1999 and 1998, and the results of its operations and
its cash flows for the year ended March 31, 1999 and the initial period ended
March 31, 1998 in conformity with generally accepted accounting principles.
June 22, 1999
SPROUSE & WINN, L.L.P.
AUSTIN, TEXAS
<PAGE> 76
AUSTIN FUNDING.COM CORPORATION
(FORMERLY AUSTIN ASSET MANAGEMENT CORPORATION)
AND ITS WHOLLY-OWNED SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1999 AND 1998 (UNAUDITED), MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
UNAUDITED
JUNE 30, MARCH 31,
-------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
ASSETS
<S> <C> <C> <C> <C>
CURRENT ASSETS
Cash $ 58,909 $ 36,996 $ 4,245 $ 115,482
Accounts receivable -0- -0- -0- 1,611,768
Inventory (Notes 2 and 5) 3,860,365 1,953,471 1,852,937 1,288,416
----------- ----------- ----------- -----------
Total Current Assets 3,919,274 1,990,467 1,857,182 3,015,666
----------- ----------- ----------- -----------
OTHER RECEIVABLES
Stockholder receivable (Note 5) 36,560 39,360 48,760 36,560
Other receivables (Note 5) (776) 143,073 28,830 -0-
Notes receivable 500,000 11,952 11,866 11,952
----------- ----------- ----------- -----------
Total Other Receivables 535,784 194,385 89,456 48,512
----------- ----------- ----------- -----------
PROPERTY AND EQUIPMENT
Furniture and equipment 45,802 19,014 45,802 17,080
Accumulated depreciation (11,535) (1,700) (11,535) (1,700)
----------- ----------- ----------- -----------
Net Property and Equipment 34,267 17,314 34,267 15,380
----------- ----------- ----------- -----------
DEPOSITS 205,356 3,217 5,669 2,107
----------- ----------- ----------- -----------
INVESTMENT IN LIMITED PARTNERSHIP (Note 6) 509,452 -0- 484,968 -0-
----------- ----------- ----------- -----------
TOTAL ASSETS $ 5,204,133 $ 2,205,383 $ 2,471,542 $ 3,081,665
=========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 141,522 $ -0- $ 115,962 $ 58,468
Deferred income 60,918 30,678 73,476 25,677
Income taxes payable -0- -0- -0- 40,966
Other liabilities -0- -0- 20 133
Current maturities of long-term debt (Note 3) 109,516 -0- 9,226 -0-
Lines of credit and mortgage purchase agreement (Note 2) 3,355,446 1,953,205 1,823,312 2,790,232
Deferred income taxes (Note 7) -0- -0- -0- 769
----------- ----------- ----------- -----------
Total Current Liabilities 3,667,402 1,983,883 2,021,996 2,916,245
LONG-TERM DEBT, net of current maturities (Note 3) 14,672 -0- 17,162 -0-
DEFERRED INCOME TAXES LESS CURRENT PORTION
(Note 7) -0- -0- -0- 3,076
----------- ----------- ----------- -----------
Total Liabilities 3,682,074 1,983,883 2,039,158 2,919,321
STOCKHOLDERS' EQUITY 1,522,059 221,500 432,384 162,344
----------- ----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,204,133 $ 2,205,383 $ 2,471,542 $ 3,081,665
=========== =========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-2
<PAGE> 77
AUSTIN FUNDING.COM CORPORATION
(FORMERLY AUSTIN ASSET MANAGEMENT CORPORATION)
AND ITS WHOLLY-OWNED SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE-MONTH PERIOD ENDED JUNE 30, 1999 AND 1998 (UNAUDITED),
THE YEAR ENDED MARCH 31, 1999,
AND THE PERIOD APRIL 4, 1997 (INCEPTION) TO MARCH 31, 1998
<TABLE>
<CAPTION>
UNAUDITED
JUNE 30, MARCH 31,
------------------------- --------------------------
1999 1998 1999 1998
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
SALES $ 3,917,526 $ 5,940,313 $ 20,548,383 $ 10,345,625
COST OF SALES 3,749,270 5,578,754 19,432,063 9,753,230
----------- ------------ ------------ ------------
GROSS PROFIT 168,256 361,559 1,116,320 592,395
----------- ------------ ------------ ------------
SELLING AND ADMINISTRATIVE
Salaries and wages 140,666 207,370 866,275 260,883
Office expense and supplies 8,502 15,367 64,055 37,855
Occupancy (Note 4) 13,567 6,890 41,921 12,495
Travel and entertainment 30,221 16,323 90,041 11,509
Telephone 14,894 8,913 71,914 26,263
Depreciation -0- -0- 9,834 1,700
Automobile expenses (Note 4) 7,009 5,732 25,065 2,297
Professional fees 47,250 15,822 70,700 29,466
Insurance 8,269 7,823 34,115 14,586
Equipment rental and maintenance (Note 4) 3,814 1,465 13,207 4,993
Advertising and marketing 4,632 13,842 33,310 5,576
Telemarketing 4,135 58 3,635 8,693
Other expenses 63,759 29,645 73,997 48,494
----------- ------------ ------------ ------------
Total Selling and Administrative 346,718 329,250 1,398,069 464,810
----------- ------------ ------------ ------------
OPERATING INCOME (LOSS) (178,462) 32,309 (281,749) 127,585
GAIN ON SALE OF PROPERTY (Note 5) -0- -0- -0- 47,258
OTHER INCOME (EXPENSES) 12,121 2,034 42,009 9,617
----------- ------------ ------------ ------------
INCOME, before income taxes (166,341) 34,343 (239,740) 184,460
INCOME TAX EXPENSE (BENEFIT)
(Note 7) -0- -0- (44,812) 47,116
----------- ------------ ------------ ------------
NET INCOME (LOSS) $ (166,341) $ 34,343 $ (194,928) $ 137,344
=========== ============ ============ ============
EARNINGS (LOSS) PER SHARE $ (.04) $ 17.17 $ (97.46) $ 235.63
=========== ============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-3
<PAGE> 78
AUSTIN FUNDING.COM CORPORATION
(FORMERLY AUSTIN ASSETS MANAGEMENT CORPORATION)
AND ITS WHOLLY-OWNED SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE-MONTH PERIOD ENDED JUNE 30, 1999 (UNAUDITED),
THE YEAR ENDED MARCH 31, 1999,
AND THE PERIOD APRIL 4, 1997 (INCEPTION) TO MARCH 31, 1998
<TABLE>
<CAPTION>
Preferred Stock Common Stock*
--------------------------- ------------------------
Shares Shares Additional Retained
(Issued and (Issued and Paid-In Earnings
Outstanding) Amount Outstanding) Amount Capital (Deficit) Total
----------- ------------ ----------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31,
1997 $ -0- $ -0- $ -0- $ -0- $ -0-
Issued 2,000
common shares -0- 2,000 20 24,980 -0- 25,000
Net income -0- -0- -0- 137,344 137,344
----------- ----------- ---------- ----------- ----------- -----------
Balance at March 31,
1998 -0- 2,000 20 24,980 137,344 162,344
Issued 500 preferred
shares - April 1998 500 5 -0- 484,963 -0- 484,968
Dividend paid -0- -0- -0- (20,000) (20,000)
Net income (loss) -0- -0- -0- (194,928) (194,928)
----------- ----------- ----------- ---------- ----------- ----------- -----------
Balance at March 31,
1999 500 5 2,000 20 509,943 (77,584) 432,384
Redeemed 500
preferred shares -
April 1999 (500) (5) -0- (484,963) -0- (484,968)
Issued 500 preferred
shares - April 1999 500 5 -0- 995,695 -0- 995,700
Conversion of
preferred stock to
common stock (500) (5) 500 5 -0- -0- -0-
Issued 108,108
common shares -
June 1999 108,108 1,081 744,203 -0- 745,284
Net income (loss) -0- -0- -0- (166,341) (166,341)
Distribution of shares -0- 21,333,333 21,333 (21,333) -0- -0-
Elimination of
intercompany
accounts -0- -0- (110,608) (1,106) 1,106 -0- -0-
----------- ----------- ----------- ---------- ----------- ----------- -----------
Balance at June 30,
1999 -0- $ -0- $21,333,333 $ 21,333 $ 1,744,651 $ (243,925) $ 1,522,059
=========== =========== =========== ========== =========== =========== ===========
</TABLE>
*100,000,000 shares authorized, $0.001 par value as of June 30, 1999
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-4
<PAGE> 79
AUSTIN FUNDING.COM CORPORATION
(FORMERLY AUSTIN ASSET MANAGEMENT CORPORATION)
AND ITS WHOLLY-OWNED SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE-MONTH PERIOD ENDED JUNE 30, 1999 AND 1998 (UNAUDITED),
THE YEAR ENDED MARCH 31, 1999,
AND THE PERIOD APRIL 4, 1997 (INCEPTION) TO MARCH 31, 1998
<TABLE>
<CAPTION>
UNAUDITED
JUNE 30, MARCH 31,
------------------------ --------------------------
1999 1998 1999 1998
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (166,341) $ 34,343 $ (194,928) $ 137,344
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation -0- -0- 9,834 1,700
(Increase) decrease in receivables -0- 1,611,768 1,611,768 (1,611,768)
(Increase) decrease in inventories (1,771,596) (665,055) (564,435) (1,288,416)
(Increase) decrease in other receivables 53,672 (145,873) (41,010) (48,512)
(Increase) decrease in deposits (3,249) (1,110) (2,452) (2,107)
Increase (decrease) in accounts payable and accrued
liabilities 25,560 (58,468) 57,383 58,468
Increase (decrease) in deferred tax liabilities -0- (3,845) (2,735) 3,845
Increase (decrease) in federal income taxes payable -0- 3,847 (43,187) 40,966
Increase in deferred income and other liabilities 12,578 4,868 47,799 25,810
----------- ----------- ----------- -----------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (1,849,376) 780,475 878,037 (2,682,670)
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment -0- (1,934) (28,722) (17,080)
----------- ----------- ----------- -----------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES -0- (1,934) (28,722) (17,080)
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 100,000 -0- 30,218 -0-
Net borrowings on line of credit 1,806,240 (837,027) (966,920) 2,790,232
Principal payments on long-term debt (2,200) -0- (3,830) -0-
Proceeds from issuance of common stock -0- -0- -0- 25,000
Dividends paid -0- (20,000) (20,000) -0-
----------- ----------- ----------- -----------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 1,904,040 (857,027) (960,532) 2,815,232
----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH 54,664 (78,486) (111,217) 115,482
CASH, Beginning of Year or Period 4,245 115,482 115,482 -0-
----------- ----------- ----------- -----------
CASH, End of Year or Period $ 58,909 $ 36,996 $ 4,265 $ 115,482
=========== =========== =========== ===========
TAXES PAID $ -0- $ 1,110 $ 1,110 $ 2,304
=========== =========== =========== ===========
INTEREST PAID $ 55,080 $ 72,656 $ 414,573 $ 153,141
=========== =========== =========== ===========
</TABLE>
NON-CASH FINANCING ACTIVITY:
o 500 shares of preferred stock were issued in exchange for a limited
partnership interest in April 1998. These shares were subsequently redeemed
back in exchange for the limited partnership interest in April 1999.
o 500 shares of preferred stock was issued in exchange for a $500,000
certificate of deposit and a $500,000 negotiable security in April 1999.
o All remaining shares of preferred stock (500 shares) were converted into
500 shares of common stock in June 1999.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-5
<PAGE> 80
AUSTIN FUNDING.COM CORPORATION
(FORMERLY AUSTIN ASSET MANAGEMENT CORPORATION)
AND ITS WHOLLY-OWNED SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998 (UNAUDITED), MARCH 31, 1999 AND 1998
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Austin Funding.com Corporation (formerly Austin Asset Management
Corporation) (AFCC) was incorporated in Nevada, on April 29, 1999,
as a wholly owned subsidiary of Innovation International, Inc.
(Innovation).
On June 7, 1999, Innovation's Board of Directors authorized the
pro-rata distribution to its shareholders of 1,600,000 shares of the
$.001 par value common stock of AFCC as a dividend-in-kind.
Effective with the June 14, 1999, notice to shareholders concerning
that ("spin-off") distribution, and the acquisition described below,
AFCC became separate from and was no long a subsidiary of
Innovation.
On June 14, 1999, pursuant to an Agreement dated May 26, 1999, AFCC
acquired 100% of the capital stock of Austin Funding Corporation
(AFC) from eleven individuals representing all of the holders of
said stock. Effective with the completion of that acquisition, AFC
became a wholly-owned subsidiary of AFCC.
As of June 30, 1999, the capital stock of AFCC consists of
100,000,000 shares of common stock, par value of one tenth of a cent
($.001) per share, and 20,000,000 shares of preferred stock, par
value of one tenth of a cent ($.001). Consideration in the
acquisition of AFC included the issuance of 19,733,333 common shares
to the former shareholders of AFC. In addition, the former
shareholders of AFC may receive up to a total of 2,500,000
additional shares over the next five calendar years if certain
targeted compound internal growth rates, as defined, are achieved.
AFCC, through its subsidiary AFC, is engaged primarily in the
business of buying and selling real estate mortgages to secondary
markets. When loans are purchased they are categorized as inventory
until they can be resold into the secondary market. Revenues are
generally recognized when the closing sale is completed. Revenue
includes loan amounts as well as various fees.
Generally, neither AFCC or AFC retain any servicing rights on loans
acquired for resale.
F-6
<PAGE> 81
AUSTIN FUNDING.COM CORPORATION
(FORMERLY AUSTIN ASSET MANAGEMENT CORPORATION)
AND ITS WHOLLY-OWNED SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998 (UNAUDITED), MARCH 31, 1999 AND 1998
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
BUSINESS ACQUISITION
The acquisition of AFC has been accounted for under the purchase
method in accordance with APB 16. The assets and liabilities of AFC
were transferred at fair value which approximated book value at the
date of acquisition.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Austin
Funding.com Corporation and its wholly owned subsidiary Austin
Funding Corporation. Austin Funding.com Corporation was incorporated
in Nevada on April 29, 1999 and acquired Austin Funding Corporation,
as detailed above, on June 14, 1999. All significant intercompany
accounts and transactions have been eliminated.
ACCOUNTING BASIS
AFCC prepares its financial statements on the accrual basis of
accounting.
BASIS OF PRESENTATION
The accompanying balance sheets as of June 30, 1999 and 1998, and
March 31, 1999 and 1998, and statements of income and cash flows for
the three months ended June 30, 1999 and 1998, and the twelve months
ended March 31, 1999, and from April 4, 1997(inception) to March 31,
1998, include the accounts of AFCC and AFC.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements. Actual results could differ
from those estimates.
INVENTORY
Inventory consists of real estate mortgages held for resale.
Mortgages are accounted for under the specific identification
method. They are recorded at the lower of cost or market.
F-7
<PAGE> 82
AUSTIN FUNDING.COM CORPORATION
(FORMERLY AUSTIN ASSET MANAGEMENT CORPORATION)
AND ITS WHOLLY-OWNED SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 1999 AND 1998 (UNAUDITED), MARCH 31, 1999 AND 1998
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Assets are depreciated
using the straight-line method over their estimated useful lives
which range from three to seven years.
Maintenance and repairs are charged to operations as incurred, and
betterments of existing assets are capitalized.
AFCC accounts for long-lived assets as prescribed by the Financial
Accounting Standards Board issued Statement No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of, which requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment
are present and undiscounted cash flows estimated to be generated by
those assets are less than the assets' carrying amount. There has
been no impairment recorded in the financial statements.
INCOME TAXES
AFCC is a corporation subject to federal and state income taxes.
AFCC has elected to be taxed on a separate entity since its
inception on April 29, 1999. AFCC and its wholly owned subsidiary
intend to file a consolidated tax return for 1999.
AFCC accounts for its income taxes in accordance with Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes.
CONCENTRATION OF CREDIT RISK
Accounts receivable potentially expose AFCC to concentrations of
credit risk as defined by Statement of Financial Accounting Standard
No. 105, Disclosure of Information about Financial Instruments with
Off-Balance Sheet Risk and Financial Instruments with Concentrations
of Credit Risk.
AFCC purchases mortgages in the normal course of business from
customers located throughout the United States.
F-8
<PAGE> 83
AUSTIN FUNDING.COM CORPORATION
(FORMERLY AUSTIN ASSET MANAGEMENT CORPORATION)
AND ITS WHOLLY-OWNED SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 1999 AND 1998 (UNAUDITED), MARCH 31, 1999 AND 1998
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PREFERRED STOCK - Subsidiary AFC
The preferred stock of AFC is redeemable at the option of the
stockholders or AFC at any time. AFC must redeem the stock five
years after the date of issuance, or upon notification from a
stockholder that AFC has materially breached the stock purchase
agreement.
ADVERTISING
Advertising costs are expensed when incurred.
INTERIM FINANCIAL STATEMENTS
The results of operations for the three months ended June 30, 1999
and 1998, are not necessarily indicative of the results to be
expected for the full fiscal year. All information as of and for the
three months ended is unaudited, but, in the opinion of management,
contains all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the combined financial
position, results of operations and cash flows of AFCC.
RECLASSIFICATION
Certain amounts in March 31, 1998, have been reclassified to be
consistent with the financial statement presentation in March 31,
1999.
F-9
<PAGE> 84
AUSTIN FUNDING.COM CORPORATION
(FORMERLY AUSTIN ASSET MANAGEMENT CORPORATION
AND ITS WHOLLY-OWNED SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998 (UNAUDITED), MARCH 31, 1999 AND 1998
NOTE 2: LINES OF CREDIT AND MORTGAGE PURCHASE AGREEMENT
<TABLE>
<CAPTION>
MARCH 31,
--------------------------
1999 1998
---------- -----------
<S> <C> <C>
AFCC had a $3,000,000 line of credit with a financial
institution which was terminated in February 1999. The line of
credit is due on demand. Proceeds from sales of loans are made
directly to the line of credit to the extent of original cost,
plus interest at prime rate plus two percent through maturity
date, and prime rate plus three percent after maturity date.
The debt is secured by the mortgage inventory and all assets
of AFCC. The debt is additionally secured by personal
guarantees of the stockholders and an affiliate of AFCC, as
well as $250,000 in collateral pledged by the affiliate. The
available line of credit at March 31, 1999 is $-0-. $1,388,550 $2,790,232
AFCC has a $2,000,000 mortgage purchase agreement with a
financial institution. Each loan is individually accepted or
rejected by the lender and the agreement has no expiration
date. Proceeds from sales of loans are made directly to the
mortgage purchase agreement, and interest is calculated at
prime rate plus two percent through maturity date, and prime
rate plus three percent after maturity date. The debt is
secured by the mortgage inventory. 24,866 -0-
AFCC has a $500,000 line of credit with a financial
institution. The line of credit expires on January 1, 2000.
Proceeds from sales of loans are made directly to the line of
credit, and interest is calculated using a weighted-average of
interest rates for loans held through maturity date, and the
weighted-average plus 2 percent after maturity. The debt is
secured by the mortgage inventory and is personally guaranteed
by the stockholders. 162,971 -0-
AFCC has a $250,000 line of credit with a financial
institution. The line of credit expires on June 9, 1999.
Interest is calculated at 9.75%. The debt is personally
guaranteed by an employee of AFCC. 246,925 -0-
---------- -----------
$1,823,312 $ 2,790,232
========== ===========
</TABLE>
F-10
<PAGE> 85
AUSTIN FUNDING.COM CORPORATION
(FORMERLY AUSTIN ASSET MANAGEMENT CORPORATION
AND ITS WHOLLY-OWNED SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998 (UNAUDITED), MARCH 31, 1999 AND 1998
NOTE 3: LONG-TERM DEBT
AFCC has a note payable with an individual. The original amount of
the note was $36,000 and was dated October 5, 1998. Payments of
$1,000 are due in monthly installments which include interest at
12.5% beginning November 1, 1998 and continuing until November 1,
2001, when the balance is due. The note is secured by the assets of
AFCC.
<TABLE>
<CAPTION>
MARCH 31, 1999
----------------
<S> <C>
Current $ 9,226
Long-term 17,162
-------
Total $26,388
=======
</TABLE>
Future commitments on long-term debt are:
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------
<S> <C>
2000 $ 9,226
2001 10,444
2002 6,718
-------
Total $26,388
=======
</TABLE>
NOTE 4: LEASES
AFCC leases office space, vehicles and certain office equipment
under operating leases which terminate at various dates. The lease
for office space is personally guaranteed by both stockholders and a
former employee of AFCC. In addition, the Vice-President of AFCC has
personally guaranteed a lease for a vehicle. Rentals paid under
these leases were approximately $80,192 and $19,784 for March 31,
1999 and 1998, respectively. Future commitments on these leases are:
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------
<S> <C>
2000 $ 67,681
2001 66,541
2002 5,507
--------
Total $139,729
========
</TABLE>
F-11
<PAGE> 86
AUSTIN FUNDING.COM CORPORATION
(FORMERLY AUSTIN ASSET MANAGEMENT CORPORATION
AND ITS WHOLLY-OWNED SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998 (UNAUDITED), MARCH 31, 1999 AND 1998
NOTE 5: RELATED PARTY TRANSACTIONS
Included in stockholder receivable at March 31, 1999 and 1998, are
advances of $48,760 and $36,560 made to a stockholder.
Included in other receivables at March 31, 1999, is an amount of
$28,830 due from a separate corporation owned by the stockholders of
AFCC.
Included in inventory is a loan of $79,721 to a sister of an officer
of AFC.
During the period ended March 31, 1998, AFCC purchased a property
from a relative of a stockholder for approximately $89,000. The
property was subsequently sold to an unrelated third party resulting
in a net gain of $47,258.
During the period ended March 31, 1998, an employee of AFCC
personally funded outstanding loans of approximately $267,400. Upon
the sale of loans, these amounts were included in revenue and cost
of sales of AFCC. The employee was reimbursed for the amount funded
plus interest for the period from which loans were funded through
the date of sale. Amounts paid to the employee were not materially
different from amounts funded.
NOTE 6: INVESTMENT IN LIMITED PARTNERSHIP
AFCC received a 98% limited partnership interest in exchange for 500
shares of preferred stock. The investment is accounted for using the
equity method. Partnership income is first allocated based on the
aggregate of net loss that has been allocated, and then based on
partnership interest percentages; partnership losses are allocated
50 percent to limited partners and 50 percent to general partners.
NOTE 7: INCOME TAXES
The income tax provision shown in the statements of operations is
comprised of the following:
<TABLE>
<CAPTION>
MARCH 31,
---------------------------
<S> <C> <C>
1999 1998
-------- -------
Current $ -0- $43,271
Deferred (44,812) 3,845
-------- -------
Total taxes $(44,812) $47,116
======== =======
</TABLE>
F-12
<PAGE> 87
AUSTIN FUNDING.COM CORPORATION
(FORMERLY AUSTIN ASSET MANAGEMENT CORPORATION
AND ITS WHOLLY-OWNED SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998 (UNAUDITED), MARCH 31, 1999 AND 1998
NOTE 7: INCOME TAXES (CONTINUED)
Deferred income taxes reflect the impact of temporary differences
between amounts of assets and liabilities for financial reporting
purposes and such amounts as measured by tax laws. These temporary
differences are determined in accordance with SFAS No. 109 and are
more inclusive in nature than "timing differences" as determined
under previously applicable accounting principles.
The net deferred tax liability as of March 31, 1998 relates to the
following temporary differences:
<TABLE>
<S> <C>
Depreciation $15,380
-------
Net temporary differences $15,380
=======
Calculated tax liability from temporary
differences at statutory rates $ 3,845
=======
Current portion $ 769
Long-term portion 3,076
-------
Total deferred taxes $ 3,845
=======
United States Federal $ 3,845
-------
Total deferred taxes $ 3,845
=======
</TABLE>
NOTE 8: SUBSEQUENT EVENTS
During April 1999, AFC issued 500 shares of its preferred stock in
exchange for a $500,000 certificate of deposit and a $500,000
negotiable security assigned to AFCC by the shareholder.
During April 1999, AFC redeemed 500 shares of its preferred stock,
releasing the shareholder from a collateral agreement for a line of
credit.
During June 1999, preferred stock shareholders converted all
preferred stock to common stock.
During May 1999, AFC made three mortgage loans to a stockholder in
the amount of $266,500.
F-13
<PAGE> 88
WE HAVE NOT AUTHORIZED ANY DEALER, SALESPERSON OR OTHER PERSON TO
PROVIDE ANY INFORMATION OR MAKE ANY REPRESENTATIONS ABOUT ALLQUEST.COM EXCEPT
THE INFORMATION OR REPRESENTATIONS CONTAINED IN THIS PROSPECTUS. YOU SHOULD NOT
RELY ON ANY ADDITIONAL INFORMATION OR REPRESENTATIONS IF MADE.
This prospectus does not constitute an offer to sell, or a solicitation
of an offer to buy any securities:
- except the common stock offered by this prospectus;
- in any jurisdiction in which the offer or solicitation is not
authorized.
- in any jurisdiction where the dealer or other salesperson is
not qualified to make the offer or solicitations;
- to any person to whom it is unlawful to make the offer or
solicitation; or
- to any person who is not a United States resident or who is
outside the jurisdiction of the United States.
The delivery of this prospectus or any accompanying sale does not imply
that:
- there have been no changes in the affairs of Austin
Funding.com after the date of this prospectus; or
- the information contained in this prospectus is correct after
the date of this prospectus.
UNTIL _________________, ALL DEALERS EFFECTING TRANSACTIONS IN THE
REGISTERED SECURITIES, 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 AS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR SOLD ALLOTMENTS OR SUBSCRIPTIONS.
$10,000,000 8% SUBORDINATED DEBENTURES DUE 2015
AUSTIN FUNDING.COM CORPORATION
----------------
PROSPECTUS
----------------
CHOICE INVESTMENTS, INC.
____________, 1999
<PAGE> 89
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Articles of the Company waive the personal liability of a
director or officer for damages for breach of fiduciary duty except for (i) acts
or omissions which involve intentional misconduct, fraud or a knowing violation
of law, or (ii) the payment of distributions in violation of Section 78.300 of
the NGCL, which concerns the unlawful payment of distributions to stockholders.
While the Articles provide directors and officers with protection from
awards for monetary damages for breaches of their duty of care, they do not
eliminate such duty. Accordingly, the Articles will have no effect on the
availability of equitable remedies such as an injunction or rescission based on
a director's or officer's breach of his or her duty of care.
The Bylaws provide for indemnification of the directors and officers of
the Company to the fullest extent permitted by applicable state law, as then in
effect. The indemnification rights conferred by the Bylaws are not exclusive of
any other right to which a person seeking indemnification may otherwise be
entitled. The Company plans to purchase liability insurance for the directors
and officers for certain losses arising from claims or charges made against them
while acting in their capacities as directors or officers. The SEC has taken the
position that the provisions discussed in this section do not eliminate the
monetary liability of directors or officers under the Federal securities laws.
Item 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses to be borne by
the Registrant in connection with the issuance and distribution of the
securities being registered hereby other than underwriting discounts and
commissions.
<TABLE>
<S> <C>
SEC registration fee $ 3,330
NASD filing fee 1,500
Accounting fees and expenses 5,000
Legal fees 60,000
Blue sky fees and expenses 25,000
Marketing Agent's marketing fee 50,000
Marketing Agent's expenses including
counsel fees and expenses 20,000
Cost of printing and engraving 15,000
Escrow Agent and Trustee Fees 10,000
Transfer Agent Fees 1,000
Miscellaneous 5,000
--------
Total $195,830
</TABLE>
II-1
<PAGE> 90
Item 26. RECENT SALES OF UNREGISTERED SECURITIES
On June 7, 1999, Innovation International authorized the Company to
distribute 1,600,000 common shares of the Company to the shareholders of
Innovation International as a dividend-in-kind and as a result of this
distribution ("spin-off"), the Company became separate from and was no longer a
subsidiary of Innovation International. Such shares were issued without
registration because the shares were a spin-off transaction not involving a sale
of the securities of the Company as described in SEC Staff Legal Bulletin No. 4,
dated September 16, 1997.
The Company entered into an agreement with the shareholders of AFC
pursuant to which it became a subsidiary of the Company. The Company issued
19,733,333 common shares to the former shareholders of AFC in consideration for
their AFC shares. In addition, the former shareholders of AFC (and not the
former shareholders of Innovation International) may receive the rights of up to
a total of 2,500,000 additional shares over the next five calendar years if
certain targeted compound internal growth rates of the Company are achieved.
Under the terms of the agreement with Innovation International, if the audited
consolidated Pretax Income of AFC shall have reflected a 25% compound internal
growth rate for three consecutive years, then AFC (or its successor the Company)
shall issue and deliver an additional 2,500,000 shares of common stock to the
former AFC shareholders on a pro rata basis.
None of the securities discussed herein were registered under the
Securities Act of 1933. AFC has issued shares of its common stock and preferred
stock since its inception in 1997. The first such sale occurred when AFC was
organized. It issued Terry G. Hartnett and Glenn A. LaPointe 1,000 shares each
for cash contributions totaling $25,000. Such shares were issued without
registration pursuant to an exemption from registration under Section 4(2) of
the Securities Act of 1933.
In 1998 AFC issued 500 shares of its Series A Preferred Stock to L.H.
Hardy, Jr. for a 98% limited partnership interest in a limited partnership. In
that same year, AFC issued 1,000 shares to Mr. Hardy for his help in arranging
for a loan for AFC. The 500 shares of Series A Preferred Stock and the 1,000
shares of Common Stock conveyed to Hardy have been repurchased by AFC and such
shares have been canceled. Such shares were issued without registration pursuant
to an exemption from registration under Section 4(2) of the Securities Act of
1933. In April 1999, AFC issued 500 shares of its Class B Preferred Stock in
exchange for a $500,000 certificate of deposit and the assignment of a $500,000
note receivable from Bradley J. Farley and Glenn G. Farley. See "Certain
Relationships and Related Transactions." In May 1999 the Farleys converted their
500 shares of Class B Preferred Stock to 324,324 shares of Common Stock of AFC,
which was then exchanged for 6,783,872 of the Company Common Stock. In June 1999
AFC issued 78,549 of its shares (approximately 1,643,006 Company shares after
the exchange) to a group of six employees for services rendered. Such shares
were issued without registration pursuant to an exemption from registration
under Section 4(2) of the Securities Act of 1933.
II-2
<PAGE> 91
On September 30, 1999, Mr. Bradley G. Farley purchased 1,500,000 shares
of the Company's 1999 Series A Preferred Stock in exchange for approximately
$1,433,000 in advances that he has made to the Company. The Preferred Stock sold
to Farley pays no dividend, nor has any conversion or voting rights. The Company
may redeem the 1999 Series A Preferred Stock for $1.00 per share upon giving
Farley ten days advance notice. Such shares were issued without registration
pursuant to an exemption from registration under Regulation D of the Securities
Act of 1933.
In each of the above transactions, no general advertising or
solicitation was utilized in connection with any such sale. Investors were
offered access to the Company's books and records and the opportunity to meet
with officers of the Company.
Item 27. EXHIBITS
The following exhibits were previously filed or are either filed
herewith or incorporated by reference to documents filed herewith as indicated
below:
EXHIBITS DESCRIPTION
1 Form of Marketing Agreement between Choice Investments, Inc. and the
Company
2.1 Reorganization Plan and Agreement dated May 26, 1999 by and among
Innovation International, Inc., the Company and Austin Funding
Corporation.*
2.2 Amendment to Reorganization Plan and Agreement dated June 12, 1999.*
3.1 Certificate of Amended and Restated Articles of Incorporation of the
Company*
3.2 Bylaws of the Company*
3.3 Certificate of Designation, Preferences, Rights and Limitations of
1999 Series A Preferred Stock of Austin Funding.com Corporation*
4.1 Form of Indenture between the Company and Norwest Bank Texas, N.A.
as Trustee, with respect to the 8% Subordinated Debentures
4.2 Specimen Subordinated Debenture
4.3 Pledge Agreement between the Company and Trustee
5 Opinion of Selman & Munson, P.C., regarding the validity of issuance
of the Subordinated Debentures
II-3
<PAGE> 92
10.1 1999 Stock Option and Incentive Plan of the Company*
10.2 Employment Agreement as of July 19, 1999 between the Company and
Glenn A. LaPointe*
10.3 Consulting Agreement between Subsidiary and Bradley J. Farley dated
April 14, 1999*
10.4 Whole Loan Purchase Agreement between Subsidiary and EquiCredit
Corporation of America dated March 17, 1998*
10.5 Master Agreement for Sale and Purchase of Mortgages between
Contimortgage Corporation and Subsidiary*
10.6 Bulk Continuing Loan Purchase Agreement between Household Financial
Services, Inc. and Subsidiary dated June 28, 1999*
10.7 Mortgage Loan Purchase and Sale Agreement between Life Bank and
Subsidiary dated February 22, 1999*
10.8 Seller Agreement between Impac Funding Corporation and Subsidiary
dated April 7, 1999*
10.9 Commercial Loan and Servicing Agreement between First National of
North America, LLC and Subsidiary dated December 22, 1998*
10.10 Mortgages Purchase Agreement between Residential Mortgage Services
of Texas, Inc. and Subsidiary dated October 14, 1998*
10.11 Loan and Security Agreement between Capital First Mortgage
Corporation and Pioneer Commercial Funding Corp. dated June 2, 1997*
10.12 Lease Agreement between 823 Congress Ltd. and Capital First Mortgage
Corporation dated April, 1997*
10.13 First Amendment to Lease Agreement dated September 1, 1998*
10.14 Mortgages Purchase Agreement between Residential Mortgage Services
of Texas, Inc. and Subsidiary dated June 11, 1999*
10.15 Master Repurchase Agreement between Impac Warehouse Lending Group
and Austin Funding Corporation dated June 22, 1999*
II-4
<PAGE> 93
10.16 Stock Exchange Agreement between Bradley J. Farley and the Company*
10.17 Subscription Escrow Agreement between the Company and Compass Bank,
N.A.
11 Statement regarding computation of earnings to fixed charges
15 Sprouse & Winn, L.L.P.'s letter regarding the Company's unaudited
interim financial statement
21 Subsidiaries of the Company
23.1 Consent of Accountants
23.2 Consent of Selman & Munson, P.C.
25 Statement of eligibility of Trustee (to be filed by amendment)
27 Financial Data Schedule*
99 Additional Exhibits
- ----------
* Filed as part of the Registration Statement on Form 10-SB filed by the
Company as amended (File No. 000-26815), and incorporated herein by
reference.
Item 28. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes to:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to the Registration Statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or together, represent a
fundamental change in the information in the Registration Statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of the securities offered would not exceed
that which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a
II-5
<PAGE> 94
20% change in the maximum aggregate offering price set forth in the "Calculation
of Registration Fee" table in the effective Registration Statement; and
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at the time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
(b) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, as amended (the "Securities Act"), the information omitted from the
form of prospectus filed as part of this registration statement in reliance upon
Rule 430A and contained in a form of prospectus filed by the registrant pursuant
to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be part of this registration statement as of the time it was declared effective.
(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.
(c) It will provide to Choice at the closing specified in the
underwriting agreements, certificates in such denominations and registered in
such names as required by Choice to permit prompt delivery to each purchaser.
II-6
<PAGE> 95
SIGNATURES
IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE
REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL
OF THE REQUIREMENTS FOR FILING ON FORM SB-2 AND HAS DULY CAUSED THIS
REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO
DULY AUTHORIZED, IN THE CITY OF AUSTIN, STATE OF TEXAS, ON NOVEMBER 12, 1999.
AUSTIN FUNDING.COM CORPORATION
By: /s/ GLENN A. LAPOINTE
------------------------------------------
Glenn A. LaPointe, President
By: /s/ TERRY G. HARTNETT
------------------------------------------
Terry G. Hartnett, Chief Financial Officer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints
Glenn A. LaPointe as his true and lawful attorneys-in-fact and agents with full
power of substitution and resubstitution, for him and his name, place and stead,
in any and all capacities, to sign any or all amendments (including post
effective amendments) to this Registration Statement and a new Registration
Statement filed pursuant to Rule 462(b) of the Securities Act of 1933 and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the foregoing, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or either of them, or their substitutes, may
lawfully do or cause to be done by virtue hereof.
II-7
<PAGE> 96
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates stated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
President, Chairman of the Board, Executive
Officer and Director (Principal Executive
/s/ GLENN A. LAPOINTE Officer) 11/12/99
- --------------------------- --------
Glenn A. LaPointe
/s/ TERRY G. HARTNETT Chief Financial Officer and Director 11/12/99
- --------------------------- --------
Terry G. Hartnett
/s/ BRADLEY J. FARLEY Director 11/12/99
- --------------------------- --------
Bradley J. Farley
/s/ GLENN G. FARLEY Director 11/12/99
- --------------------------- --------
Glenn G. Farley
/s/ L. H. HARDY, JR. Director 11/12/99
- --------------------------- --------
L. H. Hardy, Jr.
/s/ SHANNON D. STEWART Officer and Director 11/12/99
- --------------------------- --------
Shannon D. Stewart
/s/ KAREN R. HELLER Officer and Director 11/12/99
- --------------------------- --------
Karen R. Heller
/s/ JENNIFER ANN V. BULLOCK Officer and Director 11/12/99
- --------------------------- --------
Jennifer Ann V. Bullock
</TABLE>
II-8
<PAGE> 97
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
1 Form of Marketing Agreement between Choice Investments, Inc. and the
Company
2.1 Reorganization Plan and Agreement dated May 26, 1999 by and among
Innovation International, Inc., the Company and Austin Funding
Corporation.*
2.2 Amendment to Reorganization Plan and Agreement dated June 12, 1999.*
3.1 Certificate of Amended and Restated Articles of Incorporation of the
Company*
3.2 Bylaws of the Company*
3.3 Certificate of Designation, Preferences, Rights and Limitations of
1999 Series A Preferred Stock of Austin Funding.com Corporation*
4.1 Form of Indenture between the Company and Norwest Bank Texas, N.A.
as Trustee, with respect to the 8% Subordinated Debentures
4.2 Specimen Subordinated Debenture
4.3 Pledge Agreement between the Company and Trustee
5 Opinion of Selman & Munson, P.C., regarding the validity of issuance
of the Subordinated Debentures
10.1 1999 Stock Option and Incentive Plan of the Company*
10.2 Employment Agreement as of July 19, 1999 between the Company and
Glenn A. LaPointe*
10.3 Consulting Agreement between Subsidiary and Bradley J. Farley dated
April 14, 1999*
10.4 Whole Loan Purchase Agreement between Subsidiary and EquiCredit
Corporation of America dated March 17, 1998*
10.5 Master Agreement for Sale and Purchase of Mortgages between
Contimortgage Corporation and Subsidiary*
10.6 Bulk Continuing Loan Purchase Agreement between Household Financial
Services, Inc. and Subsidiary dated June 28, 1999*
</TABLE>
<PAGE> 98
<TABLE>
<S> <C>
10.7 Mortgage Loan Purchase and Sale Agreement between Life Bank and
Subsidiary dated February 22, 1999*
10.8 Seller Agreement between Impac Funding Corporation and Subsidiary
dated April 7, 1999*
10.9 Commercial Loan and Servicing Agreement between First National of
North America, LLC and Subsidiary dated December 22, 1998*
10.10 Mortgages Purchase Agreement between Residential Mortgage Services
of Texas, Inc. and Subsidiary dated October 14, 1998*
10.11 Loan and Security Agreement between Capital First Mortgage
Corporation and Pioneer Commercial Funding Corp. dated June 2, 1997*
10.12 Lease Agreement between 823 Congress Ltd. and Capital First Mortgage
Corporation dated April, 1997*
10.13 First Amendment to Lease Agreement dated September 1, 1998*
10.14 Mortgages Purchase Agreement between Residential Mortgage Services
of Texas, Inc. and Subsidiary dated June 11, 1999*
10.15 Master Repurchase Agreement between Impac Warehouse Lending Group
and Austin Funding Corporation dated June 22, 1999*
10.16 Stock Exchange Agreement between Bradley J. Farley and the Company*
10.17 Subscription Escrow Agreement between the Company and Compass Bank,
N.A.
11 Statement regarding computation of earnings to fixed charges
15 Sprouse & Winn, L.L.P.'s letter regarding the Company's unaudited
interim financial statement
21 Subsidiaries of the Company
23.1 Consent of Accountants
23.2 Consent of Selman & Munson, P.C.
25 Statement of eligibility of Trustee (to be filed by amendment)
27 Financial Data Schedule*
99 Additional Exhibits
</TABLE>
- ----------
* Filed as part of the Registration Statement on Form 10-SB filed by the
Company as amended (File No. 000-26815), and incorporated herein by
reference.
<PAGE> 1
EXHIBIT 1
AUSTIN FUNDING.COM CORPORATION
(Holding Company for Austin Funding Corporation)
$10,000,000 Debenture Offering
MARKETING AGREEMENT
____________, 1999
Choice Investments, Inc.
5900 Balcones Drive, Suite 110
Austin, Texas 78731
Gentlemen:
Austin Funding.com Corporation, a Nevada corporation (the "Company") hereby
confirms its agreement with Choice Investments, Inc. ("Choice" or the "Agent" or
"you") as follows:
Section 1. The Offering. The Company is offering up to $10,000,000 of its
8% Secured Subordinated Debentures Due December 31, 2015 (the "Debentures"), in
an offering (the "Offering"). The Debentures are to be offered in increments of
$5,000, not to exceed $1,000,000 to any one investor, in accordance with the
Prospectus (as hereinafter defined). The amount of the Offering may be changed
by the Company after consultation with, and the consent of, the Agent, subject
to such declaration of effectiveness of an amendment to the Prospectus by the
Securities and Exchange Commission (the "SEC") as may be required. The Offering
will commence on November __, 1999, and subscriptions will be accepted until
4:00 p.m., C.S.T., on ___________, 2000, subject to the Company's right to
extend the subscription period until __________, 2000, or terminate the Offering
prior to __________, 2000, upon the sale of all of the Debentures (the
"Expiration Date"). All purchases in the Offering will be subject to certain
minimum and maximum purchase limitations and other terms and conditions,
including the right of the Company, in its sole discretion, to reject orders in
whole or in part.
The Company has filed with the SEC a registration statement on Form SB-2
(File No. _________) containing a prospectus relating to the Offering for the
registration of the Debentures under the Securities Act of 1933, as amended (the
"1933 Act"), and has filed such amendments thereof and such amended prospectuses
as may have been required to the date hereof. Such Registration Statement,
including any documents incorporated by reference therein and all financial
schedules and exhibits thereto, as amended, including post-effective amendments,
is herein called the "Registration Statement." The prospectus, as amended, on
file with the SEC at the time the Registration Statement initially became
effective is hereinafter called the "Prospectus," except that if any prospectus
is filed by the Company pursuant to Rule 430A or
1
<PAGE> 2
Rule 424(b) or (c) of the rules and regulations of the SEC under the 1933 Act
(the "1933 Act Regulations") differing from the prospectus on file at the time
the Registration Statement initially becomes effective, the term "Prospectus"
shall refer to the prospectus filed pursuant to Rule 430A or Rule 424(b) or (c)
from and after the time said prospectus is filed with the SEC.
Section 2. Appointment of the Agent. Subject to the terms and conditions of
this Agreement, the Company hereby appoints the Agent, as its financial advisor
and marketing agent, to consult with and advise the Company in connection with
the Offering, but not to solicit subscriptions for Debentures in the Offering.
On the basis of the representations, warranties and agreements herein contained,
the Agent accepts such appointment and agrees to assist the Company in the
Offering as follows: (i) assist in preparing the Prospectus and marketing
materials in connection with the Offering; (ii) assist in developing
supplemental marketing material items; (iii) organize Debenture information with
Company employees and equipment; (iv) hold employee and director training
sessions; (v) develop targeted investor lists in cooperation with Company
directors and management; and (vi) respond to direct inquiries by providing
Agent personnel at the Sales Center on the first three days and the last three
days of the Offering and three other days as needed; to the extent necessary,
Agent personnel will respond to non-routine questions of a financial or
investment nature; on those days when Agent personnel are at the Sales Center,
such personnel will be available to discuss the merits of an investment in the
Company on an individual basis with prospective investors; provided, however,
that the Agent shall not be responsible for obtaining subscriptions of any
specific amount of Debentures and shall not be obligated to take any action
which is inconsistent with any applicable laws, rules, regulations, decisions or
orders. Subscriptions will be offered by means of Debenture Order Forms as
described in the Prospectus.
On the basis of the representations, warranties and agreements herein
contained, but subject to the terms and conditions herein set forth, Choice
accepts such appointment and agrees to consult with and advise the Company as to
the matters set forth herein and in the letter agreement ("Letter Agreement"),
dated October ___, 1999, between the Company and Choice , a copy of which is
attached hereto as Exhibit "A". It is acknowledged by the Company that Choice
shall not be required to purchase any Debentures.
The Company agrees and acknowledges that the Agent may utilize its broker
network in the Offering to distribute the Debentures, on a "best efforts" basis,
and, if deemed appropriate by the Agent, other broker/dealers which are members
of the National Association of Securities Dealers, Inc. (the "NASD") pursuant to
the terms and conditions of a Selected Dealers' Agreement between the Agent and
such broker/dealers, the form of which is attached hereto as Exhibit "B". The
Agent hereby agrees that prior to utilizing its other broker/dealers, the Agent
will consult with the Company regarding its determination and will not take any
action in this regard which is not approved in writing by the Company.
2
<PAGE> 3
The Company hereby further agrees and acknowledges that, having appointed
the Agent hereunder, only personnel employed by the Agent, and such other
personnel as are assigned for specific services or services contemplated by this
Agreement to be performed by the Agent, will be involved in providing the
services described herein.
All subscription funds received by the Agent or by other broker/dealers
soliciting subscriptions, if any, shall be promptly transmitted (either by U.S.
Mail or similar type of transmittal) to Compass Bank (the "Escrow Agent") for
deposit in a separate interest-bearing account (the "Escrow Account") by noon of
the following business day.
The obligations of the Agent pursuant to this Agreement shall terminate
upon the completion or termination or abandonment of the Offering, but in no
event later than _________, 2000 (the "End Date"). All fees or expenses due to
the Agent but unpaid will be payable to the Agent in next day funds at the
earlier of the Closing Date (as hereinafter defined) or the End Date. In the
event the Offering is extended beyond the End Date, the Company and the Agent
may mutually agree to renew this Agreement under mutually acceptable terms.
Section 3. Fees. In addition to the expenses specified in Sections 7 and 8
hereof, as compensation for the Agent's services under this Agreement, the
Company will pay the following fees to the Agent:
(a) A financial advisory fee of $50,000 payable in two installments:
the first installment of $25,000 was paid on the execution of the Letter
Agreement and the second installment of $25,000 is payable when the Registration
Statement (as defined hereinafter) becomes effective. Such fees shall be deemed
to have been earned when due. Should the Offering be terminated for any reason
not attributable to the action or inaction of the Agent, Agent shall be deemed
to have earned, and shall be paid, fees accruing through the stage at which
point the termination occurred, including any accrued legal fees expended by the
Agent.
(b) A commission equal to 5% of the aggregate actual purchase price
of the Debentures sold in the Offering by Choice, if any. In the event that a
syndicate of selected broker-dealers are used to assist in the Offering, the
Agent will allocate to such selected broker-dealers who assist in the Offering
an amount competitive with gross underwriting discounts charged at such time for
comparable amounts of Debentures sold in a similar market environment. Fees with
respect to purchases affected through selected broker-dealers other than the
Agent shall be transmitted by the Agent to such selected broker-dealer. The
decision to utilize selected broker-dealers will be made by the Company with
consent of the Agent.
Section 4. Accounts; Closing. The Company shall establish and maintain the
Escrow Account for the benefit of the subscribers of Debentures. No funds
deposited into the Escrow Account shall be released or disbursed to the Company,
and no withdrawal authorizations will be exercised by the Company, until all of
the conditions set forth in Section 9 of this Agreement shall have been
fulfilled. In the event the Offering is not consummated for any reason,
including, but not limited to, the inability to sell the Debentures during the
Offering (including any permitted extension thereof), this Agreement shall
terminate and the Company shall refund to any persons
3
<PAGE> 4
who have subscribed for any of the Debentures the full amount which the Company
may have received plus accrued interest as set forth in the Prospectus.
If all of the Debentures to be sold in the Offering are subscribed for at
the completion of the Offering, the Company agrees on the Closing Date to issue
the Debentures which have been subscribed for against payment therefor from the
aforesaid Escrow Account maintained for the benefit of the subscribers with the
Escrow Agent and to deliver certificates evidencing ownership of such Debentures
in such authorized denominations and registered in such names as indicated on
the Debenture Order Forms directly to the purchasers thereof as promptly as
practicable after the Closing Date. In addition, a closing shall be held at the
offices of Selman & Munson, P.C., or at such other place as shall be agreed upon
between the Company and the Agent, as of the close of business on a business day
to be selected by the Agent, which business day shall be no less than two
business days following the giving of prior notice to the Company and no more
than five business days after the Debentures have been sold or at such other
time as shall be agreed upon between the Company and the Agent. The Company
shall notify the Agent by telephone, confirmed in writing, when funds shall have
been received for all Debentures. At the closing, the Company shall deliver to
the Agent in next day funds the commissions, fees and expenses due and owing to
the Agent as set forth in Sections 3, 9 and 10 hereof, and the certificates
required hereby and other documents deemed reasonably necessary by the Agent
shall be executed and delivered to effect the sale of the Debentures as
contemplated hereby and pursuant to the terms of the Prospectus. The hour and
date upon which the Company shall release for delivery all Debentures, in
accordance with the terms hereof, are referred to herein as the "Closing Date."
Section 5. Representations and Warranties of the Company. In order to
induce the Agent to enter into this Agreement, the Company represents and
warrants to, and agrees with, the Agent that:
(a) The Company has all such power, authority, authorizations,
approvals and orders as may be required to enter into this Agreement, to carry
out the provisions and conditions hereof and to issue and sell the Debentures as
provided herein and as described in the Prospectus. The consummation of the
Offering, the execution, delivery and performance of this Agreement and the
consummation of the transactions herein contemplated have been duly and validly
authorized by all necessary corporate action on the part of the Company. This
Agreement has been duly executed and delivered by the Company and is legal,
valid and binding on it, enforceable in accordance with its terms, except as the
enforceability thereof may be limited by bankruptcy, insolvency, moratorium,
reorganization or similar laws relating to or affecting the enforcement of
creditors' rights, and subject, as to the enforcement of remedies, including the
remedy of specific performance and injunctive and other forms of equitable
relief which may be subject to certain equitable defenses and to the discretion
of the court before which any proceedings may be brought, to general principles
of equity regardless of whether the enforceability is considered a proceeding at
law or in equity, and except as the obligations of the Company under the
indemnification and contribution provisions hereof may be limited by federal or
state securities laws or the public policy underlying such laws.
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<PAGE> 5
(b) A Registration Statement on Form SB-2 (Registration No.
___________) with respect to the Debentures has been prepared by the Company in
conformity with the requirements of the Act and the SEC Rules and Regulations,
has been filed with the SEC and has been declared effective by the SEC. At the
time the Registration Statement became effective, and at all times subsequent
thereto up to the Closing Date, the Registration Statement and the Prospectus,
including any amendments or supplements thereto, contained and will contain all
statements that are required to be stated therein in accordance with the Act and
the SEC Rules and Regulations and conformed and will conform in all material
respects to the requirements of the Act and the SEC Rules and Regulations. The
Registration Statement, the Prospectus, any Blue Sky Application or any Sales
Information (as such term is defined in Section 10 hereof), including any
amendments or supplements thereto, did not contain or will not contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading; provided,
however, that none of the representations and warranties in this subsection
shall apply to statements in or omissions from any preliminary Prospectus, the
Prospectus, the Registration Statement or any conformity or supplement made in
reliance upon and in conformity with information made in reliance upon and in
conformity with information furnished to the Company in writing by the Agent
expressly for use therein. Without limiting the generality of the foregoing, all
fees, whether of finder's, originators, underwriters or otherwise required to be
disclosed in the Prospectus have been disclosed; all legal or governmental
proceedings pending or threatened involving the Company and required to be
disclosed in the Prospectus have been disclosed; and all contracts, agreements
or other documents of a character required to be described or referred to
therein have been disclosed in the Prospectus. All contracts, agreements and
other documents described or referred to in the Prospectus, to which the Company
is a party, or by which it or its properties are bound or committed are, unless
otherwise disclosed therein, in full force and effect; the descriptions thereof
or references thereto are correct in all material respects; and no default
exists in the due performance or observance of any obligations, agreements or
other document so described or referred to therein, unless otherwise disclosed
therein. As of the Closing Date, the Company will have satisfied the conditions
precedent to their consummation of the Offering in accordance with all
applicable laws, regulations, decisions and orders.
(c) Neither the SEC nor any state authority nor any court or
other governmental agency or body has, by order or otherwise, prevented or
suspended the use of the Prospectus or the offer or sale of the Debentures, or
to the best knowledge of the Company, is any such action threatened.
(d) Sprouse & Winn, L.L.P., which has expressed its opinion with
respect to certain of the financial statements and schedules filed as part of
the Prospectus and included in the Registration Statement, is, with respect to
the Company's subsidiary, Austin Funding Corporation ("AFC"), an independent
certified public accountant within the meaning of the Code of Professional
Ethics of the American Institute of Certified Public Accountants.
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<PAGE> 6
(e) The financial statements and schedule(s) of AFC and notes
related thereto included in the Registration Statement and which are part of the
Prospectus present fairly the financial condition of AFC as of the dates
indicated and the results of their operations for the periods specified and
comply as to form in all material respects with the applicable accounting
requirements. Such financial statements have been prepared in conformity with
generally accepted accounting principles applied on a consistent basis during
the periods involved. The tables and any other financial and numerical data in
the Prospectus fairly present in all material respects the information purported
to be shown thereby at the respective dates thereof and for the respective
periods covered thereby and were prepared on a basis consistent with the audited
financial statements of AFC.
(f) Since the respective dates as of which information is given
in the Prospectus, except as may otherwise be stated therein, (i) there has not
been any material adverse change in the condition of the Company or AFC,
financial or otherwise, or in the results of operations, earnings, affairs or
business prospects of the Company or AFC, whether or not arising from
transactions in the ordinary course of business; (ii) there have not been any
material transactions entered into by the Company or AFC, other than those in
the ordinary course of business; (iii) there has not been any material increase
in the long-term debt of the Company or AFC; (iv) there has not been any
material adverse change in the aggregate dollar amount of the Company's or AFC's
surplus or reserves; (v) there has been no material adverse change in the
Company's or AFC's relationship with its insurance carriers; (vi) there has been
no material change in management of the Company or AFC; and (vii) there has been
no material increase in the Company's or AFC's liability for borrowed money.
(g) The Company is duly incorporated and validly existing as a
corporation in good standing under the laws of the State of Nevada, with full
corporate power and authority to own its properties and conduct its business as
described in the Prospectus. The Company has obtained all licenses, permits and
other governmental authorizations currently required for the conduct of its
business, except where the failure to do so would not individually or in the
aggregate have a material adverse effect on the business, prospects, results of
operation or general affairs of the Company; all such licenses, permits and
other governmental authorizations are in full force and effect, and the Company
is in all material respects complying therewith. The Company is not required to
qualify as a foreign corporation in any other jurisdiction in which the failure
to qualify would have a material adverse impact on the conduct of the Company's
business as described in the Prospectus.
(h) The authorized, issued and outstanding equity capital of the
Company is as set forth in the Prospectus under the caption "Capitalization"; no
Debentures have been or will be issued and outstanding prior to the Closing
Date; the Debentures offered in the Offering have been duly and validly
authorized for issuance and, when issued and delivered by the Company pursuant
to the terms in the Prospectus against payment of the consideration as set forth
in the Prospectus, will be duly and validly issued and fully paid and
nonassessable; and the Company's common stock conforms to the description
thereof contained in the Prospectus. There are no pre-emptive rights or other
rights to subscribe for or to purchase any Debentures pursuant to the Company's
Articles of Incorporation, Bylaws or other governing documents or any agreement
or
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<PAGE> 7
other instrument to which the Company is a party or by which it is bound.
Neither the filing of the Registration Statement nor the offering or sale of the
Debentures as contemplated by this Agreement gives rise to any rights, other
than those which have been waived or satisfied, for or relating to the
registration of any Debentures. The certificates used to evidence the Debentures
are in due and proper form.
(i) The Company has one subsidiary, AFC. Upon the Closing, the
Company will own, directly or indirectly, all of the issued and outstanding
capital stock of AFC, free and clear of any lien, charge or encumbrance and,
except as disclosed in the Prospectus, there are no outstanding warrants, rights
or options to acquire or instruments convertible into, or exchangeable for any
capital stock or other equity interest in AFC.
(j) The Company is not in violation of its Articles of
Incorporation, Bylaws or other corporate governing documents. The Company is not
in violation of or in default, and no event has occurred which with notice of
lapse of time, or both, would constitute default on the part of the Company in
the performance or observance of any obligation, agreement, covenant or
condition contained in any contract, lease, loan agreement, mortgage, note,
indenture or other material instrument to which it is a party or by which it or
its assets are bound, which default in any individual case or in the aggregate
would have a material adverse effect on the business, prospects, general
affairs, operations or financial condition of the Company, and the execution and
delivery of this Agreement, the incurrence of the obligations herein set forth
and the consummation of the transactions herein contemplated will not conflict
with or constitute a breach of, or default under, or result in the creation of
any material lien, charge or encumbrance upon any of the assets of the Company
pursuant to the Articles of Incorporation or Bylaws of the Company or any
material obligation, agreement, contract, franchise, license, lease, indenture,
note, mortgage loan agreement or other material instrument to which it is a
party or in which it has a beneficial interest in, or by which it may be bound,
or materially violate or conflict with any law, administrative regulation or
administrative or court decree. No consent, approval, authorization or other
order of any court, regulatory body, administrative agency or other governmental
body is required for the execution and delivery of this Agreement or the
consummation of the transactions contemplated by this Agreement, except such as
has been obtained and except for approval of the SEC, compliance with the Act,
the state securities laws ("Blue Sky Laws") applicable to the Offering of the
Debentures and the clearance of such offering with the NASD and the National
Association of Securities Dealers Automated Quotation System ("NASDAQ").
(k) The Company and AFC each have good and marketable title to
all its properties and assets material to its business and to those properties
and assets described in the Prospectus as owned by it, free and clear of all
liens, charges, encumbrances or restrictions, except such as are described in
the Prospectus or are individually or in the aggregate are not materially
significant or important in relation to the business of the Company; and all of
the leases and subleases material to the business of AFC under which AFC holds
properties, including those described in the Prospectus, are valid and binding
leases and subleases in full force and effect.
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<PAGE> 8
(l) The Company is not subject to nor in violation of any
directive from the State of Nevada or any other governmental authority to make
any material change in the method of conducting its business or affairs; the
Company has conducted and is conducting its business to comply in all material
respects with all applicable statutes and regulations and, except as set forth
in the Prospectus, there is, to the knowledge of the Company, no charge,
investigation, action, suit or proceeding before or by any court, regulatory
authority or governmental agency or body pending or threatened which may
materially and adversely affect the performance of this Agreement or the
consummation of the transactions herein contemplated or which may result in any
material adverse change in the condition (financial or otherwise), business,
operations general affairs or prospects of the Company, or which would
materially affect any of its properties and assets. The Company is in compliance
in all material respects with the applicable financial recordkeeping and
reporting requirements of the Currency and Foreign Transactions Reporting Act of
1970, as amended, and the rules and regulations thereunder.
(m) All documents delivered or to be delivered by the Company or
their representatives in connection with the issuance and sale of the Debentures
or in connection with the Agent's exercise of due diligence, except for those
documents which were prepared by parties other than the Company or its
representatives, to the knowledge of the Company, were on the dates on which
they were delivered, or will be on the dates on which they are to be delivered,
true, complete and correct in all material respects.
(n) The Company and AFC have each filed all required federal,
state and foreign income, sales and franchise tax returns and has paid all taxes
shown as due and payable thereon except where permitted to be extended; neither
the Company nor AFC have any knowledge of any tax deficiency which has been
asserted or threatened against the Company or AFC which could materially and
adversely affect the business or operations or properties of the Company.
(o) Appropriate arrangements have been made for placing the
funds received from subscriptions for Debentures in special interest-bearing
accounts with the Escrow Agent until all Debentures are sold and paid for, with
provision for refund to the purchasers in the event that the closing of the
Debentures is not completed for whatever reason or for delivery to the Company
if all Debentures are sold.
(p) The Company has complied or will comply in all material
respects with each and every undertaking or commitment made by them under the
Blue Sky Laws, including, without limitation, each and every undertaking or
commitment made in connection with the Offering. The Company has used its best
efforts to qualify the Debentures for offering in every state designated by the
Company and the Agent. The materials previously filed or filed after the date
hereof with any state do not and will not contain any untrue statements of
material fact nor are there or will there be any omissions of material facts
required to be stated therein or that are necessary to make the statements
therein not misleading.
8
<PAGE> 9
(q) No relationship, direct or indirect, exists between the
Company, on the one hand, and the directors or officers of the Company, on the
other hand, which is required to be described in the Prospectus and which is not
so described.
(r) The Company has not: (i) placed any securities within the
last 18 months; (ii) had any material dealings with any member of the NASD or
any person related to or associated with such member, other than discussions and
meetings relating to the proposed Offering and routine purchases and sales of
U.S. Government and agency securities and other assets; (iii) entered into a
financial or management consulting agreement except as contemplated hereunder
and except for the engagement letter with the Agent attached hereto as Exhibit
"A"; or (iv) engaged any intermediary between the Agent and the Company in
connection with the offering of the Debentures, and no person is being
compensated in any manner for such service.
Any certificate signed by any officers of the Company and delivered to the
Agent or to the Agent's counsel shall be deemed a representation and warranty of
the Company to the Agent as to the matters covered thereby. Any certificate
delivered by the Company to their counsel for purposes of enabling such counsel
to render the opinions referred to in Section 9(e) will also be furnished to the
Agent and its counsel and shall be deemed to be additional representations and
warranties by the Company to the Agent as to the matters covered thereby and the
Agent and its counsel are entitled to rely thereon.
Section 6. Representations and Warranties of Choice.
(a) Choice is a corporation established in 1983 and is validly
existing in good standing under the laws of the State of Texas with full power
and authority to provide the services to be furnished to the Company hereunder.
(b) The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly and validly
authorized by all necessary action on the part of Choice, and this Agreement has
been duly and validly executed and delivered by Choice and is a legal, valid and
binding agreement of Choice, enforceable in accordance with its terms except as
the enforceability thereof may be limited by bankruptcy, insolvency, moratorium,
reorganization or similar laws relating to or affecting the enforcement of
creditors' rights generally or the rights of creditors, or by general equity
principles, regardless of whether such enforceability is considered in a
proceeding in equity or at law.
(c) Each of Choice and its employees, agents and representatives
who shall perform any of the services hereunder shall be duly authorized and
empowered, and shall have all licenses, approvals and permits necessary to
perform such services.
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<PAGE> 10
(d) The execution and delivery of this Agreement by Choice, the
consummation of the transactions contemplated hereby and compliance with the
terms and provisions hereof will not conflict with, or result in a breach of,
any of the terms, provisions or conditions of, or constitute a default (or an
event which with notice or lapse of time or both would constitute a default)
under, the articles of incorporation of Choice or any material agreement,
indenture or other instrument to which Choice is a party or by which it or its
property is bound.
(e) No approval of any regulatory or supervisory or other public
authority is required in connection with Choice's execution and delivery of this
Agreement or the performance of its terms, except as may have been received.
(f) There is no suit or proceeding or charge or action before or
by any court, regulatory authority or government agency or body or, to the
knowledge of Choice, pending or threatened, which might materially adversely
affect Choice's performance of this Agreement.
Section 7. Agreements of the Company. The Company hereby agrees with the
Agent that:
(a) The Company will use its best efforts to cause the
Registration Statement to be declared effective by the SEC. The Company will
notify the Agent immediately and confirm the notice in writing thereto (i) of
any request by or the receipt of any comments from the SEC with respect to the
transactions contemplated by this Agreement; (ii) of any request by or any
comments or other communications received from the SEC and any request by the
SEC for any amendment or supplement to the Registration Statement or the
Prospectus, or for additional information with respect to the transactions
contemplated therein or by the Offering; and (iii) of the issuance by the SEC or
any court or governmental agency or body of any stop order or other order
suspending or enjoining the effectiveness or approval of the Registration
Statement, the Prospectus or the Offering or of the institution of any
proceedings for that purpose or of any notification of the suspension of
qualification of the Debentures in any jurisdiction or the initiation or
threatening of any proceeding for that purpose or the threat of any such action.
The Company will make every reasonable effort to prevent the issuance by the SEC
and any court or governmental agency or body of any stop order or other such
order, or request for amendment or additional information or the commencement of
any proceeding and, if any such order, request or proceeding shall at any time
be issued or commenced, to obtain the lifting thereof, to respond thereto or to
obtain the termination thereof at the earliest possible moment.
(b) The Company will deliver to the Agent, without charge, from
time to time such number of copies of the Prospectus and related documents (as
amended or supplemented), as the Agent may reasonably request. The Company
authorizes the Agent, subject to all requirements of applicable law, to use the
Prospectus (as the same may be amended or supplemented) in connection with the
sale of the Debentures.
(c) The Company will deliver to the Agent at least two complete
copies (including exhibits) of its Registration Statement on Form SB-2 as
originally filed with the SEC and of each amendment thereto.
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<PAGE> 11
(d) The Company will comply, at its own expense, with all
requirements imposed upon it by the SEC and by the Act, the Exchange Act and the
SEC Rules and Regulations, including, without limitation, Rules 10b-5 and 10b-6
under the Exchange Act, in each case as from time to time in effect, so far as
necessary to permit the continuance of offers, sales or dealings in Debentures
during such period in accordance with the provisions hereof and the Prospectus.
(e) If, at any time during the period when the Prospectus is
required by law to be delivered, any event occurs as a result of which, in the
opinion of counsel to the Company or the Agent, the Prospectus, including any
amendments or supplements, would contain an untrue statement of a material fact,
or would omit to state any material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, or if it is necessary in the opinion
of counsel to the Company or the Agent at any time to amend or supplement the
Prospectus, including any amendments or supplements to comply with the Act and
all other laws, the Company, as appropriate, will promptly advise the Agent
thereof and will promptly prepare and file with the SEC and any other authority
with jurisdiction an amendment or supplement.
(f) The Company will not, prior to the Closing Date, incur any
material liability or obligation, direct or contingent, or enter into any
material transaction, other than in the ordinary course of business, except as
disclosed in the Prospectus.
(g) The Company will not acquire any Debentures prior to the
Closing Date.
(h) During the period of three years after the date of the
Prospectus, the Company will furnish to the Agent upon request (i) as soon as
practicable after the end of each fiscal year, the annual report of the Company
containing the balance sheet of the Company as of the close of such fiscal year
and corresponding statements of income, stockholders' equity and changes in
financial position for the year then ended, such financial statements to be
certified by independent public accountants; (ii) as soon as practicable after
the end of each fiscal quarter (other than the last quarter of each fiscal
year), an unaudited balance sheet and statements of income, stockholders' equity
and changes in financial position of the Company as at the end of and for such
quarter; (iii) as soon as available, a copy of each proxy statement, financial
statement and periodic and special reports of the Company mailed to holders of
any class of its securities registered under Section 12 of the Exchange Act;
(iv) as soon as practicable after the filing thereof, of each report or other
statement or document filed by the Company with the SEC or other regulatory
agency or with any national securities exchange or quotation system on which any
securities of the Company may be listed or quoted; and (v) from time to time,
such other information concerning the Company as the Agent may reasonably
request.
(i) The Company will comply or cause to be complied with the
conditions to the obligations specified in Section 11 hereof.
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<PAGE> 12
(j) The Company shall promptly prepare and file with the SEC,
from time to time, such reports as may be required to be filed by the SEC Rules
and Regulations, including, without limitation, reports with respect to the sale
of the Debentures and the application of the proceeds thereof as may be required
in accordance with Rule 463 under the Act.
(k) The Company shall comply in all material respects with the
undertaking given by the Company in connection with the qualification of the
Debentures for offering and sale under the Blue Sky Laws.
(l) The Company shall use the net proceeds from the sale of the
Debentures in the manner set forth in the Prospectus under the caption "Use of
Proceeds."
(m) The Company will not, for a period of 90 days after the date
hereof, without the prior written consent of the Agent, offer for sale, sell or
issue, contract to sell or otherwise dispose of, any Debentures of, or any
securities convertible into or exercisable for, Debentures issued pursuant to
the Offering or sell or grant any options, rights or warrants with respect to
Debentures.
(n) Other than as permitted by applicable law, the Company will
not distribute any Prospectus or other offering material in connection with the
subject offering and sale of the Debentures.
(o) The Company will qualify the Debentures under the Blue Sky
Laws of such jurisdictions as the Company and the Agent mutually agree to make
such applications, file such consents to service of process or other documents
and furnish such other information as may be reasonably requested for that
purpose and to comply with such laws so as to permit the continuance of sales
and dealings in such jurisdictions for as long a period as the Company and the
Agent may mutually agree. The Company will notify the Agent immediately of, and
confirm in writing, the suspension of qualification of the Debentures or the
threat of such action in any jurisdiction. In each jurisdiction where any of the
Debentures shall have been qualified as provided above, the Company will make
and file such statements and reports as are required by, or in the future may be
required by, the laws of such jurisdiction.
(p) At the Closing Date, the Company will have completed the
Offering in all material respects as described in the Prospectus and in
accordance with all applicable laws, regulations, decisions and orders of the
SEC and state securities authorities.
(q) The Company will maintain appropriate arrangements with the
Escrow Agent for depositing all funds received from persons mailing
subscriptions for or orders to purchase Debentures in the Offering in an account
bearing interest at the rate, if any, described in the Prospectus until the
Closing Date and satisfaction of all conditions precedent to the release of the
Company's obligation to refund payments received from persons subscribing for or
ordering Debentures in the Offering as described in the Prospectus or until
refunds of such funds have been made to the persons entitled thereto as
described in the Prospectus.
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<PAGE> 13
(r) The Company will use its best efforts to (i) encourage and
assist a market maker to establish and maintain a market for the Debentures, and
(ii) obtain approval for and maintain quotation of the Debentures on the
Small-Cap Market of the NASDAQ system effective on or prior to the Closing Date.
The Company will take such actions and furnish such information as are
reasonably requested by the Agent in order for the Agent to ensure compliance
with the NASD "Interpretation With Respect to Free Riding and Withholding."
(s) The Company will conduct its business in compliance in all
material respects with all applicable federal and state laws, rules,
regulations, decisions, directives and orders, including all decisions,
directives and orders of the SEC.
(t) The Company shall not deliver the Debentures until it has
satisfied or caused to be satisfied in all material respects each and every
condition set forth in Section 11 hereof unless such condition is waived in
writing by the Agent.
Section 8. Covenants of Choice. Choice hereby covenants with the Company,
during the period when the Prospectus is used, Choice will comply, in all
material respects and at its own expense, with all requirements imposed upon it,
to the extent applicable, by the 1933 Act and the 1934 Act and the rules and
regulations promulgated thereunder and state blue sky laws and regulations
applicable to Choice; Choice will distribute the Prospectuses or offering
materials in connection with the sales of the Debentures only in accordance with
the 1933 Act and the rules and regulations promulgated thereunder.
Section 9. Payment of Expenses of the Company. Subject to the provisions of
Section 10 below, whether or not the transactions contemplated hereunder are
consummated or this Agreement becomes effective or is terminated for any reason,
the Company will pay all costs and expenses incident to the performance of its
obligations hereunder, including, without limiting the generality of the
foregoing:
(a) All fees and expenses of the accountants and counsel of the
Company, all costs and expenses incurred in connection with the preparation,
printing, filing and distribution, including costs of shipping and mailing, of
the Registration Statement and the Prospectus and all amendments and supplements
thereto and other documents in connection with the transactions contemplated by
this Agreement and the Prospectus (including all exhibits and financial
statements) (and all agreements and supplements provided for therein and in this
Agreement and the preliminary and supplemental Blue Sky Memoranda).
(b) All registration fees and expenses, including, without
limitation, legal fees and disbursements of the Company's counsel incurred in
connection with qualifying or registering all or any part of the Debentures for
offer and sale under the Blue Sky Laws.
(c) All fees and expenses of the trustee, registrar, paying
agent and any special agents appointed with respect to the Debentures,
preparation, printing, issuance and delivery of the certificates representing
Debentures, all issue and transfer taxes, if any, with respect to the sale and
delivery of the Debentures and all fees of the NASD.
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<PAGE> 14
The Company shall reimburse the Agent pursuant to the procedures set forth
in Section 10 for any expense provided in (a) through (c) above which, in the
first instance, was paid by the Agent.
Section 10. Reimbursement of Agent's Expenses. Except for the reimbursement
provided herein, the Agent will pay its own costs and expenses incurred in
connection with the performance of this Agreement and the transactions
contemplated hereunder, including the fees and disbursements of its counsel,
marketing expenses and due diligence expenses. The Company shall reimburse the
Agent for the fees and disbursements of its counsel (up to a maximum of
$20,000.00 for legal fees, including out-of-pocket expenses for travel and other
disbursements of counsel), which shall be paid within five days of receipt by
the Company of an itemized bill summarizing such expenses since the date of the
last bill, if any, to the date of the current bill. To the extent not previously
paid, full payment of such fees and expenses shall be made in next day funds on
the Closing Date provided that the Company shall have received an itemized bill
summarizing any unreimbursed expenses at least two days before the Closing Date
or on such later date if the Company shall have received an itemized bill
summarizing any unreimbursed expenses at least two days before such date or, if
the Offering is not completed and is abandoned or terminated for any reason,
within five days of receipt by the Company of a reasonable accounting from the
Agent of its expenses.
The Company may request, and the Agent agrees to provide, copies of
documentary evidence of all expenses of $25.00 or more for which Agent seeks
reimbursement, such as receipts or paid bills, that state information to
establish the amount, date, place and essential character of the expenditure.
Subject to the provisions of this Section 10, in the event the Offering for any
reason is not closed, the Company will reimburse the Agent for its actual,
accountable, reasonable legal fees and expenses.
Section 11. Conditions to the Obligations of the Agent and the Release of
Debentures. The issuance and sale of the Debentures, the delivery of
certificates in respect thereof, and the obligations of the Agent hereunder
shall be subject to the accuracy in all material respects of the representations
and warranties on the part of the Company herein set forth as of the date hereof
and as of the Closing Date to the accuracy in all material respects of the
statements of the officers of the Company made pursuant to the provisions hereof
and to the performance in all material respects by the Company's obligations
hereunder.
The issuance and sale of the Debentures, the delivery of certificates in
respect thereof, and the obligations of the Agent on the Closing Date shall also
be subject to the following additional conditions (which are solely for the
Agent's benefit), unless waived in writing by the Agent:
(a) The Registration Statement shall have been declared
effective by the SEC; prior to the Closing Date, no stop order or such other
order suspending the offering or the effectiveness of the Registration Statement
or the effectiveness of the Prospectus shall have been issued or proceedings
therefor instituted, initiated or threatened by the SEC or any court or
governmental agency or body and any request of the SEC or any other governmental
agency or
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<PAGE> 15
body for inclusion of additional information in the Registration Statement, or
otherwise, shall have been complied with. The NASD, upon review of the terms of
this Agreement, shall not have objected to the Agent's performance of its
obligations hereunder or the terms set forth.
(b) The Agent shall not have advised the Company in writing that
the Registration Statement or the Prospectus or any amendment or supplement
thereto contains an untrue statement of fact, which is material or omits to
state a fact which is material and is required to be stated therein or necessary
to make the statements therein not misleading.
(c) The Agent shall have received on the Closing Date
certificates on behalf of the Company, dated as of the Closing Date, signed by
the chief executive officer and the chief financial officer of the Company, in
form and substance reasonably satisfactory to the Agent's counsel, to the effect
that (i) the signers of each of such certificates have carefully examined the
Registration Statement and the Prospectus and that, in their opinion, at the
time the Registration Statement and the Prospectus became effective, neither the
Registration Statement nor the Prospectus contained any untrue statement of a
material fact or omitted to state any material fact required to or stated
therein or necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading; (ii) since the
respective effective or approval dates of the Registration Statement and the
Prospectus, no event has occurred which should have been set forth in an
amendment of or supplement to the Registration Statement or the Prospectus which
has not been so set forth, including specifically, but without limitation, any
material adverse change in the condition, financial or otherwise, or in the
earnings, capital, properties, prospects or affairs of the Company and, the
conditions set forth in this Section 11 have been satisfied; (iii) and to the
further effect that the Company has performed all agreements and has satisfied
all conditions on its part to be performed or satisfied at or prior to the
Closing Date and will comply with all obligations to be satisfied by them after
the Offering; (iv) that all the representations and warranties contained in
Section 5 hereof are true and correct on and as of the Closing Date, with the
same force and effect as though expressly made on the Closing Date; (v) no stop
order suspending the effectiveness of the Registration Statement has been
initiated or threatened by the SEC or any state authority; and (vi) no order
suspending the Offering or the effectiveness of the Prospectus has been issued
and no proceedings for that purpose have been initiated or to the best of their
knowledge threatened by the SEC or any state authority.
(d) The Debentures shall have been qualified or be exempt from
qualification under the Blue Sky Laws of such states as shall have been
identified by the Company. The Company shall have obtained approval for and
shall have in place an arrangement for the quotation of the Debentures on the
Small-Cap Market of the NASDAQ system.
(e) The Agent shall have received on the Closing Date an opinion
of Selman & Munson, P.C., counsel for the Company, dated as of the Closing Date,
addressed to the Agent, substantially to the effect as set forth in Exhibit "C"
hereto.
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<PAGE> 16
(f) At the time this Agreement is executed and also on the
Closing Date, there shall be delivered to the Agent a letter addressed to the
Agent, from Sprouse & Winn, L.L.P., independent accountant, the first one to be
dated ___________, 1999, the second one to be dated the Closing Date,
substantially identical in form and substance to the unsigned form of letter
heretofore submitted to and approved by the Agent, and which shall contain
information as of a date within five business days of the date of such letter.
(g) Such further certificates, documents and opinions as the
Agent may reasonably request from the Company (including certificates of
officers of the Company) shall have been furnished by the Company.
(h) The Agent's counsel shall have been furnished with such
documents and opinions as they may reasonably require for the purpose of
enabling them to pass upon the sale of the Debentures as herein contemplated and
related proceedings and in order to evidence the accuracy or completeness of any
of the representations or warranties or the fulfillment of any of the conditions
herein contained; and all proceedings taken by the Company in connection with
the sale of the Debentures as herein contemplated shall be reasonably
satisfactory in form and substance to the Agent and its counsel; provided, any
objection by such counsel to the foregoing shall be made by written advice to
this effect from the Agent accompanied by a written opinion of Jack W. Ledbetter
& Associates setting forth such objections.
(i) The representations and warranties of the Company
contained herein shall be true and correct on the date of this Agreement and on
and as of the Closing Date; the Company shall have performed all covenants and
agreements contained herein to be performed on its part at or prior to such
Closing Date.
(j) The Company shall have not have sustained, since the date of
the latest financial statements included in the Registration Statement, any
material loss or interference with its business, or from any labor dispute or
any court or legislative or other governmental action, order or decree, that is
not set forth in the Prospectus. Since the respective dates as of which
information is given in the Registration Statement and the Prospectus, there
shall not have been any change in the long-term debt of the Company, or any
change, or any development involving a prospective change, in or affecting the
general affairs, management, financial position, stockholders' equity or results
of operations of the Company, otherwise than as set forth or contemplated in the
Registration Statement and Prospectus, the effect of which, in any such case
described above sufficiently material and adverse as to make it impracticable or
inadvisable to proceed with the Offering or the delivery of the Debentures on
the terms and in the manner contemplated in the Prospectus.
(k) Prior to and at the Closing Date: (i) there shall have been
no material adverse change in the condition, financial or otherwise, or in the
earnings, the business affairs or business prospects of the Company or AFC from
that as of the latest dates as of which such condition is set forth in the
Prospectus, except as referred to therein; (ii) there shall have been no
material transaction entered into by the Company or AFC from the latest date as
of which the financial condition of the Company is set forth in the Prospectus
other than transactions referred
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<PAGE> 17
to or contemplated therein; (iii) neither the Company nor AFC shall have been in
default (nor shall an event have occurred which, with notice or lapse of time or
both, would constitute a default) under any provision of any agreement or
instrument relating to any outstanding indebtedness which default would have a
material adverse effect on the Company; (iv) no action, suit or proceedings, at
law or in equity or before or by any federal or state commission, board or other
administrative agency, shall be pending or, to the knowledge of the Company or
AFC, threatened against the Company or AFC or affecting any of their properties
wherein an unfavorable decision, ruling or finding would materially and
adversely affect the business, operations, financial condition or income of the
Company; and (v) the Debentures shall have been qualified or registered for
offering and sale under the securities or Blue Sky Laws of the jurisdiction as
the Company shall have agreed.
(l) At or prior to the Closing Date, the Agent shall receive (i)
a copy of the order from the SEC declaring the Registration Statement effective,
and (ii) a certificate of good standing from the State of Nevada evidencing the
good standing and existence of the Company.
(m) Subsequent to the date hereof, there shall not have occurred
any of the following: (i) a suspension or limitation in trading in securities
generally on the New York Stock Exchange or American Stock Exchange or in the
over-the-counter market, or quotations halted generally on the NASDAQ system, or
minimum or maximum prices for trading have been fixed, or maximum ranges for
prices for securities have been required by either of such exchanges or the NASD
or by order of the SEC or any other governmental authority; or (ii) the
engagement by the United States in hostilities which have resulted in the
declaration, on or after the date hereof, of a national emergency or war if the
effect of any such event specified in this clause (iii) makes it impracticable
or inadvisable to proceed with the Offering or the delivery of the Debentures on
the terms and in the manner contemplated in the Registration Statement.
(n) On the Effective Date and on the Closing Date, the Agent
shall have received from the Company's legal counsel a Blue Sky Memorandum
setting forth the states in which the Debentures may be sold and the number of
Debentures that may be sold in each such state.
If any of the material conditions specified in this Section 11 shall not
have been fulfilled when and as required by this Agreement, this Agreement and
all of the Agent's obligations hereunder may be canceled by the Agent by
notifying the Company of such cancellation in writing or by telegram at any time
at or prior to the Closing Date, and any such cancellation shall be without
liability of any party to any other party except as otherwise provided in
Sections 3, 9, 10 and 11 hereof. Notwithstanding the above, if this Agreement is
canceled pursuant to this paragraph, the Company agrees to reimburse the Agent
for all of the Agent's expenses (including without limitation the fees and
expenses of the Agent's counsel) subject to the applicable provisions of
Sections 3 and 10 hereof.
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<PAGE> 18
Section 12. Indemnification and Contribution.
(a) The Company hereby agrees (i) to indemnify and hold harmless
the Agent, each of its directors, officers, other employees and agents and any
person who controls the Agent within the meaning of Section 15 or Section 20(a)
of the Exchange Act (the Agent and each person being indemnified hereinafter
called an "Indemnified Party") against any and all losses, claims, damages or
liabilities, joint or several, to which an Indemnified Party may become subject,
under the Act, the Exchange Act or other federal or state statutory law or
regulation, at common law or otherwise; (ii) to reimburse promptly such
Indemnified Party for reasonable legal or other expenses incurred by such
Indemnified Party in connection with investigating any claims or preparing for
or defending any actions, commenced or threatened, whether or not resulting in
any liability; and (iii) to reimburse promptly such Indemnified Party for any
amount paid in settlement of any claim or action, commenced or threatened, if
such settlement is effected with the written consent of the Company; insofar as
such losses, claims, damages, liabilities, expenses, actions or settlements,
referred to above, arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in the Registration
Statement, Prospectus or any amendments or supplements thereto, or in any
application filed under any Blue Sky Law, or in any other document,
advertisement, oral statement or communication ("Sales Information") prepared,
made or executed by the Company in connection with or in contemplation of the
transactions contemplated by this Agreement, or in the information furnished or
otherwise made available to the Agent by the Company, 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, in
light of the circumstances under which they were made, not misleading, or arise
from any theory of liability whatsoever relating to or arising from or based
upon the Registration Statement, Prospectus or Sales Information or other
documentation distributed in connection with the Offering or are based on any
oral misstatements made by the Company or its agents, or arise out of any action
or omission to act by the Company, its officers, directors, employees or agents,
which action is willful or negligent. The Company will not be liable in any such
case to the extent that any such loss, claim, damage, liability or expense
arises out of or is based upon an untrue statement or alleged untrue statement
or omission or alleged omission made in the Registration Statement, the
Prospectus or any amendment or supplement thereto or in any Blue Sky Application
in reliance upon and in conformity with written information furnished to the
Company by or on behalf of the Agent specifically for use therein. The Company
will not, however, be responsible for claims, liabilities, losses, damages or
expenses to the extent they result primarily from actions taken or omitted to be
taken by the Agent in bad faith or from the Agent's negligence. In the event
that the Company advances any amounts alleged to be due under this Section 12(a)
to the Indemnified Party and it is determined by a court of competent
jurisdiction that the Indemnified Party is not entitled to indemnification
hereunder, then the Indemnified Party shall repay, without interest, any amounts
so advanced to the Company, as the case may be. The indemnification obligations
of the Company as provided above are in addition to any liabilities the Company
may have under other agreements, under common law or otherwise. The obligation
of indemnity provided for hereunder is effective immediately in respect of all
events prior to or after the date hereof and shall survive any expiration,
termination or other cessation of this Agreement.
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<PAGE> 19
(b) The Agent agrees (i) to indemnify and hold harmless the
Company, each of its directors and officers and each person who controls the
Company within the meaning of the Act (the Company and each person being
indemnified hereinafter called an "Indemnified Party") against any and all
losses, claims, damages or liabilities, joint or several, to which an
Indemnified Party may become subject, under the Act, the Exchange Act, or other
federal or state statutory law or regulations, at common law or otherwise; (ii)
to reimburse promptly such Indemnified Party for reasonable legal or other
expenses incurred by such Indemnified Party in connection with investigating any
claims or preparing for or defending any actions, commenced or threatened,
whether or not resulting in any liability; and (iii) to reimburse promptly such
Indemnified Party for any amount paid in settlement of any claims or actions,
commenced or threatened, if such settlement is effected with the written consent
of the Agent; insofar as such losses, claims, damages or liabilities (or actions
in respect thereof) arise out of or are based upon any untrue or alleged untrue
statement of any material fact contained in the Registration Statement, the
Prospectus or any amendment or supplement thereto, or any 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 or arise out of any action or omission to act
by the Agent, its officers, directors, employees or agents, which action is
willful or negligent, 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 the Registration Statement, the Prospectus, or any
amendment or supplement thereto, or in any Blue Sky Application, in reliance
upon and in conformity with written information furnished to the Company by the
Agent specifically for use in the preparation thereof. The Agent will not,
however, be responsible for claims, liabilities, losses, damages or expenses to
the extent they result primarily from actions taken or omitted to be taken by
the Company in bad faith or from the Company's negligence. In the event that the
Agent advances any amounts alleged to be due under this Section 12(b) to an
Indemnified Party and it is determined by a court of competent jurisdiction that
the Indemnified Party is not entitled to indemnification hereunder, then the
Indemnified Party shall repay, without interest, any amounts so advanced to the
Agent. The indemnification obligations of the Agent as provided above are in
addition to any liabilities the Agent may have under other agreements, under
common law or otherwise. The obligation of indemnity provided for hereunder is
effective immediately in respect of all events prior to or after the date hereof
and shall survive any expiration, termination or other cessation of this
Agreement.
(c) Promptly after receipt by an Indemnified Party under this
Section of notice of the commencement of any action, such Indemnified Party
shall, if a claim in respect thereof is to be made against an indemnifying party
under this Section, notify the indemnifying party in writing of the commencement
thereof. In no case shall an indemnifying party be liable under this Agreement
with respect to any loss, claim, damage, liability, expense, action or
settlement unless the indemnifying party shall have been notified in writing by
the Indemnified Party seeking indemnification, of the assertion or filing of the
claim or action giving rise to such loss, claim, damage, liability, expense,
action or settlement promptly after such Indemnified Party shall have been
advised of, or otherwise shall have received information as to, the assertion or
filing of such claim or action. In case any such action is brought against any
Indemnified Party, and such Indemnified Party notifies an indemnifying party of
the commencement thereof, the indemnifying party will be entitled to participate
in, and, to the extent that it or he may wish, jointly with all
19
<PAGE> 20
other Indemnifying Parties, similarly notified, to assume the defense thereof,
with counsel reasonably satisfactory to such Indemnified Party; provided,
however, if the defendants in any such action include both the Indemnified Party
and the indemnifying party and the Indemnified Party shall have reasonably
concluded, based upon advice of its counsel, that there may be legal defenses
available to it or he and/or any other Indemnified Party which are different
from or additional to those available to the indemnifying party, the Indemnified
Party shall have the right to select separate counsel to assume such legal
defenses and to otherwise participate in the defense of such action on behalf of
such Indemnified Party. 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 for any legal or
other expenses subsequently incurred by such Indemnified Party in connection
with defense thereof unless:
(i) the Indemnified Party shall have employed such counsel
in connection with the assumption of legal defenses in accordance with the
proviso to the next preceding sentence (it being understood, however, that the
indemnifying party shall not be liable for the expenses of more than one
separate counsel);
(ii) the indemnifying party shall not have employed counsel
reasonably satisfactory to the Indemnified Party to represent the Indemnified
Party within a reasonable time after notice or commencement of the action; or
(iii) the indemnifying party has authorized the employment
of counsel at the expense of the indemnifying party.
(d) If the indemnification provided for in this Section is
unavailable to an Indemnified Party in respect of any losses, claims, damages or
liabilities referred to therein, then each indemnifying party, in lieu of
indemnifying such Indemnified Party, shall, subject to the limitations
hereinafter set forth, contribute to the amount paid or payable by such
Indemnified Party as a result of such losses, claims, damages or liabilities:
(i) in such proportion as is appropriate to reflect the
relative benefits received by the Company and the Agent from the offering of the
Debentures; 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 the Company and the Agent in connection with the statements or
omissions which resulted in such losses, claims, damages or liabilities, as well
as any other relevant equitable considerations.
The respective relative benefits received by the Company and the Agent
shall be deemed to be in such proportion so that the Agent is responsible for
the portion of the losses, claims, damages or liabilities represented by the
percentage that the fee to be paid to the Agent in connection with the
solicitation of subscriptions described in Section 3 hereof bears to the actual
purchase price of the Debentures, and Company and its officers and directors and
controlling
20
<PAGE> 21
persons, in the aggregate, jointly and severally are responsible for the
remaining portion. The relative fault of the Company and the Agent shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission to state a material fact
relates to information supplied by the Company or by the Agent and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The amount paid or payable by a party as a
result of the losses, claims, damages and liabilities referred to above shall be
deemed to include, subject to the limitations set forth in paragraph (d) of this
Section, any legal or other fees or expenses reasonably incurred by such party
in connection with investigating or defending any action or claim.
The Company and the Agent agree that it would not be just and equitable if
contribution pursuant to this Section were determined by pro rata or per capita
allocation or by any other method or allocation which does not take into account
the equitable considerations referred to in the immediately preceding paragraph.
Notwithstanding the provisions of this Section, no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation.
Section 13. Effective Date. This Agreement shall become effective
immediately.
Section 14. Termination. Without limiting the right to terminate this
Agreement pursuant to any other provision hereof:
(a) This Agreement may be terminated by the Agent or the Company
prior to the Closing Date if, in the Agent's reasonable judgment:
(i) additional material governmental restrictions, not
enforce and effect on the date hereof, shall have been imposed upon trading in
securities general or a suspension or limitation in trading in securities
generally has occurred on the New York Stock Exchange or American Stock Exchange
or in the over-the-counter market, or quotations halted generally on the NASDAQ
System, or minimum or maximum prices for trading have been fixed, or maximum
ranges for prices for securities have been required by either of such exchanges
or the NASD or by order of the SEC or any other governmental authority; or the
engagement or continued engagement by the United States in major hostilities or
the declaration of a national emergency or war or a material decline in the
price of equity or debt securities if the effect of such hostilities, national
emergency or war or decline, in the Agent's judgment, make it impracticable or
inadvisable to proceed with the Offering or the delivery of Debentures on the
terms and in the manner contemplated in the Registration Statement and the
Prospectus;
(ii) any event shall have occurred or shall exist which
makes untrue or incorrect in any material respect any statement or information
contained in the Registration Statement or the Prospectus or which is not
reflected in the Registration statement or the Prospectus but should be
reflected therein in order to make the statements or information contained
therein not misleading in any material respect (unless the Registration
Statement or the Prospectus, as appropriate, is amended or supplemented
appropriately in a timely manner);
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<PAGE> 22
(iii) the Company or AFC shall have sustained a loss by
fire, flood, accident or other calamity which is material to the property,
business or financial condition of the Company or AFC whether or not such loss
shall have been insured, or there shall have been, since the respective dates as
of which information is given in the Prospectus, any material adverse change in
the business, condition or prospects of the Company or AFC whether or not
arising in the ordinary course of business, or in the market for the securities
of the Company, which shall render it inadvisable to proceed with the delivery
of the Debentures.
(b) This Agreement may be terminated by a party upon written
notice to the other party at any time at or prior to the Closing Date if any of
the Conditions specified in Section 11 hereby shall not have been fulfilled when
and as required by this Agreement or if the services to be performed by the
Agent have not been completed by __________, 2000.
Any termination pursuant to this Section 14 shall be without liability on
the part of the Agent to the Company or on the part of the Company to the Agent
(except for the expenses to be paid or reimbursed by the Company pursuant to
Section 3 or Section 10 hereof and except as to indemnification to the extent
provided in Section 12 hereof).
In the event that the Offering is not consummated for any reason,
including, but not limited to, the termination of this Agreement or the
inability of the Company to sell the Debentures during the Offering, this
Agreement shall terminate and the Company shall refund to any persons who have
subscribed for any of the Debentures the full amount which it may have received
from them, together with interest at the rate stated in the Prospectus. Upon
termination of this Agreement, neither party shall have any other obligation to
the other except as otherwise provided for pursuant to Sections 3, 10 and 12
hereof and as provided in Section 25.
Section 15. Representation and Indemnities to Survive Delivery. The
respective indemnities, agreements, representations, warranties and other
statements of the Company and its directors and officers, and of the Agent 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 Agent or the
Company or any of their respective partners, officers, agents or directors or
any controlling person, as the case may be, and will survive delivery of any
payment for the Debentures sold hereunder.
Section 16. Notice. All communications hereunder will be in writing and, if
sent to the Agent will be mailed, delivered or telegraphed and confirmed to the
Agent c/o Choice Investments, Inc., 5900 Balcones Drive, Suite 110, Austin,
Texas 78731, with a copy to Jack W. Ledbetter & Associates, P.C., 3563 Far West
Boulevard, Suite 107, Austin, Texas 78731; if sent to the Company will be
mailed, delivered or telegraphed and confirmed to the Company at 823 Congress
Avenue, Suite 515, Austin, Texas 78701, with a copy to Mr. Jack A. Selman,
Selman & Munson, P.C., 111 Congress Avenue, Suite 1000, Austin, Texas 78701.
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<PAGE> 23
Section 17. Successors. This Agreement will inure to the benefit of and be
binding upon the parties hereto and their respective successors, personal
representatives and assigns, and to the benefit of the officers and directors
and controlling persons referred to in Section 12, and no other person will have
any right or obligation hereunder. The term "successors" shall not include any
purchaser of the Debentures merely by reason of such purchase.
Section 18. Partial Unenforceability. If any section, paragraph or
provision of this Agreement is for any reason determined to be invalid or
unenforceable, such determination shall not affect the validity or
enforceability of any other section, paragraph or provision hereof.
Section 19. Applicable Law. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of Texas.
Section 20. Entire Agreement. This Agreement, including schedules and
exhibits hereto, which are integral parts hereof and incorporated as though set
forth in full, constitutes the entire agreement between the parties pertaining
to the subject matter hereof superseding any and all prior or contemporaneous
oral or prior written agreements, proposals, letters of intent and
understandings, and cannot be modified, changed, waived or terminated except by
a writing which expressly states that it is an amendment, modification or
waiver, refers to this Agreement and is signed by the party to be charged. No
course of conduct or dealing shall be construed to modify, amend or otherwise
affect any of the provisions hereof.
Section 21. Headings. Headings on the Sections in this Agreement are for
reference purposes only and shall not be deemed to have any substantive effect.
Section 22. Delivery by Telecopier. This Agreement shall become effective
upon execution and delivery hereof by all the parties hereto; delivery of this
Agreement may be made by telecopier to the parties with original copies promptly
to follow by overnight courier.
Section 23. Construction. This Agreement has been negotiated by the parties
and their respective counsel. This Agreement will be fairly interpreted in
accordance with its terms and without any strict construction in favor of or
against either party.
Section 24. Attorneys Fees. If any action at law or in equity, including an
action for declaratory relief, is brought to enforce or interpret the provisions
of this Agreement, the prevailing party shall be entitled to recover reasonable
attorneys fees from the other party, which fees may be set by the court in the
trial of such action or may be enforced in a separate action brought for that
purpose, and which fees shall be in addition to any other relief which may be
awarded.
Section 25. Exhibits. Each and all of the Exhibits referred to herein and
attached hereto are hereby incorporated into this Agreement for all purposes as
fully as if set forth herein. The Exhibits include Exhibits "A" through "C."
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<PAGE> 24
Section 26. Arbitration. Any controversy or claim arising out of this
letter of intent or the Agency Agreement, or the breach thereof, shall be
settled by arbitration in accordance with the rules of the American Arbitration
Association, and judgment upon the award rendered by the arbitration may be
entered in any court having jurisdiction thereof. The place for such arbitration
shall be in Austin, Texas. The arbitration agreement set forth herein shall not
limit a court from granting a temporary restraining order or preliminary
injunction in order to preserve the status quo of the parties pending
arbitration. Further, the arbitrator(s) shall have power to enter such orders by
way of interim award, and they shall be enforceable in court.
If the foregoing is in accordance with the Agent's understanding of our
agreement, please sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement between the Company and the Agent,
all in accordance with its terms.
Very truly yours,
AUSTIN FUNDING.COM CORPORATION
By:
----------------------------
Glenn A. LaPointe, President
The foregoing Agreement is hereby
confirmed and accepted as of the date
first above written.
CHOICE INVESTMENTS, INC.
("Agent")
By:
--------------------------------
Name:
-----------------------------
Title:
----------------------------
24
<PAGE> 25
EXHIBIT "A"
Letter Agreement
(to be attached)
1
<PAGE> 26
EXHIBIT "B"
SELECTED DEALERS' AGREEMENT
_________________, 1999
Gentlemen:
We have agreed to assist Austin Funding.com Corporation (the "Company"), in
connection with the offer and sale (the "Offering") of up to $10,000,000 of the
Company's 8% Secured Subordinated Debentures Due December 31, 2015 (the
"Debentures"). The minimum purchase is $5,000, and Debentures may be purchased
only in increments of $5,000, not to exceed $1,000,000 by any individual
purchaser. The Debentures to be issued and certain of the terms on which they
are being offered are more fully described in the enclosed Prospectus dated
___________, 1999 (the "Prospectus").
We are offering the selected dealers (of which you are one) the opportunity
to participate in the solicitation of offers to buy the Debentures, and we will
pay you a fee in the amount of ___% of the dollar amount of the Debentures sold
on behalf of the Company by you, as evidenced by the authorized designation of
your firm on the order form or forms for such Debentures accompanying the funds
transmitted for payment therefor to the special account established by the
Company for the purpose of holding such funds. It is understood, of course, that
payment of your fee will be made only out of compensation received by us for the
Debentures sold on behalf of the Company by you, as evidenced in accordance with
the preceding sentence. As soon as practicable after the closing date of the
Offering, we will remit to you, out of our compensation as provided above, the
fees to which you are entitled hereunder.
Each order form for the purchase of Debentures must set forth the identity
and address of each person to whom the certificates for such Debentures should
be issued and delivered. Such order form should clearly identify your firm. You
shall instruct any subscriber who elects to send his order form to you to make
any accompanying check payable to "Compass Bank, Escrow Agent" to be deposited
in a segregated account with Compass Bank as Escrow Agent ("Escrow Agent") by
noon of the next business day after receipt.
This offer is made subject to the terms and conditions herein set forth and
is made only to selected dealers who are (i) members in good standing of the
National Association of Securities Dealers, Inc. ("NASD") who are to comply with
all applicable rules of the NASD, including, without limitation, the NASD's
Interpretation With Respect to Free-Riding and Withholding and Section 24 of
Article III of the NASD's Rules of Fair Practice, or (ii) foreign dealers not
eligible for membership in the NASD who agree (A) not to sell any Debentures
within the United States, its territories or possessions or to person who are
citizens thereof or resident therein, and (B) in making other sales to comply
with the above-mentioned NASD Interpretation, Sections 8, 24 and 36 of the
above-referenced Article III as it applies to non-member brokers or dealers in a
foreign country.
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<PAGE> 27
Orders for Debentures will be strictly subject to confirmation and we,
acting on behalf of the Company, reserve the right in our uncontrolled
discretion to reject any order in whole or in part, to accept or reject orders
in the order of their receipt or otherwise, and to allot. Neither you nor any
other person is authorized by the Company or by us to give any information or
make any representations other than those contained in the Prospectus in
connection with the sale of any of the Debentures. No selected dealer is
authorized to act as agent for us when soliciting offers to buy the Debentures
from the public or otherwise. No selected dealer shall engage in any stabilizing
(as defined in Rule 10b-7 promulgated under the Securities Exchange Act of 1934)
with respect to the Debentures during the Offering.
We and each selected dealer assisting in selling Debentures pursuant hereto
agree to comply with the applicable requirements of the Securities Exchange Act
of 1934 and applicable state rules and regulations. In addition, we and each
selected dealer confirm that the Securities and Exchange Commission interprets
Rule 15c2-8 promulgated under the Securities Exchange Act of 1934 as requiring
that a Prospectus be supplied to each person who is expected to receive a
confirmation of sale 48 hours prior to delivery of such person's order form.
We and each selected dealer further agree to the extent that our customers
desire to pay for Debentures with funds held by or to be deposited with us, in
accordance with the interpretation of the Securities and Exchange Commission of
Rule 15c2-4 promulgated under the Securities Exchange Act of 1934, either (a)
upon receipt of an executed order form or direction to execute an order form on
behalf of a customer, to forward the Offering price for the Debentures ordered
on or before twelve noon of the business day following receipt or execution of
an order form by us to the Escrow Agent for deposit in a segregated account, or
(b) to solicit indications of interest in which event (i) we will subsequently
contact any customer indicating interest to confirm the interest and give
instructions to execute and return an order form or to receive authorization to
execute the order form on the customer's behalf, (ii) we will mail
acknowledgements of receipt of orders to each customer confirming interest on
the business day following such confirmation, (iii) we will debit accounts of
such customers on the fifth business day (the "debit date") following receipt of
the confirmation referred to in (i), and (iv) we will forward completed order
forms together with such funds to the Company on or before twelve noon on the
next business day following the debit date for deposit in a segregated account.
We and each selected dealer acknowledge that if the procedure in (b) is adopted,
our customers' funds are not required to be in their accounts until the debit
date.
Unless earlier terminated by us, this Agreement shall terminate upon the
closing date of the Offering. We may terminate this Agreement or any provisions
hereof at any time by written or telegraphic notice to you. Of course, our
obligations hereunder are subject to the successful completion of the Offering.
In the event that the Offering is not consummated for any reason, including but
not limited to the inability to sell all of the Debentures during the Offering
(including any permitted extensions thereof), this Agreement shall terminate and
any persons who have subscribed for any of the Debentures shall have refunded to
them the full amount which has been received from such person, together with
interest at the rate specified in the Prospectus, from the date payment is
received as provided in the Prospectus.
3
<PAGE> 28
You agree that at any time or times prior to the termination of this
Agreement you will, upon our request, report to us the number of Debentures of
Debentures sold on behalf of the Company by you under this Agreement.
We shall have full authority to take such actions as we may deem advisable
in respect of all matters pertaining to the Offering. We shall be under no
liability to you except for lack of good faith and for obligations expressly
assumed by us in this Agreement.
Upon application to us, we will inform you as to the states in which we
believe the Debentures has been qualified for sale under, or are exempt from the
requirements of, the respective blue sky laws of such states, but we assume no
responsibility or obligation as to your rights to sell Debentures in any state.
Additional copies of the Prospectus and any supplements thereto will be
supplied in reasonable quantities upon request.
Any notice from us to you shall be deemed to have been duly given if
mailed, telephoned or telegraphed to you at the address to which this Agreement
is mailed.
This Agreement shall be construed in accordance with the laws of the State
of Texas.
Please confirm your agreement hereto by signing and returning the
confirmation accompanying this letter at once to us at Choice Investments, Inc.,
5900 Balcones Drive, Suite 100, Austin, Texas 78731. The enclosed copy will
evidence the Agreement between us.
CHOICE INVESTMENTS, INC.
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
4
<PAGE> 29
EXHIBIT "C"
Form of Opinion
(to be attached)
<PAGE> 1
AUSTIN FUNDING.COM CORPORATION,
as Issuer,
$10,000,000
8% SECURED
SUBORDINATED DEBENTURES DUE DECEMBER ____, 2015
---------------------
INDENTURE
Dated as of ___________, 1999
---------------------
NORWEST BANK TEXAS, N.A.
as Trustee
---------------------
- --------------------------------------------------------------------------------
<PAGE> 2
CROSS REFERENCE TABLE*
<TABLE>
<CAPTION>
TIA INDENTURE
SECTION SECTION
- ------- -------
<S> <C>
310(a)(1)..................................................................................................... 7.10
(a)(2)................................................................................................. 7.10
(a)(3)................................................................................................ N.A.**
(a)(4).................................................................................................. N.A.
(b)............................................................................................... 7.08; 7.10
(c)......................................................................................................N.A.
3.11(a)........................................................................................................7.11
(b)......................................................................................................7.11
(c)......................................................................................................N.A.
3.12(a)........................................................................................................2.05
(b).....................................................................................................12.03
(c).....................................................................................................12.03
(d)......................................................................................................7.06
3.13(a)........................................................................................................7.06
(b)(1).................................................................................................. N.A.
(b)(2)...................................................................................................7.06
(c).....................................................................................................12.02
(d)......................................................................................................7.06
3.14(a).................................................................................................4.02; 12.02
(b)......................................................................................................N.A.
(c)(1)..................................................................................................12.04
(c)(2)..................................................................................................12.04
(c)(3)...................................................................................................N.A.
(d)......................................................................................................N.A.
(e).....................................................................................................12.05
(f)......................................................................................................4.03
3.15(a)........................................................................................................7.01
(b)...............................................................................................7.05; 12.02
(c)......................................................................................................7.01
(d)......................................................................................................7.01
(e)......................................................................................................6.11
3.16(a) (last sentence)2.08
(a)(1)(A)................................................................................................6.05
(a)(1)(B)................................................................................................6.04
(a)(2)...................................................................................................N.A.
(b)......................................................................................................6.07
3.17(a)(1).....................................................................................................6.08
(a)(2)...................................................................................................6.09
(b)......................................................................................................2.04
3.18(a).......................................................................................................12.01
</TABLE>
* Note: This Cross Reference Table shall not, for any purpose, be deemed
to be part of the Indenture.
** Note: N.A. means Not Applicable.
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ARTICLE 1.........................................................................................................1
DEFINITIONS AND INCORPORATION BY REFERENCE..................................................................1
SECTION 1.01. Definitions...................................................................................1
SECTION 1.02. Other Definitions.............................................................................5
SECTION 1.03. Incorporation by Reference of Trust Indenture Act ............................................5
SECTION 1.04. Rules of Construction.........................................................................5
ARTICLE 2.........................................................................................................6
THE SECURITIES..............................................................................................6
SECTION 2.01. Form and Dating..............................................................................6
SECTION 2.02. Execution and Authentication.................................................................6
SECTION 2.03. Registrar and Paying Agent...................................................................7
SECTION 2.04. Paying Agent to Hold Money and Securities in Trust...........................................7
SECTION 2.05. Holder Lists.................................................................................7
SECTION 2.06. Exchange and Registration of Transfer of Securities; Restrictions on Transfers; Depositary...7
SECTION 2.07. Replacement Securities.......................................................................8
SECTION 2.08. Outstanding Securities; Determinations Of Holders' Action....................................9
SECTION 2.09. Temporary Securities.........................................................................9
SECTION 2.10 Cancellation................................................................................10
SECTION 2.11. Persons Deemed Owners.......................................................................10
SECTION 2.12. CUSIP Numbers...............................................................................10
SECTION 2.13. Restrictions On Transfer....................................................................10
ARTICLE 3........................................................................................................11
REDEMPTION AND REPURCHASES.................................................................................11
SECTION 3.01. Right To Redeem; Notices To Trustee.........................................................11
SECTION 3.02. Selection Of Securities To Be Redeemed......................................................11
SECTION 3.03. Notice Of Redemption........................................................................11
SECTION 3.04. Effect Of Notice Of Redemption..............................................................12
SECTION 3.05. Deposit Of Redemption Price.................................................................12
SECTION 3.06. Securities Redeemed In Part.................................................................12
SECTION 3.07. Conversion Arrangement On Call For Redemption...............................................13
ARTICLE 4........................................................................................................13
COVENANTS..................................................................................................13
SECTION 4.01. Payment of Securities.......................................................................13
SECTION 4.02. Financial Information; SEC Reports..........................................................14
SECTION 4.03. Compliance Certificate......................................................................14
SECTION 4.04. Further Instruments and Acts................................................................14
SECTION 4.05. Maintenance of Office or Agency. ...........................................................15
SECTION 4.06. Existence...................................................................................15
</TABLE>
<PAGE> 4
<TABLE>
<S> <C> <C>
ARTICLE 5........................................................................................................15
SUCCESSOR CORPORATION......................................................................................15
SECTION 5.01. When the Company May Merge or Transfer Assets...............................................15
ARTICLE 6........................................................................................................16
DEFAULTS AND REMEDIES......................................................................................16
SECTION 6.01. Events of Default...........................................................................16
SECTION 6.02. Acceleration................................................................................17
SECTION 6.03. Other Remedies..............................................................................17
SECTION 6.04. Waiver of Past Defaults.....................................................................17
SECTION 6.05. Control by Majority.........................................................................17
SECTION 6.06. Limitation on Suits.........................................................................18
SECTION 6.07. Rights of Holders to Receive Payment........................................................18
SECTION 6.08. Collection Suit by Trustee..................................................................18
SECTION 6.09. Trustee May File Proofs of Claim............................................................18
SECTION 6.10. Priorities..................................................................................19
SECTION 6.11. Undertaking for Costs.......................................................................19
SECTION 6.12. Waiver of Stay, Extension or Usury Laws.....................................................20
ARTICLE 7........................................................................................................20
TRUSTEE....................................................................................................20
SECTION 7.01. Duties of Trustee...........................................................................20
SECTION 7.02. Rights of Trustee...........................................................................21
SECTION 7.03. Individual Rights of Trustee................................................................22
SECTION 7.04. Trustee's Disclaimer........................................................................22
SECTION 7.05. Notice of Defaults..........................................................................22
SECTION 7.06. Reports by Trustee to Holders...............................................................22
SECTION 7.07. Compensation and Indemnity..................................................................22
SECTION 7.08. Replacement of Trustee......................................................................23
SECTION 7.09. Successor Trustee by Merger.................................................................24
SECTION 7.10. Eligibility; Disqualification...............................................................24
SECTION 7.11. Preferential Collection of Claims Against Company...........................................24
ARTICLE 8........................................................................................................24
DISCHARGE OF INDENTURE.....................................................................................24
SECTION 8.01. Discharge of Liability on Securities........................................................24
SECTION 8.02. Repayment to the Company....................................................................25
ARTICLE 9........................................................................................................25
AMENDMENTS.................................................................................................25
SECTION 9.01. Without Consent of Holders..................................................................25
SECTION 9.02. With Consent of Holders.....................................................................25
SECTION 9.03. Compliance with Trust Indenture Act. .......................................................26
SECTION 9.04. Revocation and Effect of Consents, Waivers and Actions......................................26
SECTION 9.05. Notation on or Exchange of Securities.......................................................26
SECTION 9.06. Trustee to Sign Supplemental Indentures.....................................................26
SECTION 9.07. Effect of Supplemental Indentures...........................................................27
ARTICLE 10.......................................................................................................27
</TABLE>
ii
<PAGE> 5
<TABLE>
<S> <C> <C>
SUBORDINATION..............................................................................................27
SECTION 10.01. Agreement of Subordination.................................................................27
SECTION 10.02. Payments to Holders........................................................................27
SECTION 10.03. Subrogation of Securities..................................................................29
SECTION 10.04. Authorization by Holders...................................................................30
SECTION 10.05. Notice to Trustee..........................................................................30
SECTION 10.06. Trustee's Relation to Senior Indebtedness..................................................31
SECTION 10.07. No Impairment of Subordination.............................................................31
SECTION 10.08. Reliance by Holders of Senior Indebtedness on Subordination Provisions.....................31
SECTION 10.09. Reinstatement of Subordination.............................................................31
SECTION 10.10. Permitted Payments.........................................................................31
SECTION 10.11. Article Applicable to Paying Agents........................................................32
SECTION 10.12. Reliance on Judicial Order or Certificate of Liquidating Agent.............................32
ARTICLE 11.......................................................................................................32
SECURITY AND PAYMENT.......................................................................................32
SECTION 11.01. Zero Coupon Bond...........................................................................32
SECTION 11.02 Payment of Interest; Interest Rights Preserved.............................................32
SECTION 11.03 Payment of Principal Amount................................................................33
SECTION 11.04 Remaining Sums.............................................................................34
ARTICLE 12.
MISCELLANEOUS..............................................................................................34
SECTION 12.01. Trust Indenture Act........................................................................34
SECTION 12.02. Notices....................................................................................35
SECTION 12.03. Communication by Holders with Other Holders................................................36
SECTION 12.04. Certificate and Opinion as to Conditions Precedent. .......................................37
SECTION 12.05. Statements Required in Certificate or Opinion..............................................37
SECTION 12.06. Severability Clause........................................................................37
SECTION 12.07. Rules By Trustee, Paying Agent and Registrar...............................................37
SECTION 12.08. Governing Law..............................................................................37
SECTION 12.09. No Recourse Against Others.................................................................37
SECTION 12.10. Successors.................................................................................38
SECTION 12.11. Multiple Originals.........................................................................38
</TABLE>
iii
<PAGE> 6
INDENTURE
This INDENTURE, dated as of __________, 1999, is between Austin Funding.com
Corporation, a Nevada corporation (the "Company"), and Norwest Bank Texas, N.A.,
a __________ __________, as trustee (the "Trustee").
Each party agrees, for the benefit of the other and for the equal and ratable
benefit of the Holders of the Company's 8% Secured Subordinated Debentures due
December ______, 2015 as follows:
ARTICLE 1.
DEFINITIONS AND INCORPORATION BY REFERENCE
SECTION 1.01. Definitions.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
control, when used with respect to any specified Person, means the power to
direct or cause the direction of the management and policies of such Person,
directly or indirectly, whether through the ownership of voting securities, by
contract or otherwise; and the terms controlling and controlled have meanings
correlative to the foregoing.
"Bankruptcy Law" means Title 11, United States Code, or any similar
Federal or state law for the relief of debtors.
"Board of Directors" means either the board of directors of the Company
or any duly authorized committee of such board.
"Business Day" means each day of the year on which banking institutions
are not required or authorized to close in the City of Lakewood, Colorado, or
the city in which the Corporate Trust Office is located.
"Cash" means U.S. legal tender.
"Common Stock" means any stock of any class of the Company which has no
preference in respect of dividends or of amounts payable in the event of any
voluntary or involuntary liquidation, dissolution or winding up of the Company
and which is not subject to redemption by the Company.
"Company" means the party named as the "Company" in the first paragraph
of this Indenture until a successor replaces it pursuant to the applicable
provisions of this Indenture and, thereafter, shall mean such successor. The
foregoing sentence shall likewise apply to any subsequent such successor or
successors.
"Company Request" or "Company Order" means a written request or order
signed in the name of the Company by its Chairman of the Board, a Vice Chairman,
its President or a Vice President, and by its Treasurer, an Assistant Treasurer,
its Secretary or an Assistant Secretary, and delivered to the Trustee.
"Corporate Trust Office" means the principal office of the Trustee at
which at any particular time its corporate trust business shall be principally
administered, which office is, at the date as of which this Indenture is dated,
located at Lakewood, Colorado, Attention: _____________.
"Default" means any event which is, or after notice or passage of time
or both would be, an Event of Default.
<PAGE> 7
"Depository" means, with respect to the Securities issuable or issued
in whole or in part in global form, the Person specified in Section 2.06 as the
Depositary with respect to the Securities, until a successor shall have been
appointed and become such pursuant to the applicable provisions of this
Indenture, and thereafter, "Depositary" shall mean or include such successor.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
and the rules and regulations of the SEC promulgated thereunder.
"Holder" means a Person in whose name a Security is registered on the
Registrar's books.
"Indebtedness" means, with respect to any Person, and without
duplication, (i) all indebtedness, obligations and other liabilities (contingent
or otherwise) of such Person for borrowed money (including obligations of the
Company in respect of overdrafts, foreign exchange contracts, currency exchange
agreements, interest rate protection agreements, and any loans or advances from
banks, whether or not evidenced by notes or similar instruments) or evidenced by
bonds, debentures, notes or similar instruments (whether or not the recourse of
the lender is to the whole of the assets of such Person or to only a portion
thereof), (ii) all reimbursement obligations and other liabilities (contingent
or otherwise) of such Person with respect to letters of credit, bank guarantees
or bankers' acceptances, (iii) all obligations and liabilities (contingent or
otherwise) in respect of leases of such Person (a) required, in conformity with
generally accepted accounting principles, to be accounted for as capitalized
lease obligations on the balance sheet of such Person, or (b) required, in
conformity with generally accepted accounting principles, to be accounted for as
an operating lease, provided either (1) such operating lease requires, at the
end of the term thereof, that such Person make any payment other than accrued
periodic rent in the event that such Person does not acquire the leased real
property and related fixtures subject to such lease, or (2) such Person has an
option to acquire the leased real property and related fixtures, whether such
option is exercisable at any time or under specific circumstances, (iv) all
obligations of such Person (contingent or otherwise) with respect to an interest
rate swap, cap or collar agreement or other similar instrument or agreement, (v)
all direct or indirect guaranties or similar agreements by such Person in
respect of, and obligations or liabilities (contingent or otherwise) of such
Person to purchase or otherwise acquire or otherwise assure a creditor against
loss in respect of, indebtedness, obligations or liabilities of another Person
of the kind described in clauses (i) through (iv), (vi) any indebtedness or
other obligations described in clauses (i) through (iv) secured by any mortgage,
pledge, lien or other encumbrance existing on property which is owned or held by
such Person, regardless of whether the indebtedness or other obligation secured
thereby shall have been assumed by such Person, and (vii) any and all deferrals,
renewals, extensions and refundings of, or amendments, modifications or
supplements to, any indebtedness, obligation or liability of the kind described
in clauses (i) through (vi).
"Indenture" means this Indenture, as amended or supplemented from time
to time in accordance with the terms hereof.
"Issue Date" of any Security means the date on which the Security was
originally issued or deemed issued as set forth on the face of the Security.
"Legal Holiday" is any day other than a Business Day. If any specified
date (including a date for giving notice) is a Legal Holiday, the action shall
be taken on the next succeeding date that is not a Legal Holiday.
"NASDAQ National Market" means the electronic inter-dealer quotation
system operated by NASDAQ Stock Market, Inc., a subsidiary of the National
Association of Securities Dealers, Inc.
"NYSE" means The New York Stock Exchange, Inc.
"Officer" means the Chairman of the Board, any Vice Chairman, the
President, any Vice President, the Treasurer or the Secretary or any Assistant
Treasurer or Assistant Secretary of the Company.
2
<PAGE> 8
"Officers' Certificate" means a written certificate containing the
information specified in Sections 12.04 and 12.05, signed in the name of the
Company by its Chairman of the Board, a Vice Chairman, its President or a Vice
President, and by its Treasurer, an Assistant Treasurer, its Secretary or an
Assistant Secretary, and delivered to the Trustee.
"Opinion of Counsel" means a written opinion containing the information
specified in Sections 12.04 and 12.05, from legal counsel acceptable to the
Trustee. The counsel may be an employee of, or counsel to, the Company or the
Trustee.
"Person" means any individual, corporation, partnership, limited
liability company, joint venture, association, joint-stock company, trust,
unincorporated organization, or government or any agency or political
subdivision thereof.
"Principal" or "Principal Amount" of a Security means the principal
amount at Stated Maturity as set forth on the face of such Security.
"Redemption Date" means the date specified by the Company for
redemption of Securities in accordance with the terms of the Securities and
Section 3.01 of this Indenture.
"Redemption Price" shall have the meaning set forth in paragraph 5 of
the Securities.
"Representative" means the (i) Indenture trustee or other trustee,
agent or representative for any Senior Indebtedness, or (ii) with respect to any
Senior Indebtedness that does not have any such trustee, agent or other
representative, (a) in the case of such Senior Indebtedness issued pursuant to
an agreement providing for voting arrangements as among the holders or owners of
such Senior Indebtedness, any holder or owner of such Senior Indebtedness acting
with the consent of the required Persons necessary to bind such holders or
owners of such Senior Indebtedness, and (b) in the case of all other such Senior
Indebtedness, the holder or owner of such Senior Indebtedness.
"Sale Price of the Common Stock" means, on any date, the closing per
share sale price, or if no closing sale price is reported, the average bid and
ask prices or, if more than one, in either case, the average of the average bid
and average ask prices, on such date as reported in the composite transactions
for the principal United States securities exchange on which the common stock is
traded or, if the common stock is not listed on a United States national or
regional stock exchange, as reported by The NASDAQ National Market.
"SEC" means the Securities and Exchange Commission.
"Securities" means the Company's 8% Secured Subordinated Debentures due
December ____, 2015, unless the context otherwise indicates.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations of the SEC promulgated thereunder.
3
<PAGE> 9
"Senior Indebtedness" means the principal of, premium, if any, interest
(including all interest accruing subsequent to the commencement of any
bankruptcy or similar proceeding, whether or not a claim for post-petition
interest is allowable as a claim in any such proceeding), rent and end of term
payments payable on or in connection with, and, to the extent not included in
the foregoing, all amounts payable as fees, costs, expenses, liquidated damages,
indemnities, repurchase and other put obligations and other amounts to the
extent accrued or due on or in connection with, Indebtedness of the Company,
whether outstanding on the date of this Indenture or thereafter created,
incurred, assumed, guaranteed or in effect guaranteed by the Company (including
all deferrals, renewals, extensions or refundings of, or amendments,
modifications or supplements to, the foregoing). Notwithstanding the foregoing,
the term Senior Indebtedness shall not include (i) Indebtedness evidenced by the
Securities, (ii) Indebtedness of the Company to any subsidiary of the Company, a
majority of the voting stock of which is owned, directly or indirectly, by the
Company, (iii) accounts payable or other indebtedness to trade creditors created
or assumed by the Company in the ordinary course of business, and (iv) any
particular Indebtedness in which the instrument creating or evidencing the same
or the assumption or guarantee thereof expressly provides that such Indebtedness
shall not be senior in right of payment to, or is pari passu with, or is
subordinated or junior to, the Securities.
"Significant Subsidiary" means, with respect to any Person, a
Subsidiary of such Person organized under the laws of the United States of
America, any state thereof, or the District of Columbia that would constitute a
"significant subsidiary" as such term is defined under Rule 1-02 of Regulation
S-X of the SEC.
"Stated Maturity," when used with respect to any Security, means the
date specified in such Security as the fixed date on which an amount equal to
the Principal of such Security is due and payable.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of capital stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other subsidiaries of that Person (or a combination
thereof), and (ii) any partnership (a) the sole general partner or managing
general partner of which is such Person or a subsidiary of such Person, or (b)
the only general partners of which are such Person or one or more subsidiaries
of such Person (or any combination thereof).
"TBCC" means the Texas Business & Commerce Code, as amended, as in
effect on the date of this Indenture.
"TIA" means the Trust Indenture Act of 1939, as amended, as in effect
on the date of this Indenture, except as provided in Section 9.03.
"Trading Day" means a day during which trading in securities generally
occurs on the NYSE or, if the applicable security is not listed on the NYSE, on
the NASDAQ National Market, or if the applicable security is not quoted on the
NASDAQ National Market, on the principal other national or regional securities
exchange on which the applicable security is then listed or, if the applicable
security is not listed on a national or regional securities exchange, on the
principal other market on which the applicable security is then traded.
"Trust Officer" means any officer within the corporate trust department
of the Trustee, including any vice president, assistant vice president,
assistance secretary, assistant treasurer, trust officer or any other officer of
the Trustee who customarily performs functions similar to those performed by the
Persons who at the time shall be such officers, respectively, or to whom any
corporate trust matter is referred because of such person's knowledge of and
familiarity with the particular subject and who shall have direct responsibility
for the administration of this Indenture.
"Trustee" means the party named as the "Trustee" in the first paragraph
of this Indenture until a successor replaces it pursuant to the applicable
provisions of this Indenture and, thereafter, shall mean such successor. The
foregoing sentence shall likewise apply to any subsequent such successor or
successors.
4
<PAGE> 10
"Voting Stock" means stock of any class or classes, however designated,
having ordinary voting power for the election of a majority of the board of
directors of a corporation, other than stock having such power only by reason of
the occurrence of a contingency.
SECTION 1.02. Other Definitions.
<TABLE>
<CAPTION>
Defined
Term in Section
- ---- ----------
<S> <C>
"Articles Of Incorporation".................................................................................2.13(a)
"Cash".........................................................................................................1.01
"Defaulted Interest".......................................................................................11.02(b)
"Defaulted Principal"......................................................................................11.03(b)
"Discharge Date"...............................................................................................8.01
"Event Of Default".............................................................................................6.01
"Interest Payment Date".......................................................................................11.01
"Notice Of Default"............................................................................................6.01
"Over-Allotment Option"........................................................................................2.02
"Ownership Limit" ..........................................................................................2.13(a)
"Paying Agent".................................................................................................2.03
"Payment Blockage Notice" ....................................................................................10.02
"Registrar"....................................................................................................2.03
"Regular Record Date".........................................................................................11.01
"Restriction Agreements".......................................................................................2.13
"Special Record Date"......................................................................................11.02(a)
"Trigger Event"................................................................................................11.9
"Zero Coupon Bond"............................................................................................11.01
</TABLE>
SECTION 1.03. Incorporation by Reference of Trust Indenture Act.
Whenever this Indenture refers to a provision of the TIA, the provision
is incorporated by reference in and made a part of this Indenture. The following
TIA terms used in this Indenture have the following meanings:
"Commission" means the SEC.
"Indenture Securities" means the Securities.
"Indenture Security Holder" means a Holder.
"Indenture to be Qualified" means this Indenture.
"Indenture Trustee" or "Institutional Trustee" means the Trustee.
All other TIA terms used in this Indenture that are defined by the TIA,
defined by TIA reference to another statute or defined by SEC rules have the
meanings assigned to them by such definitions.
SECTION 1.04. Rules of Construction.
Unless the context otherwise requires:
a) a term has the meaning assigned to it;
5
<PAGE> 11
(b) an accounting term not otherwise defined has the meaning assigned
to it in accordance with generally accepted accounting principles as in effect
from time to time;
(c) "or" is not exclusive;
(d) "including" means including, without limitation; and
(e) words in the singular include the plural, and words in the plural
include the singular.
ARTICLE 2.
THE SECURITIES
SECTION 2.01. Form and Dating.
The Securities and the Trustee's certificate of authentication for the
Securities shall be substantially in the form of Exhibit "A" attached hereto and
incorporated herein by reference. The Securities may have notations, legends or
endorsements required by law, stock exchange rule or usage; provided, any such
notation, legend or endorsement required by usage shall be in a form acceptable
to the Company. The Company shall provide any such notations, legends or
endorsements to the Trustee in writing. Each Security shall be dated the date of
its authentication.
SECTION 2.02. Execution and Authentication.
The Securities shall be executed on behalf of the Company by its
Chairman of the Board, one of its Vice Chairmen, its President or one of its
Vice Presidents, and attested by its Treasurer or Secretary or one of its
Assistant Treasurers or one of its Assistant Secretaries. The signature of any
of these officers on the Securities may be manual or by facsimile.
Securities bearing the manual or facsimile signatures of individuals
who were at any time the proper Officers of the Company shall bind the Company,
notwithstanding that such individuals or any of them have ceased to hold such
offices prior to the authentication and delivery of such Securities or did not
hold such offices at the date of authentication of such Securities.
No Security shall be entitled to any benefit under this Indenture or be
valid or obligatory for any purpose unless there appears on such Security a
certificate of authentication substantially in the form provided for herein duly
executed by the Trustee by manual signature of an authorized signatory, and such
certificate upon any Security shall be conclusive evidence, and the only
evidence, that such Security has been duly authenticated and delivered
hereunder.
The Trustee shall authenticate and deliver Securities for original
issue in an aggregate Principal Amount of $10,000,000 upon a Company Order
without any further action by the Company. The aggregate Principal Amount of
Securities outstanding at any time may not exceed the amount set forth in the
foregoing sentence, except as provided in Section 2.07 hereof.
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SECTION 2.03. Registrar and Paying Agent.
The Company shall maintain an office or agency where Securities may be
presented for registration of transfer or for exchange ("Registrar"), an office
or agency where debt with respect to the Securities shall paid and the
Securities may be presented for purchase or payment ("Paying Agent"). The
Registrar shall keep a register of the Securities and of their transfer and
exchange. The Company may have one or more co-registrars and one or more
additional paying agents. The term Paying Agent includes any additional paying
agent.
The Company shall enter into an appropriate agency agreement with any
Registrar or Paying Agent or co-registrar (if not the Trustee or an Affiliate of
the Trustee). The agreement shall implement the provisions of this Indenture
that relate to such agent and the relevant Security. The Company shall notify
the Trustee of the name and address of any such agent. If the Company fails to
maintain a Registrar or Paying Agent, the Trustee shall act as such and shall be
entitled to appropriate compensation therefor pursuant to Section 7.07 hereof.
The Company or an Affiliate of the Company may act as Paying Agent or Registrar
or co-registrar.
The Company initially appoints the Trustee as Registrar and Paying
Agent in connection with the Securities.
SECTION 2.04. Paying Agent to Hold Money and Securities in Trust.
Except as otherwise provided herein, prior to or on each due date of
payments in respect of any Security, the Company shall deposit with the Paying
Agent a sum of money or securities sufficient to make such payments when such
payments are due. The Company shall require the Paying Agent (if not the
Trustee) to agree in writing that the Paying Agent shall hold in trust for the
benefit of Holders or the Trustee all money and securities held by the Paying
Agent for the making of payments in respect of the Securities and shall notify
the Trustee of any default by the Company in making any such payment. At any
time during the continuance of any such default, the Paying Agent shall, upon
the written request of the Trustee, forthwith pay to the Trustee all money and
securities so held in trust. If the Company or an Affiliate of the Company acts
as Paying Agent, it shall segregate the money and securities held by it as
Paying Agent and hold it as a separate trust fund. The Company at any time may
require the Paying Agent to pay all money and securities held by it to the
Trustee and to account for any funds and securities disbursed by it. Upon doing
so, the Paying Agent shall have no further liability for such money or
securities.
SECTION 2.05. Holder Lists.
The Trustee shall preserve in as current a form as is reasonably
practicable the most recent list available to it of the names and addresses of
Holders. If the Trustee is not the Registrar, the Company shall cause to be
furnished to the Trustee at least semiannually on February 10 and August 10 a
listing of Holders dated within 15 days of the date on which the list is
furnished and at such other times as the Trustee may request in writing a list,
in such form and as of such date as the Trustee may reasonably require, of the
names and addresses of Holders.
SECTION 2.06. Exchange and Registration of Transfer of Securities;
Restrictions on Transfers; Depositary.
Upon surrender for registration of transfer of any Security at any
office or agency of the Company designated as Registrar or co-registrar pursuant
to Section 2.03 hereof and satisfaction of the requirements for such transfer
set forth in this Section 2.06, the Company shall execute, and the Trustee shall
authenticate and deliver, in the name of the designated transferee or
transferees, one or more new Securities of any authorized denominations and of a
like aggregate Principal Amount and bearing such restrictive legends as may be
required by this Indenture.
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Securities may be exchanged for a like aggregate Principal Amount of Securities
of other authorized denominations. Securities to be exchanged shall be
surrendered at any office or agency to be maintained by the Company designated
as Registrar or co-registrar pursuant to Section 2.03 hereof and the Company
shall execute and register, and the Trustee shall authenticate and deliver in
exchange therefor, the Security or Securities which the Holder making the
exchange shall be entitled to receive, bearing registration numbers not
contemporaneously outstanding.
All Securities presented for registration of transfer or for exchange into like
Securities, repurchase, redemption or payment shall (if so required by the
Company, the Trustee, the Registrar or any co-registrar) be duly endorsed by, or
be accompanied by a written instrument or instruments of transfer in form
satisfactory to the Company and the Trustee, duly executed by the Holder or such
Holder's attorney duly authorized in writing.
No service charge shall be charged to the Holder for any exchange for like
Securities or registration of transfer of Securities, but the Company may
require payment of a sum sufficient to cover any tax, assessments or other
governmental charges that may be imposed in connection therewith.
None of the Company, the Trustee, the Registrar or any co-registrar shall be
required to exchange for like Securities or register a transfer of (i) any
Securities for a period of 15 days next preceding the mailing of notice of
Securities to be redeemed, or (ii) any Securities or portions thereof selected
or called for redemption, or (iii) any Securities or portion thereof surrendered
for conversion into Common Stock.
All Securities issued upon any transfer or exchange for like Securities shall be
valid obligations of the Company, evidencing the same debt, and entitled to the
same benefits under this Indenture as the Securities surrendered upon such
exchange or transfer.
SECTION 2.07. Replacement Securities.
If (i) any mutilated Security is surrendered to the Trustee, or (ii)
the Company and the Trustee receive evidence to their satisfaction of the
destruction, loss or theft of any Security, and there is delivered to the
Company and the Trustee such security or indemnity as may be required by them to
save each of them harmless, then, in the absence of notice to the Company or the
Trustee that such Security has been acquired by a bona fide purchaser, the
Company shall execute and, upon its written request, the Trustee shall
authenticate and deliver, in exchange for any such mutilated Security or in lieu
of any such destroyed, lost or stolen Security, a new Security of like tenor and
Principal Amount, bearing a number not contemporaneously outstanding.
In case any such mutilated, destroyed, lost or stolen Security has
become or is about to become due and payable, or is about to be repurchased or
redeemed by the Company pursuant to Article 3 hereof, the Company in its
discretion may, instead of issuing a new Security, pay, repurchase or redeem
such Security, as the case may be.
Upon the issuance of any new Securities under this Section 2.07, the
Company may, as a condition to such issuance, require the payment of a sum
sufficient to cover any tax or other governmental charge that may be imposed in
relation thereto and any other expenses (including the fees and expenses of the
Trustee) connected therewith.
Every new Security issued pursuant to this Section 2.07 in lieu of any
mutilated, destroyed, lost or stolen Security shall constitute an original
additional contractual obligation of the Company, whether or not the mutilated
destroyed, lost or stolen Security shall be at any time enforceable by anyone,
and shall be entitled to all benefits of this Indenture equally and
proportionately with any and all other Securities duly issued hereunder.
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The provisions of this Section 2.07 are exclusive and shall preclude
(to the extent lawful) all other rights and remedies with respect to the
replacement or payment of mutilated, destroyed, lost or stolen Securities.
SECTION 2.08. Outstanding Securities; Determinations Of Holders'
Action.
Securities outstanding at any time are all the Securities authenticated
by the Trustee except for those canceled by it, those delivered to it for
cancellation, those paid pursuant to Section 4.01 hereof, those replaced or paid
pursuant to Section 2.07 hereof and those described in this Section 2.08 as not
outstanding. A Security does not cease to be outstanding because the Company or
an Affiliate thereof holds the Security; provided, however, in determining
whether the Holders of the requisite Principal Amount of Securities have given
or concurred in any request, demand, authorization, direction, notice, consent
or waiver hereunder, Securities owned by the Company or any Affiliate of the
Company shall be disregarded and deemed not to be outstanding, except that, in
determining whether the Trustee shall be protected in relying upon any such
request, demand, authorization, direction, notice, consent or waiver, only
Securities which the Trust Officer actually knows to be so owned shall be so
disregarded unless written notice of such ownership is received by the Trustee
at the Corporate Trust Office of the Trustee in accordance with Section 12.02
hereof and such notice references the Securities and this Indenture. Subject to
the foregoing, only Securities outstanding at the time of such determination
shall be considered in any such determination (including, without limitation,
determinations pursuant to Articles 6 and 9 hereof).
If a Security is replaced pursuant to Section 2.07, it ceases to be
outstanding unless the Trustee receives proof satisfactory to it that the
replaced Security is held by a bona fide purchaser.
If the Paying Agent holds, in accordance with this Indenture, on a
Redemption Date, or on the Business Day following a Repurchase Date, or on
Stated Maturity, money or securities, if permitted hereunder, sufficient to pay
Securities payable on that date, then on and after that date such Securities
shall cease to be outstanding and interest, if any, on such Securities shall
cease to accrue; provided, if such Securities are to be redeemed, notice of such
redemption has been duly given pursuant to this Indenture or provision therefor
satisfactory to the Trustee has been made.
SECTION 2.09. Temporary Securities.
Pending the preparation of definitive Securities, the Company may
execute, and upon Company Order the Trustee shall authenticate and deliver,
temporary Securities which are printed, lithographed, typewritten, mimeographed
or otherwise produced, in any authorized denomination, substantially of the
tenor of the definitive Securities in lieu of which they are issued and with
such appropriate insertions, omissions, substitutions and other variations as
the officers executing such Securities may determine, as conclusively evidenced
by their execution of such Securities.
If temporary Securities are issued, the Company shall cause definitive
Securities to be prepared without unreasonable delay. After the preparation of
definitive Securities, the temporary Securities shall be exchangeable for
definitive Securities upon surrender of the temporary Securities at the office
or agency of the Company designated for such purpose pursuant to Section 2.03
hereof, without charge to the Holder. Upon surrender for cancellation of any one
or more temporary Securities, the Company shall execute and the Trustee shall
authenticate and deliver in exchange therefor a like Principal Amount of
definitive Securities of authorized denominations. Until so exchanged, the
temporary Securities shall in all respects be entitled to the same benefits
under this Indenture as definitive Securities.
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SECTION 2.10 Cancellation.
All Securities surrendered for payment, purchase, conversion,
redemption or registration of transfer or exchange for the Securities shall, if
surrendered to any Person other than the Trustee, be delivered to the Trustee
and shall be promptly canceled by it. The Company may at any time deliver to the
Trustee for cancellation any Securities previously authenticated and delivered
hereunder which the Company may have acquired in any manner whatsoever, and all
Securities so delivered shall be promptly canceled by the Trustee. The Company
may not issue new Securities to replace Securities it has paid for or delivered
to the Trustee for cancellation. No Securities shall be authenticated in lieu of
or in exchange for any Securities canceled as provided in this Section 2.10,
except as expressly permitted by this Indenture. All canceled Securities held by
the Trustee shall be disposed of by the Trustee in accordance with its customary
procedures.
SECTION 2.11. Persons Deemed Owners.
Prior to due presentment of a Security for registration of transfer,
the Company, the Trustee and any agent of the Company or the Trustee may treat
the Person in whose name such Security is registered as the owner of such
Security for the purpose of receiving payment of Principal Amount, Redemption
Price and interest, if any, in respect thereof, for the purpose of conversion
and for all other purposes whatsoever, whether or not such Security be overdue,
and none of the Company, the Trustee or any agent of the Company or the Trustee
shall be affected by notice to the contrary.
SECTION 2.12. CUSIP Numbers.
The Company in issuing the Securities may use "CUSIP" numbers (if then
generally in use), and, if so, the Trustee shall use "CUSIP" numbers in notices
of redemption as a convenience to Holders; provided, any such notice may state
that no representation is made as to the correctness of such numbers either as
printed on the Securities or as contained in any notice of redemption and that
reliance may be placed only on the other identification numbers printed on the
Securities, and any such redemption shall not be affected by any defect in or
omission of such numbers. The Company will promptly notify the Trustee of any
change in the "CUSIP" numbers.
SECTION 2.13. Restrictions On Transfer.
(a) Pursuant to the Company's Amended and Restated Articles of
Incorporation (the "Articles of Incorporation"), the Company's Common Stock and
Preferred Stock (as defined in the Articles of Incorporation) is subject to
certain restrictions on ownership and transfer. These provisions have been
implemented in connection with the Certificate of Designation, Preferences,
Rights and Limitations of 1999 Series A Preferred Stock of the Company dated as
of September 29, 1999, and the Company's 1999 Stock Option and Incentive Plan
(collectively, the "Restriction Agreements").
(b) Any Securities shall bear a legend in substantially the following
form:
"SHAREHOLDERS MAY OBTAIN, UPON WRITTEN REQUEST AND WITHOUT CHARGE, A
STATEMENT DESCRIBING THE LIMITATIONS OR DENIALS OF SHAREHOLDERS'
PREEMPTIVE RIGHT TO OBTAIN UNISSUED SHARES OF THE CORPORATION, AS SET
FORTH IN THE ARTICLES OF INCORPORATION ON FILE IN THE OFFICE OF THE
SECRETARY OF STATE. SUCH A STATEMENT MAY BE OBTAINED BY SHAREHOLDERS
UPON WRITTEN REQUEST TO THE CORPORATION AT THE CORPORATION'S PRINCIPAL
PLACE OF BUSINESS OR REGISTERED OFFICE."
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE
TERMS AND CONDITIONS OF A CERTAIN CERTIFICATE OF DESIGNATION,
PREFERENCES,
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RIGHTS AND LIMITATIONS OF 1999 SERIES A PREFERRED STOCK OF AUSTIN
FUNDING.COM CORPORATION DATED AS OF SEPTEMBER 29, 1999, INCLUDING THE
POSSIBLE MANDATORY EXCHANGE THEREFOR FOR OTHER SECURITIES OF THE
CORPORATION. COPIES OF SUCH AGREEMENT MAY BE OBTAINED WITHOUT CHARGE
UPON WRITTEN REQUEST TO THE CORPORATION AT ITS PRINCIPAL PLACE OF
BUSINESS OR REGISTERED OFFICE."
(c) Any stock certificate representing the Common Stock issued upon
conversion of a Security shall bear any legend then used by the Company
pertaining to the foregoing restriction on ownership and transfer.
ARTICLE 3.
REDEMPTION AND REPURCHASES
SECTION 3.01. Right To Redeem; Notices To Trustee.
The Company, at its option at any time after December ____, 2001, may
redeem the Securities in accordance with the provisions of paragraph 5 of the
Securities. If the Company elects to redeem Securities pursuant to paragraph 5
of the Securities, it shall notify the Trustee in writing of the Redemption
Date, the Principal Amount of Securities to be redeemed and the Redemption
Price.
The Company shall give the notice to the Trustee provided for in this
Section 3.01 in the case of any redemption of the Securities, at least 30 days
before the Redemption Date unless a shorter notice shall be satisfactory to the
Trustee.
SECTION 3.02. Selection Of Securities To Be Redeemed.
If less than all the Securities held in definitive form are to be
redeemed pursuant to Section 3.01, the Trustee shall select the definitive
Securities to be redeemed pro rata or by lot or by a method the Trustee
considers fair and appropriate (as long as such method is not prohibited by the
rules of any securities exchange or quotation system on which the Securities are
then listed or quoted). The Trustee shall make the selection at least 25 days,
but not more than 65 days, before the Redemption Date from outstanding
definitive Securities not previously called for redemption. The Trustee may
select for redemption portions of the Principal Amount of Securities that have
denominations larger than $1,000. Securities and portions of them the Trustee
selects shall be in Principal Amounts of $1,000 or an integral multiple of
$1,000. Except as expressly stated otherwise, provisions of this Indenture that
apply to definitive Securities called for redemption also apply to portions of
definitive Securities called for redemption. The Trustee shall notify the
Company promptly of the definitive Securities or portions of definitive
Securities to be redeemed.
Any interest in a Security held in global form by and registered in the
name of the Depositary or its nominee to be redeemed in whole or in part will be
redeemed in accordance with the procedures of the Depositary.
SECTION 3.03. Notice Of Redemption.
At least 20 days but not more than 60 days before a Redemption Date,
the Company shall mail a notice of redemption by first-class mail, postage
prepaid, to each Holder of Securities to be redeemed.
The notice shall identify the Securities to be redeemed and shall
state:
(a) the Redemption Date;
(b) the Redemption Price;
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(c) the name and address of the Paying Agent;
(d) that Securities called for redemption must be surrendered to the
Paying Agent to collect the Redemption Price;
(e) if fewer than all the outstanding Securities are to be redeemed,
the certificate number and Principal Amounts of the particular Securities to be
redeemed;
(f) that interest, if any, on Securities called for redemption will
cease to accrue on and after the Redemption Date; and
(g) the CUSIP number or numbers for the Securities.
The notice, if mailed in the manner herein provided, shall be conclusively
presumed to have been duly given, whether or not the Holder receives such
notice. In any case, failure to give such notice by mail or any defect in the
notice to the Holder of any Security designated for redemption as a whole or in
part shall not affect the validity of the proceedings for the redemption of any
other Security.
At the Company's request, the Trustee shall give the notice of
redemption in the Company's name and at the Company's expense.
SECTION 3.04. Effect Of Notice Of Redemption.
Once notice of redemption is given, pursuant to Section 3.03 hereof,
Securities called for redemption become due and payable on the Redemption Date
and at the Redemption Price.
Upon the later of the Redemption Date or the date such Securities are
surrendered to the Paying Agent, such Securities shall be paid at the Redemption
Price stated in the notice.
SECTION 3.05. Deposit Of Redemption Price.
Prior to 10 a.m., Central Standard Time, on the Redemption Date, the
Company shall deposit with the Paying Agent (or if the Company or an Affiliate
of the Company is the Paying Agent, shall segregate and hold in trust) money
sufficient to pay the Redemption Price of all Securities to be redeemed on that
date other than Securities or portions of Securities called for redemption which
prior thereto have been delivered by the Company to the Trustee for
cancellation, and on or after the Redemption Date (unless the Company shall
default in the payment of the Securities at the Redemption Price), interest, if
any, on the Securities or portion of Securities called for redemption shall
cease to accrue and, except as provided in Section 8.02 hereof, to be entitled
to any benefit or security under this Indenture, and the Holders thereof shall
have no right in respect of such Securities except the right to receive the
Redemption Price thereof and unpaid interest to (but excluding) the Redemption
Date. The Paying Agent shall as promptly as practicable return to the Company
any money, with interest, if any, thereon, not required for that purpose. If
such money is then held by the Company in trust and is not required for such
purpose, it shall be discharged from such trust.
SECTION 3.06. Securities Redeemed In Part.
Upon surrender of a Security that is redeemed in part, the Company
shall execute and the Trustee shall authenticate and deliver to the Holder a new
Security in an authorized denomination equal in Principal Amount to the
unredeemed portion of the Security surrendered.
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SECTION 3.07. Conversion Arrangement On Call For Redemption.
In connection with any redemption of Securities, the Company may
arrange for the purchase and conversion into Common Stock of any Securities
called for redemption by an agreement with one or more investment bankers or
other purchasers to purchase such Securities by paying to the Paying Agent in
trust for the Holders, on or before the close of business on the Redemption
Date, an amount that, together with any amounts deposited with the Paying Agent
by the Company for the redemption of the Securities, is not less than the
Redemption Price to the Redemption Date, of such Securities. Notwithstanding
anything to the contrary contained in this Article 3, the obligation of the
Company to pay the Redemption Price of such Securities shall be deemed to be
satisfied and discharged to the extent such amount is so paid by such
purchasers. If such an agreement is entered into, any Securities not duly
surrendered for conversion by the Holders thereof may, at the option of the
Company, be deemed, to the fullest extent permitted by law, acquired by such
purchasers from such Holders and surrendered by such purchasers for conversion,
all immediately prior to the close of business on the Redemption Date, subject
to payment of the above amount as aforesaid. The Paying Agent shall hold and pay
to the Holders whose Securities are selected for redemption any such amount paid
to it in the same manner as it would money deposited with it by the Company for
the redemption of Securities. Without the Paying Agent's prior written consent,
no arrangement between the Company and such purchasers for the purchase and
conversion of any Securities shall increase or otherwise affect any of the
powers, duties, responsibilities or obligations of the Paying Agent as set forth
in this Indenture, and the Company agrees to indemnify the Paying Agent from,
and hold it harmless against, any loss, liability or expense arising out of or
in connection with any such arrangement for the purchase and conversion of any
Securities between the Company and such purchasers, including the costs and
expenses incurred by the Paying Agent in the defense of any claim or liability
arising out of or in connection with the exercise or performance of any of its
powers, duties, responsibilities or obligations under this Indenture.
ARTICLE 4.
COVENANTS
SECTION 4.01. Payment of Securities.
The Company shall promptly pay or cause to be paid all payments in
respect of the Securities on the dates and in the manner provided in the
Securities or pursuant to this Indenture. Principal Amount, Redemption Price and
interest, if any, shall be considered paid on the applicable date due if on such
date the Trustee or the Paying Agent holds, in accordance with this Indenture,
money or securities, if permitted hereunder, sufficient to pay all such amounts
then due.
The Company shall pay interest on overdue amounts at the rate set forth
in paragraph 1 of the Securities and it shall pay interest on overdue interest
at the same rate compounded semiannually (to the extent that the payment of such
interest shall be legally enforceable), which interest on overdue interest shall
accrue from the date such amounts became overdue.
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SECTION 4.02. Financial Information; SEC Reports.
The Company will deliver to the Trustee (i) as soon as available and in
any event within 90 days after the end of each fiscal year of the Company (a) a
consolidated balance sheet of the Company and its Subsidiaries as of the end of
such fiscal year and the related consolidated statements of operations,
stockholders' equity and cash flows for such fiscal year, all reported on by an
independent public accountant of nationally recognized standing, and (b) a
report containing a management's discussion and analysis of the financial
condition and results of operations and a description of the business and
properties of the Company, and (ii) as soon as available and in any event within
45 days after the end of each of the first three quarters of each fiscal year of
the Company (y) an unaudited consolidated financial report for such quarter, and
(z) a report containing a management's discussion and analysis of the financial
condition and results of operations of the Company; provided, foregoing shall
not be required for any fiscal year or quarter, as the case may be, with respect
to which the Company files or expects to file with the Trustee an annual report
or quarterly report, as the case may be, pursuant to the third paragraph of this
Section 4.02.
At any time the Company is not subject to either Section 13 or 15(d) of
the Exchange Act, the Company shall at the request of any Holder (or holders of
Common Stock issued upon conversion of the Securities) provide to such Holder
(or holders of such Common Stock) and any prospective purchaser designated by
such Holders (or holders of such Common Stock), as the case may be, such
information, if any, required by Rule 144A(d)(4) under the Securities Act.
The Company shall file with the Trustee, within 15 days after it files
such annual and quarterly reports, information, documents and other reports with
the SEC, copies of its annual report and of the information, documents and other
reports (or copies of such portions of any of the foregoing as the SEC may by
rules and regulations prescribe) which the Company is required to file with the
SEC pursuant to Section 13 or 15(d) of the Exchange Act.
Delivery of such reports, information and documents to the Trustee is
for informational purposes only and the Trustee's receipt of such shall not
constitute constructive notice of any information contained therein or
determinable from the information contained therein, including the Company's
compliance with any of its covenants hereunder (as to which the Trustee is
entitled to rely exclusively on Officers' Certificates).
SECTION 4.03. Compliance Certificate.
The Company shall deliver to the Trustee, within 120 days after the end
of each fiscal year of the Company, an Officers' Certificate in which one of the
two Officers signing such certificate is either the principal executive officer,
principal financial officer or principal accounting officer of the Company,
stating whether or not to the knowledge of the signers thereof the Company is in
Default in the performance and observance of any of the terms, provisions and
conditions of this Indenture (without regard to any period of grace or
requirement of notice provided hereunder) and, if the Company shall be in
Default, specifying all such Defaults and the nature and status thereof of which
the signers may have knowledge.
Any notice required to be given under this Section 4.03 shall be
delivered to the Trustee at its Corporate Trust Office.
SECTION 4.04. Further Instruments and Acts.
Upon request of the Trustee, the Company will execute and deliver such
further instruments and do such further acts as may be reasonably necessary or
proper to carry out more effectively the purposes of this Indenture.
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SECTION 4.05. Maintenance of Office or Agency.
The Company will appoint in Lakewood, Colorado, an office or agency
where Securities may be presented or surrendered for payment, where Securities
may be surrendered for registration of transfer, exchange, purchase, redemption
or conversion and where notices and demands to or upon the Company in respect of
the Securities and this Indenture may be served. The office or agency in
Lakewood, State of Colorado, shall be the Corporate Trust Office of the Trustee,
and shall be the office or agency for all of the aforesaid purposes unless the
Company shall appoint some other office or agency for such purposes and shall
give prompt written notice to the Trustee of the location, and any change in the
location, of such other office or agency. If at any time the Company shall fail
to maintain any such required office or agency or shall fail to furnish the
Trustee with the address thereof, such presentations, surrenders, notices and
demands may be made or served at the Corporate Trust Office.
The Company may also from time to time designate one or more other
offices or agencies where the Securities may be presented or surrendered for any
or all such purposes and may from time to time rescind such designations;
provided, however, no such designation or rescission shall in any manner relieve
the Company of its obligation to maintain an office or agency in Lakewood, State
of Colorado, for such purposes.
SECTION 4.06. Existence.
Subject to Article 5 hereof, the Company will do or cause to be done
all things necessary to preserve and keep in full force and effect its corporate
existence under the laws of its jurisdiction of incorporation, and to maintain
all qualifications, permits and licenses (including, without limitation, all
licenses and certifications required pursuant to any organization regulation in
connection with the ownership or operation of a residential mortgage business
and the conduct of lender and other related businesses and businesses incidental
thereto) necessary in the normal conduct of its business; provided, however, the
Company shall not be required to maintain any such qualification, permit or
license if the Company shall determine that the maintenance thereof is no longer
desirable in the conduct of the business of the Company and that the loss
thereof is not disadvantageous in any material respect to the Holders.
ARTICLE 5.
SUCCESSOR CORPORATION
SECTION 5.01. When the Company May Merge or Transfer Assets.
The Company shall not consolidate with or merge with or into any other
Person (other than in a merger or consolidation in which the Company is the
surviving Person) or convey, transfer or lease its properties and assets
substantially as an entirety to any Person, unless:
(a) the Person (if other than the Company) formed by such consolidation
or into which the Company is merged or the Person which acquires by conveyance,
transfer or lease the properties and assets of the Company substantially as an
entirety shall be a corporation, limited liability company, partnership or trust
organized and validly existing under the laws of the United States or any State
thereof or the District of Columbia, and shall expressly assume by an indenture
supplemental hereto, executed and delivered to the Trustee in form reasonably
satisfactory to the Trustee, the due and punctual payment of the Principal
Amount, Redemption Price or interest, if any, on the Securities, according to
their tenor, and the due and punctual performance of all of the covenants and
obligations of the Company under the Securities and this Indenture, and shall
have provided for conversion rights in accordance with this Indenture;
(b) immediately after giving effect to such transaction, no Default or
Event of Default shall have occurred and be continuing; and
(c) the Company shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such consolidation,
merger, conveyance, transfer or lease and, if a supplemental indenture is
required
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in connection with such transaction, such supplemental indenture, comply with
this Article 5 and that all conditions precedent herein provided for relating to
such transaction have been satisfied.
The successor Person formed by such consolidation or into which the
Company is merged or the successor Person to which such conveyance, transfer or
lease is made shall succeed to, and be substituted for, and may exercise every
right and power of, the Company under this Indenture with the same effect as if
such successor had been named as the Company herein; and thereafter, except in
the case of a lease, the Company shall be discharged from all obligations and
covenants under this Indenture and the Securities.
ARTICLE 6.
DEFAULTS AND REMEDIES
SECTION 6.01. Events of Default.
An Event of Default occurs if:
(a) the Company defaults in the payment of the Principal Amount,
Redemption Price or the payment of interest on any Security when the same
becomes due and payable at its Stated Maturity, upon redemption, upon
declaration, when due for repurchase by the Company or otherwise, and fails to
remedy the same within 10 days of receipt by the Company of a Notice of Default,
whether or not such payment shall be prohibited by Article 10 hereof;
(b) the Company fails to comply with any of its agreements or covenants
in the Securities or this Indenture (other than those referred to in clause (a)
above) and such failure continues for 60 days after receipt by the Company of a
Notice of Default;
(c) a decree or order by a court having jurisdiction in the premises
shall have been entered adjudging the Company a bankrupt or insolvent, or
approving as properly filed a petition seeking reorganization of the Company
under any Bankruptcy Law, and such decree or order shall have continued
undischarged and unstayed for a period of 60 consecutive days; or a decree or
order of a court having jurisdiction in the premises of the appointment of a
receiver or liquidator or trustee or assignee in bankruptcy or insolvency of the
Company or of its property, or for the winding-up or liquidation of its affairs,
shall have been entered, and such decree or order shall have remained in force
undischarged and unstayed of a period of 60 consecutive days; or
(d) the Company shall institute proceedings to be adjudicated a
voluntary bankrupt, or shall consent to the filing of a bankruptcy proceeding
against it, or shall file a petition or answer or consent seeking reorganization
under any Bankruptcy Law, or shall consent to the filing of any such petition,
or shall consent to the appointment of a receiver or liquidator or trustee or
assignee in bankruptcy or insolvency of it or of its property or shall make an
assignment for the benefit of creditors, or shall admit in writing its inability
to pay its debts generally as they become due.
A Default under clause (b) above is not an Event of Default until the
Trustee notifies the Company, or the Holders of at least 25% in aggregate
Principal Amount of the Securities at the time outstanding notify the Company
and the Trustee, of the Default and the Company does not cure such Default (and
such Default is not waived) within the time specified in clause (b) above after
actual receipt of such notice (a "Notice Of Default"). Any such notice must
specify the Default, demand that it be remedied and state that such notice is a
Notice of Default.
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SECTION 6.02. Acceleration.
If an Event of Default (other than an Event of Default specified in
Section 6.01(c) or (d) hereof) occurs and is continuing, the Trustee by notice
to the Company, or the Holders of at least 25% in aggregate Principal Amount of
the Securities at the time outstanding by notice to the Company and the Trustee,
may declare the Principal Amount and accrued and unpaid interest to the date of
declaration on all the Securities to be immediately due and payable. Upon such a
declaration, such Principal Amount and accrued unpaid interest shall become and
be due and payable immediately. If an Event of Default specified in Section
6.01(c) or (d) hereof occurs and is continuing, the Principal Amount and accrued
and unpaid interest on all the Securities shall become and be immediately due
and payable without any declaration or other act on the part of the Trustee or
any Holders. The Holders of a majority in aggregate Principal Amount of the
Securities at the time outstanding, by notice to the Company and the Trustee
(and without notice to any other Holder), may rescind an acceleration and its
consequences if the rescission would not conflict with any judgment or decree
and if all existing Events of Default have been cured or waived except
nonpayment of the Principal Amount and accrued and unpaid interest that have
become due solely as a result of acceleration and if all amounts due to the
Trustee under Section 7.07 hereof have been paid. No such rescission shall
affect any subsequent or other Default or Event of Default or impair any
consequent right.
SECTION 6.03. Other Remedies.
If an Event of Default occurs and is continuing, the Trustee may pursue
any available remedy to collect the payment of the Principal Amount and accrued
and unpaid interest) on the Securities or to enforce the performance of any
provision of the Securities or this Indenture. Notwithstanding the foregoing to
the contrary, the Zero Coupon Bond is non-callable and the Trustee may not
dispose of, or disburse the proceeds of, the Zero Coupon Bond until its maturity
in 2015 and, provided further, the Trustee shall not undertake any action which
could impair the value of the Zero Coupon Bond.
The Trustee may maintain a proceeding even if the Trustee does not
possess any of the Securities or does not produce any of the Securities in the
proceeding. A delay or omission by the Trustee or any Holder in exercising any
right or remedy accruing upon an Event of Default shall not impair the right or
remedy or constitute a waiver of, or acquiescence in, the Event of Default. No
remedy is exclusive of any other remedy. All available remedies are cumulative.
SECTION 6.04. Waiver of Past Defaults.
The Holders of a majority in aggregate Principal Amount of the
Securities at the time outstanding, by notice to the Company and the Trustee
(and without notice to any other Holder), may waive an existing Default or Event
of Default and its consequences except (i) an Event of Default described in
Section 6.01(a) hereof, or (ii) a Default in respect of a provision that under
Section 9.02 hereof cannot be amended without the consent of each Holder
affected. When a Default or Event of Default is waived, it is deemed cured, but
no such waiver shall extend to any subsequent or other Default or Event of
Default or impair any consequent right.
SECTION 6.05. Control by Majority.
The Holders of a majority in aggregate Principal Amount of the
Securities at the time outstanding may direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or of
exercising any trust or power conferred on the Trustee. However, the Trustee may
refuse to follow any direction that conflicts with any law or this Indenture or
that the Trustee determines in good faith is unduly prejudicial to the rights of
other Holders or would involve the Trustee in personal liability unless the
Trustee is offered indemnity reasonably satisfactory to it.
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SECTION 6.06. Limitation on Suits.
A Holder may not pursue any remedy with respect to this Indenture or
the Securities unless:
(a) the Holder gives to the Company and the Trustee written notice
stating that an Event of Default is continuing;
(b) the Holders of at least 25% in aggregate Principal Amount of the
Securities at the time outstanding make a written request to the Trustee to
pursue the remedy;
(c) such Holder or Holders offer to the Trustee reasonable security or
indemnity against any loss, liability or expense satisfactory to the Trustee;
(d) the Trustee does not comply with the request within 60 days after
receipt of the notice, the request and the offer of security or indemnity; and
(e) the Holders of a majority in aggregate Principal Amount of the
Securities at the time outstanding do not give the Trustee a direction
inconsistent with the request during such 60 day period.
A Holder may not use this Indenture to prejudice the rights of any
other Holder or to obtain a preference or priority over any other Holder.
SECTION 6.07. Rights of Holders to Receive Payment.
Notwithstanding any other provision of this Indenture, but subject to
Section 6.04 and Articles 10 and 11 hereof, the right of any Holder to receive
payment of the Principal Amount, Redemption Price or interest, if any, in
respect of the Securities held by such Holder, on or after the respective due
dates expressed in the Securities or any date of redemption, or to bring suit
for the enforcement of any such payment on or after such respective dates, shall
not be impaired or affected adversely without the consent of each such Holder.
SECTION 6.08. Collection Suit by Trustee.
If an Event of Default described in Section 6.01(a) hereof occurs and
is continuing, the Trustee may recover judgment in its own name and as trustee
of an express trust against the Company for the whole amount owing with respect
to the Securities and the amounts provided for in Section 7.07 hereof.
SECTION 6.09. Trustee May File Proofs of Claim.
In case of the pendency of any receivership, insolvency, liquidation,
bankruptcy, reorganization, arrangement, adjustment, composition or other
judicial proceeding relative to the Company or any other obligor upon the
Securities or the property of the Company or of such other obligor or their
creditors, the Trustee (irrespective of whether the Principal Amount, Redemption
Price or interest, if any, in respect of the Securities shall then be due and
payable as therein expressed or by declaration or otherwise and irrespective of
whether the Trustee shall have made any demand on the Company for the payment of
any such amount) shall be entitled and empowered, by intervention in such
proceeding or otherwise:
(a) to file and prove a claim for the whole amount of the Principal
Amount, Redemption Price or interest, if any, and to file such other papers or
documents as may be necessary or advisable in order to have the claims of the
Trustee (including any claim for the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel) and of the
Holders allowed in such judicial proceeding, and
(b) to collect and receive any monies or other property payable or
deliverable on any such claims and to distribute the same;
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and any custodian, receiver, assignee, trustee, liquidator, sequestrator or
similar official in any such judicial proceeding is hereby authorized by each
Holder to make such payments to the Trustee and, in the event that the Trustee
shall consent to the making of such payments directly to the Holders, to pay the
Trustee any amount due it for the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel, and any other
amounts due the Trustee under Section 7.07 hereof.
If the Trustee does not file a claim or proof of debt in the form
required in such proceedings prior to 30 days before the expiration of the time
to file such claims or proofs, then any holder or holders of Senior Indebtedness
or their representative or representatives shall have the right to demand, sue
for, collect, receive and receipt for the payments and distributions in respect
of the Securities which are required to be paid or delivered to the holders of
Senior Indebtedness as provided in this Article and to file and prove all claims
therefor and to take all such other action in the name of the holders or
otherwise as such holders of Senior Indebtedness or the Representative thereof
may determine to be necessary or appropriate for the enforcement of the
provisions of this Article.
Nothing herein contained shall be deemed to authorize the Trustee to
authorize or consent to or accept or adopt on behalf of any Holder any plan of
reorganization, arrangement, adjustment or composition affecting the Securities
or the rights of any Holder thereof, or to authorize the Trustee to vote in
respect of the claims of any Holder in any such proceeding.
SECTION 6.10. Priorities.
If the Trustee collects any money pursuant to this Article 6, it shall
pay out the money in the following order:
FIRST: to the Trustee for amounts due under Section 7.07 hereof;
SECOND: to holders of Senior Indebtedness to the extent required by
Article 10 hereof;
THIRD: to Holders for amounts due and unpaid on the Securities for the
Principal Amount, Redemption Price or interest, if any, as the case may be,
ratably, without preference or priority of any kind, according to such amounts
due and payable on the Securities; and
FOURTH: the balance, if any, to the Company.
The Trustee may fix a proposed record date and payment date for any
payment to Holders pursuant to this Section 6.10 and shall notify the Company in
writing with respect to such proposed record date and payment date. At least 15
days before such record date, the Company (or the Trustee at the request of the
Company) shall mail to each Holder and the Trustee a notice that states the
record date, the payment date and amount to be paid.
SECTION 6.11. Undertaking for Costs.
In any suit for the enforcement of any right or remedy under this
Indenture or in any suit against the Trustee for any action taken or omitted by
it as Trustee, a court in its discretion may require the filing by any party
litigant (other than the Trustee) in the suit of an undertaking to pay the costs
of the suit, and the court in its discretion may assess reasonable costs,
including reasonable attorneys' fees and expenses, against any party litigant in
the suit, having due regard to the merits and good faith of the claims or
defenses made by the party litigant. This Section 6.11 does not apply to a suit
by the Trustee, any suit by a Holder for the enforcement of the payment of the
Principal Amount, Redemption Price or interest, if any, on or after the due date
expressed in such Security, or a suit by Holders of more than 10% in aggregate
Principal Amount of the Securities at the time outstanding.
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SECTION 6.12. Waiver of Stay, Extension or Usury Laws.
The Company covenants (to the extent that it may lawfully do so) that
it will not at any time insist upon, or plead, or in any manner whatsoever claim
or take the benefit or advantage of, any stay or extension law or any usury or
other law wherever enacted, now or at any time hereafter in force, which would
prohibit or forgive the Company from paying all or any portion of the Principal
Amount or Redemption Price in respect of Securities, or any interest on any such
amounts, as contemplated herein, or which may affect the covenants or the
performance of this Indenture; and the Company (to the extent that it may
lawfully do so) hereby expressly waives all benefit or advantage of any such
laws and covenants that it will not hinder, delay or impede the execution of any
power herein granted to the Trustee, but will suffer and permit the execution of
every such power as though no such law had been enacted.
ARTICLE 7.
TRUSTEE
SECTION 7.01. Duties of Trustee.
(a) If an Event of Default has occurred and is continuing, the Trustee
shall exercise the rights and powers vested in it by this Indenture and use the
same degree of care and skill in its exercise as a prudent person would exercise
or use under the circumstances in the conduct of his or her own affairs.
(b) Except during the continuance of an Event of Default:
(i) the Trustee need perform only those duties that are
specifically set forth in this Indenture and no others; and
(ii) in the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the correctness of the
opinions expressed therein, upon certificates or opinions furnished to the
Trustee and conforming to the requirements of this Indenture. However, in the
case of any such certificates or opinions which by any provision hereof are
specifically required to be furnished to the Trustee, the Trustee shall examine
the certificates and opinions to determine whether or not they conform to the
requirements of this Indenture.
This Section 7.01(b) shall be in lieu of Section 315(a) of the TIA, and
such Section 315(a) is hereby expressly excluded from this Indenture, as
permitted by the TIA.
(c) The Trustee may not be relieved from liability for its own
negligent actions, its own negligent failure to act or its own willful
misconduct, except that:
(i) this paragraph (c) does not limit the effect of paragraph
(b) of this Section 7.01;
(ii) the Trustee shall not be liable for any error of judgment
made in good faith by a Trust Officer unless it is proved that the Trustee was
negligent in ascertaining the pertinent facts; and
(iii) the Trustee shall not be liable with respect to any
action it takes or omits to take in good faith in accordance with a direction
received by it pursuant to Section 6.05 hereof.
Subparagraphs (c)(i),(ii) and (iii) shall be in lieu of Sections
315(d)(1), 315(d)(2) and 315(d)(3) of the TIA and such Sections 315(d)(1),
315(d)(2) and 315(d)(3) are hereby expressly excluded from this Indenture, as
permitted by the TIA.
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(d) Every provision of this Indenture that in any way relates to the
Trustee is subject to paragraphs (a), (b), (c) and (e) of this Section 7.01.
(e) The Trustee may refuse to perform any duty or exercise any right or
power or extend or risk its own funds or otherwise incur any financial liability
unless it receives indemnity reasonably satisfactory to it against any loss,
liability or expense.
(f) Money held by the Trustee in trust hereunder need not be segregated
from other funds except to the extent required by law.
SECTION 7.02. Rights of Trustee.
(a) The Trustee may conclusively rely on any document reasonably
believed by it to be genuine and to have been signed or presented by the proper
Person. The Trustee need not investigate any fact or matter stated in the
document.
(b) Before the Trustee acts or refrains from acting, it may require a
Company Order, an Officers' Certificate or an Opinion of Counsel. The Trustee
shall not be liable for any action it takes or omits to take in good faith in
reliance on a Company Order, Officers' Certificate or Opinion of Counsel.
(c) The Trustee may act through agents and shall not be responsible for
the misconduct or negligence of any agent appointed with due care.
(d) Subject to the provisions of Section 7.01(c), the Trustee shall not
be liable for any action it takes or omits to take in good faith which it
believes to be authorized or within its rights or powers.
(e) The Trustee may consult with counsel selected by it and any advice
or Opinion of Counsel shall be full and complete authorization and protection in
respect of any action taken or suffered or omitted by it hereunder in good faith
and in accordance with such advice or Opinion of Counsel.
(f) The Trustee shall be under no obligation to exercise any of the
rights or powers vested in it by this Indenture, unless the Holders shall have
offered to the Trustee reasonable security or indemnity reasonably satisfactory
to it against the costs, expenses and liabilities which may be incurred therein
or thereby.
(g) The Trustee shall not be bound to make any investigation into the
facts or matters stated in any resolution, certificate, statement, instrument,
opinion, report, notice, request, direction, consent, order, bond, debenture,
note, other evidence of indebtedness or other paper or document, but the
Trustee, in its discretion, may make such further inquiry or investigation into
facts or matters as it may see fit, and, if the Trustee shall determine to make
such further inquiry or investigation, it shall be entitled to examine the
books, records and premises of the Company, personally or by agent or attorney
at the sole cost of the Company and shall incur no liability or additional
liability of any kind by reason of such inquiry or investigation.
(h) The Trustee may execute any of the trusts or powers hereunder or
perform any duties hereunder either directly or by or through agents or
attorneys and the Trustee shall not be responsible for any negligent act on the
part of any agent or attorney appointed with due care by it hereunder.
(i) The Trustee shall not be deemed to have notice of any Default or
Event of Default unless a Trust Officer of the Trustee has actual knowledge
thereof or unless written notice of any event which is in fact such a default is
received by the Trustee at the Corporate Trust Office of the Trustee in
accordance with Section 12.02 hereof, and such notice references the Securities
and this Indenture.
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(j) The rights, privileges, protections, immunities and benefits given
to the Trustee, including, without limitation, its right to be indemnified, are
extended to, and shall be enforceable by, the Trustee in each of its capacities
hereunder, and to each agent, custodian and other Person employed to act
hereunder.
(k) The Trustee shall be under no obligation to expend or risk its own
funds or to exercise, at the request or direction of any of the Holders, any of
the rights or powers vested in it by this Indenture pursuant to this Indenture.
SECTION 7.03. Individual Rights of Trustee.
The Trustee in its individual or any other capacity may become the
owner or pledgee of Securities and may otherwise deal with the Company or its
Affiliates with the same rights it would have if it were not Trustee. Any Paying
Agent, Registrar or co-registrar may do the same with the like rights. However,
the Trustee must comply with Sections 7.10 and 7.11 hereof.
SECTION 7.04. Trustee's Disclaimer.
The Trustee makes no representation as to the validity or adequacy of
this Indenture or the Securities; it shall not be accountable for Company's use
of the proceeds from the Securities; and it shall not be responsible for any
statement in the prospectus for the Securities or in this Indenture or the
Securities (other than its certificate of authentication), the acts of a prior
Trustee hereunder, or the determination as to which beneficial owners are
entitled to receive any notices hereunder.
SECTION 7.05. Notice of Defaults.
If a Default occurs and is continuing and if it is actually known by a
Trust Officer or if written notice of any event which is in fact such a default
is received by the Trustee at the Corporate Trust Office of the Trustee in
accordance with Section 12.02 hereof, and such notice references the Securities
and this Indenture, the Trustee shall give to each Holder notice of the Default
within 90 days after it occurs. Except in the case of a Default described in
Section 6.01(a) hereof, the Trustee may withhold the notice if and so long as a
committee of its Trust Officers in good faith determines that withholding the
notice is in the interests of Holders. The second sentence of this Section 7.05
shall be in lieu of the proviso to Section 315(b) of the TIA, and such provision
is hereby expressly excluded from this Indenture, as permitted by the TIA. The
Trustee shall not give notice of a Default pursuant to Section 6.01(c) until at
least 60 days have passed since its occurrence.
SECTION 7.06. Reports by Trustee to Holders.
Within 60 days after each May 1, beginning with the May 1 following the
date of this Indenture, the Trustee shall mail to each Holder a brief report
dated as of such May 1 that complies with TIA Section 313(a), if required by
such Section 313(a). The Trustee also shall comply with TIA Section 313(b).
A copy of each report at the time of its mailing to Holders shall be
filed with the SEC and each securities exchange on which the Securities are
listed. The Company agrees to promptly notify the Trustee whenever the
Securities become listed on any securities exchange and of any delisting
thereof.
SECTION 7.07. Compensation and Indemnity.
The Company agrees:
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(a) to pay to the Trustee from time to time such compensation as the
Company and the Trustee shall from time to time agree in writing for all
services rendered by it hereunder (which compensation shall not be limited by
any provision of law in regard to the compensation of a trustee of an express
trust);
(b) to reimburse the Trustee upon its request for all reasonable
expenses, disbursements and advances incurred or made by the Trustee in
accordance with any provision of this Indenture (including the compensation and
the expense, advances and disbursements of its agents and counsel), except any
such expense, disbursement or advance as may be attributable to its negligence
or bad faith; and
(c) to indemnify the Trustee for, and to hold it harmless against, any
and all loss, damage, claims, liability or expense (including taxes other than
taxes based upon, measured by, or determined by the income of the Trustee)
incurred without negligence or bad faith on its part, arising out of or in
connection with the acceptance or administration of this trust, including the
costs and expenses of defending itself against any claim (whether asserted by
the Company, any Holder or any other Person) or liability in connection with the
exercise or performance of any of its powers or duties hereunder.
To secure the Company's payment obligations in this Section 7.07, the
Trustee shall have a lien prior to the Securities on all money or property held
or collected by the Trustee, except that held in trust to pay the Principal
Amount, Redemption Price or interest, if any, as the case may be, on particular
Securities.
The Company's payment obligations pursuant to this Section 7.07 shall
survive the discharge of this Indenture. When the Trustee incurs expenses after
the occurrence of a Default specified in Section 6.01(c) or (d), the expenses
are intended to constitute expenses of administration under any Bankruptcy Law.
SECTION 7.08. Replacement of Trustee.
The Trustee may resign by so notifying the Company; provided, however,
no such resignation shall be effective until a successor Trustee has accepted
its appointment pursuant to this Section 7.08. The Holders of a majority in
aggregate Principal Amount of the Securities at the time outstanding may remove
the Trustee by so notifying the Trustee and may appoint a successor Trustee. The
Company shall remove the Trustee if:
(a) the Trustee fails to comply with, or ceases to be eligible under,
Section 7.10 hereof;
(b) the Trustee is adjudged bankrupt or insolvent;
(c) a receiver or public officer takes charge or control of the Trustee
or its property or affairs; or
(d) the Trustee otherwise in the Company's reasonable judgment becomes
incapable of acting.
In addition, the Company may remove the Trustee if the Company
determines that the services provided by the Trustee hereunder may be obtained
at a substantially lower cost to the Company, as determined in the sole
discretion of the Company.
If the Trustee resigns or is removed or if a vacancy exists in the
office of Trustee for any reason, the Company shall promptly appoint, by
resolution of its Board of Directors, a successor Trustee.
Every successor Trustee appointed hereunder shall execute, acknowledge
and deliver to the Company and to the retiring Trustee an instrument accepting
such appointment, and thereupon the resignation or removal of the retiring
Trustee shall become effective and such successor Trustee, without any further
act, deed or conveyance, shall become
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vested with all the rights, powers, trusts and duties of the retiring Trustee;
but, on the request of the Company or the successor Trustee, such retiring
Trustee shall, upon payment of its charges, execute and deliver an instrument
transferring to such successor Trustee all the rights, powers and trusts of the
retiring Trustee and shall duly assign, transfer and deliver to such successor
Trustee all property and money held by such retiring Trustee hereunder, subject
to the lien provided for in Section 7.07 hereof. Upon request of any such
successor Trustee, the Company shall execute any and all instruments for more
fully and certainly vesting in and confirming to such successor Trustee all such
rights, powers and trusts. No successor Trustee shall accept its appointment
unless at the time of such acceptance such successor Trustee shall be eligible
under this Article.
If a successor Trustee does not take office within 30 days after the
retiring Trustee resigns or is removed, the retiring Trustee, the Company or the
Holders of a majority in aggregate Principal Amount of the Securities at the
time outstanding may petition any court of competent jurisdiction for the
appointment of a successor Trustee at the expense of the Company.
If the Trustee fails to comply with Section 7.10 hereof, any Holder may
petition any court of competent jurisdiction for the removal of the Trustee and
the appointment of a successor Trustee.
SECTION 7.09. Successor Trustee by Merger.
If the Trustee consolidates with, merges or converts into, or transfers
all or substantially all its corporate trust business (including the trust
created by this Indenture) or assets to, another corporation, the resulting,
surviving or transferee corporation without any further act shall be the
successor Trustee hereunder; provided, such corporation shall be otherwise
eligible under this Article, without the execution or filing of any paper or any
further act on the part of any of the parties hereto. In case any Securities
shall have been authenticated, but not delivered, by the Trustee then in office,
any successor by merger, conversion or consolidation to such authenticating
Trustee may adopt such authentication and deliver the Securities so
authenticated with the same effect as if such successor Trustee had itself
authenticated such Securities.
SECTION 7.10. Eligibility; Disqualification.
The Trustee shall at all times satisfy the requirements of TIA Sections
310(a)(1) and 310(b). The Trustee shall have a combined capital and surplus of
at least $50,000,000 (or if the Trustee is a member of a bank holding company
system, its bank holding company shall have a combined capital and surplus of at
least $50,000,000) as set forth in its most recent published annual report of
conditions. Nothing herein contained shall prevent the Trustee from filing with
the SEC the application referred to in the penultimate paragraph of TIA Section
310(b). If at any time the Trustee shall cease to be eligible in accordance with
the provisions of this Section 7.10, it shall correct such ineligibility or
resign immediately in the manner and with the effect specified in this Article
7.
SECTION 7.11. Preferential Collection of Claims Against Company.
The Trustee shall comply with TIA Section 311(a), excluding any
creditor relationship listed in TIA Section 311(b). A Trustee who has resigned
or been removed shall be subject to TIA Section 311(a) to the extent indicated
therein.
ARTICLE 8.
DISCHARGE OF INDENTURE
SECTION 8.01. Discharge of Liability on Securities.
When (i) the Company delivers to the Trustee all outstanding Securities
(other than Securities replaced pursuant to Section 2.07 hereof) for
cancellation, or (ii) all outstanding Securities have become due and payable and
the Company deposits with the Trustee Cash and/or securities, as permitted by
the terms hereof, sufficient to pay at Stated Maturity
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the Principal Amount of all outstanding Securities (other than Securities
replaced pursuant to Section 2.07 hereof), and if in either case the Company
pays all other sums payable hereunder by the Company, then this Indenture shall,
subject to Section 7.07 hereof, cease to be of further effect. The Trustee shall
join in the execution of a document prepared by the Company acknowledging
satisfaction and discharge of this Indenture on demand of the Company
accompanied by an Officers' Certificate and Opinion of Counsel and at the cost
and expense of the Company.
SECTION 8.02. Repayment to the Company.
The Trustee and the Paying Agent shall return to the Company upon
written request any money or securities held by them for the payment of any
amount with respect to the Securities that remains unclaimed for two years;
provided, the Trustee or such Paying Agent, before being required to make any
such return, shall mail to each such Holder notice that such money or securities
remains unclaimed and that, after a date specified therein, which shall not be
less than 30 days from the date of such publication or mailing, any unclaimed
money or then remaining will be returned to the Company. After return to the
Company, Holders entitled to the money or securities must look to the Company
for payment as general creditors unless an applicable abandoned property law
designates another Person.
ARTICLE 9.
AMENDMENTS
SECTION 9.01. Without Consent of Holders.
The Company and the Trustee may amend this Indenture and the Securities
without the consent of any Holder:
(a) to cure any ambiguity or to correct or supplement any provision
contained herein or in any supplemental indenture which may be defective or
inconsistent with any other provision contained herein or in any supplemental
indenture, or to make such other provisions with regard to matters or questions
arising under this Indenture which shall not materially adversely affect the
interests of the Holders;
(b) to provide for the assumption of the Company's obligations to the
Holders of the Debentures in case of a merger or consolidation or sale of all or
substantially all of the Company's assets;
(c) to provide for uncertificated Securities in addition to
certificated Securities so long as such uncertificated Securities are in
registered form for purposes of the Internal Revenue Code of 1986, as amended;
(d) to make any change that does not adversely affect the right of any
Holder; or
(e) to make any change to comply with the TIA, or any amendment
thereto, or to comply with any requirement of the SEC in connection with the
qualification, if any, of the Indenture under the TIA.
SECTION 9.02. With Consent of Holders.
The Company and the Trustee, with the written consent of the Holders of
at least a majority in aggregate Principal Amount of the Securities at the time
outstanding, may amend this Indenture or the Securities. However, without the
consent of each Holder affected, an amendment or supplement to this Indenture or
the Securities may not:
(a) make any change to the Principal Amount of Securities whose Holders
must consent to an amendment;
(b) make any change to the manner or rate of accrual in connection with
interest, if any, reduce the rate of interest referred to in paragraph 1 of the
Securities or extend the time for payment of interest, if any, on any Security;
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(c) reduce the Principal Amount of or extend the Stated Maturity of any
Security;
(d) reduce the Redemption Price of any Security;
(e) make any Security payable in money or securities other than that
stated in the Security;
(f) make any change in Article 10 hereof that adversely affects the
rights of any Holder;
(g) make any change in Sections 6.04 or 6.07 hereof or this Section
9.02, except to increase the percentage of Holders referenced in Sections 6.04
or 6.07 hereof, as applicable; or
(h) make any change that adversely affects the right of the Company to
repurchase the Securities in accordance with the terms thereof and this
Indenture.
It shall not be necessary for the consent of the Holders under this
Section 9.02 to approve the particular form of any proposed amendment, but it
shall be sufficient if such consent approves the substance thereof.
An amendment under this Section 9.02 or Section 9.01 hereof may not
make any change that adversely affects the rights under Article 10 hereof of any
holder of Senior Indebtedness then outstanding unless the requisite holders of
such Senior Indebtedness consent to such change pursuant to the terms of such
Senior Indebtedness.
After an amendment under this Section 9.02 becomes effective, the
Company shall mail to each Holder a notice briefly describing the amendment.
SECTION 9.03. Compliance with Trust Indenture Act.
Every supplemental indenture executed pursuant to this Article 9 shall
comply with the TIA as then in effect, if then required to so comply.
SECTION 9.04. Revocation and Effect of Consents, Waivers and Actions.
Until an amendment, waiver or other action becomes effective, a consent
to it or any other action by a Holder of a Security is a continuing consent by
the Holder and every subsequent Holder of that Security or portion of the
Security that evidences the same obligation as the consenting Holder's Security,
even if notation of the consent, waiver or action is not made on the Security.
However, any such Holder or subsequent Holder may revoke the consent, waiver or
action as to such Holder's Security or portion of the Security if the Trustee
receives the notice of revocation before the date the amendment, waiver or
action becomes effective. After an amendment, waiver or action becomes
effective, it shall bind every Holder.
SECTION 9.05. Notation on or Exchange of Securities.
Securities authenticated and delivered after the execution of any
supplemental indenture pursuant to this Article 9 may, and shall if required by
the Trustee, bear a notation in form approved by the Trustee as to any matter
provided for in such supplemental indenture. If the Company shall so determine,
new Securities so modified as to conform, in the opinion of the Trustee and the
Board of Directors, to any such supplemental indenture may be prepared and
executed by the Company and authenticated and delivered by the Trustee in
exchange for outstanding Securities.
SECTION 9.06. Trustee to Sign Supplemental Indentures.
The Trustee shall sign any supplemental indenture authorized pursuant
to this Article 9 if the amendment does not adversely affect the rights, duties,
liabilities or immunities of the Trustee. If it does, the Trustee may, but need
not, sign such supplemental indenture. In signing such amendment the Trustee
shall be entitled to receive, and (subject to the provisions of Section 7.01
hereof) shall be fully protected in relying upon, an Officers' Certificate and
an Opinion of
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Counsel stating that such amendment is authorized or permitted by this
Indenture.
SECTION 9.07. Effect of Supplemental Indentures.
Upon the execution of any supplemental indenture under this Article 9,
this Indenture shall be modified in accordance therewith, and such supplemental
indenture shall form a part of this Indenture for all purposes; and every Holder
of Securities theretofore or thereafter authenticated and delivered hereunder
shall be bound thereby.
ARTICLE 10.
SUBORDINATION
SECTION 10.01. Agreement of Subordination.
The Company covenants and agrees for itself and its successors, and
each Holder of Securities issued hereunder by such Holder's acceptance thereof
likewise covenants and agrees, that all Securities shall be issued subject to
the provisions of this Article 10, and each Person holding any such Security
whether upon original issue or upon transfer or assignment thereof, accepts and
agrees to be bound by such provisions.
The payment of the Principal Amount, Redemption Price, interest and any
other amounts payable, if any, in respect of all Securities issued hereunder
shall, to the extent and in the manner hereinafter set forth, be subordinated
and subject in right of payment to the prior payment in full in Cash or other
payment satisfactory to the holders of Senior Indebtedness of all Senior
Indebtedness of the Company, whether outstanding at the date of this Indenture
or thereafter incurred, or thereafter created, assumed or guaranteed.
No provision of this Article 10 shall prevent the occurrence of any
Default or Event of Default hereunder.
SECTION 10.02. Payments to Holders.
No payment shall be made with respect to the payment of Principal
Amount, Redemption Price, interest and any other amounts payable, if any, on the
Securities, except payments and distributions made by the Trustee as permitted
by Section 10.05, if:
(a) a default in any payment obligations in respect of Senior
Indebtedness occurs and is continuing, without regard to any applicable period
of grace (whether at maturity or at a date fixed for payment or by declaration
or otherwise); or
(b) any other default occurs and is continuing with respect to Senior
Indebtedness that permits the holders of such Senior Indebtedness as to which
such default relates to accelerate its maturity and the Trustee receives a
notice of the default (a "Payment Blockage Notice") from a holder of Senior
Indebtedness.
If the Trustee receives any Payment Blockage Notice pursuant to clause
(b) above, no subsequent Payment Blockage Notice shall be effective for purposes
of this Section unless and until at least 365 days shall have elapsed since the
initial effectiveness of the immediately prior Payment Blockage Notice. No
nonpayment default that existed or was continuing on the date of delivery of any
Payment Blockage Notice to the Trustee shall be the basis for a subsequent
Payment Blockage Notice (it being acknowledged that (i) any action of the
Company or any of its Subsidiaries occurring subsequent to delivery of a Payment
Blockage Notice that would give rise to any event of default pursuant to any
provision of Senior Indebtedness under which an event of default previously
existed (or was continuing at the time of delivery of such Payment Blockage
Notice) shall constitute a new event of default for this purpose, and (ii) any
breach of a financial
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covenant giving rise to a nonpayment default for a period ending subsequent to
the date of delivery of the respective Payment Blockage Notice shall constitute
a new event of default for this purpose).
The Company may and shall resume payments on and distributions in
respect of the Securities:
(i) in case of a default referred to in clause (a) above, the
earlier of the date upon which the default is cured or waived in accordance with
the terms of the governing instrument or ceases to exist, or
(ii) in the case of a default referred to in clause (b) above,
the earlier of the date upon which the default is cured, waived in accordance
with the terms of the governing instrument or ceases to exist or 179 days pass
after the applicable Payment Blockage Notice is received if the maturity of such
Senior Indebtedness has not been accelerated, unless this Article 10 otherwise
prohibits the payment or distribution at the time of such payment or
distribution.
Upon any payment by the Company or distribution of assets of the
Company of any kind or character, whether in Cash, property or securities, to
creditors upon any dissolution or winding-up or liquidation or reorganization or
bankruptcy of the Company, whether voluntary or involuntary, or insolvency,
receivership or similar proceedings relating to the Company or its property, or
an assignment for the benefit of creditors or any marshaling of the Company's
assets or liabilities, all amounts due or to become due upon all Senior
Indebtedness of the Company shall first be paid in full in Cash or other payment
satisfactory to the holders of such Senior Indebtedness before any payment is
made on account of the Principal Amount, Redemption Price, interest or any other
amounts payable, if any, in respect of the Securities (except payments made
pursuant to Article 8 hereof from monies deposited with the Trustee pursuant
thereto prior to the happening of such dissolution or winding-up or liquidation
or reorganization or bankruptcy of the Company, whether voluntary or involuntary
or insolvency, receivership or similar proceedings relating to the Company or
its property, or an assignment of the benefit of creditors or any marshaling of
the Company's assets or liabilities), and upon any such dissolution or
winding-up or liquidation or reorganization or bankruptcy of the Company,
whether voluntary or involuntary or insolvency, receivership or similar
proceedings relating to the Company or its property, or an assignment of the
benefit of creditors or any marshaling of the Company's assets or liabilities,
any payment by the Company, or distribution of assets of the Company of any kind
or character, whether in Cash, property or securities, to which the Holders of
the Securities or the Trustee would be entitled, except for the provisions of
this Article 10, shall (except as aforesaid) be paid by the Company or by any
receiver, trustee in bankruptcy, liquidating trustee, agent or other Person
making such payment or distribution, or by the Holders of the Securities or by
the Trustee under this Indenture if received by them or it, directly to the
holders of Senior Indebtedness of the Company as their interests may appear or
their representative or representatives, or to the trustee or trustees under any
indenture pursuant to which any instruments evidencing any such Senior
Indebtedness may have been issued, as their respective interests may appear to
the extent necessary to pay all such Senior Indebtedness in full in Cash or
other payment satisfactory to the holders of such Senior Indebtedness, after
giving effect to any concurrent payment or distribution to or for the holders of
such Senior Indebtedness, before any payment or distribution is made to the
Holders of the Securities or to the Trustee.
In the event that any Securities are declared due and payable before
their Stated Maturity pursuant to Section 6.02 hereof, then and in such event
the Company shall promptly notify holders of its Senior Indebtedness of such
acceleration. The Company may not pay the Securities until five days have passed
after such acceleration occurs and may thereafter pay the Securities only to the
extent that this Article 10 permits the payment at that time.
In the event that, notwithstanding the foregoing provisions, any
payment or distribution of assets of the Company of any kind or character,
whether in Cash, property or securities (including, without limitation, by way
of setoff or otherwise), prohibited by the foregoing provisions in this Section
10.02, shall be received by the Trustee or the Holders of the Securities before
all Senior Indebtedness of the Company is paid in full in Cash or other payment
satisfactory to the holders of such Senior Indebtedness, such payment or
distribution shall be held in trust for the benefit of and shall be paid over or
delivered to the holders of Senior Indebtedness of the Company or their
representative or representatives, or to the trustee or trustees under any
indenture pursuant to which any instruments evidencing any such Senior
Indebtedness may have been issued, as their respective interests may appear, as
calculated by the Company, for
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application to the payment of all such Senior Indebtedness remaining unpaid to
the extent necessary to pay all such Senior Indebtedness in full in Cash or
other payment satisfactory to the holders of such Senior Indebtedness, after
giving effect to any concurrent payment or distribution to or for the holders of
such Senior Indebtedness.
For purposes of this Article 10, the words Cash, property or securities
shall not be deemed to include shares of stock of the Company as reorganized or
readjusted, or securities of the Company or any other corporation provided for
by a plan of reorganization or readjustment, the payment of which is
subordinated at least to the extent provided in this Article 10 with respect to
the Securities to the payment of all Senior Indebtedness of the Company which
may at the time be outstanding; provided, (i) such Senior Indebtedness is
assumed by the new corporation, if any, resulting from any such reorganization
or readjustment, and (ii) the rights of the holders of such Senior Indebtedness
(other than leases that are not assumed by the Company or the new corporation,
as the case may be) are not, without the consent of such holders, altered by
such reorganization or readjustment. The consolidation of the Company with, or
the merger of the Company into, another corporation or the liquidation or
dissolution of the Company following the conveyance or transfer of its property
as an entirety, or substantially as an entirety, to another corporation upon the
terms and conditions provided for in Article 5 hereof shall not be deemed a
dissolution, winding-up, liquidation or reorganization for the purposes of this
Section 10.02 if such other corporation shall, as a part of such consolidation,
merger, conveyance or transfer, comply with the conditions stated in Article 5
hereof.
Nothing in this Section 10.02 shall apply to claims of, or payments to,
the Trustee under or pursuant to Section 7.07 hereof. This Section 10.02 shall
be subject to the further provisions of Section 10.05 hereof.
SECTION 10.03. Subrogation of Securities.
Subject to the payment in full in Cash or other payment satisfactory to
the holders of Senior Indebtedness of all Senior Indebtedness of the Company,
the rights of the Holders of the Securities shall be subrogated to the rights of
the holders of such Senior Indebtedness to receive payments or distributions of
Cash, property or securities of the Company applicable to such Senior
Indebtedness until the Principal Amount, Redemption Price and interest, if any,
in respect of the Securities shall be paid in full; and, for the purposes of
such subrogation, no payments or distributions to the holders of such Senior
Indebtedness of any Cash, property or securities to which the Holders of the
Securities or the Trustee would be entitled except for the provisions of this
Article 10, and no payment over pursuant to the provisions of this Article 10,
to or for the benefit of the holders of such Senior Indebtedness by Holders of
the Securities or the Trustee, shall, as between the Company, its creditors
other than holders of its Senior Indebtedness, and the Holders of the Securities
be deemed to be a payment by the Company to or on account of the Senior
Indebtedness; and no payments or distributions of Cash, property or securities
to or for the benefit of the holders of the Securities pursuant to the
subrogation provisions of this Article 10, which would otherwise have been paid
to the holders of Senior Indebtedness shall be deemed to be a payment by the
Company to or for the account of the Securities. It is understood that the
provisions of this Article 10 are and are intended solely for the purpose of
defining the relative rights of the Holders of the Securities, on the one hand,
and the holders of Senior Indebtedness, on the other hand.
Nothing contained in this Article 10 or elsewhere in this Indenture or
in the Securities is intended to or shall impair, as between the Company, its
creditors other than the holders of its Senior Indebtedness and the Holders of
the Securities, the obligation of the Company, which is absolute and
unconditional, to pay to the Holders of the Securities the Principal Amount,
Redemption Price and interest, if any, in respect of the Securities as and when
the same shall become due and payable in accordance with their terms, or is
intended to or shall affect the relative rights of the Holders of the Securities
and creditors of the Company other than the holders of its Senior Indebtedness,
nor shall anything herein or therein prevent the Trustee or the Holder of any
Security from exercising all remedies otherwise permitted by applicable law upon
default under this Indenture, subject to the rights, if any, under this Article
10 of the holders of Senior Indebtedness in respect of Cash, property or
securities of the Company received upon the exercise of any such remedy.
Upon any payment or distribution of assets of the Company referred to
in this Article 10, the Trustee, subject to the provisions of Section 7.01
hereof, and the Holders of the Securities shall be entitled to rely upon any
order or
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decree made by any court of competent jurisdiction in which such dissolution,
winding-up, liquidation or reorganization proceedings are pending, or a
certificate of the receiver, trustee in bankruptcy, liquidating trustee, agent
or other Person making such payment or distribution, delivered to the Trustee,
to the Holders of the Securities for the purpose of ascertaining the Persons
entitled to participate in such distribution, the holders of the Senior
Indebtedness and other indebtedness of the Company, the amount thereof or
payable thereon, the amount or amounts paid or distributed thereon and all other
facts pertinent thereto or to this Article 10.
SECTION 10.04. Authorization by Holders.
Each Holder of a Security by such Holder's acceptance thereof
authorizes and directs the Trustee in his behalf to take such action as may be
necessary or appropriate to effectuate the subordination provided in this
Article 10 and appoints the Trustee such Holder's attorney-in-fact for any and
all such purposes.
SECTION 10.05. Notice to Trustee.
The Company shall give prompt written notice in a form of an Officers'
Certificate to a Trust Officer of any fact known to the Company which would
prohibit the making of any payment of monies to or by the Trustee or any Paying
Agent in respect of the Securities pursuant to the provisions of this Article
10, but failure to give such notice shall not affect the subordination of the
Securities to the Senior Indebtedness as provided in this Article 10.
Notwithstanding the provisions of this Article 10 or any other
provision of this Indenture, the Trustee shall not be charged with knowledge of
the existence of any facts which would prohibit the making of any payment of
monies to or by the Trustee in respect of the Securities pursuant to the
provisions of this Article 10, unless and until a Trust Officer shall have
actually received written notice thereof at the Corporate Trust Office from the
Company (in the form of an Officers' Certificate) or a holder or holders of
Senior Indebtedness or a Representative or from any trustee therefor; and before
the receipt of any such written notice, the Trustee, subject to the provisions
of Section 7.01 hereof, shall be entitled in all respects to assume that no such
facts exist; provided, if on a date not fewer than two Business Days prior to
the date upon which by the terms hereof any such monies may become payable for
any purpose (including, without limitation, the payment of the Principal Amount,
Redemption Price, interest or any other amounts payable, if any, in respect of
any Security) the Trustee shall not have received, with respect to such monies,
the notice provided for in this Section 10.05, then, anything herein contained
to the contrary notwithstanding, the Trustee shall have full power and authority
to receive such monies and to apply the same to the purpose for which they were
received, and shall not be affected by any notice to the contrary which may be
received by it on or after such prior date.
Notwithstanding anything to the contrary herein set forth, nothing
shall prevent any payment of amounts deposited with the Trustee pursuant to
Section 8.01 hereof so long as the Trustee had no notice that such amounts when
so deposited were prohibited pursuant to the provisions of Section 10.02 hereof.
The Trustee, subject to the provisions of Section 7.01, shall be
entitled to rely on the delivery to it of a written notice by a Person
representing himself to be a holder or a Representative of Senior Indebtedness
of the Company (or a trustee on behalf of such holder) to establish that such
notice has been given by a holder or a Representative of such Senior
Indebtedness or a trustee on behalf of any such holder or holders. In the event
that the Trustee determines in good faith that further evidence is required with
respect to the right of any Person as a holder of Senior Indebtedness of the
Company to participate in any payment or distribution pursuant to this Article
10, the Trustee may request such Person to furnish evidence to the reasonable
satisfaction of the Trustee as to the amount of such Senior Indebtedness held by
such Person, the extent to which such Person is entitled to participate in such
payment or distribution and any other facts pertinent to the rights of such
Person under this Article 10, and if such evidence is not furnished the Trustee
may defer any payment to such Person pending judicial determination as to the
right of such Person to receive such payment.
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SECTION 10.06. Trustee's Relation to Senior Indebtedness.
The Trustee in its individual capacity shall be entitled to all the
rights set forth in this Article 10 in respect of any Senior Indebtedness of the
Company at any time held by it, to the same extent as any other holder of such
Senior Indebtedness, and nothing in this Article 10 or elsewhere in this
Indenture shall deprive the Trustee of any of its rights as such holder. The
provisions of this Article 10 shall not apply to the Trustee's rights under
Section 7.07 hereof.
With respect to the holders of Senior Indebtedness of the Company, the
Trustee undertakes to perform or to observe only such of its covenants and
obligations as are specifically set forth in this Article 10, and no implied
covenants or obligations with respect to the holders of such Senior Indebtedness
shall be read into this Indenture against the Trustee. The Trustee shall not be
deemed to owe any fiduciary duty to the holders of Senior Indebtedness of the
Company and, subject to the provisions of Section 7.01 hereof, the Trustee shall
not be liable to any holder of such Senior Indebtedness if it shall pay over or
deliver to Holders of Securities, the Company or any other Person money or
assets to which any holder of Senior Indebtedness of the Company shall be
entitled by virtue of this Article 10 or otherwise.
SECTION 10.07. No Impairment of Subordination.
No right of any present or future holder of any Senior Indebtedness of
the Company to enforce subordination as herein provided shall at any time in any
way be prejudiced or impaired by (i) any amendment of or addition or supplement
to any such Senior Indebtedness or any instrument or agreement relating thereto
(unless otherwise expressly provided therein), or (ii) any act or failure to act
on the part of the Company or by any act or failure to act, in good faith, by
any such holder, or by any noncompliance by the Company with the terms,
provisions and covenants of the instrument, regardless of any knowledge thereof
which any such holder may have or otherwise be charged with or (iii) a failure
to act by any Holders of Securities or the failure of such Holder to comply with
this Indenture.
SECTION 10.08. Reliance by Holders of Senior Indebtedness on
Subordination Provisions.
Each Holder of Securities by such Holder's acceptance thereof,
acknowledges and agrees that the foregoing subordination provisions are, and are
intended to be, an inducement and a consideration to each holder of any Senior
Indebtedness of the Company, whether such Senior Indebtedness was created,
assumed or acquired before or after the issuance of the Securities, to acquire
and continue to hold, or to continue to hold, such Senior Indebtedness and such
holder of Senior Indebtedness shall be deemed conclusively to have relied on
such subordination provisions in acquiring and continuing to hold, or in
continuing to hold, such Senior Indebtedness, and no amendment or modification
of the provisions contained herein shall diminish the rights of such holder or
holders unless such holder or holders shall have agreed in writing thereto.
SECTION 10.09. Reinstatement of Subordination.
If, at any time, all or part of any payment of any Senior Indebtedness
theretofore made by the Company or any other Person is rescinded or must
otherwise be returned by the holders of such Senior Indebtedness for any reason
whatsoever (including, without limitation, the insolvency, bankruptcy or
reorganization of the Company or such other Person), these subordination
provisions shall continue to be effective or be reinstated, as the case may be,
all as though such payment had not been made.
SECTION 10.10. Permitted Payments.
Nothing contained in this Article 10 or elsewhere in this Indenture, or
in the Securities shall prevent (a) the Company at any time, except under the
conditions described in Section 10.02 hereof, from making payments at any time
of Principal Amount, Redemption Price or interest or any other amounts payable,
if any, in respect of the Securities, or from depositing with the Trustee or any
Paying Agent money for such payments, or (b) the application by the Trustee or
Paying Agent of any monies deposited with it under this Indenture to the payment
of or on account of the Principal Amount, Redemption Price or interest or any
other amounts payable, if any, in respect of the Securities to the Holders of
the Securities entitled thereto to the beneficiaries thereof, if such payment
would not have been prohibited by the provisions of Section 10.02 hereof.
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SECTION 10.11. Article Applicable to Paying Agents.
If at any time any Paying Agent other than the Trustee shall have been
appointed by the Company and be then acting hereunder, the term "Trustee" as
used in this Article 10 shall (unless the context otherwise requires) be
construed as extending to and including such Paying Agent within its meaning as
fully for all intents and purposes as if such Paying Agent were named in this
Article 10 in addition to or in place of the Trustee; provided, however, the
first paragraph of Section 10.05 hereof shall not apply to the Company or any
Affiliate of the Company if it or such Affiliate acts as Paying Agent.
SECTION 10.12. Reliance on Judicial Order or Certificate of Liquidating
Agent.
Upon any payment or distribution of assets of the Company referred to
in this Article 10, the Trustee and the Holders of Securities shall be entitled
to rely upon any order or decree entered by any court of competent jurisdiction
in which such insolvency, bankruptcy, receivership, liquidation, reorganization,
dissolution, winding up or similar case or proceeding is pending, or a
certificate of the trustee in bankruptcy, liquidating trustee, custodian,
receiver, assignee for the benefit of creditors, agent or other Person making
such payment or distribution, delivered to the Trustee or to the Holders of
Securities, for the purpose of ascertaining the Persons entitled to participate
in such payment or distribution, the holders of Senior Indebtedness and other
indebtedness of the Company, the amount thereof or payable thereon, the amount
or amounts paid or distributed thereon and all other facts pertinent thereto or
to this Article 10.
ARTICLE 11.
SECURITY AND PAYMENT
SECTION 11.01. Zero Coupon Bond.
The Principal Amount shall be secured by the Company's pledge of a
non-callable United States government zero coupon security (the "Zero Coupon
Bond"). On or before the date a Security is issued pursuant to this Agreement,
the Company shall purchase the Zero Coupon Bond and perfect the Trustee's
security interest therein through either (i) delivery to the Trustee of a
certificated security representing ownership of the Zero Coupon Bond, along with
an appropriate security power therefor, or (ii) designation of the Trustee as
the entitlement holder (as such term is defined in Section 8.102 of the TBCC)
with respect to the Zero Coupon Bond on behalf of the Holders pursuant to this
Agreement, which designation shall be accomplished through the issuance of an
appropriate entitlement order (as such term is defined in Section 8.102(a)(8) of
the TBCC) and any other instrument reasonably requested by the issuer of the
Zero Coupon Bond and/or the Trustee. The parties acknowledge that evidence of
the Company's purchase of the Zero Coupon Bond may be provided in the form of a
certificate reflecting Company ownership thereof or a letter issued by a
governmental agency or institutional depositor confirming a book-entry credit in
such agency's or entity's books and records in favor of the Company and, in such
regard, the parties agree to take all reasonable and necessary steps to insure
that the Trustee receives a perfected security interest in the Zero Coupon Bond
in accordance with applicable law (which shall be the law of the State of Texas
unless expressly required to be that of the state in which the issuer is
located). The Zero Coupon Bond shall secure payment of the Company's obligations
hereunder and, in the event of the Company's default and failure to pay
obligations due Holders when due hereunder, the Trustee shall, subject to the
provisions of Article 6 hereof, collect the proceeds thereof and distribute the
same, first, to the Holders (pro rata, if necessary, in accordance with the
Company's obligations), and second, the remainder, if any, to the Company.
SECTION 11.02. Payment Of Interest; Interest Rights Preserved.
(a) Interest on any Security that is payable, and is punctually paid or
duly provided for, on any Interest Payment Date shall be paid by the Company to
the Trustee at least 5 days prior to the date due. Following receipt of such
funds, the Trustee shall pay interest due to the person in whose name that
Security is registered at the close of business
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on the Regular Record Date for such interest at the office or agency of the
Company maintained for such purpose. Each installment of interest on any
Security shall be paid in Cash to Payee's address located inside the United
States on or before the date due.
(b) Except as otherwise specified with respect to the Securities, any
interest on any Security that is payable, but is returned undeliverable to the
Trustee following any Interest Payment Date (herein called "Defaulted Interest")
shall forthwith cease to be payable to the registered Holder thereof on the
relevant Regular Record Date by virtue of having been such Holder, and such
Defaulted Interest may be paid by the Company, at its election in each case, as
provided in clause (i) or (ii) below:
(i) The Company may elect to make payment of any Defaulted
Interest to the persons in whose names the Securities are registered at the
close of business on a Special Record Date for the payment of such Defaulted
Interest, which shall be fixed in the following manner. At any time following
receipt of the Trustee's report of Defaulted Interest, the Company shall notify
the Trustee in writing of the amount of Defaulted Interest proposed to be paid
on each Security and the date of the proposed payment (which shall not be less
than 20 days after such notice is received by the Trustee), and at the same time
the Company shall deposit with the Trustee an amount of money equal to the
aggregate amount proposed to be paid in respect of such Defaulted Interest or
shall make arrangements satisfactory to the Trustee for such deposit on or prior
to the date of proposed payment, such money when deposited to be held in trust
for the benefit of the persons entitled to such Defaulted Interest as in this
clause provided. Thereupon the Trustee shall fix a Special Record Date for the
payment of such Defaulted Interest which shall be not more than 15 days and not
less than 10 days prior to the date of the proposed payment and not less than 10
days after the receipt by the Trustee of the notice of the proposed payment. The
Trustee shall promptly notify the Company of such Special Record Date and, in
the name and at the expense of the Company, shall cause notice of the proposed
payment of such Defaulted Interest and the Special Record Date therefor to be
mailed, first-class postage prepaid, to each Holder of Securities at his address
as it appears on the list of Holders maintained pursuant to Section 2.05 hereof
not less than 10 days prior to such Special Record Date. The Trustee may, in its
discretion, in the name and at the expense of the Company, cause a similar
notice to be published at least once in an Authorized Newspaper in each place of
payment, but such publications shall not be a condition precedent to the
establishment of such Special Record Date. Notice of the proposed payment of
such Defaulted Interest and the Special Record Date therefor having been mailed
as aforesaid, such Defaulted Interest shall be paid to the persons in whose
names the Securities are registered at the close of business on such Special
Record Date and shall no longer be payable pursuant to the following clause
(ii).
(ii) The Company may make payment of any Defaulted Interest on
the Securities in any other lawful manner not inconsistent with the requirements
of any securities exchange on which such Securities may be listed, and upon such
notice as may be required by such exchange, if, after notice given by the
Company to the Trustee of the proposed payment pursuant to this clause, such
manner of payment shall be deemed practicable by the Trustee.
(iii) The Trustee shall pay, with the proceeds of the Zero
Coupon Bond, any accrued and unpaid interest in accordance with the provisions
of Section 12.01 hereof.
Subject to the foregoing provisions of this Section and Section 2.06
hereof, each Security delivered under this Indenture upon registration of
transfer of or in exchange for or in lieu of any other Security shall carry the
rights to interest accrued and unpaid, and to accrue, which were carried by such
other Security.
SECTION 11.03 Payment of Principal Amount.
(a) The Principal Amount that is due and payable shall be punctually
paid or duly provided for by the Company, Trustee at least 5 days prior to the
Stated Maturity date. Following receipt of such funds, the Trustee shall pay
such Principal Amount to the person in whose name that Security is registered at
the close of business on the Regular Record Date for such Principal Amount at
the office or agency of the Company maintained for such purpose. Each Principal
Amount shall be paid in Cash to Payee's address located inside the United
States.
33
<PAGE> 39
(b) Except as otherwise specified with respect to the Security, any
Principal Amount on any Security that is payable, but is returned undeliverable
to the Trustee following any applicable Maturity Date (herein called "Defaulted
Principal") shall forthwith cease to be payable to the registered Holder thereof
on the relevant Regular Record Date by virtue of having been such Holder, and
such Defaulted Principal Amount may be paid by the Company, at its election in
each case, as provided in clause (i) and (ii) below:
(i) The Company may elect to make payment of any Defaulted
Principal Amount to the persons in whose names the Securities are registered at
the close of business on a Special Record Date for the payment of such Defaulted
Principal Amount, which shall be fixed in the following manner. At any time
following receipt of the Trustee's report of Defaulted Principal, the Company
shall notify the Trustee in writing of the amount of Defaulted Principal Amount
proposed to be paid on each Security and the date of the proposed payment (which
shall not be less than 20 days after such notice is received by the Trustee),
and at the same time the Company shall deposit with the Trustee an amount of
money equal to the aggregate amount proposed to be paid in respect of such
Defaulted Principal Amount or shall make arrangements satisfactory to the
Trustee for such deposit on or prior to the date of proposed payment, such money
when deposited to be held in trust for the benefit of the persons entitled to
such Defaulted Principal Amount as in this clause provided. Thereupon the
Trustee shall fix a Special Record Date for the payment of such Defaulted
Principal Amount which shall be not more than 15 days and not less than 10 days
prior to the date of the proposed payment and not less than 10 days after the
receipt by the Trustee of the notice of the proposed payment. The Trustee shall
promptly notify the Company of such Special Record Date and, in the name and at
the expense of the Company, shall cause notice of the proposed payment of such
Defaulted Principal Amount and the Special Record Date therefor to be mailed,
first-class postage prepaid, to each Holder of Securities at his address as it
appears on the list of Holders maintained pursuant to Section 2.05 hereof not
less than 10 days prior to such Special Record Date. The Trustee may, in its
discretion, in the name and at the expense of the Company, cause a similar
notice to be published at least once in an Authorized Newspaper in each place of
payment, but such publications shall not be a condition precedent to the
establishment of such Special Record Date. Notice of the proposed payment of
such Defaulted Principal Amount and the Special Record Date therefor having been
mailed as aforesaid, such Defaulted Principal Amount shall be paid to the
persons in whose names the Securities are registered at the close of business on
such Special Record Date and shall no longer be payable pursuant to the
following clause (ii).
(ii) The Company may make payment of any Defaulted Principal
Amount on the Securities in any other lawful manner not inconsistent with the
requirements of any securities exchange on which such Securities may be listed,
and upon such notice as may be required by such exchange, if, after notice given
by the Company to the Trustee of the proposed payment pursuant to this clause,
such manner of payment shall be deemed practicable by the Trustee.
SECTION 11.04. Remaining Sums. The Trustee shall pay any remaining
proceeds of the Zero Coupon Bond and any unpaid Principal Amount to the Company
on June 30, 2016. Payment shall be made by wire transfer by the Trustee to the
Company's designated account within the United States and thereafter neither the
Trustee nor the Company shall have any further obligations to one another or any
Holder pursuant to this Indenture.
ARTICLE 12.
MISCELLANEOUS
SECTION 12.01. Trust Indenture Act.
This Indenture is hereby made subject to, and shall be governed by, the
provisions of the TIA required to be part of and to govern indentures qualified
under the TIA; provided, however, this Section 12.01 shall not require this
Indenture or the Trustee to be qualified under the TIA prior to the time such
qualification is in fact required under the terms of the TIA, nor shall it
constitute any admission or acknowledgment by any party that any such
qualification is required prior to the time such qualification is in fact
required under the terms of the TIA. If any provision hereof limits, qualifies
or conflicts with another provision hereof which is required to be included in
an indenture qualified under the TIA, such required provision shall control.
34
<PAGE> 40
SECTION 12.02. Notices.
Any request, demand, authorization, notice, waiver, consent or
communication shall be in writing and delivered in Person or mailed by first
class mail, postage prepaid, addressed as follows or transmitted by facsimile
transmission (confirmed by overnight courier) to the following facsimile
numbers:
35
<PAGE> 41
if to the Company:
Austin Funding.com Corporation
823 Congress Avenue, Suite 515
Austin, Texas 78701
Attention: Mr. Glenn A. LaPointe, President
Phone: (512) 480-8000
Telecopy: (512) 480-8001
with a copy to:
Mr. Jack A. Selman
Selman & Munson, P.C.
111 Congress Plaza, Suite 1000
Austin, Texas 7801
Phone: (512) 505-5955
Telecopy: (512) 505-5956
if to the Trustee:
Norwest Bank Texas, N.A.
-------------------------
-------------------------
Attn:
-------------------
Phone: ( )
--- ------------
Telecopy: ( )
--- ---------
The Company or the Trustee by notice to the other may designate
additional or different addresses for subsequent notices or communications.
Any notice or communication given to a Holder shall be mailed to the
Holder, by first class mail, postage prepaid, at the Holder's address as it
appears on the registration books of the Registrar and shall be sufficiently
given if so mailed within the time prescribed.
Failure to mail a notice or communication to a Holder or any defect in
it shall not affect its sufficiency with respect to other Holders. If a notice
or communication is mailed in the manner provided above, it is duly given,
whether or not received by the addressee.
If the Company mails a notice or communication to the Holders, it shall
mail a copy to the Trustee and each Registrar, Paying Agent or co-registrar.
SECTION 12.03. Communication by Holders with Other Holders.
Holders may communicate pursuant to TIA Section 312(b) with other
Holders with respect to their rights under this Indenture or the Securities. The
Company, the Trustee, the Registrar, the Paying Agent and anyone else shall have
the protection of TIA Section 312(c).
36
<PAGE> 42
SECTION 12.04. Certificate and Opinion as to Conditions Precedent.
Upon any request or application by the Company to the Trustee to take
any action under this Indenture, the Company shall furnish to the Trustee:
(a) an Officers' Certificate stating that, in the opinion of the
signers, all conditions precedent, if any, provided for in this Indenture
relating to the proposed action have been complied with; and
(b) an Opinion of Counsel stating that, in the opinion of such counsel,
all such conditions precedent have been complied with.
SECTION 12.05. Statements Required in Certificate or Opinion.
Each Officers' Certificate or Opinion of Counsel with respect to
compliance with a covenant or condition provided for in this Indenture shall
include:
(a) a statement that each individual making such Officers' Certificate
or Opinion of Counsel has read such covenant or condition;
(b) a brief statement as to the nature and scope of the examination or
investigation upon which the statements or opinions contained in such Officers'
Certificate or Opinion of Counsel are based;
(c) a statement that, in the opinion of each such individual, he or she
has made such examination or investigation as is necessary to enable him or her
to express an informed opinion as to whether or not such covenant or condition
has been complied with; and
(d) a statement that, in the opinion of such individual, such covenant
or condition has been complied with.
SECTION 12.06. Severability Clause.
In case any provision in this Indenture or in the Securities shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
SECTION 12.07. Rules By Trustee, Paying Agent and Registrar.
The Trustee may make reasonable rules for action by or a meeting of
Holders. The Registrar and the Paying Agent may make reasonable rules for their
functions.
SECTION 12.08. Governing Law.
THE LAWS OF THE STATE OF TEXAS SHALL GOVERN THIS INDENTURE AND THE
SECURITIES, WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAWS.
SECTION 12.09. No Recourse Against Others.
A director, officer, employee or stockholder, as such, of the Company
shall not have any liability for any obligations of the Company under the
Securities or this Indenture or for any claim based on, in respect of or by
reason of such obligations or their creation. By accepting a Security, each
Holder shall waive and release all such liability. The waiver and release shall
be part of the consideration for the issue of the Securities.
37
<PAGE> 43
SECTION 12.10. Successors.
All agreements of the Company in this Indenture and the Securities
shall bind its successor. All agreements of the Trustee in this Indenture shall
bind its successor.
SECTION 12.11. Multiple Originals.
The parties may sign any number of copies of this Indenture. Each
signed copy shall be an original, but all of them together represent the same
agreement. One signed copy is enough to prove this Indenture.
IN WITNESS WHEREOF, the undersigned, being duly authorized, have
executed this Indenture on behalf of the respective parties hereto as of the
date first written above.
AUSTIN FUNDING.COM CORPORATION,
a Nevada corporation
By:
---------------------------------------
Glenn A. LaPointe, President
NORWEST BANK TEXAS, N.A.,
a
-------------------------
By:
-------------------------------------
Name:
-------------------------------------
Title:
-------------------------------------
38
<PAGE> 44
EXHIBIT "A"
[FORM OF FACE OF SECURITY]
AUSTIN FUNDING.COM CORPORATION
8% SECURED SUBORDINATED DEBENTURE DUE DECEMBER ____, 2015
FOR UNITED STATES FEDERAL INCOME TAX PURPOSES, THIS SECURITY BEARS INFORMATION
INCLUDING THE PRINCIPAL AMOUNT, THE ISSUE DATE AND THE INTEREST RATE. ADDITIONAL
INFORMATION WILL BE MADE AVAILABLE TO HOLDERS UPON REQUEST TO GLENN A. LAPOINTE
OF THE COMPANY AT (512) 480-8000.
No.
Issue Date: , Principal Amount: $
---------- ----- -----------
Interest Rate: 8% per annum CUSIP:
------------
Stated Maturity: December , 2015
----
Austin Funding.com Corporation, a Nevada corporation, promises to pay
to _________________ or registered assigns, on ________, 2015, the Principal
Amount of _____________________________ Dollars ($_______________________)].
Interest on the Principal Amount hereof will be paid as specified on
the other side of this Security.
Additional provisions of this Security are set forth on the other side
of this Security.
IN WITNESS WHEREOF, Austin Funding.com Corporation has caused this
instrument to be duly executed.
AUSTIN FUNDING.COM CORPORATION,
a Nevada corporation
By:
-------------------------------------------
Glenn A. LaPointe, President
Dated:
-----------------------------------------
<PAGE> 45
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
Norwest Bank Texas, N.A., as Trustee, certifies that this is one of the
Securities referred to in the within-mentioned Indenture.
By:
-------------------------------------
Name:
-------------------------------------
Title:
-------------------------------------
A-2
<PAGE> 46
[FORM OF REVERSE SIDE OF SECURITY]
AUSTIN FUNDING.COM CORPORATION
1. INTEREST
This Security shall bear interest at the rate of eight percent (8%) per
annum, payable monthly commencing on ________, ____.
The principal hereof is secured by a non-callable United States
government zero coupon security in the principal amount of $10,000,000,
purchased at an original issue discount of $__________, maturing on December
____, 2015.
2. METHOD OF PAYMENT
Subject to the terms and conditions of the Indenture, the Company will
make payments in respect of the Securities to the Persons who are registered
Holders of Securities (i) interest only, commencing on ___________ and
continuing thereafter on the 1st day of each month until the Stated Maturity
date; and (ii) all then remaining unpaid principal, on the (1) Redemption Date,
(2) the Stated Maturity date, as the case may be. Holders must surrender
Securities to the Paying Agent to collect such payments in respect of the
Securities. The Company will pay cash amounts in money of the United States that
at the time of payment is legal tender for payment of public and private debts.
However, the Company may make such cash payments by check payable in such money.
3. PAYING AGENT AND REGISTRAR
Initially, Norwest Bank Texas, N.A., a __________ ______________ (the
"Trustee"), will act as Paying Agent and Registrar. The Company may appoint and
change any Paying Agent, Registrar or co-registrar without notice, other than
notice to the Trustee. The Company or any of its Subsidiaries or any of their
Affiliates may act as Paying Agent, Registrar or co-registrar.
4. INDENTURE
The Company issued the Securities under an Indenture (the "INDENTURE"),
dated as of ___________, 1999, between the Company and the Trustee. Capitalized
terms used herein and not defined herein have the meanings ascribed thereto in
the Indenture. The Securities are subject to all such terms, and Holders are
referred to the Indenture for a statement of those terms.
The Securities are secured subordinated obligations of the Company
limited to $10,000,000 aggregate Principal Amount (subject to Sections 2.02 and
2.07 of the Indenture). The Indenture does not limit other indebtedness of the
Company, secured or unsecured, including Senior Indebtedness of the Company.
5. REDEMPTION AT THE OPTION OF THE COMPANY
No sinking fund is provided for the Securities. The Securities are
redeemable as a whole, or from time to time in part, at any time at the option
of the Company.
Notice of redemption at the option of the Company will be mailed at
least 20 days but not more than 60 days before the Redemption Date to each
Holder of Securities to be redeemed at the Holder's registered address. If money
sufficient to pay the Redemption Price of all Securities (or portions thereof)
to be redeemed on the Redemption Date is deposited with the Paying Agent in
accordance with the provisions of the Indenture, on and after the Redemption
Date interest ceases to accrue on such Securities or portions thereof.
Securities in denominations larger than $1,000 of Principal
A-3
<PAGE> 47
Amount may be redeemed in part but only in multiples of $1,000 of Principal
Amount.
6. SUBORDINATION
The Securities are subordinated to all existing and future Senior
Indebtedness of the Company. To the extent provided in the Indenture, Senior
Indebtedness of the Company must be paid before the Securities may be paid. The
Indenture does not limit the present or future amount of Senior Indebtedness
that the Company may have. The Company agrees, and each Holder by accepting a
Security agrees, to the subordination and authorizes the Trustee to give it
effect and appoints the Trustee as attorney-in-fact for such purpose.
7. DENOMINATIONS; TRANSFER; EXCHANGE
The Securities are in registered form, without coupons, in
denominations of $5,000 of Principal Amount and integral multiples of $5,000. A
Holder may transfer Securities in accordance with the Indenture. The Registrar
may require a Holder, among other things, to furnish appropriate endorsements
and transfer documents and to pay any taxes and fees required by law or
permitted by the Indenture. The Registrar need not transfer or exchange any
Securities selected for redemption (except, in the case of a Security to be
redeemed in part, the portion of the Security not to be redeemed) or any
Securities in respect of which a Repurchase Notice or has been given and not
withdrawn (except, in the case of a Security to be purchased in part, the
portion of the Security not to be purchased) or any Securities for a period of
15 days before the mailing of notice of Securities to be redeemed.
8. PERSONS DEEMED OWNERS
The registered Holder of this Security may be treated as the owner of
this Security for all purposes.
9. UNCLAIMED MONEY OR SECURITIES
The Trustee and the Paying Agent shall return to the Company upon
written request any money or securities held by them for the payment of any
amount with respect to the Securities that remains unclaimed for two years,
provided, however, that a Trustee or such Paying Agent, before being required to
make any such return, shall at the expense of the Company cause to be mailed to
each such Holder notice that such money or securities remains unclaimed and
that, after a date specified therein, which shall not be less than 30 days from
the date of such publication or mailing, any unclaimed money or securities then
remaining will be returned to the Company. After return to the Company, Holders
entitled to the money or securities must look to the Company for payment as
general creditors unless an applicable abandoned property law designates another
Person.
10. AMENDMENT; WAIVER
Subject to certain exceptions set forth in the Indenture, (i) the
Indenture or the Securities may be amended with the written consent of the
Holders of at least a majority in aggregate Principal Amount of the Securities
at the time outstanding, and (ii) certain Defaults and Events of Defaults may be
waived with the written consent of the Holders of a majority in aggregate
Principal Amount of the Securities at the time outstanding. Subject to certain
exceptions set forth in the Indenture, without the consent of any Holder, the
Company and the Trustee may amend the Indenture or the Securities to cure any
ambiguity, defect or inconsistency, or to provide for the assumption of the
Company's obligations to the Holders of the Securities in case of a merger or
consolidation or sale of all or substantially all of the Company's assets; to
provide for uncertificated Securities in addition to or in place of certificated
Securities or to make any change that does not adversely affect the rights of
any Holder or to comply with any requirement of the SEC in connection with the
qualification of the Indenture under the TIA.
A-4
<PAGE> 48
11. DEFAULTS AND REMEDIES
Under the Indenture, Events of Default include (i) the Company defaults
in the payment of the Principal Amount or on any Security when the same becomes
due and payable at its Stated Maturity, upon redemption, upon declaration, when
due for repurchase by the Company or otherwise, whether or not such payment
shall be prohibited by Article 10 of the Indenture; (ii) the Company fails to
comply with any of its agreements or covenants in this Security or the Indenture
(other than those referred to in clause (i) above) and such failure continues
for 60 days after receipt by the Company of a Notice of Default; and (iii)
certain events of bankruptcy or insolvency as set forth in the Indenture. If an
Event of Default occurs and is continuing, the Trustee, or the Holders of at
least 25% in aggregate Principal Amount of the Securities at the time
outstanding, may declare all the Securities to be due and payable immediately.
Certain events of bankruptcy or insolvency are Events of Default which will
result in the Securities being declared due and payable immediately upon the
occurrence of such Events of Default.
Holders may not enforce the Indenture or the Securities except as
provided in the Indenture. The Trustee may refuse to enforce the Indenture or
the Securities unless it receives reasonable indemnity or security. The Trustee
may not dispose of, or disburse the proceeds of, the zero coupon security until
its maturity in 2015. Subject to certain limitations, Holders of a majority in
aggregate Principal Amount of the Securities at the time outstanding may direct
the Trustee in its exercise of any trust or power. The Trustee may withhold from
Holders notice of any continuing Default (except a Default in payment of amounts
specified in clause (i) above) if it determines that withholding notice is in
their interests.
12. TRUSTEE DEALINGS WITH THE COMPANY
The Trustee under the Indenture, in its individual or any other
capacity, may become the owner or pledgee of Securities and may otherwise deal
with and collect obligations owed to it by the Company or its Affiliates and may
otherwise deal with the Company or its Affiliates with the same rights it would
have if it were not Trustee.
13. NO RECOURSE AGAINST OTHERS
A director, officer, employee or stockholder, as such, of the Company
shall not have any liability for any obligations of the Company under the
Securities or the Indenture or for any claim based on, in respect of or by
reason of such obligations or their creation. By accepting a Security, each
Holder waives and releases all such liability. The waiver and release are part
of the consideration for the issue of the Securities.
14. AUTHENTICATION
This Security shall not be valid until an authorized signatory of the
Trustee manually signs the Trustee's Certificate of Authentication on the other
side of this Security.
15. ABBREVIATIONS
Customary abbreviations may be used in the name of a Holder or an
assignee, such as TEN COM (=tenants in common), TENANT (=tenants by the
entireties), JT TEN (=joint tenants with right of survivorship and not as
tenants in common), CUST (=custodian), and U/G/M/A (=Uniform Gift to Minors
Act).
16. GOVERNING LAW
THE LAWS OF THE STATE OF TEXAS SHALL GOVERN THE INDENTURE AND THIS
SECURITY, WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAWS.
The Company will furnish to any Holder upon written request and without
charge a copy of the Indenture. Requests may be made to:
Austin Funding.com Corporation
823 Congress Avenue, Suite 515
Austin, Texas 78701
Attention: Mr. Glenn A. LaPointe, President
Telecopy: (512) 480-8001
A-5
<PAGE> 49
[FORM OF ASSIGNMENT]
For value received ________________________ hereby sell(s), assign(s)
and transfer(s) unto _____________________ (Please insert social security or
other Taxpayer Identification Number of assignee) the within Security, and
hereby irrevocably constitutes and appoints _____________ attorney to transfer
the said Security on the books of the Company, with full power of substitution
in the premises.
Dated: -------------------------------------------
--------------
-------------------------------------------
-------------------------------------------
Signature(s)
Signature(s) must be guaranteed by an eligible Guarantor
Institution (a bank, a stock broker, a savings and loan association or
a credit union) with membership in an approved signature guarantee
program pursuant to Securities and Exchange Commission Rule 17Ad-15) if
shares of Common Stock are to be issued, or Securities to be delivered,
other than to or in the name of the registered holder.
--------------------------------------------
Signature Guaranty
NOTICE: The above signatures of the holder(s) hereof must correspond with the
name as written upon the face of the Security in every particular without
alteration or enlargement or any change whatever.
A-6
<PAGE> 1
[FORM OF FACE OF SECURITY]
AUSTIN FUNDING.COM CORPORATION
8% SECURED SUBORDINATED DEBENTURE DUE DECEMBER ____, 2015
FOR UNITED STATES FEDERAL INCOME TAX PURPOSES, THIS SECURITY BEARS INFORMATION
INCLUDING THE PRINCIPAL AMOUNT, THE ISSUE DATE AND THE INTEREST RATE. ADDITIONAL
INFORMATION WILL BE MADE AVAILABLE TO HOLDERS UPON REQUEST TO GLENN A. LAPOINTE
OF THE COMPANY AT (512) 480-8000.
No.
Issue Date: , Principal Amount:
---------- ----- --------
Interest Rate: 8% per annum CUSIP:
------------
Stated Maturity: December , 2015
----
Austin Funding.com Corporation, a Nevada corporation, promises to pay
to _________________ or registered assigns, on ________, 2015, the Principal
Amount of _____________________________ Dollars ($_______________________)].
Interest on the Principal Amount hereof will be paid as specified on
the other side of this Security.
Additional provisions of this Security are set forth on the other side
of this Security.
IN WITNESS WHEREOF, Austin Funding.com Corporation has caused this
instrument to be duly executed.
AUSTIN FUNDING.COM CORPORATION,
a Nevada corporation
By:
-----------------------------------------
Glenn A. LaPointe, President
Dated:
---------------------------------------
<PAGE> 2
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
Norwest Bank, Texas, N.A., as Trustee, certifies that this is one of
the Securities referred to in the within-mentioned Indenture.
By:
------------------------------------
Name:
------------------------------------
Title:
------------------------------------
<PAGE> 3
[FORM OF REVERSE SIDE OF SECURITY]
AUSTIN FUNDING.COM CORPORATION
1. INTEREST
This Security shall bear interest at the rate of eight percent (8%) per
annum, payable monthly commencing on _________, ____.
The principal hereof is secured by a non-callable United States
government zero coupon security in the principal amount of $10,000,000,
purchased at an original issue discount of $__________, maturing on December
____, 2015.
2. METHOD OF PAYMENT
Subject to the terms and conditions of the Indenture, the Company will
make payments in respect of the Securities to the Persons who are registered
Holders of Securities (i) interest only, commencing on ___________ and
continuing thereafter on the 1st day of each month until the Stated Maturity
date; and (ii) all then remaining unpaid principal, on the (1) Redemption Date,
(2) the Stated Maturity date, as the case may be. Holders must surrender
Securities to the Paying Agent to collect such payments in respect of the
Securities. The Company will pay cash amounts in money of the United States that
at the time of payment is legal tender for payment of public and private debts.
However, the Company may make such cash payments by check payable in such money.
3. PAYING AGENT AND REGISTRAR
Initially, Norwest Bank, Texas, N.A., a _______ __________ (the
"Trustee"), will act as Paying Agent and Registrar. The Company may appoint and
change any Paying Agent, Registrar or co-registrar without notice, other than
notice to the Trustee. The Company or any of its Subsidiaries or any of their
Affiliates may act as Paying Agent, Registrar or co-registrar.
4. INDENTURE
The Company issued the Securities under an Indenture (the "INDENTURE"),
dated as of ___________, 1999, between the Company and the Trustee. Capitalized
terms used herein and not defined herein have the meanings ascribed thereto in
the Indenture. The Securities are subject to all such terms, and Holders are
referred to the Indenture for a statement of those terms.
The Securities are secured subordinated obligations of the Company
limited to $10,000,000 aggregate Principal Amount (subject to Sections 2.02 and
2.07 of the Indenture). The Indenture does not limit other indebtedness of the
Company, secured or unsecured, including Senior Indebtedness of the Company.
5. REDEMPTION AT THE OPTION OF THE COMPANY
No sinking fund is provided for the Securities. The Securities are
redeemable as a whole, or from time to time in part, at any time at the option
of the Company.
Notice of redemption at the option of the Company will be mailed at
least 20 days but not more than 60 days before the Redemption Date to each
Holder of Securities to be redeemed at the Holder's registered address. If money
sufficient to pay the Redemption Price of all Securities (or portions thereof)
to be redeemed on the Redemption Date is deposited with the Paying Agent in
accordance with the provisions of the Indenture, on and after the Redemption
Date interest ceases to accrue on such Securities or portions thereof.
Securities in denominations larger than $1,000 of Principal Amount may be
redeemed in part but only in multiples of $1,000 of Principal Amount.
<PAGE> 4
6. SUBORDINATION
The Securities are subordinated to all existing and future Senior
Indebtedness of the Company. To the extent provided in the Indenture, Senior
Indebtedness of the Company must be paid before the Securities may be paid. The
Indenture does not limit the present or future amount of Senior Indebtedness
that the Company may have. The Company agrees, and each Holder by accepting a
Security agrees, to the subordination and authorizes the Trustee to give it
effect and appoints the Trustee as attorney-in-fact for such purpose.
7. DENOMINATIONS; TRANSFER; EXCHANGE
The Securities are in registered form, without coupons, in
denominations of $5,000 of Principal Amount and integral multiples of $5,000. A
Holder may transfer Securities in accordance with the Indenture. The Registrar
may require a Holder, among other things, to furnish appropriate endorsements
and transfer documents and to pay any taxes and fees required by law or
permitted by the Indenture. The Registrar need not transfer or exchange any
Securities selected for redemption (except, in the case of a Security to be
redeemed in part, the portion of the Security not to be redeemed) or any
Securities in respect of which a Repurchase Notice or has been given and not
withdrawn (except, in the case of a Security to be purchased in part, the
portion of the Security not to be purchased) or any Securities for a period of
15 days before the mailing of notice of Securities to be redeemed.
8. PERSONS DEEMED OWNERS
The registered Holder of this Security may be treated as the owner of
this Security for all purposes.
9. UNCLAIMED MONEY OR SECURITIES
The Trustee and the Paying Agent shall return to the Company upon
written request any money or securities held by them for the payment of any
amount with respect to the Securities that remains unclaimed for two years,
provided, however, that a Trustee or such Paying Agent, before being required to
make any such return, shall at the expense of the Company cause to be mailed to
each such Holder notice that such money or securities remains unclaimed and
that, after a date specified therein, which shall not be less than 30 days from
the date of such publication or mailing, any unclaimed money or securities then
remaining will be returned to the Company. After return to the Company, Holders
entitled to the money or securities must look to the Company for payment as
general creditors unless an applicable abandoned property law designates another
Person.
10. AMENDMENT; WAIVER
Subject to certain exceptions set forth in the Indenture, (i) the
Indenture or the Securities may be amended with the written consent of the
Holders of at least a majority in aggregate Principal Amount of the Securities
at the time outstanding, and (ii) certain Defaults and Events of Defaults may be
waived with the written consent of the Holders of a majority in aggregate
Principal Amount of the Securities at the time outstanding. Subject to certain
exceptions set forth in the Indenture, without the consent of any Holder, the
Company and the Trustee may amend the Indenture or the Securities to cure any
ambiguity, defect or inconsistency, or to provide for the assumption of the
Company's obligations to the Holders of the Securities in case of a merger or
consolidation or sale of all or substantially all of the Company's assets; to
provide for uncertificated Securities in addition to or in place of certificated
Securities or to make any change that does not adversely affect the rights of
any Holder or to comply with any requirement of the SEC in connection with the
qualification of the Indenture under the TIA.
11. DEFAULTS AND REMEDIES
Under the Indenture, Events of Default include (i) the Company defaults
in the payment of the Principal Amount or on any Security when the same becomes
due and payable at its Stated Maturity, upon redemption, upon declaration, when
due for repurchase by the Company or otherwise, whether or not such payment
shall be prohibited by Article 10 of the Indenture; (ii) the Company fails to
comply with any of its agreements or covenants in this Security or the Indenture
(other than those referred to in clause (i) above) and such failure continues
for 60 days after receipt by the Company of a Notice of Default; and (iii)
certain events of bankruptcy or insolvency as set forth in the Indenture. If an
Event of
<PAGE> 5
Default occurs and is continuing, the Trustee, or the Holders of at least 25% in
aggregate Principal Amount of the Securities at the time outstanding, may
declare all the Securities to be due and payable immediately. Certain events of
bankruptcy or insolvency are Events of Default which will result in the
Securities being declared due and payable immediately upon the occurrence of
such Events of Default.
Holders may not enforce the Indenture or the Securities except as
provided in the Indenture. The Trustee may refuse to enforce the Indenture or
the Securities unless it receives reasonable indemnity or security. The Trustee
may not dispose of, or disburse the proceeds of, the zero coupon security until
its maturity in 2015. Subject to certain limitations, Holders of a majority in
aggregate Principal Amount of the Securities at the time outstanding may direct
the Trustee in its exercise of any trust or power. The Trustee may withhold from
Holders notice of any continuing Default (except a Default in payment of amounts
specified in clause (i) above) if it determines that withholding notice is in
their interests.
12. TRUSTEE DEALINGS WITH THE COMPANY
The Trustee under the Indenture, in its individual or any other
capacity, may become the owner or pledgee of Securities and may otherwise deal
with and collect obligations owed to it by the Company or its Affiliates and may
otherwise deal with the Company or its Affiliates with the same rights it would
have if it were not Trustee.
13. NO RECOURSE AGAINST OTHERS
A director, officer, employee or stockholder, as such, of the Company
shall not have any liability for any obligations of the Company under the
Securities or the Indenture or for any claim based on, in respect of or by
reason of such obligations or their creation. By accepting a Security, each
Holder waives and releases all such liability. The waiver and release are part
of the consideration for the issue of the Securities.
14. AUTHENTICATION
This Security shall not be valid until an authorized signatory of the
Trustee manually signs the Trustee's Certificate of Authentication on the other
side of this Security.
15. ABBREVIATIONS
Customary abbreviations may be used in the name of a Holder or an
assignee, such as TEN COM (=tenants in common), TENANT (=tenants by the
entireties), JT TEN (=joint tenants with right of survivorship and not as
tenants in common), CUST (=custodian), and U/G/M/A (=Uniform Gift to Minors
Act).
16. GOVERNING LAW
THE LAWS OF THE STATE OF TEXAS SHALL GOVERN THE INDENTURE AND THIS
SECURITY, WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAWS.
The Company will furnish to any Holder upon written request and without
charge a copy of the Indenture. Requests may be made to:
Austin Funding.com Corporation
823 Congress Avenue, Suite 515
Austin, Texas 78701
Attention: Mr. Glenn A. LaPointe, President
Telecopy: (512) 480-8001
<PAGE> 6
[FORM OF ASSIGNMENT]
For value received ________________________ hereby sell(s), assign(s)
and transfer(s) unto _____________________ (Please insert social security or
other Taxpayer Identification Number of assignee) the within Security, and
hereby irrevocably constitutes and appoints _____________ attorney to transfer
the said Security on the books of the Company, with full power of substitution
in the premises.
Dated: ______________ ------------------------------------------
------------------------------------------
------------------------------------------
Signature(s)
Signature(s) must be guaranteed by an eligible Guarantor
Institution (a bank, a stock broker, a savings and loan association or
a credit union) with membership in an approved signature guarantee
program pursuant to Securities and Exchange Commission Rule 17Ad-15) if
shares of Common Stock are to be issued, or Securities to be delivered,
other than to or in the name of the registered holder.
------------------------------------------
Signature Guaranty
NOTICE: The above signatures of the holder(s) hereof must correspond with the
name as written upon the face of the Security in every particular without
alteration or enlargement or any change whatever.
<PAGE> 1
PLEDGE AGREEMENT
This Pledge Agreement (this "Pledge Agreement") is made and entered
into as of _________, 1999, by Austin Funding.com Corporation, a Nevada
corporation ("Pledgor") in favor of Norwest Bank Texas, N.A. as trustee (herein,
"Trustee") on behalf of the holders ("Holders") of Pledgor's 8% Secured
Subordinated Debentures Due 2015 (the "Debentures"), as more particularly
described in that certain Indenture between Pledgor and Trustee dated _________,
1999, as it may be amended from time to time (the "Indenture").
WITNESSETH:
WHEREAS, Pledgor is the owner of that certain non-callable United
States government zero coupon security in the face amount of $10,000,000,
evidence of which is attached hereto and incorporated herein by reference as
Exhibit "A" (the "Bond"); and .
WHEREAS, Pledgor and Trustee have entered into the Indenture; and
WHEREAS, the terms of the Indenture require, among other things, that
Pledgor execute and deliver this Pledge Agreement in order to secure the payment
and performance by Pledgor of Pledgor's obligations to Holders of the
Debentures.
AGREEMENT
NOW THEREFORE, in consideration of the premises and in order to induce
the Trustee to enter into the Indenture, Pledgor hereby agrees with Trustee as
follows:
SECTION 1. Pledge. Pledgor hereby pledges to Trustee, and grants to
Trustee a continuing first priority security interest in all of its right, title
and interest in the Bond and all products and proceeds of the Bond, including,
without limitation, all cash, options, rights, instruments and other property or
proceeds from time to time received, receivable or otherwise distributed in
respect of or in exchange for any or all of the Bond (the "Pledged Collateral").
SECTION 2. Security for Debentures. This Pledge Agreement and the
"Entitlement Documents" (as hereinafter defined) secure the prompt and complete
payment and performance when due (whether at stated maturity, by acceleration or
otherwise) of Pledgor's obligation to pay interest and principal with respect to
the Debentures.
SECTION 3. Perfection of Security Interest in Pledged Collateral. On or
before the date hereof, Pledgor has (i) perfected Trustee's security interest in
the Pledged Collateral through either (a) delivery to the Trustee of a
certificated security representing ownership of the Bond, along with an
appropriate security power therefor, or (b) designating Trustee as the
entitlement holder (as such term is defined in Section 8.102 of the Texas
Business & Commerce Code, as amended, as in effect on the date hereof [the
"TBCC"]) to the issuer of the Bond (such applicable instrument(s) herein,
collectively, the "Entitlement Documents");
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<PAGE> 2
and (ii) delivery of an appropriate "Entitlement Order" (as such term is defined
in Section 8.102(a)(8) of the TBCC) to Trustee and the issuer of the Bond.
Notwithstanding the form of the Pledged Collateral, Pledgor and the
Trustee acknowledge and agree that, at all times during the term of this Pledge
Agreement, all certificates or instruments representing or evidencing the
Pledged Collateral shall be delivered to and held by Trustee on behalf of the
Holders pursuant hereto, or shall be held by the Bond issuer pursuant to
appropriate Entitlement Documents and Entitlement Order(s), and shall be
accompanied by duly executed instruments of transfer or assignment in blank, all
in form and substance satisfactory to Trustee.
SECTION 4. Representations and Warranties. Pledgor hereby makes all
representations and warranties, and agrees to comply with all of the
obligations, requirements and restrictions in the covenants and agreements,
applicable to Pledgor contained in the Indenture. Pledgor further represents and
warrants that:
(a) The execution, delivery and performance by Pledgor of this Pledge
Agreement is within Pledgor's powers, has been duly authorized by all necessary
action, and does not contravene, or constitute a default under, any provision of
applicable law or regulation or of any agreement, judgment, injunction, order,
decree or other instrument binding upon Pledgor or result in the creation or
imposition of any lien on any assets of Pledgor.
(b) Pledgor's purchase of the Bond was duly authorized.
(c) Pledgor is the legal, record and beneficial owner of the Pledged
Collateral, free and clear of any lien or claims of any person or entity except
for the security interest created by this Pledge Agreement.
(d) Pledgor has full power and authority to enter into this Pledge
Agreement and has the right to grant a security interest in the Pledged
Collateral as provided by this Pledge Agreement.
(e) This Pledge Agreement has been duly executed and delivered by
Pledgor and constitutes a legal, valid and binding obligation of Pledgor,
enforceable against Pledgor in accordance with its terms, except as such
enforceability may be limited by the effect of any applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting
creditors' rights generally or general principles of equity.
(f) Upon the delivery and filing, as applicable, of the Entitlement
Documents, the Entitlement Order(s) and the Pledged Collateral in accordance
with the provisions of this Pledge Agreement and (as to certain proceeds of the
Pledged Collateral) the filing of Uniform Commercial Code (the "UCC") financing
statements, the pledge of the Pledged Collateral pursuant to this Pledge
Agreement creates a valid and perfected first priority security interest in the
Pledged Collateral, securing the payment of the Debentures in accordance with
the terms
2
<PAGE> 3
and provisions of the Indenture for the benefit of the Holders, and enforceable
as such against all creditors of Pledgor.
(g) No consent of any other person or entity and no consent,
authorization, approval or other action by, and no notice to or filing with, any
governmental authority or regulatory body is required either (i) for the pledge
by Pledgor of the Pledged Collateral pursuant to this Pledge Agreement or for
the execution, delivery or performance of this Pledge Agreement by Pledgor, or
(ii) for the exercise by Trustee of the rights provided for in this Pledge
Agreement or the remedies in respect of the Pledged Collateral pursuant to this
Pledge Agreement (except as may be required in connection with such disposition
by laws affecting the offering and sale of securities).
(h) No litigation, investigation or proceeding of or before any
arbitrator or governmental authority is pending or, to the best knowledge of
Pledgor, threatened by or against Pledgor or against any of its properties or
revenues with respect to this Pledge Agreement or any of the transactions
contemplated hereby.
(i) The pledge of the Pledged Collateral pursuant to this Pledge
Agreement is not prohibited by any applicable law or governmental regulation,
release, interpretation or opinion of the Board of Governors of the Federal
Reserve System or other regulatory agency (including, without limitation,
Regulations G, T, U and X of the Board of Governors of the Federal Reserve
System).
(j) All information set forth herein relating to the Pledged Collateral
is accurate and complete in all respects.
SECTION 5. Further Assurance. Pledgor will, promptly upon request by
Trustee, execute and deliver or cause to be executed and delivered, or use its
best efforts to procure, all assignments, instruments and other documents, all
in form and substance satisfactory to Trustee, deliver any instruments to
Trustee and take any other actions that are necessary or, in the reasonable
opinion of Trustee, desirable to perfect, continue the perfection of or protect
the first priority of Trustee's security interest in, the Pledged Collateral, to
protect the Pledged Collateral against the rights, claims or interests of third
persons or to effect the purposes of this Pledge Agreement. Pledgor also hereby
authorizes Trustee to file any financing or continuation statements, or
Entitlement Orders, with respect to the Pledged Collateral without the signature
of Pledgor to the extent permitted by applicable law. Pledgor will pay all costs
incurred in connection with any of the foregoing.
SECTION 6. Power of Attorney. Subject to the provisions of the
Indenture, Pledgor hereby appoints and constitutes Trustee as Pledgor's
attorney-in-fact to exercise all of the following powers upon and at any time
after the occurrence of an Event of Default: (i) collection of proceeds of any
Pledged Collateral; (ii) conveyance of any item of Pledged Collateral to any
purchaser thereof; (iii) giving of any notices or recording of any liens under
Section 5 hereof; (iv) making of any payments or taking any acts under Section 7
hereof and
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<PAGE> 4
(v) paying or discharging taxes or liens, levied or placed upon or threatened
against the Pledged Collateral, the legality or validity thereof and the amounts
necessary to discharge the same to be determined by Trustee in its sole
discretion, and such payments made by Trustee to become the obligations of
Pledgor to Trustee, due and payable immediately without demand. Trustee's
authority hereunder shall include, without limitation, the authority to endorse
and negotiate, for Trustee's own account, any checks or instruments in the name
of Pledgor, execute and give receipt for any certificate of ownership or any
document, transfer tide to any item of Pledged Collateral, sign Pledgor's name
on all Entitlement Documents, Entitlement Orders, financing statements or any
other documents deemed necessary or appropriate to preserve, protect or perfect
the security interest in the Pledged Collateral and to file the same, prepare,
file and sign Pledgor's name on any notice of lien, and prepare, file and sign
Pledgor's name on a proof of claim in bankruptcy or similar document against any
customer of Pledgor, and to take any other actions arising from or incident to
the powers granted to Trustee in this Pledge Agreement. This power of attorney
is coupled with an interest and is irrevocable by Pledgor.
SECTION 7. Agent May Perform. If Pledgor fails to perform any agreement
contained herein, Trustee may itself perform, or cause performance of, such
agreement and the reasonable expenses of Trustee incurred in connection
therewith shall be payable by Pledgor under Section 9 hereof.
SECTION 8. Remedies Upon Default. If any Event of Default shall have
occurred and be continuing, Trustee shall have all of the rights and remedies
with respect to the Pledged Collateral set forth in the Indenture.
SECTION 9. Expenses. Pledgor will upon demand pay to Trustee the amount
of any and all reasonable expenses, including, without limitation, the
reasonable fees, expenses and disbursements of its counsel, of any business
broker or other selling agent and of any other experts and agents retained by
Trustee, that Trustee may incur in connection with (i) the administration of
this Pledge Agreement, (ii) the custody or preservation of, or the sale of,
collection from, or other realization upon, any of the Pledged Collateral, (iii)
the exercise or enforcement of any of the rights of Trustee hereunder, or (iv)
the failure by Pledgor to perform or observe any of the provisions hereof.
SECTION 10. Interest Absolute. All rights of Trustee and security
interests hereunder, and all obligations of Pledgor hereunder, shall be absolute
and unconditional irrespective of:
(a) any lack of validity or enforceability of the Indenture, or any
other agreement or instrument relating thereto;
(b) any change in the time, manner or place of payment of, or in any
other term of, all or any of Pledgor's obligations pursuant to the Indenture, or
any other amendment or waiver of or any consent to any departure from the
Indenture;
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<PAGE> 5
(c) any exchange, surrender, release or non-perfection of any other
collateral, or any release or amendment or waiver of or consent to departure
from any guarantee, for all or any of Pledgor's obligations pursuant to the
Indenture; or
(d) any other circumstance which might otherwise constitute a defense
available to, or a discharge of, Pledgor in respect of the Indenture obligations
or of this Pledge Agreement.
SECTION 11. Miscellaneous Provisions.
SECTION 11.1 Notices. All notices, requests and demands to or
upon a party hereto, to be effective, shall be in writing and shall be sent by
certified or registered mail, return receipt requested, by personal delivery
against receipt, by overnight courier or by facsimile and, unless otherwise
expressly provided herein, shall be deemed to have been validly served, given or
delivered immediately when delivered against receipt, two (2) business days
after deposit in the mail, postage prepaid, one (1) business day after deposit
with an overnight courier or, in the case of facsimile notice, when sent,
addressed as follows:
If to Trustee: Norwest Bank Texas, N.A.
-------------------------------------
-------------------------------------
Attention:
---------------------------
Facsimile No.:
-----------------------
If to Pledgor: Austin Funding.com Corporation
823 Congress, Suite 515
Austin, Texas 78701
Attention: Glenn A. LaPointe
Facsimile No.: (512) 480-8001
with a copy to:
Jack A. Selman
Selman & Munson, P.C.
111 Congress Plaza, Suite 1000
Austin, Texas 78701
Facsimile No.: (512) 505-5956
or to such other address as each party may designate for itself by notice given
in accordance with this Section 11.1.
SECTION 11.2 No Adverse Interpretation of Other Agreements. This Pledge
Agreement may not be used to interpret another pledge, security or debt
agreement of Pledgor, Pledgor or any subsidiary thereof. No such pledge,
security or debt agreement may be used to interpret this Pledge Agreement.
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<PAGE> 6
SECTION 11.3 Severability. The provisions of this Pledge Agreement are
severable, and if any clause or provision shall be held invalid or unenforceable
in whole or in part in any jurisdiction, then such invalidity or
unenforceability shall affect in that jurisdiction only such clause or
provision, or part thereof, and shall not in any manner affect such clause or
provision in any other jurisdiction or any other clause or provision of this
Pledge Agreement in any jurisdiction.
SECTION 11.4 Headings. The headings of the Articles and Sections of
this Pledge Agreement have been inserted for convenience of reference only, are
not to be considered a part hereof and shall in no way modify or restrict any of
the terms or provisions hereof.
SECTION 11.5 Amendments Waivers and Consents. Any amendment or waiver
of any provision of this Pledge Agreement and any consent to any departure by
Pledgor from any provision of this Pledge Agreement shall be effective only if
made or given in compliance with all of the terms and provisions of the
Indenture necessary for amendments or waivers of, or consents to, any departure
by Pledgor from any provision of the Indenture, and Trustee not shall be deemed,
by any act, delay, indulgence, omission or otherwise, to have waived any right
or remedy hereunder or to have acquiesced in any default or event of default or
in any breach of any of the terms and conditions hereof. Failure of Trustee to
exercise, or delay in exercising, any right, power or privilege hereunder shall
not operate as a waiver thereof. No single or partial exercise of any right,
power or privilege hereunder shall preclude any other or further exercise
thereof or the exercise of any other right, power or privilege. A waiver by
Trustee of any right or remedy hereunder on any one occasion shall not be
construed as a bar to any right or remedy that Trustee would otherwise have on
any future occasion. The rights and remedies herein provided are cumulative, may
be exercised singly or concurrently and are not exclusive of any rights or
remedies provided by law.
SECTION 11.6 Interpretation of Pledge Agreement. Time is of the essence
in each provision of this Pledge Agreement of which time is an element. All
terms not defined herein or in the Indenture shall have the meaning set forth in
the applicable UCC, except where the context otherwise requires. To the extent a
term or provision of this Pledge Agreement conflicts with the Indenture and is
not dealt with herein with more specificity, the Indenture shall control with
respect to the subject matter of such term or provision. Acceptance of or
acquiescence in a course of performance rendered under this Pledge Agreement
shall not be relevant to determine the meaning of this Pledge Agreement even
though the accepting or acquiescing party had knowledge of the nature of the
performance and opportunity for objection.
SECTION 11.7 Continuing Security Interest; Transfer of Debentures. This
Pledge Agreement shall create a continuing security interest in the Pledged
Collateral and shall (i) remain in full-force and effect until the payment in
full of all of the Debentures, (ii) be binding upon Pledgor, its successors and
assigns, and (iii) inure, together with the rights and remedies of Trustee
hereunder, to the benefit of the Trustee and the Holders, and their respective
heirs, successors, transferees and assigns.
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<PAGE> 7
SECTION 11.8 Reinstatement. This Pledge Agreement shall continue to be
effective or be reinstated if at any time any amount received by Trustee in
respect of the Indenture obligations is rescinded or must otherwise be restored
or returned by Trustee upon the insolvency, bankruptcy, dissolution, liquidation
or reorganization of Pledgor or upon the appointment of any receiver,
intervenor, conservator, trustee or similar official for Pledgor or any
substantial part of its assets, or otherwise, all as though such payments had
not been made.
SECTION 11.9 Survival of Provisions. All representations, warranties
and covenants of Pledgor contained herein shall survive the execution and
delivery of this Pledge Agreement, and shall terminate only upon the full and
final payment and performance of Pledgor's obligations pursuant to the
Indenture.
SECTION 11.10 Waivers. Pledgor waives presentment and demand for
payment of any of its obligations pursuant to the Debenture, protest and notice
of dishonor or default with respect to any of such obligations, notice of
intention to accelerate, notice of acceleration and all other notices to which
Pledgor might otherwise be entitled, except as otherwise expressly provided
herein or in the Indenture.
SECTION 11.11 Authority of Trustee.
(a) Trustee shall have and be entitled to exercise all powers hereunder
that are specifically granted to Trustee by the terms hereof, together with such
powers as are reasonably incident there to. Trustee may perform any of its
duties hereunder or in connection with the Pledged Collateral by or through
agents or employees and shall be entitled to retain counsel and to act in
reliance upon the advice of counsel concerning all such matters. Neither
Trustee, nor any director, officer, employee, attorney or agent of Trustee,
shall be liable to Pledgor for any action taken or omitted to be taken by it or
them hereunder, except for its or their own gross negligence or willful
misconduct, nor shall Trustee be responsible for the validity, effectiveness or
sufficiency hereof or of any document or security furnished pursuant hereto.
Trustee and its directors, officers, employees, attorneys and agents shall be
entitled to rely on any communication, instrument or document believed by it or
them to be genuine and correct and to have been signed or sent by the proper
person or persons. Pledgor agrees to indemnify and hold harmless Trustee and any
other person or entity from and against any and all costs, expenses (including
reasonable fees, expenses and disbursements of attorneys and paralegals
(including, the allocated costs of inside counsel), claims and liabilities
incurred by Trustee or such person or entity hereunder, unless such claim or
liability shall be due to willful misconduct or gross negligence on the part of
Trustee or such person or entity.
SECTION 11.12 Release; Termination of Pledge Agreement.
(a) Subject to the provisions of Section 11.8 hereof, this Pledge
Agreement shall terminate upon full and final payment and performance of
Pledgor's obligations pursuant to the Indenture and payment in full of all fees
and expenses owing by Pledgor and Pledgor to
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<PAGE> 8
Trustee. At such time, Trustee shall, at the request of Pledgor, reassign and
redeliver to Pledgor all of the Pledged Collateral hereunder that has not been
sold, disposed of, retained or applied by Trustee in accordance with the terms
hereof. Such reassignment and redelivery shall be without warranty by or
recourse to Trustee, except as to the absence of any prior assignments by
Trustee of its interest in the Pledged Collateral, and shall be at the expense
of Pledgor.
(b) Pledgor agrees that it will not sell or dispose of, or grant any
option or warrant with respect to, any of the Pledged Collateral.
SECTION 11.13 Final Expression. This Pledge Agreement, together with
any other agreement executed in connection herewith, is intended by the parties
as a final expression of this Pledge Agreement and is intended as a complete and
exclusive statement of the terms and conditions thereof.
SECTION 11.14 Pledgor Remains Liable. Anything herein to the contrary
notwithstanding, (a) Pledgor shall remain liable under any contracts and
agreements included in the Pledged Collateral, to the extent set forth therein,
to perform all of its duties and obligations thereunder to the same extent as if
this Pledge Agreement had not been executed, (b) the exercise by Trustee of any
of the rights hereunder shall not release Pledgor from any of its duties or
obligations under the contracts and agreements included in the Pledged
Collateral, and (c) Trustee shall not have any obligation or liability under any
contracts and agreements included in the Pledged Collateral by reason of this
Pledge Agreement, nor, except as provided in the Indenture, shall Trustee be
obligated to perform any of the obligations or duties of Pledgor thereunder or
to take any action to collect or enforce any claim for payment assigned
hereunder.
SECTION 11.15 GOVERNING LAW; SUBMISSION TO JURISDICTION; WAIVER OF JURY
TRIAL; WAIVER OF DAMAGES.
(i) THIS PLEDGE AGREEMENT SHALL BE GOVERNED BY AND INTERPRETED
UNDER THE LAWS OF THE STATE OF TEXAS, AND ANY DISPUTE ARISING OUT OF, CONNECTED
WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THE
PLEDGOR AND TRUSTEE IN CONNECTION WITH THIS PLEDGE AGREEMENT AND WHETHER ARISING
IN CONTRACT TORT EQUITY OR OTHERWISE, SHALL BE RESOLVED IN ACCORDANCE WITH THE
INTERNAL LAWS (AS OPPOSED TO THE CONFLICTS OF LAWS PROVISIONS) AND DECISIONS OF
THE STATE OF TEXAS; PROVIDED, IF EXPRESSLY REQUIRED TO BE THAT OF THE STATE IN
WHICH THE ISSUER IS LOCATED, THE LAW APPLICABLE TO PERFECTION OF TRUSTEE'S
SECURITY INTEREST IN THE PLEDGED COLLATERAL SHALL BE THAT OF THE STATE IN WHICH
THE ISSUER IS LOCATED.
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<PAGE> 9
(ii) EXCEPT AS PROVIDED IN THE NEXT PARAGRAPH, PLEDGOR AND
TRUSTEE AGREE THAT ALL DISPUTES BETWEEN OR AMONG THEM ARISING OUT OF CONNECTED
WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN
CONNECTION WITH THIS PLEDGE AGREEMENT, AND WHETHER ARISING IN CONTRACT, TORT
EQUITY OR OTHERWISE, SHALL BE RESOLVED ONLY BY STATE OR FEDERAL COURTS LOCATED
IN AUSTIN, TRAVIS COUNTY, TEXAS, BUT PLEDGOR AND TRUSTEE ACKNOWLEDGE THAT ANY
APPEALS FROM THOSE COURTS MAY HAVE TO BE HEARD BY A COURT LOCATED OUTSIDE OF
AUSTIN, TRAVIS COUNTY, TEXAS. PLEDGOR WAIVES IN ALL DISPUTES ANY OBJECTION THAT
IT MAY HAVE TO THE LOCATION OF THE COURT CONSIDERING THE DISPUTE, INCLUDING,
WITHOUT LIMITATION, ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS
OF FORUM NON CONVENIENS.
(iii) PLEDGOR AGREES THAT TRUSTEE SHALL, IN ITS OWN NAME, HAVE
THE RIGHT TO THE EXTENT PERMITTED BY APPLICABLE LAW TO PROCEED AGAINST THE
PLEDGED COLLATERAL IN A COURT IN ANY LOCATION REASONABLY SELECTED IN GOOD FAITH
TO ENABLE TRUSTEE TO REALIZE ON SUCH PROPERTY, OR TO ENFORCE A JUDGMENT OR OTHER
COURT ORDER AGAINST SUCH PROPERTY ENTERED IN FAVOR OF TRUSTEE. PLEDGOR AGREES
THAT IT WILL NOT ASSERT ANY PERMISSIVE COUNTERCLAIMS IN ANY PROCEEDING BROUGHT
BY TRUSTEE TO REALIZE ON SUCH PROPERTY, OR TO ENFORCE A JUDGMENT OR OTHER COURT
ORDER IN FAVOR OF TRUSTEE WITH RESPECT TO SUCH PROPERTY. PLEDGOR WAIVES ANY
OBJECTION THAT IT MAY HAVE TO THE LOCATION OF THE COURT IN WHICH TRUSTEE HAS
COMMENCED A PROCEEDING DESCRIBED IN THIS PARAGRAPH, INCLUDING, WITHOUT
LIMITATION, ANY OBLIGATION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF
FORUM NON CONVENIENS.
(iv) PLEDGOR AND TRUSTEE EACH WAIVE ANY RIGHT TO HAVE A JURY
PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN CONTRACT TORT OR
OTHERWISE, ARISING OUT OF, CONNECTED WITH, RELATED TO OR INCIDENTAL TO THE
RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THIS PLEDGE AGREEMENT.
INSTEAD, ANY DISPUTES RESOLVED IN COURT WILL BE RESOLVED IN A BENCH TRIAL
WITHOUT A JURY. PLEDGOR IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OF ANY OF
THE AFOREMENTIONED COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF
COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO PLEDGOR AT
ITS ADDRESS SET FORTH IN THE INDENTURE, SUCH SERVICE TO BECOME EFFECTIVE FIVE
(5) BUSINESS DAYS AFTER SUCH MAILING.
9
<PAGE> 10
(v) PLEDGOR AGREES THAT TRUSTEE SHALL NOT HAVE ANY LIABILITY TO
PLEDGOR, WHETHER SOUNDING IN TORT CONTRACT OR OTHERWISE, FOR LOSSES SUFFERED BY
PLEDGOR IN CONNECTION WITH, ARISING OUT OF OR IN ANY WAY RELATED TO, THE
TRANSACTIONS CONTEMPLATED AND THE RELATIONSHIP ESTABLISHED BY THIS PLEDGE
AGREEMENT OR ANY ACT, OMISSION OR EVENT OCCURRING IN CONNECTION THEREWITH,
UNLESS IT IS DETERMINED BY A FINAL AND NONAPPEALABLE JUDGMENT OF A COURT THAT IS
BINDING ON TRUSTEE CONSTITUTING GROSS NEGLIGENCE OR WILLFUL MISCONDUCT.
SECTION 11.16 Acknowledgments. Pledgor hereby acknowledges that:
(a) it has been advised by counsel in the negotiation, execution and
delivery of this Pledge Agreement;
(b) Trustee has no fiduciary relationship to Pledgor, and the
relationship between Trustee on the one hand, and Pledgor, on the other hand, is
solely as described in the Indenture; and
(c) no joint venture exists between Pledgor and Trustee.
SECTION 11.17 Counterparts. This Pledge Agreement may be executed in
any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed and delivered shall be deemed to be
an original and all of which counterparts taken together shall constitute but
one and the same instrument.
IN WITNESS WHEREOF, Pledgor and Trustee has caused this Pledge
Agreement to be duly executed and delivered as of the date first above written.
PLEDGOR:
AUSTIN FUNDING.COM CORPORATION,
a Nevada corporation
By:
------------------------------------
Glenn A. LaPointe, President
10
<PAGE> 11
TRUSTEE:
Norwest Bank Texas, N.A.
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
11
<PAGE> 12
EXHIBIT "A"
Evidence of Bond Issuance
(to be attached)
12
<PAGE> 1
November 12, 1999
Board of Directors
Austin Funding.com Corporation
823 Congress Avenue
Suite 515
Austin, Texas 78701
Re: Austin Funding.com Corporation
Gentlemen:
We have acted as counsel to Austin Funding.com Corporation (the
"Corporation") in connection with the preparation and filing with the Securities
and Exchange Commission of a registration statement on Form 10-SB under the
Securities Act of 1933, as amended, relating to the registration of common stock
of the Corporation and the Corporation's 8% Secured Subordinated Debentures (the
"Debentures").
As counsel to the Corporation, we have examined the Amended and
Restated Articles of Incorporation and Bylaws of the Corporation as well as such
other documents and proceedings as we have considered necessary for the purposes
of this opinion. We have also examined and are familiar with the proceedings
taken by the Corporation to issue and sell up to $10,000,000 of 8% secured
subordinated debentures due 2015 of the Corporation (the "Debentures"). In
addition, we have examined a copy of the Corporation's Registration Statement on
Form SB-2, of which this opinion is an exhibit (the "Registration Statement"),
and that certain Indenture between the Corporation and Norwest Bank Texas, N.A.,
as Trustee, filed with the Securities and Exchange Commission under the
Securities Act of 1933, as amended, and the Trust Indenture Act of 1939.
<PAGE> 2
Board of Directors
Austin Funding.com Corporation
November 12, 1999
Page 2
Based upon the foregoing, and having regard to legal considerations
which we deem relevant, we are of the opinion that the Debentures, when issued,
will have been validly issued and will be binding obligations of the
Corporation.
We consent to the filing of this opinion with the Securities and
Exchange Commission as an exhibit to the Registration Statement and to the use
of our name under the heading "Legal Matters" in the Registration Statement.
Very truly yours,
SELMAN & MUNSON, P.C.
By:
-------------------------------------
Jack A. Selman, President
<PAGE> 1
EXHIBIT 10.17
SUBSCRIPTION ESCROW AGREEMENT
THIS ESCROW AGREEMENT is entered into as of the _____the day of ______,
1999 by and among Austin Funding.com Corporation, a Nevada corporation (the
"Corporation"); __________ , an __________ corporation (the "Marketing Agent");
and Compass Bank (the "Escrow Agent").
WITNESSETH:
WHEREAS, the Corporation is conducting a public offering for sale to
investors on a best efforts basis of up to $10,000,000 of its secured
subordinated debentures (the "Debentures") and under which the Corporation and
the Marketing Agent will be soliciting subscription funds in the form of cash,
check, authorized withdrawals from _____________________ or other immediately
available funds (the "Subscription Funds") from subscribers for a minimum $5,000
investment (the "Offering") in the offering (the "Subscribers");
WHEREAS, on _____________, 1999, the Securities and Exchange Commission
declared effective the Company's Registration Statement on Form SB-2 for the
purpose of registering for sale under the Securities Act of 1933, as amended,
the Debentures;
WHEREAS, the subscription period for the Offering will expire at 4:00
p.m., C.S.T. on __________, ____, subject to the Corporation's right to extend
the subscription period without notice until __________, ____, or terminate the
Offering at any time (the "Expiration Date") and subject further to the right of
the Marketing Agent, in its sole discretion, to permit investors to submit
irrevocable orders together with legally binding commitments for payment for
shares of Debentures for which they subscribe at any time prior to the
Expiration Date with payment to be received at any time prior to 24 hours before
completion of the Offering (the "Closing"); and
WHEREAS, the Corporation and the Marketing Agent desire to establish an
escrow account with the Escrow Agent for the purpose of holding the subscription
funds received during the course of the offering (the "Escrow Funds");
NOW, THEREFORE, in consideration of the premises and the mutual
covenants, agreements, representations, warranties and dependent promises set
forth herein, the parties agree as follows:
1. Appointment of Escrow Agent. The Corporation and the Marketing Agent
appoint the Escrow Agent to hold the Subscription Funds, and the Escrow Agent
accepts the appointment, all in accordance with the terms and subject to the
conditions of this Escrow Agreement.
(a) Establishment of Escrow Account. On or prior to the date
of commencement of the Offering, the parties shall establish an interest-bearing
escrow account which shall be entitled "Austin Funding.com Corporation Escrow
Account" (the "Escrow
1
<PAGE> 2
Account"). The Marketing Agent will instruct Subscribers to make checks for
subscriptions payable to the order of or wire transfer funds directly to the
Marketing Agent which shall promptly transmit such funds to the Escrow Agent for
deposit into the Escrow Account in accordance with the provisions of Rule 15c2-4
of the Securities Exchange Act of 1934, as amended.
(b) The Escrow Period. The Escrow Period shall begin with the
commencement of the Offering and shall terminate upon the earlier to occur of
the following dates:
(i) The date upon which the Escrow Agent confirms that it
has received in the Escrow Account subscriptions for ___________ in value of the
Debentures and subscriptions therefor have been accepted by the Corporation;
(ii) The Expiration Date (unless extended as permitted in
the Prospectus); or
(iii) The date upon which a determination is made by the
Corporation and the Marketing Agent to terminate the Offering prior to the sale
of __________ in value of the Debentures.
During the Escrow Period, the Corporation is aware and understands that it is
not entitled to any of the Escrow Funds and no amounts deposited in the Escrow
Account shall become the property of the Corporation or any other entity, or be
subject to the debts of the Corporation or any other entity, until such Escrow
Funds are disbursed in accordance with Section 3 below.
2. Deposit of Funds.
(a) The Escrow Agent is hereby authorized to forward each
check for collection, and upon collection of the proceeds of each check, deposit
the collected proceeds in the Escrow Account. As an alternative, the Escrow
Agent may telephone the bank on which the check is drawn to confirm that the
check has been paid.
Any check returned unpaid to the Escrow Agent shall be returned to the
Marketing Agent. In such cases, the Escrow Agent will promptly notify the
Corporation of such return.
If the Corporation rejects any subscriptions for which the Escrow Agent
has already collected funds, the Escrow Agent shall promptly issue a refund
check to the rejected Subscriber. If the Corporation rejects any subscription
for which the Escrow Agent has not yet collected funds but has submitted the
Subscriber's check for collection, the Escrow Agent shall promptly issue a check
in the amount of the Subscriber's check to the rejected Subscriber after the
Escrow Agent has cleared such funds. If the Escrow Agent has not yet submitted a
rejected Subscriber's check for collection, the Escrow Agent shall promptly
remit the Subscriber's check directly to the Subscriber.
2
<PAGE> 3
(b) The Corporation will deposit or cause to be deposited with
the Escrow Agent all proceeds from the sale of the Debentures received from
Subscribers, accompanied by executed Order Forms and Certifications in the form
attached hereto as Exhibits "A" and "B". The Escrow Agent shall (i) make copies
of all subscription checks, Order Forms and Certificates received by it, (ii)
promptly deposit such checks for collection in the Escrow Account to be
maintained hereunder, (iii) retain a copy of each Order Form and Certificate for
its records and (iv) promptly forward to the Corporation a copy of each such
check and the executed original of each such Order Form and Certificate if
received. The Escrow Agent shall have no responsibility for proceeds from the
sale of the Debentures not received and collected by it.
The Escrow Agent shall promptly notify the Corporation of any
subscription received without accompanying subscription documents or where the
subscription does not exactly match the subscription document ("Unidentified
Subscriptions"). Any Unidentified Subscriptions and accompanying documents not
identified in writing by the Corporation within three (3) business days of such
notification shall be returned by the Escrow Agent to the Subscriber. All
Unidentified Contributions that are subsequently identified shall be immediately
deposited into escrow.
(c) Based upon information set forth in the Order Forms
delivered hereunder, the Escrow Agent shall maintain a written record of names
and addresses of the Subscribers, the amount of the Debentures subscribed for by
each Subscriber and the amounts received from each Subscriber.
(d) All Escrow Funds deposited shall be invested in money
market funds investing solely in United States government and agency securities
(e.g., Federal Money Market Fund), unless other written direction is given by
the Corporation or the Marketing Agent.
3. Disbursement.
(a) The Escrow Agent shall notify the Corporation at such time
as it has received, in payment for the Debentures, cash and subscriptions
aggregating $________ (the "Target Amount").
(b) At such time as the Escrow Agent has received in cash and
subscriptions the Target Amount, the Escrow Agent shall disburse said amount to
the Corporation upon written disbursement instructions outlined in 3(d) below
from the Corporation and the Marketing Agent. After the Target Amount of cleared
funds has been received, the Escrow Agent shall continue collecting Subscriber's
funds, pursuant to the procedure set forth above, until notified by the
Corporation to either disburse such funds to the Corporation or return the
Subscribers' amounts exceeding the Target Amount to such Subscribers presenting
funds over the Target Amount, with interest accrued thereon. The Escrow Agent
shall immediately disburse such funds to the Corporation from time to time upon
written notification from the Corporation that such subscriptions have been
accepted by the Corporation.
3
<PAGE> 4
(c) In the event $___________ has not been subscribed for by
__________, ____, or the extended date provided to the Escrow Agent by the
Corporation or the Marketing Agent, the Corporation and the Marketing Agent
shall confirm such fact in writing, whereupon the Escrow Agent shall return the
full amount of each Subscriber's deposit with interest accrued thereon to each
Subscriber.
(d) Each Disbursement Instruction shall be signed by two
officers of the Corporation and the Marketing Agent and shall contain the
following information: (i) a reference to this Agreement, (ii) the identity of
the person to whom a disbursement of Escrow Funds is to be made, (iii) the
amount of Escrow Funds to be disbursed (including the interest thereon), (iv)
instructions as to the form or method and destination of the disbursement (e.g.,
cashier's, wire transfer instructions) and (v) a summary statement of the event
or condition which has occasioned the delivery of the Disbursement Instruction.
Escrow Agent shall not be responsible for evaluating the truth or sufficiency of
the summary statement or Disbursement Instruction.
4. Confirmation/Discrepancies. The Escrow Agent shall confirm receipt
or investment of Escrow Funds by its monthly account statement delivered to the
Corporation unless otherwise indicated.
5. Taxpayer Information. Prior to any investment of Escrow Funds, the
Corporation shall provide the Escrow Agent with written certification of its
taxpayer identification number, and in any event, with appropriate W-8 or W-9
forms within 30 days from the date hereof. Failure to provide such information
and forms may result in a penalty and require the Escrow Agent to withhold tax
on any interest payable hereunder.
6. Reliance. The Escrow Agent shall be protected in acting in good
faith upon any written notice, request, waiver, consent, certificate, receipt,
authorization or other paper or document which the Escrow Agent believes to be
genuine and what it purports to be.
7. Escrow Agent Liability. The Escrow Agent shall not be liable for
anything which it may do or refrain from doing in good faith in connection with
this Escrow Agreement, except its own gross negligence or willful misconduct.
8. Legal Representation. The Escrow Agent may confer with legal counsel
in the event of any dispute or question as to the construction of any of the
provisions hereof, or its duties hereunder, and it shall incur no liability and
it shall be fully protected in acting in accordance with the opinions of such
counsel.
9. Disputes. In the event of any genuine disagreement resulting in
adverse claims or demands being made in connection with the subject matter of
this Escrow Agreement, or in the event that the Escrow Agent in good faith is in
doubt as to what action it should take hereunder, the Escrow Agent may, at its
option, refuse to comply with any claims or demands on it, or refuse to take any
other action hereunder so long as such disagreement continues or such debt
exists, and in such event, the Escrow Agent shall not be or become liable in any
way or to
4
<PAGE> 5
any person for its failure or refusal to act, and the Escrow Agent shall be
entitled to continue to refrain from acting until (i) the rights of all parties
have been fully and finally adjudicated by a court of competent jurisdiction or
(ii) all differences shall have been adjudged and all doubt resolved by
agreement among all of the interested persons, and the Escrow Agent shall have
been notified thereof in writing signed by all such persons. In addition to the
foregoing remedies, the Escrow Agent is hereby authorized in the event of any
doubt as to the course of action it should take under this Escrow Agreement, to
petition the District Court of Travis County, Texas, or the United States
Federal District of the Western District of Texas, for instructions or to
interplead the funds or asset so held into such court. The parties agree to the
jurisdiction of either of said courts over their persons as well as the
Property, waive personal service of process and agree that service of process by
certified or registered mail, return receipt requested, to the address set forth
below each party's signature to this Escrow Agreement shall constitute adequate
service.
10. Indemnity. The Escrow Agent shall not be liable for anything which
it may do or refrain from doing in connection with this Escrow Agreement,
provided it acts in good faith, including its own negligence, except for its own
gross negligence or willful misconduct. The parties hereto agree to indemnify
the Escrow Agent for, and to hold it harmless against, any loss, liability or
expense (including, without limitation, reasonable attorneys' fees) incurred by
it without gross negligence or willful misconduct on its part arising out of or
in connection with its entering into this Escrow Agreement and the carrying out
of its duties hereunder, including the costs and expenses of defending itself
against any claim of liability in the premises.
11. Resignation of Escrow Agent. The Escrow Agent may resign for any
reason, upon 30 days written notice to the parties to the Escrow Agreement. Upon
expiration of such 30-day notice period, the Escrow Agent may deliver all cash
or property in its possession under this Escrow Agreement to any successor
Escrow Agent appointed by the Corporation, or if no successor Escrow Agent has
been appointed, to any court of competent jurisdiction in Travis County, Texas.
Upon either such delivery, the Escrow Agent shall be released from any and all
liability under this Escrow Agreement. A termination under this paragraph shall
in no way change the terms of paragraphs 9, 10 and 12 affecting reimbursement of
expenses, indemnity and fees. The Escrow Agent shall have the right to deduct
from Escrow Funds transferred to any successor Escrow Agent any outstanding and
unpaid expenses or fees.
12. Escrow Agent Fee. Simultaneous with the execution of this
Agreement, the Corporation has paid the Escrow Agent a fee of $______________.
13. Notices. All notices and communications hereunder shall be in
writing, and shall be deemed to be duly given if sent registered or certified
mail, return receipt requested, to the prospective address set forth below. The
Escrow Agent shall not be charged with knowledge of any fact, including but not
limited to performance or non-performance of any condition, unless it has
actually received written notice thereof from all of the parties hereto of their
authorized representative clearly referring to this Escrow Agreement.
5
<PAGE> 6
If to the Corporation: Austin Funding.com Corporation
823 Congress Avenue, Suite 515
Austin, Texas 78701
Attn: Jim C. Hodge
With a copy to: Selman & Munson, P.C.
111 Congress Ave.
Suite 1000
Austin, TX 78701
Attn: Jack A. Selman
If to the Escrow Agent:
Attn:
If to the Marketing Agent:
Attn:
With a copy to:
Attn:
14. Successors. The rights created by this Escrow Agreement shall inure
to the benefit of, and the obligations created hereby shall be binding upon, the
successor and assigns of the Escrow Agent and the parties hereto.
15. Choice of Law. This Escrow Agreement shall be construed and
enforced according to the laws of the State of Texas.
16. No Interest Created in Fund. The Escrow Agent shall not issue any
certificate of deposit, stock certificates or any other instrument or document
representing any interest in the Escrow Account.
17. Termination. This Escrow Agreement shall terminate and the Escrow
Agent shall be discharged of all responsibility hereunder at such time as the
Escrow Agent shall have completed its duties hereunder.
18. Counterparts. This Escrow Agreement may be executed in several
counterparts, or by separate instruments, and all such counterparts and
instruments shall constitute one agreement, binding on all of the parties
hereto.
19. Entire Agreement. This Escrow Agreement constitutes the entire
understanding and agreement of the parties hereto with respect to the subject
matter hereof and transactions described herein and supersedes all prior
agreements of understandings, written or oral, between the parties with respect
thereto.
6
<PAGE> 7
20. Severability. If any provision of this Escrow Agreement is declared
by a court of competent jurisdiction to be invalid, void or unenforceable, the
remaining provisions shall nevertheless continue in full force and effect
without being impaired or invalidated in any way.
21. Collection of Funds. It is strictly understood that the Escrow
Agent has no duty to disburse any funds, to any party, until such funds have
been collected by the Escrow Agent, and those funds are available. It is hereby
acknowledged by the parties that funds deposited with the Escrow Agent in the
form of a cashier's check shall be deemed to be immediately available funds for
the purpose of disbursements.
22. Agents. The following persons are authorized to direct the Escrow
Agent regarding any transactions to this Escrow including, but not limited to,
disbursements and investments:
Glenn A. LaPointe
IN WITNESS WHEREOF, the Escrow Agent and the Corporation have executed
this Escrow Agreement on the day and year first written above.
ESCROW AGENT:
By:
-------------------------------------------
-------------------------------------------
Its:
-------------------------------------------
CORPORATION:
AUSTIN FUNDING.COM CORPORATION
By:
-------------------------------------------
Name:
------------------------------------------
Title:
----------------------------------------
MARKETING AGENT:
------------------------------------------------
By:
-------------------------------------------
-------------------------------------------
Its:
-------------------------------------------
7
<PAGE> 1
EXHIBIT 11.1
SCHEDULE RE: COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
March 31, 1999 March 31, 1998
-------------- --------------
<S> <C> <C>
Net Income (loss) (194,928) (137,344)
Weighted average number of common shares 2,000 583
outstanding - basic and diluted
Net Income (loss) per share - basic and diluted $ (97.46) $ 235.63
</TABLE>
<PAGE> 1
EXHIBIT 15
ADVISORY LETTER IN CONNECTION WITH THE UNAUDITED FINANCIAL
STATEMENTS OF AUSTIN FUNDING.COM FOR THE QUARTER ENDED
JUNE 30, 1999
The consolidated balance sheet and Austin Funding.com Corporation as of June 30,
1999, and the consolidated statements of income, stockholders' equity and cash
flows for the quarter ended June 30, 1999 were prepared by management and are
included, by reference, in the Registration Form SB-2, herein.
The accompanying unaudited consolidated financial statements are the
representation of management. We have not audited, reviewed, or otherwise been
associated with the accompanying financial statements and accordingly, do not
express an opinion or any other form of assurance on them.
SPROUSE & WINN, L.L.P.
Austin, Texas
November 12, 1999
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
State of
Percentage of Incorporation or
Parent Subsidiary Ownership Organization
------ ---------- --------- ------------
<S> <C> <C> <C>
Austin Funding.com Corporation AFC Mortgage Corporation 100% Texas
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the use in this Form SB-2 Registration Statement of Austin
Funding.com Corporation (the "Corporation") of our report dated June 22, 1999,
relating to the consolidated financial statements of Austin Funding.com
Corporation as of March 31, 1999 and 1998 and to the reference to our firm in
the Registration Statement.
SPROUSE & WINN, L.L.P.
Certified Public Accountants
Austin, Texas
November 12, 1999
<PAGE> 1
EXHIBIT 23.2
CONSENT OF COUNSEL
We consent to the use of our opinion, to the incorporation by reference
of such opinion as an exhibit to the Form SB-2 and to the reference to our firm
under the heading "Legal Matters" in the Prospectus and included in this Form
SB-2. In giving this consent, we do not admit that we are within the category of
persons whose consent is required under Section 7 of the Securities Act of 1933,
as amended, or the rules and regulations of the Securities and Exchange
Commission thereunder.
SELMAN & MUNSON, P.C.
By:
---------------------------------
Jack A. Selman, President
Austin, Texas
September 3, 1999
<PAGE> 1
EXHIBIT 99
(Prospective Investor Letter/Request Card - Austin Funding.com Corporation
Letterhead)
_______________, 1999
Dear Prospective Investor:
We are pleased to announce that Austin Funding.com Corporation (the "Company"),
a Nevada corporation and parent of Austin Funding Corporation, is offering up
to $10,000,000 of its 8% secured subordinated debentures in a Public Offering
("Offering"). The Company is offering the debentures in minimum increments of
$5,000 to the general public. Net offering proceeds will increase the capital
of Austin Funding Corporation and the Company and, consistent with regulatory
restrictions, will support the expansion of the Company's financial services
business.
We have available the following materials which will help you learn more about
the merits of the Company's debentures as an investment.
PROSPECTUS: This document provides detailed information about the
Company's operations and the proposed debenture Offering.
QUESTIONS AND ANSWERS BROCHURE: Key questions and answers about the
debenture Offering are found in this pamphlet.
DEBENTURE ORDER FORM: This form is used to purchase debentures by
returning it with your payment in the business reply envelope enclosed
with the Debenture Order Form. The deadline for ordering debentures is
4:00 p.m., Central Standard Time, ___________, 1999.
We invite our employees, customers, local community members and the general
public to purchase the Company's debentures in the Offering. Through this
Offering you have the opportunity to buy debentures directly from the Company
without commission or fee. The board of directors and senior management of the
Company fully support this debenture Offering.
If you have additional questions regarding the debenture Offering, please call
us at (512) 302-6060, Monday through Friday from 9:00 a.m. to 6:00 p.m. or stop
by the Debenture Sales Center located at ______________________________, in
Austin, Texas.
Sincerely,
Glenn A. LaPointe
President
This is not an offer to sell or a solicitation of an offer to buy debentures.
The offer is made only by the Prospectus.
<PAGE> 2
DEBENTURE OFFERING
QUESTIONS & ANSWERS
FACTS ABOUT THE OFFERING
AUSTIN FUNDING.com CORPORATION (THE "COMPANY"), A NEVADA CORPORATION IS
OFFERING UP TO AN AGGREGATE OF $10,000,000 OF ITS 8% SECURED SUBORDINATED
DEBENTURES IN A PUBLIC OFFERING ("OFFERING").
THIS BROCHURE ANSWERS SOME OF THE MOST FREQUENTLY ASKED QUESTIONS ABOUT THE
OFFERING AND ABOUT YOUR OPPORTUNITY TO INVEST IN THE COMPANY.
INVESTMENT IN THE DEBENTURES INVOLVES CERTAIN RISKS. FOR A DISCUSSION OF THESE
RISKS AND OTHER FACTORS, INVESTORS ARE URGED TO READ THE ACCOMPANYING
PROSPECTUS.
WHY IS THE COMPANY OFFERING DEBENTURES?
The net offering proceeds will be used by the Company for general working
capital purposes, to repay outstanding indebtedness and to provide funds for
the Company to acquire related financial services business.
WHO IS ELIGIBLE TO PURCHASE THE DEBENTURES IN THE OFFERING?
Any member of the general public.
HOW MUCH IS BEING OFFERED AND AT WHAT PRICE AND UNIT?
The Company is offering up to $10,000,000 of its debentures at a minimum
investment of $5,000 through the Prospectus. Debentures must be purchased in
increments of $5,000. No purchase may exceed $1,000,000.
HOW DO I ORDER DEBENTURES?
You must complete the enclosed Debenture Order Form. Instructions for
completing your Debenture Order Form are contained in this packet. Your order
must be received by the Company by 4:00 p.m., Central Standard Time, on
________, 1999.
HOW MAY I PAY FOR MY DEBENTURES?
You may pay for debentures by check, cash or money order. Funds will be placed
in an escrow account with Compass Bank ("Bank") and will earn interest from the
day funds are received until the completion or termination of the Offering. You
will not have access to these funds from the day we receive your order until
the completion or termination of the Offering.
MUST I PAY A COMMISSION?
No. You will not be charged a commission or fee on the purchase of debentures
in the Offering. However, the Company may pay a commission to the underwriter,
Choice Investments, Inc., in connection with the Offering.
IS MY INVESTMENT SECURED?
The debentures are secured by a non-callable zero coupon security in the face
amount of $10,000,000 due in 2015, but are otherwise subordinate to the
Company's current and future indebtedness.
WHAT ARE MY EARNINGS ON THE DEBENTURES?
The debentures accrue interest at an annual rate of 8%. Interest is payable
monthly on the first day of the month. Unless earlier redeemed by the Company,
all principal and interest is due and payable in full on December ___, 2015.
1
<PAGE> 3
HOW WILL THE DEBENTURES BE TRADED?
Prior to the Offering, there has been no public market for the Company's
debentures. The Company has applied to have the debentures traded in the
over-the-counter market and listed in the "yellow sheets" published by the
National Quotation Bureau, LLC. It is unlikely that an active trading market
will develop for the debentures.
FOR ADDITIONAL INFORMATION YOU MAY CALL OUR DEBENTURE INFORMATION CENTER AT
(512) 302-6060, Monday through Friday from 9:00 a.m. to 6:00 p.m. Central
Standard Time.
THIS IS NOT AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY DEBENTURES.
THE OFFER WILL BE MADE ONLY BY THE PROSPECTUS.
2
<PAGE> 4
DEBENTURE ORDER FORM AUSTIN FUNDING.COM CORPORATION
Note: Please read the Debenture Order Form Guide and Instructions attached to
this form before completion.
- -------------------------------------------------------------------------------
DEADLINE
- -------------------------------------------------------------------------------
The Offering ends at 4:00 p.m., Central Standard time, on _____, 1999. Your
Debenture Order Form, properly executed and with the correct payment, must be
received at the address on the bottom of this form by this deadline or it may
be considered void.
- -------------------------------------------------------------------------------
NUMBER AND AMOUNT OF DEBENTURES
- -------------------------------------------------------------------------------
(1) Amount of Debenture* $
-----------------
Amount of Debenture** $
-----------------
Amount of Debenture** $
-----------------
Amount of Debenture** $
-----------------
-----------------
(2) Total Amount Due $
-----------------
*The minimum dollar amount which may be subscribed for is $5,000, and
debentures must be purchased in increments of $5,000. ** If more than one,
indicate the amount and ownership (see 5 & 6 below). The maximum amount of
debentures which may be subscribed for is $1,000,000 in the Offering.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Method of Payment Purchaser Information
- -------------------------------------------------------------------------------
<S> <C>
(3) ___ Enclosed is a check, bank draft or money (4) ___ Check here if you are a director, officer or
order payable to Compass Bank for employee of Austin Funding Corporation or
$_______________ (or cash if presented in a member of such person's immediate family.
person)
</TABLE>
Payments will be deposited in an Escrow Account with Compass Bank, Austin,
Texas. Payment by check, cash or money order will earn interest in the Escrow
Account until the debenture offering closes.
<TABLE>
<S> <C> <C>
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DEBENTURE REGISTRATION
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(5) Form of debenture ownership
Individual Uniform Transfer to Minors Partnership
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Joint Tenants (WROS) Uniform Gift to Minors Individual Retirement Account
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Tenants in Common Corporation Fiduciary/Trust (Under Agreement Dated
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(6) Name (Please Print Clearly) Social Security or Tax. I.D.
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Name Daytime Telephone
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Street Address Evening Telephone
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City State Zip Code County of Residence
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NASD AFFILIATION (This section only applies to those individuals who meet the
delineated criteria.)
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_____ check here if you are a member of the National Association of Securities
Dealers, Inc. ("NASD"), a person associated with an NASD member, a member of
the immediate family of any such person to whose support such person
contributes, directly or indirectly, or the holder of an account in which an
NASD member or person associated with an NASD member has a beneficial interest.
To comply with conditions under which an exemption from the NASD's
Interpretation With Respect to Free-Riding and Withholding is available, you
agree, if you have checked the NASD affiliation box: (i) not to sell, transfer
or hypothecate the debentures for a period of 150 days following the issuance,
and (ii) to report this subscription in writing to the applicable NASD member
within one day of the payment therefor.
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ACKNOWLEDGEMENT
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By signing below, I acknowledge receipt of the Prospectus dated
__________________, 1999 and that I have reviewed the provisions therein and
understand that I may not change or revoke my order once it is received by
Choice Investments, Inc. I certify that this debenture order is for my account
only and there is no agreement or understanding regarding any further sale or
transfer of these debentures.
Under penalties of perjury, I further certify that: (1) the social security
number or taxpayer identification number given above is correct; and (2) I am
not subject to backup withholding. You must cross out this item, (2) above, if
you have been notified by the Internal Revenue Service that you are subject to
backup withholding because of underreporting interest or dividends on your tax
return.
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SIGNATURE
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Sign and date the form. When purchasing as a custodian, include your full
title. An additional signature is required only when payment is by withdrawal
from an account that requires more than one signature to withdraw funds.
YOUR ORDER WILL BE FILLED IN ACCORDANCE WITH THE PROVISIONS OF THE PROSPECTUS.
THIS ORDER IS NOT VALID IF NOT SIGNED. If you need help completing this Form,
you may call the Debenture Sales Center at (512) 302-6060.
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Signature Title (if applicable) Date
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Signature Title (if applicable) Date
Broker Assisted Orders-Refer to Prospectus.
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A.E. Name R. R. Number B/D Name
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B/D Mailing Address/City/State/Zip Code Telephone Number
FOR OFFICE USE ONLY
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DEBENTURE SALES CENTER
Date Rec'd / / Order # Batch # 5900 Balcones Drive
--- --- --- -------- ------ Austin, Texas 78731
Check # Category (512) 302-6060
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Amount $ Initials
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<PAGE> 5
AUSTIN FUNDING.COM CORPORATION
DEBENTURE ORDER FORM
GUIDE AND INSTRUCTIONS
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DEBENTURE OWNERSHIP GUIDE
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INDIVIDUAL
The debenture is to be registered in an individual's name only. You may not
list beneficiaries for this ownership.
JOINT TENANTS
Joint Tenancy with Right of Survivorship identifies two or more persons as
owners of the debenture. Upon the death of one of the owners, ownership
automatically passes to the surviving tenant(s). You may not list beneficiaries
for this ownership.
TENANTS IN COMMON
Tenants in Common identifies two or more persons as owners of the debenture.
When a debenture is held by tenants in common, upon the death of one co-tenant,
ownership of the debenture will be held by the surviving co-tenant(s) and by
the heirs of the deceased co-tenant. All parties must agree to the transfer or
sale of debentures held by tenants in common. You may not list beneficiaries
for this ownership.
INDIVIDUAL RETIREMENT ACCOUNT
Individual Retirement Account ("IRA") holders may make debenture purchases from
their IRA through a pre-arranged "trustee-to-trustee" transfer. A debenture may
only be held in a self-directed IRA. Please contact the Stock Sales Center if
you have any questions about your IRA account or to obtain a list of local
brokers who will open a self-directed IRA, or check with your broker.
UNIFORM GIFT TO MINORS/UNIFORM TRANSFERS TO MINORS
For Texas residents and residents of many states, debentures may be held in the
name of a custodian for the benefit of a minor under the Uniform Transfers to
Minors Act. For residents of most other states, a debenture may be held in a
similar type of ownership under the Uniform Gift to Minors Act of the
individual states. For either ownership, the minor is the actual owner of the
debenture with the adult custodian being responsible for the investment until
the minor reaches legal age.
Instructions: If you are a Texas resident and wish to register a debenture in
this ownership, check "Uniform Transfers to Minors." For other states, see your
legal advisor if you are unsure about the correct registration of your
debenture.
On the first "NAME" line, print the first name, middle initial and last name of
the custodian, with the abbreviation "CUST" after the name. Print the first
name, middle initial and last name of the minor on the second "NAME line. Only
one custodian and one minor may be designated.
CORPORATION/PARTNERSHIPS
Corporations/Partnerships may purchase debentures. Please provide the
Corporation/Partnership's legal name and Tax I.D. number.
FIDUCIARIES:
Generally, fiduciary relationships (such as Conservatorship, Legal Trust,
Guardianship, etc.) are established under a form of a trust agreement or are
pursuant to a court order. Without a legal document establishing a fiduciary
relationship, your debenture may not be registered in a fiduciary capacity.
Instructions: On the first "NAME" line, print the first name, middle initial
and last name of the fiduciary if the fiduciary is an individual. If the
fiduciary is a corporation, list the corporate title on the first "NAME" line.
Following the name, print the fiduciary "title" such as trustee, executor,
personal representative, etc.
<PAGE> 6
On the second "NAME" line, print either the name of the maker, donor or
testator OR the name of the beneficiary. Following the name, indicate the type
of legal document establishing the fiduciary relationship (agreement, court
order, etc.). In the blank after "Under Agreement Dated," fill in the date of
the document governing the relationship. The date of the document need not be
provided for a trust created by a will.
An example of fiduciary ownership of a debenture in the case of a trust is:
John D. Smith, Trustee for Thomas A. Smith Under Agreement Dated 06/09/87.
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ITEM INSTRUCTION
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ITEMS 1 AND 2
Fill in the number of debentures, and the amount of each, that you wish to
purchase and the total payment due. The amount due is determined by totaling
the amounts of all debentures to be purchased. The minimum debenture amount is
$5,000, and debentures will be sold only in multiples of $5,000. The maximum
purchase amount in the Offering by any person is $1,000,000 of the debentures
in the Offering.
ITEM 3
Payment for debentures may be made in cash (only if delivered by you in person)
or by check, bank draft or money order made payable to Choice Investments, Inc.
DO NOT MAIL CASH. If you choose to make a cash payment, take your Debenture
Order Form and payment in person to the Debenture Sales Office listed at the
bottom of the Debenture Order Form. Your funds will earn interest as provided
in the Prospectus.
ITEM 6
The securities industry has developed a uniform system of registrations that we
will use in the issuance of Austin Funding.com Corporation debentures. Print
the name(s) in which you want the debentures registered and the mailing address
of the registration. Include the first name, middle initial and last name of
the debenture holder. Avoid the use of two initials. Please omit words that do
not affect ownership rights, such as "Mrs.," "Mr.," "Dr.," "special account,"
etc.
Enter the Social Security or Tax I.D. number of one registered owner. This
registered owner must be listed on the first "NAME" line. Be sure to include
your telephone number because we will need to contact you if we cannot execute
your order as given. Review the Debenture Ownership Guide on this page and
refer to the instructions for Uniform Gift to Minors/Uniform Transfer to Minors
and Fiduciaries.
