<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 15, 1997
REGISTRATION NO. 333-
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------------
HOUSEHOLD INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
6711
(PRIMARY STANDARD INDUSTRIAL
CLASSIFICATION CODE NUMBER)
36-3121988
(I.R.S. EMPLOYER
IDENTIFICATION NO.)
2700 SANDERS ROAD
PROSPECT HEIGHTS, ILLINOIS 60070
(847) 564-5000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
JOHN W. BLENKE
VICE PRESIDENT-CORPORATE LAW
AND ASSISTANT SECRETARY
HOUSEHOLD INTERNATIONAL, INC.
2700 SANDERS ROAD
PROSPECT HEIGHTS, ILLINOIS 60070
(847) 564-6150
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
-------------------------
Copies to:
BARBARA L. BORDEN, ESQ.
COOLEY GODWARD LLP
4365 EXECUTIVE DRIVE, SUITE 1100
SAN DIEGO, CALIFORNIA 92121
(619) 550-6064
RUSSELL J. BRUEMMER, ESQ.
WILMER, CUTLER & PICKERING
2445 M STREET, N.W.
WASHINGTON, D.C. 20037
(202) 663-6804
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement and all
other conditions described in the enclosed Prospectus have been satisfied or
waived.
If the securities being registered on this Form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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TITLES OF EACH CLASS PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
OF SECURITIES TO AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION
BE REGISTERED REGISTERED(1) PER UNIT PRICE FEE(2)(3)
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Common Stock......... 1,497,801 shares Not Applicable(1) Not Applicable(1) $54,754.00
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(1) Based on an estimate of the maximum number of shares of common stock of the
Registrant to be issued in connection with the merger of Household Auto
Corporation, a wholly-owned subsidiary of the Registrant, into ACC Consumer
Finance Corporation (the "Merger") as determined in accordance with the
procedures described in the Agreement and Plan of Merger which is attached
as Annex A to the Prospectus and Proxy Statement included herein. For
purposes of calculating the "Exchange Ratio," it was assumed that $20.00 in
value of the Registrant's common stock would be issued and the sum of the
daily volume weighted average price per share of the Registrant's common
stock for the ten trading days ending on September 12, 1997 was used divided
by ten. Shares of the Registrant's common stock are to be issued solely in
exchange for other securities in connection with the Merger.
(2) Calculated pursuant to Rule 457(f)(1) under the Securities Act of 1933, as
amended. The fee is based on the average of the high and low prices of ACC
Consumer Finance Corporation common stock as reported on the NASDAQ National
Market System on September 12, 1997.
(3) In accordance with Rules 14a-6(i)(1) and 0-11 of the Securities Exchange Act
of 1934, $37,338 of the Registration Fee was previously transmitted to the
Commission. The $17,416 balance was transmitted by wire transfer on
September 15, 1997.
-------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
[ACC CONSUMER FINANCE CORPORATION LOGO]
NOTICE OF SPECIAL MEETING OF
STOCKHOLDERS TO BE HELD
ON OCTOBER 21, 1997
To the Stockholders of ACC Consumer Finance Corporation ("ACC" or the
"Company"):
Notice is hereby given that a special meeting (the "Special Meeting") of
stockholders of ACC will be held on October 21, 1997 at 9:00 a.m. local time at
the offices of Wilmer, Cutler & Pickering, 2445 M Street, N.W., Washington, D.C.
20037. The Special Meeting is for the following purposes:
1. To consider and vote upon a proposal to (i) approve and adopt an
Agreement and Plan of Merger dated as of August 24, 1997 (the "Merger
Agreement") by and among Household International, Inc. ("Household
International"), Household Auto Corporation and ACC, and (ii) approve the
merger of Household Auto Corporation with and into ACC (the "Merger")
pursuant to which ACC will become a wholly-owned subsidiary of Household
International and each outstanding share of ACC common stock will be
converted into consideration valued at $22.00 per share consisting of a
combination of cash and Household International common stock.
2. To transact such other business as may properly come before the
meeting or any adjournment, postponement or reconvention thereof.
Only stockholders of record at the close of business on September 12, 1997
(the "Record Date") are entitled to notice of and to vote at the meeting.
Holders of ACC common stock may be entitled to appraisal rights by
complying with Section 262(d)(1) of the Delaware General Corporation Law. See
"The Merger -- Appraisal Rights of Company Stockholders."
THE BOARD OF DIRECTORS OF ACC HAS UNANIMOUSLY APPROVED THE MERGER
AGREEMENT, HAS UNANIMOUSLY DETERMINED THAT THE TERMS OF THE MERGER ARE FAIR TO
AND IN THE BEST INTERESTS OF THE COMPANY'S STOCKHOLDERS, AND UNANIMOUSLY
RECOMMENDS THAT THE COMPANY'S STOCKHOLDERS APPROVE THE MERGER AND APPROVE AND
ADOPT THE MERGER AGREEMENT. THE AFFIRMATIVE VOTE OF A MAJORITY OF THE HOLDERS OF
ACC COMMON STOCK OUTSTANDING ON THE RECORD DATE WILL BE REQUIRED THEREFOR.
Your vote is important regardless of the number of shares you own. Whether
or not you plan to attend the meeting, PLEASE MARK, DATE AND SIGN THE ENCLOSED
PROXY CARD AND RETURN IT PROMPTLY IN THE ENCLOSED STAMPED ENVELOPE.
BY THE ORDER OF THE BOARD OF
DIRECTORS,
Jack R. Cohen
Vice President -- General Counsel &
Secretary
San Diego, California
September 19, 1997
<PAGE> 3
HOUSEHOLD LOGO
PROSPECTUS
HOUSEHOLD INTERNATIONAL, INC.
COMMON STOCK, $1.00 PAR VALUE
------------------------
ACC CONSUMER FINANCE CORPORATION
PROXY STATEMENT
FOR
SPECIAL MEETING OF STOCKHOLDERS
OCTOBER 21, 1997
------------------------
This Prospectus and Proxy Statement (the "Prospectus" or "Prospectus and
Proxy Statement") relates to a special meeting of stockholders (the "Special
Meeting") of ACC Consumer Finance Corporation, a Delaware corporation ("ACC" or
the "Company"). At the Special Meeting, stockholders will consider the proposed
merger (the "Merger") of Household Auto Corporation, a Delaware corporation
("HAC"), which is a wholly-owned subsidiary of Household International, Inc., a
Delaware corporation ("Household International"), with and into ACC. If the
Merger is consummated, each outstanding share of the Company's common stock, par
value $0.001 per share (the "Company Common Stock"), will be converted into (a)
cash ranging between $2.00 and $4.00 (excluding cash being paid in lieu of
fractional shares as noted below), plus (b) a fraction of a share of Household
International's common stock, par value $1.00 per share (the "HI Stock"), valued
between $18.00 and $20.00 per share of Company Common Stock. The amount of HI
Stock to be delivered for each share of Company Common Stock will be based upon
an Exchange Ratio (as defined herein) equal to a percentage which would cause
the total consideration for each share of Company Common Stock to have a value,
including the cash to be paid as noted above, equal to $22.00 per share. The HI
Stock will be valued based upon the sum of the daily volume weighted average
price per share of HI Stock as reported on the Bloomberg Equity AQR Screen
("Bloomberg") for each of the ten Trading Days (as defined herein) ending on the
Expiration Date (as defined herein) (the "HI Stock Valuation Period"), divided
by ten. Only whole shares of HI Stock will be issued to a holder of Company
Common Stock with cash being paid in lieu of fractional shares. Although the
value to be paid for each share of Company Common Stock is fixed at $22.00 per
share, the Exchange Ratio is not fixed. The amount of cash to be paid for each
share of Company Common Stock, if greater than $2.00, will be determined by
Household International no later than the day immediately preceding the HI Stock
Valuation Period. However, in certain circumstances Household International may
be required, if possible, to adjust the cash to be paid to each holder of
Company Common Stock at the Effective Time (as defined herein) in order to
maintain the intended tax treatment of the Merger. The number of shares of HI
Stock a holder of shares of Company Common Stock will be entitled to shall not
be determined until the close of business on the Trading Day immediately
preceding the date of the Special Meeting (the "Expiration Date"). Holders of
shares of Company Common Stock may obtain the volume weighted average prices per
share of HI Stock as reported on Bloomberg through any day during the HI Stock
Valuation Period by calling the telephone number set forth on page 2 of this
Prospectus.
The Prospectus and Proxy Statement does not cover any resales of HI Stock
received by affiliates of the Company upon consummation of the Merger and no
person is authorized to make use of this Prospectus and Proxy Statement in
connection with any such resale.
The HI Stock is, and the shares of HI Stock being offered hereby will be
listed and traded on the New York Stock Exchange. The closing price of the HI
Stock on the New York Stock Exchange on September 12, 1997 was $111 5/16.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
The Special Meeting will be held on October 21, 1997 at 9:00 a.m., local
time, at the offices of Wilmer, Cutler & Pickering, 2445 M Street, N.W.,
Washington, D.C. 20037, to consider a proposal to approve and adopt the Merger
Agreement (as hereinafter defined) and approve the Merger.
------------------------
The date of this Prospectus and Proxy Statement is September 16, 1997.
<PAGE> 4
THIS PROSPECTUS AND PROXY STATEMENT CONSTITUTES A PROSPECTUS OF HOUSEHOLD
INTERNATIONAL WITH RESPECT TO SHARES OF HI STOCK TO BE ISSUED IN THE MERGER IN
EXCHANGE FOR SHARES OF COMPANY COMMON STOCK.
THIS PROSPECTUS AND PROXY STATEMENT CONTAINS IMPORTANT INFORMATION. HOLDERS
OF SHARES OF COMPANY COMMON STOCK ARE URGED TO READ THIS PROSPECTUS AND PROXY
STATEMENT CAREFULLY BEFORE DECIDING HOW TO VOTE THEIR SHARES WITH RESPECT TO THE
MERGER AND MERGER AGREEMENT.
THIS PROSPECTUS AND PROXY STATEMENT INCORPORATES DOCUMENTS OF HOUSEHOLD
INTERNATIONAL BY REFERENCE THAT ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH.
THESE DOCUMENTS ARE AVAILABLE UPON REQUEST FROM:
PAUL R. SHAY, ASSISTANT GENERAL COUNSEL
AND CORPORATE SECRETARY
HOUSEHOLD INTERNATIONAL, INC.
2700 SANDERS ROAD
PROSPECT HEIGHTS, ILLINOIS 60070
TELEPHONE: (847) 564-6989
IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE
MADE BY OCTOBER 7, 1997.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND PROXY STATEMENT AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY, HOUSEHOLD INTERNATIONAL OR HAC. THIS
PROSPECTUS AND PROXY STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY FROM
ANY PERSON, OR THE SOLICITATION OF A PROXY, IN ANY JURISDICTION WHERE SUCH OFFER
OR SOLICITATION WOULD BE UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS AND PROXY STATEMENT NOR ANY
DISTRIBUTION OF SECURITIES MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE AFFAIRS OF THE
COMPANY, HOUSEHOLD INTERNATIONAL OR HAC OR THEIR RESPECTIVE SUBSIDIARIES, OR ANY
CHANGE IN THE INFORMATION CONTAINED HEREIN, SINCE THE DATE HEREOF.
ALL INFORMATION CONTAINED HEREIN WITH RESPECT TO HOUSEHOLD INTERNATIONAL OR
HAC HAS BEEN PROVIDED BY HOUSEHOLD INTERNATIONAL, AND THE COMPANY IS RELYING
UPON THE ACCURACY OF THAT INFORMATION. ALL INFORMATION CONTAINED HEREIN WITH
RESPECT TO THE COMPANY HAS BEEN PROVIDED BY THE COMPANY, AND HOUSEHOLD
INTERNATIONAL AND HAC ARE RELYING UPON THE ACCURACY OF THAT INFORMATION.
2
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
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PAGE
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Available Information................ 4
Incorporation of Certain Documents by
Reference.......................... 4
Prospectus Summary................... 5
Introduction....................... 5
The Company........................ 5
Household Auto Corporation......... 6
Household International............ 7
Selected Financial Data............ 8
Comparative Per Share Data......... 9
The Merger......................... 10
The Special Meeting of the Company
Stockholders....................... 14
Market and Trading Information....... 15
The Merger........................... 16
General............................ 16
Conduct of Business Pending
the Merger...................... 17
Operations After the Merger........ 17
Effect of the Merger
on the Company Employee
Benefit Plans and
Options......................... 18
Interest of Certain Persons in the
Merger.......................... 18
Resales by Affiliates.............. 20
Background of and Company Reasons
for the Merger.................. 21
Recommendation of the Company's
Board of Directors.............. 22
Material Contacts and Board
Deliberations................... 22
Opinion of the Company's Financial
Advisor......................... 24
Household International Reasons for
the Merger...................... 27
Conditions to the Merger;
Amendment; Termination.......... 27
Certain Federal Income Tax
Consequences.................... 29
Conversion of Shares and Exchange
of Certificates................. 33
</TABLE>
<TABLE>
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PAGE
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Fractional Shares.................. 34
Accounting Treatment............... 34
Required Regulatory Approvals...... 34
Transfer and Exchange Agents....... 34
Appraisal Rights of Company
Stockholders.................... 34
Household International.............. 35
Description of Household
International................... 35
Selected Financial Data............ 37
Description of Household
International Capital Stock..... 39
General............................ 39
Preferred Stock.................... 39
Description of Authorized Series of
Preferred Stock................. 40
Common Stock....................... 43
Preferred Share Purchase Rights.... 43
Dividends.......................... 43
Special Charter Provisions......... 44
The Company.......................... 44
Description of the Company......... 44
Selected Company Financial
Information..................... 58
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 60
Management of the Company............ 72
Principal Stockholders of the
Company............................ 76
Legal Matters........................ 77
Experts.............................. 77
Index to Defined Terms............... 78
Consolidated Financial Statements of
the Company........................ F-1
Annex A -- Copy of Merger
Agreement.......................... A-1
Annex B -- Copy of Section 262 of
DGCL............................... B-1
Annex C -- Copy of Fairness Opinion
from Credit Suisse First Boston
Corporation........................ C-1
</TABLE>
3
<PAGE> 6
AVAILABLE INFORMATION
Each of Household International and the Company is subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and in accordance therewith files reports, proxy
statements and other information with the Securities and Exchange Commission
(the "Commission"). Such reports, proxy statements and other information can be
inspected and copied at the public reference facilities of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's Regional
Offices at the Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661 and Seven World Trade Center, New York, New York 10048,
and may also be accessed through the World Wide Web site maintained by the
Commission at http://www.sec.gov. Copies of such material can also be obtained
at prescribed rates by writing to the Public Reference Section of the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549. In addition, the HI Stock is
listed on the New York Stock Exchange ("NYSE") and the Chicago Stock Exchange
and such reports, proxy statements and other material concerning Household
International can be inspected at the offices of the New York Stock Exchange,
Inc. 20 Broad Street, New York, New York 10005, and the Chicago Stock Exchange,
440 South LaSalle Street, Chicago, Illinois 60605. The Company Common Stock is
included for quotation on the Nasdaq Stock Market National Market System
("NASDAQ-NMS") and such reports, proxy statements and other information
concerning the Company can be inspected at the offices of the National
Association of Securities Dealers, Inc. 1735 K Street, N.W., Washington, D.C.
20006.
Household International has filed with the Commission a registration
statement on Form S-4 (together with any amendments thereto, the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the HI Stock to be issued pursuant to the Merger. This
Prospectus does not contain all information set forth in the Registration
Statement and exhibits thereto. Such additional information may be inspected and
copied as set forth above. Statements contained in this Prospectus relating to
any contract or document incorporated into this Prospectus by reference are not
necessarily complete, and in each instance reference is made to the copy of such
contract or document filed as an exhibit to the Registration Statement or such
other document incorporated into the Registration Statement, each such statement
being qualified in all respects by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents have been filed by Household International (File
No. 1-8198) with the Commission pursuant to the Exchange Act and are
incorporated herein by reference and made a part of this Prospectus:
(a) Household International's Annual Report on Form 10-K for the fiscal
year ended December 31, 1996;
(b) Household International's Quarterly Reports on Form 10-Q for the
quarters ended March 31 and June 30, 1997; and
(c) Household International's Current Reports on Form 8-K dated January 23,
February 10, May 23, June 20 and June 23, 1997.
All documents filed by Household International with the Commission pursuant
to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date
of this Prospectus and prior to the date of the Special Meeting shall be deemed
to be incorporated herein by reference and made a part of this Prospectus from
the date of filing of such documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein or in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
4
<PAGE> 7
PROSPECTUS SUMMARY
The following summary is not intended to be complete and is qualified in
its entirety by reference to the more detailed information contained elsewhere
in this Prospectus and Proxy Statement and the documents incorporated by
reference herein.
INTRODUCTION
Household Auto Corporation, a Delaware corporation ("HAC"), and Household
International, Inc., a Delaware corporation ("Household International"), have
entered into an Agreement and Plan of Merger dated as of August 24, 1997 (the
"Merger Agreement") with ACC Consumer Finance Corporation, a Delaware
corporation ("ACC" or the "Company"). Pursuant to the Merger Agreement, HAC will
merge with and into ACC and ACC will become a wholly-owned subsidiary of
Household International (the "Merger"). As a result of the Merger all of the
outstanding shares of the Company's common stock, par value $0.001 per share
(the "Company Common Stock") will be converted into the right to receive the
Merger Consideration. The "Merger Consideration" shall be a combination of cash
(ranging between $2.00 to $4.00) and a fraction of a share of Household
International common stock, par value $1.00 per share (the "HI Stock"), the sum
of which will be valued at $22.00 per share of Company Common Stock. No interest
will be paid with respect to the Merger Consideration.
This Prospectus and Proxy Statement is being furnished in connection with
the solicitation of proxies by the Board of Directors of the Company, to be
voted at a Special Meeting of Stockholders of the Company to be held on October
21, 1997 at 9:00 a.m., local time at the offices of Wilmer, Cutler & Pickering,
2445 M Street, N.W., Washington, D.C. 20037 and at any adjournment or
postponement thereof (the "Special Meeting") for the purpose of approving and
adopting the Merger Agreement and approving the Merger.
THE BOARD OF DIRECTORS OF THE COMPANY HAS UNANIMOUSLY DETERMINED THAT THE
MERGER IS FAIR TO AND IN THE BEST INTERESTS OF THE COMPANY'S STOCKHOLDERS, HAS
UNANIMOUSLY APPROVED AND ADOPTED THE MERGER AGREEMENT AND APPROVED THE MERGER
AND UNANIMOUSLY RECOMMENDS THAT THE COMPANY'S STOCKHOLDERS APPROVE AND ADOPT THE
MERGER AGREEMENT AND APPROVE THE MERGER.
THE COMPANY
The Company specializes in the indirect financing of automobile installment
contracts ("Contracts"), originated primarily by franchised automobile dealers,
for consumers who pose credit risks due to past credit problems, limited or no
credit histories and/or low incomes ("Non-Prime Borrowers"). These consumers are
unlikely to qualify for financing from traditional automobile financing sources
such as commercial banks, savings and loans, credit unions and the captive
finance companies of automobile manufacturers. Through its financing program,
the Company provides automobile dealers ("Dealers") with a source of financing
for Non-Prime Borrowers.
The Company was founded by three senior executives with extensive
experience in credit evaluation, asset securitization and collections. The
Company has experienced significant growth since its formation in July 1993.
From June 30, 1996, to June 30, 1997, the outstanding balance of Contracts
serviced by the Company increased from $173 million to $396 million, or 129%.
The volume of Contracts purchased by the Company increased to $197 million
during the six-month period ended June 30, 1997, from $79 million during the
six-month period ended June 30, 1996, or 149%. During the six-month period ended
June 30, 1997, the Company reported income before extraordinary loss of $4.6
million and net income of $3.6 million compared to net income of $1.9 million
for the six-month period ended June 30, 1996.
The automobile finance market is one of the largest consumer finance
markets in the United States, with approximately $393 billion in outstanding
credit as of June 1997. Since its formation, the Company has targeted the highly
fragmented non-prime segment of this market. The Company's business plan focuses
on the following strategies:
MARKET FOCUS. The Company targets major metropolitan areas and expands into
those markets in which it can recruit salespeople with non-prime lending
experience. The Company believes that major metropolitan
5
<PAGE> 8
areas provide concentrations of high volume Dealers that can be effectively
serviced by its regional sales managers. The Company attempts to develop a broad
Dealer base to avoid dependence on a limited number of Dealers.
LATE-MODEL USED VEHICLE CONTRACTS FROM FRANCHISED DEALERS. The Company's
financing program targets the purchase of Contracts for late-model used vehicles
that are originated by franchised Dealers. The Company believes that late-model
used vehicles represent the largest segment of the used vehicle market, while
posing less risk of default due to mechanical problems than do older used
vehicles. The Company targets franchised Dealers because the financial
requirements and customer service standards imposed on these dealers by
automobile manufacturers generally result in a high level of financial stability
and customer satisfaction. As a result, the Company believes, in general,
Contracts from these Dealers expose the Company to less risk of Dealer
misrepresentation and lower levels of borrower default than those from
non-franchised Dealers.
CREDIT SCORING AND RISK MANAGEMENT SYSTEM. In order to manage the higher
risks associated with Non-Prime Borrowers, the Company maintains a database that
tracks key underwriting parameters for each Contract purchased. This database is
used to statistically compare the characteristics of performing Contracts to
those of nonperforming Contracts. Using this analysis, the Company periodically
refines and enhances the proprietary credit scoring system used by its credit
officers. The Company believes that this approach to credit evaluation allows
the Company to offer to Dealers a series of different pricing programs tied to
the expected economic value of each program to the Company. In addition, the
Company has assigned designated lending limits for each credit officer.
CREDIT PERFORMANCE AND ALLOWANCE FOR CONTRACT LOSSES. The Company monitors
its delinquencies and charge-offs and attempts to maintain an adequate allowance
for losses on its Contracts held-for-investment as well as excess servicing
receivables. The Company typically permits only one extension of 30 days or more
over the term of a Contract and the Company neither restructures Contracts nor
forebears any payments on Contracts.
REGIONAL CREDIT CENTERS. The Company has regional credit centers in
Atlanta, Georgia; Dallas, Texas; Miami, Florida; Newark, Delaware; St. Louis,
Missouri; and San Diego, California to process and approve applications from the
33 (as of August 31, 1997) states in which the Company directly markets its
program. The Company believes this regional structure meets the Company's Dealer
service objectives without sacrificing economies of scale and operating
controls.
CENTRALIZED FUNDING AND COLLECTION MANAGEMENT. The Company currently
manages its Contract funding and collection activities primarily from its
headquarters in San Diego. Through this central operation, the Company conducts
an extensive pre-funding verification process of 100% of the Contracts, which
typically includes a direct telephone interview with the borrower. The Company
also monitors the performance of each of its Dealers and conducts a post-funding
quality control review of a random sample of 5% of all Contracts purchased. The
Company pursues a collection strategy of early and frequent contact with
delinquent borrowers using a high-penetration autodialer to begin contacting
borrowers who become six days delinquent.
ASSET SECURITIZATIONS. The Company issues asset-backed securities to
redeploy capital, reduce its interest rate risk and recognize gains from the
sale of the Contracts.
The Company became a public company in May 1996. The Company's executive
offices are located at 12750 High Bluff Drive, Suite 320, San Diego, California
92130, and its telephone number is (619) 793-6300.
HOUSEHOLD AUTO CORPORATION
HAC is a Delaware corporation and a wholly-owned subsidiary of Household
International. HAC was incorporated on August 20, 1997 for the express purpose
of consummating the Merger with the Company. HAC's principal executive offices
are at 2700 Sanders Road, Prospect Heights, Illinois 60070, and its telephone
number is (847) 564-6150.
6
<PAGE> 9
HOUSEHOLD INTERNATIONAL
Household International, through its subsidiaries, is a leading provider of
consumer lending products to "middle-market consumers" in the United States,
Canada and the United Kingdom. Household International offers a diversified line
of lending products to consumers including home equity loans, VISA/MasterCard*
and private-label credit cards, student loans and other unsecured loans.
Household Finance Corporation ("HFC"), a subsidiary of Household International,
is the oldest consumer finance company in the United States, with operations
dating back to 1878. At June 30, 1997, Household International served
approximately 22 million customer accounts with $44.6 billion in managed (owned
and serviced with limited recourse) receivables and $24.8 billion in owned
receivables. Household International believes it is one of the largest providers
of home equity loans and of private-label credit cards in the United States. As
of June 30, 1997, Household International has been ranked as the sixth largest
VISA/MasterCard issuer in the United States. Household International originates
loans through multiple channels of distribution, including branch offices
(approximately 630 in the United States at June 30, 1997), direct mail,
telemarketing, and alliances. From 1992 to 1996, Household International's
managed receivables in its core businesses have grown from $20.2 billion to
$40.9 billion and earnings per share have increased at least 20 percent each
year, from $1.93 in 1992 to $5.30 in 1996. Household International's managed
basis efficiency ratio has decreased from 52.7% for 1994 to 40.8% for 1996.
Household International's 1996 return on average common shareholders' equity was
18.9%. (See "Household International -- Selected Financial Data")
Commencing in 1994 Household International initiated actions to further
narrow its focus on higher return consumer lending businesses. Household
International implemented tighter expense management and emphasized growth in
the branch-based consumer finance business and credit card operations. In
addition, Household International discontinued operations in mortgage banking
and consumer banking and disposed of its individual life insurance and annuity
product lines. As part of its strategic goal to focus on its higher-return
businesses, during June 1997 Household International acquired the capital stock
of Transamerica Financial Services Holding Company ("TFS"), the branch-based
consumer finance subsidiary of Transamerica Corporation. The acquisition
increased Household International's portfolio of secured loans by approximately
$3.1 billion and managed receivables by approximately $3.2 billion, and enabled
HFC to reach many new markets and customers in the United States, Canada and the
United Kingdom and to achieve additional penetration in existing markets.
In June 1997, Household International completed a public underwritten
offering of 9.1 million shares of HI Stock for approximately $1.0 billion. Net
proceeds from the offering were used to repay certain short-term borrowings
incurred in connection with the acquisition of TFS.
The principal executive offices of Household International are at 2700
Sanders Road, Prospect Heights, Illinois 60070, and its telephone number is
(847) 564-5000.
- ---------------
*VISA and MasterCard are registered trademarks of VISA USA, Inc. and MasterCard
International,
Incorporated, respectively.
7
<PAGE> 10
SELECTED FINANCIAL DATA
The following table presents on a historical basis selected consolidated
financial data for the Company and Household International, for the six months
ended June 30, 1996 and 1997 and for each of the years in the five years ended
December 31, 1996 for Household International, and for each of its audited
periods since its inception for the Company. This financial data is based on the
consolidated financial statements of the Company and Household International,
respectively, incorporated herein by reference or included in this Prospectus
and Proxy Statement. See "Incorporation of Certain Documents by Reference,"
"Household International -- Selected Financial Data" and "Consolidated Financial
Statements of the Company."
<TABLE>
<CAPTION>
AT OR FOR THE SIX
AT OR FOR THE YEAR ENDED DECEMBER 31, MONTHS ENDED JUNE 30,
-------------------------------------------------------------- -----------------------
1992 1993 1994(1) 1995 1996 1996 1997
---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Total income (loss) before taxes
and extraordinary loss:
Company....................... $ -- $ -- $ (3,580) $ 3,675 $ 8,792 $ 3,319 $ 7,928
Household International....... 278,000 450,700 528,300 753,700 822,300 359,900 430,800
Extraordinary loss, net of
income tax benefit:
Company....................... -- -- -- -- -- -- (1,038)
Net income (loss):
Company....................... -- -- (3,580) 3,466 5,100 1,925 3,560
Household International....... 190,900 298,700 367,600 453,200 538,600 235,100 281,800
Income (loss) per common share:
Company(2)
Before extraordinary loss... -- -- -- 0.61 0.68 0.29 0.54
Extraordinary loss.......... -- -- -- -- -- -- (0.12)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total Company............. -- -- -- 0.61 0.68 0.29 0.42
Household International....... 1.93 2.85 3.50 4.30 5.30 2.30 2.78
Historical cash dividends
declared per common share:
Company....................... -- -- -- -- -- -- --
Household International....... 1.15 1.18 1.23 1.31 1.46 0.68 0.78
Total assets -- owned (end of
period):
Company....................... -- -- 42,332 46,909 64,633 53,943 96,922
Household International....... 31,128,400 32,961,500 34,338,400 29,218,800 29,594,500 29,827,400 31,201,100
Total assets -- managed (end of
period):(3)
Company....................... -- -- 42,332 133,708 290,008 202,233 447,771
Household International....... 39,074,700 42,789,300 46,833,500 44,103,400 48,120,900 46,705,400 51,013,700
Total shareholders' equity (end
of period):(4)
Company....................... -- -- 898 6,285 24,520 21,222 30,532
Household International....... 1,845,600 2,398,300 2,520,400 2,970,900 3,321,200 3,079,500 4,468,600
</TABLE>
- ------------------------
(1) Represents information for the Company as of or for the period from July 15,
1993 (inception) through June 30, 1994 and the six-month transition period
ended December 31, 1994. Effective as of January 1, 1995, the Company
changed its fiscal year end from June 30 to December 31. Each of the periods
ended June 30, 1994, December 31, 1994, December 31, 1995 and December 31,
1996 is an audited period.
(2) Due to the significant changes in the capital structure of the Company upon
the closing of its initial public offering, historical net loss per share
prior to the year ended December 31, 1995 is not presented.
(3) Total assets -- managed represents owned assets and the outstanding balance
of receivables serviced with limited recourse.
(4) The Company's shareholders' equity includes redeemable preferred stock which
was converted to common stock during 1996.
Household International's total shareholders' equity at December 31, 1995
and 1996 and June 30, 1996 and 1997 includes common shareholders' equity,
preferred stock and company obligated mandatorily redeemable preferred
securities of subsidiary trusts. Total shareholders' equity excludes
convertible preferred stock that was fully converted or redeemed during
1995.
8
<PAGE> 11
COMPARATIVE PER SHARE DATA
The following table sets forth historical per common share net income, cash
dividends, book value and market value of: (1) Household International and (2)
the Company and pro forma equivalent per common share data of the Company,
calculated by multiplying historical per share data of Household International
by the Exchange Ratio (as defined herein) assuming (i) a value of $20.00 for HI
Stock for the Merger Consideration, and (ii) an HI Stock price equal to
$111 5/16 per share (the closing price of HI Stock on the NYSE on September 12,
1997). The information set forth below should be read in conjunction with the
selected historical financial data included elsewhere in the Prospectus and
Proxy Statement.
<TABLE>
<CAPTION>
HOUSEHOLD PRO FORMA
INTERNATIONAL THE COMPANY EQUIVALENT
------------- ----------- ----------
<S> <C> <C> <C>
Net income per common share:
Year ended December 31, 1996............................. $5.30 $0.68 $0.95
Six months ended June 30, 1997........................... 2.78 0.54(1) 0.50
Cash dividends per common share:
Year ended December 31, 1996............................. 1.46 -- 0.26
Six months ended June 30, 1997........................... 0.78 -- 0.14
Book value per common share as of:
December 31, 1996........................................ 30.30 2.96 5.44
June 30, 1997............................................ 38.83 3.60 6.98
Market value per common share as of August 22, 1997(2)..... 116 5/16(3) 15 3/4(4) 20.90
Market value per common share as of September 12, 1997..... 111 5/16(3) 21 1/4(4) 20.00
</TABLE>
- ------------------------
(1) Before extraordinary loss of $1.0 million related to extinguishment of
repurchase facility.
(2) The Trading Day (as defined herein) immediately preceding public
announcement of the execution of the Merger Agreement.
(3) Based on the closing price of HI Stock as reported on the NYSE.
(4) Based on the closing price of the Company Common Stock as reported on the
NASDAQ-NMS.
9
<PAGE> 12
THE MERGER
THE MERGER...................... The Merger Agreement, which is attached to
this Prospectus and Proxy Statement as Annex
A, provides that, if approved by the holders
of a majority of the Company Common Stock and
if all other conditions set forth in the
Merger Agreement are satisfied, HAC will be
merged with and into the Company (the
"Merger") no later than the first business
day after satisfaction of such conditions
(the "Effective Time"). Following
consummation of the Merger, the Company will
continue as the surviving corporation and
will be a wholly-owned subsidiary of
Household International. See "The Merger --
General" and "-- Operations After the
Merger."
At the Effective Time each share of Company
Common Stock, except for those shares as to
which appraisal rights have been perfected in
accordance with applicable laws, will be
converted into a fraction of a share of HI
Stock valued between $18.00 and $20.00 plus
cash in the amount ranging from $2.00 to
$4.00 (the "Merger Consideration"). The value
of the Merger Consideration will be equal to
$22.00 per share. No interest will be paid on
any component of the Merger Consideration.
The "Exchange Ratio" used for determining the
HI Stock component of the Merger
Consideration shall be (i) the dollar value
of the Merger Consideration payable in HI
Stock, divided by (ii) the sum of the daily
volume weighted average price per share of HI
Stock as reported on the Bloomberg Equity AQR
Screen ("Bloomberg") for each of the ten
Trading Days ending on the Expiration Date
(the "HI Stock Valuation Period"), divided by
ten. The amount of the cash component of the
Merger Consideration, if greater than $2.00,
will be determined by Household International
no later than the day immediately preceding
the HI Stock Valuation Period. Once the
Exchange Ratio is determined, the value of HI
Stock, both before and after the Effective
Time, is subject to market value
fluctuations. See "Market and Trading
Information." Notwithstanding the foregoing
however, in certain circumstances Household
International may be required to adjust the
cash component of the Merger Consideration at
the Effective Time in order to maintain the
intended tax treatment of the Merger, if
possible. See "The Merger -- Certain Federal
Income Tax Consequences." A "Trading Day"
shall be any day on which HI Stock is traded
on the NYSE. The "Expiration Date" shall be
the Trading Day for HI Stock immediately
preceding the date of the Special Meeting.
See "The Merger -- General."
Consummation of the Merger is subject to the
satisfaction or waiver of various conditions,
including compliance by each party with its
respective covenants and the accuracy of each
party's respective representations and
warranties. Under certain conditions the
Merger Agreement may be terminated by either
party. See "The Merger -- Conditions to the
Merger; Amendment; Termination" for a more
complete discussion of the foregoing.
FRACTIONAL SHARES............... No certificates representing fractional
shares of HI Stock will be issued to holders
of shares of Company Common Stock as a
10
<PAGE> 13
result of the Merger. Holders of shares of
Company Common Stock who would otherwise be
entitled to receive fractional shares of HI
Stock will receive additional cash in lieu of
such fractional shares based upon the
Exchange Ratio of the HI Stock. See "The
Merger -- Fractional Interests."
VOTING RIGHTS AND VOTE
REQUIRED........................ All holders of Company Common Stock as of
September 12, 1997 (the "Record Date") are
entitled to vote at the Special Meeting.
Holders of not less than a majority of the
outstanding shares of the Company Common
Stock entitled to vote must vote in favor of
the Merger Agreement and the Merger in order
for the transaction to be approved. The
Company expects, based upon voting
agreements, that senior management and
holders of the Company Common Stock
representing approximately 71% of the
outstanding shares will vote in favor of the
Merger. It is not necessary for the
stockholders of Household International to
approve the transaction. See "The Special
Meeting of the Company Stockholders," "The
Merger -- Background of and Company's Reasons
for the Merger" and "-- Interest of Certain
Persons in the Merger."
RECOMMENDATION OF ACC BOARD OF
DIRECTORS....................... The Board of Directors of the Company has
unanimously approved and adopted the Merger
Agreement and approved the Merger, and
recommends a vote FOR approval and adoption
of the Merger Agreement and FOR approval of
the Merger by the stockholders of the
Company.
APPRAISAL RIGHTS................ Holders of shares of Company Common Stock may
demand appraisal rights in accordance with
Section 262(d)(1) of the General Corporation
Law of the State of Delaware ("DGCL"). To
perfect any right of appraisal a holder of
shares must, prior to any stockholder vote on
the Merger, deliver a written demand for
appraisal of his shares to the Company. In
addition, any stockholder demanding an
appraisal must not vote in favor of the
Merger. If a stockholder demands appraisal
rights, such stockholder's shares shall not
be converted as described herein, but shall
only be entitled to such rights and
consideration as may be allowed by the DGCL.
A copy of Section 262 of the DGCL is attached
as Annex B to this Prospectus. See "The
Merger -- Appraisal Rights of Company
Stockholders."
REGULATORY APPROVAL............. In order for the proposed transaction to be
completed, approval must be obtained from the
United States Federal Trade Commission and
the United States Department of Justice
pursuant to the Hart-Scott-Rodino Antitrust
Improvement Act of 1976, as amended. It is
anticipated that such federal agencies will
approve the Merger, but no assurance can be
given that such approval will be obtained.
See "The Merger -- Required Regulatory
Approvals."
MARKET PRICE OF HI STOCK........ HI Stock is listed on the NYSE and the
Chicago Stock Exchange (symbol: HI). As of
September 12, 1997, there were 106,886,874
shares of HI Stock issued and outstanding.
The reported closing sale price of the HI
Stock on the NYSE on September 12, 1997 was
$111 5/16 per share. See "Market and
11
<PAGE> 14
Trading Information" for information
regarding historical trading prices of HI
Stock.
MARKET PRICE OF COMPANY COMMON
STOCK........................... The Company Common Stock is listed on
NASDAQ-NMS (symbol: ACCI). As of September
12, 1997, there were 8,502,853 shares of
Company Common Stock issued and outstanding.
The reported closing sale price of the
Company Common Stock on NASDAQ-NMS on
September 12, 1997 was $21 1/4 per share. See
"Market and Trading Information" for
information regarding historical trading
prices of the Company Common Stock.
DELIVERY OF CERTIFICATES
REPRESENTING HI STOCK........... If the Merger is consummated, Household
International expects that certificates
representing shares of HI Stock and checks in
payment of the cash portion of the Merger
Consideration will be delivered as soon as
practicable after the Effective Time and
receipt by Harris Trust & Savings Bank (the
"Exchange Agent") of a letter of transmittal
(the "Letter of Transmittal") from the
stockholder delivering certificates
representing shares of Company Common Stock
converted in the Merger. The Letter of
Transmittal, which will be available to all
holders of Company Common Stock on the date
of the Special Meeting, will be mailed to all
holders of the Company Common Stock by the
Exchange Agent as soon as practicable after
the Special Meeting. See "The Merger --
Conversion of Shares and Exchange of
Certificates."
FEDERAL INCOME TAX
CONSEQUENCES.................... The Company, HAC and Household International
intend that the Merger will constitute a
reorganization within the meaning of Section
368(a) of the Internal Revenue Code of 1986,
as amended (the "Code"). Assuming that the
Merger constitutes a reorganization, the
portion of the Merger Consideration to be
paid in HI Stock will be treated as a
tax-free exchange. However, holders of shares
of Company Common Stock participating in the
Merger will recognize gain to the extent of
the cash received in the Merger.
Qualification of the Merger as a
reorganization is subject to certain rules.
If the Merger does not qualify as a
reorganization, holders of Company Common
Stock will be treated as having made a
taxable sale of their shares. See "The Merger
-- Certain Federal Income Tax Consequences."
FAIRNESS OPINION................ The Company's financial advisor, Credit
Suisse First Boston Corporation ("CSFB"), has
delivered to the Company's Board of Directors
its written opinion that as of August 24,
1997, and based upon and subject to certain
matters stated therein, the Merger
Consideration was fair to the holders of the
Company Common Stock from a financial point
of view. The full text of CSFB's opinion,
which sets forth assumptions made, matters
considered and limitations on the review
undertaken, is attached as Annex C to this
Prospectus. See "The Merger -- Opinion of the
Company's Financial Advisor."
INTEREST OF CERTAIN PERSONS
IN THE MERGER................... Holders, including the Founders (as defined
herein), representing approximately 71% of
the outstanding shares of the Company Common
Stock have agreed with Household
International
12
<PAGE> 15
that they will vote all of the shares of
Company Common Stock controlled by them to
approve the Merger and to approve and adopt
the Merger Agreement. In addition, directors
of the Company and certain members of the
Company's management have interests in the
Merger in addition to any interests they may
have as a stockholder of the Company
generally. Their interests include ongoing
employment with the Company as well as other
benefits as described herein. The Board of
Directors of the Company was aware of the
interest of all such persons at the time it
approved the Merger Agreement and recommended
the Merger to the stockholders of the
Company. See "The Merger -- Interest of
Certain Persons."
ACCOUNTING TREATMENT............ Household International expects to account
for the acquisition of the Company as a
purchase under generally accepted accounting
principles. See "The Merger -- Accounting
Treatment."
FURTHER INFORMATION............. Holders of shares of Company Common Stock who
require information about the Merger or who
have general questions regarding the Merger,
including requests for additional copies of
this Prospectus and Proxy Statement, the
Proxy Card or the Letter of Transmittal,
should contact Jack R. Cohen, Vice President
-- General Counsel and Secretary, ACC
Consumer Finance Corporation, 12750 High
Bluff Drive, Suite 320, San Diego, California
92130 (619/793-6300).
13
<PAGE> 16
THE SPECIAL MEETING OF THE COMPANY STOCKHOLDERS
DATE, TIME AND PLACE
This Prospectus and Proxy Statement is being furnished to the holders of
all of the Company's Common Stock (the only shares entitled to vote at any
meeting of stockholders of the Company) in connection with the solicitation of
proxies by the Board of Directors of the Company to be voted at the Special
Meeting. The Special Meeting will be held on October 21, 1997, at 9:00 a.m.
local time at the offices of Wilmer, Cutler & Pickering, 2445 M Street, N.W.,
Washington, D.C. 20037.
PURPOSE
At the Special Meeting the holders of the Company Common Stock will vote on
a proposal to adopt and approve the Merger Agreement and to approve the Merger.
RECORD DATE AND VOTE REQUIRED
The Board of Directors of the Company has fixed the close of business on
September 12, 1997 as the record date (the "Record Date") for determination of
stockholders entitled to notice of and to vote at the Special Meeting. As of the
Record Date, 8,502,853 shares of Company Common Stock were issued and
outstanding with each share thereof entitling its holder to one vote on each
matter submitted to the vote of stockholders at the Special Meeting. The
presence in person or by proxy of the holders of a majority of the shares of
Company Common Stock outstanding is required to constitute a quorum for the
Special Meeting. Adoption and approval of the Merger Agreement and approval of
the Merger require the affirmative vote of holders of not less than a majority
of the outstanding shares of Company Common Stock entitled to vote thereon.
Votes, whether in person or by proxy, will be counted and tabulated by
inspectors appointed by the Company. The inspectors will treat shares of Company
Common Stock represented by a properly executed and returned proxy as present at
the Special Meeting for purposes of determining a quorum. An abstention or a
broker non-vote will have the same effect as a vote against the proposals.
Strome Offshore Limited, Strome Partners, L.P., Cargill Financial Services
Corporation, Rocco J. Fabiano, Gary S. Burdick and Rellen M. Stewart
(collectively, the "Covenanting Stockholders"), who as of the Record Date own
approximately 71% of the outstanding Company Common Stock) have entered into
agreements with Household International that obligate them to vote all shares of
Company Common Stock they hold in favor of the proposal to adopt and approve the
Merger Agreement and approve the Merger.
PROXIES
The form of proxy for use at the Special Meeting accompanies this
Prospectus and Proxy Statement. A stockholder may use a proxy whether or not he
or she intends to attend the Special Meeting in person. The proxy may be revoked
in writing by the person giving it at any time before it is exercised by notice
to the Secretary of the Company, by executing and submitting a later dated proxy
or by attending and voting in person at the Special Meeting. All proxies validly
submitted and not revoked will be voted in the manner specified herein. IF NO
SPECIFICATION IS MADE, THE PROXIES WILL BE VOTED IN FAVOR OF ADOPTION AND
APPROVAL OF THE MERGER AGREEMENT AND APPROVAL OF THE MERGER. The Board of
Directors of the Company is not aware of any other matters that may be presented
for action at the Special Meeting, but if other matters do properly come before
the meeting it is intended that the shares represented by the accompanying proxy
will be voted by the persons named in the proxy in accordance with the
recommendation of the Company's Board of Directors.
SOLICITATION OF PROXIES; EXPENSES
Solicitation of proxies will be made in person, by mail or by telephone or
telegraph by present directors, officers and employees of the Company for which
no additional compensation will be paid. The Company will
14
<PAGE> 17
bear one-half of the cost of preparing this Prospectus and Proxy Statement, not
including the solicitation of the proxies relating to the Special Meeting which
will be borne solely by the Company, with the other half being paid for by
Household International.
This Prospectus and Proxy Statement is being mailed on or about September
19, 1997 to all holders of Company Common Stock on the Record Date.
RECOMMENDATION OF ACC BOARD OF DIRECTORS
THE BOARD OF DIRECTORS OF ACC HAS UNANIMOUSLY APPROVED AND ADOPTED THE
MERGER AGREEMENT AND APPROVED THE MERGER, AND RECOMMENDS A VOTE FOR APPROVAL AND
ADOPTION OF THE MERGER AGREEMENT AND FOR APPROVAL OF THE MERGER BY THE
STOCKHOLDERS OF ACC.
MARKET AND TRADING INFORMATION
The HI Stock is listed on the New York Stock Exchange (the "NYSE") and the
Chicago Stock Exchange under the symbol "HI." The following table sets forth for
the periods indicated the high and low sale prices per share of HI Stock on the
NYSE, together with the dividends declared by Household International per share
of HI Stock.
<TABLE>
<CAPTION>
COMMON CASH
STOCK PRICE DIVIDENDS
---------------------------- DECLARED
HIGH LOW PER SHARE
-------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995
First Quarter............................................ $ 45 $35 7/8 $.315
Second Quarter........................................... 51 1/2 43 1/8 .315
Third Quarter............................................ 62 48 7/8 .340
Fourth Quarter........................................... 68 3/8 54 1/4 .340
YEAR ENDED DECEMBER 31, 1996
First Quarter............................................ 71 1/2 52 .340
Second Quarter........................................... 76 1/2 63 .340
Third Quarter............................................ 83 7/8 68 1/2 .390
Fourth Quarter........................................... 98 1/8 82 1/2 .390
YEAR ENDED DECEMBER 31, 1997
First Quarter............................................ 108 1/4 85 .390
Second Quarter........................................... 117 7/16 78 5/8 .390
Third Quarter (through September 12, 1997)............... 130 108 7/16 .420
</TABLE>
Household International or its predecessor, HFC, has paid a regular
quarterly cash dividend on HI Stock since 1926. Household International
increased its quarterly dividend by $.05 to $.390 per share, effective with the
third quarter of 1996, and to $.420 per share effective with the third quarter
of 1997. Holders of HI Stock are entitled to receive dividends from funds
legally available therefor, when, as and if declared by the Board of Directors
of Household International, subject to the prior rights of holders of any shares
of preferred stock of Household International. See "Description of Household
International Capital Stock."
The Company's Common Stock is listed on NASDAQ-NMS under the symbol "ACCI."
The following table sets forth, from May 17, 1996 (the date the Company became
publicly traded on NASDAQ-NMS) and
15
<PAGE> 18
for the periods indicated, the high and low sale prices per share of Company
Common Stock on NASDAQ-NMS, together with the dividends declared by the Company
per share.
<TABLE>
<CAPTION>
COMMON CASH
STOCK PRICE DIVIDENDS
-------------------------- DECLARED
HIGH LOW PER SHARE
------------ ------------ ---------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
May 17, 1996 -- June 30, 1996............................. $ 9 5/8 $ 7 1/4 --
Third Quarter............................................. 9 1/2 5 5/8 --
Fourth Quarter............................................ 10 1/8 8 3/8 --
YEAR ENDED DECEMBER 31, 1997
First Quarter............................................. 12 7/8 8 3/8 --
Second Quarter............................................ 11 3/4 7 1/2 --
Third Quarter (through September 12, 1997)................ 22 11 1/8 --
</TABLE>
The execution of the Merger Agreement was publicly announced on August 25,
1997. The closing price per share for HI Stock and the Company Common Stock and
the market value of Household International and the Company as of the close of
business on August 22, 1997 (the last Trading Day for HI Stock and the Company
Common Stock prior to the announcement) is set forth below:
<TABLE>
<CAPTION>
HOUSEHOLD
INTERNATIONAL COMPANY
------------- -------
<S> <C> <C>
Closing stock price per share............................... $ 116 5/16 $ 15 3/4
Aggregate market value (amount in millions)................. $12,423 $134
</TABLE>
The Exchange Ratio will not be fixed until the Expiration Date which will
be one or two days prior to the Effective Time. Therefore, through the
Expiration Date, changes in the market price of HI Stock will affect the
fraction of HI Stock to be received by the stockholders of ACC in the Merger.
Once the Exchange Ratio is fixed, changes in the market price of HI Stock will
affect the dollar value of HI Stock to be received by the stockholders of ACC in
the Merger. Following the Effective Time, the value of HI Stock received by the
former Company stockholders will be subject to market value fluctuations due to
factors that may differ from those that affected the Company Common Stock.
Company stockholders are urged to obtain current market quotations for HI Stock
and Company Common Stock prior to the Special Meeting.
THE MERGER
The information in this Prospectus and Proxy Statement concerning the terms
of the Merger is a summary only and is qualified in its entirety by reference to
the Merger Agreement, which agreement is attached as Annex A hereto.
GENERAL
The Merger Agreement provides for the merger of HAC with and into the
Company. At the Effective Time, with the exception of those shares as to which
appraisal rights have been perfected in accordance with applicable laws, the
outstanding shares of Company Common Stock will be converted into (a) cash in an
amount ranging between $2.00 and $4.00, plus (b) a fraction of a share of HI
Stock valued between $18.00 and $20.00 (the "Merger Consideration"). The value
of the Merger Consideration will be $22.00 per share of Company Common Stock.
However, the proportionate amounts of cash and HI Stock to be received for each
share of Company Common Stock will be based upon (a) an Exchange Ratio (as
defined below), (b) Household International's determination as to the amount of
the cash component of the Merger Consideration and (c) any adjustment to the
cash component of the Merger Consideration required to maintain the intended
tax-free status of the transaction, if possible, as more fully described below.
No later than the day preceding the HI Stock Valuation Period (as defined
below), Household International will determine the amount of cash per share to
be paid as a component of the Merger Consideration. Such amount
16
<PAGE> 19
will be no less than $2.00 or more than $4.00 per share of Company Common Stock.
The amount of HI Stock to be paid for each share of Company Common Stock will be
based upon the Exchange Ratio. The "Exchange Ratio" will equal (i) the value of
the Merger Consideration that is payable in HI Stock, divided by (ii) the sum of
the daily volume weighted average price per share of HI Stock as reported on the
Bloomberg Equity AQR Screen ("Bloomberg") for the ten Trading Days ending on the
Expiration Date (the "HI Stock Valuation Period"), divided by ten (the "Weighted
Average Stock Price"). The HI Stock Valuation Period will begin on the 11th
Trading Day preceding the scheduled date of the Special Meeting and end on the
Expiration Date. An increase or decrease in the market price of HI Stock during
the HI Stock Valuation Period will affect the Exchange Ratio and the number of
shares of HI Stock issuable in the Merger. A "Trading Day" shall be any day on
which the referenced security is traded on its principal exchange, which for HI
Stock is the NYSE. The "Expiration Date" shall be the Trading Day for HI Stock
immediately preceding the date of the Special Meeting.
Since the cash component of the Merger Consideration is established prior
to the HI Stock Valuation Period, in certain circumstances the cash component of
the Merger Consideration could exceed the amount permissible under the Code in
order for the Merger to be eligible for treatment as a tax-free exchange by the
Company's stockholders. If such circumstances occur, at the Effective Time,
Household International will adjust the cash component of the Merger
Consideration downward to an amount sufficient, if possible, to permit the
characterization of the Merger as a tax-free exchange (and there shall be a
corresponding increase in the HI Stock consideration); provided, however, no
such adjustment shall reduce the cash to be paid to holders of Company Common
Stock whose shares are converted in the Merger to less than $2.00 per share. For
information concerning the Federal income tax effects of the Merger for holders
of Company Common Stock ("Company Common Stockholders"), refer to "-- Certain
Federal Income Tax Consequences" herein.
Holders of not less than a majority of the outstanding shares of Company
Common Stock entitled to vote thereon must vote in favor of the approval of the
Merger Agreement and the Merger in order for the transaction to be completed.
Subject to such stockholder approval and the satisfaction of certain conditions
and receipt of all requisite regulatory approvals, the Merger will become
effective as soon as possible thereafter in accordance with the General
Corporation Law of the State of Delaware ("DGCL") on the later to occur of (x)
the filing with the Secretary of State of the State of Delaware of a certificate
of merger and (y) that time, if any, subsequent to the time of such filing
designated in the certificate of merger as the time the Merger shall become
effective (the "Effective Time"). The parties have agreed that, unless a
subsequent time and date is agreed to by Household International, HAC and the
Company, the Effective Time will be no later than one business day after
satisfaction of the conditions set forth in "-- Conditions to the Merger;
Amendments; Termination" herein.
The Boards of Directors of Household International, HAC and the Company
have approved the Merger Agreement. Approval of the Merger Agreement by the
stockholders of Household International is not required for consummation of the
Merger.
CONDUCT OF BUSINESS PENDING THE MERGER
Pursuant to the Merger Agreement, the Company has agreed to carry on its
business until the Effective Time in substantially the same manner as conducted
prior to the execution of the Merger Agreement. The Merger Agreement requires
that the Company obtain the prior written consent of Household International
prior to taking certain actions, including the issuance or redemption of any
shares of Company Common Stock, the declaration or payment of any dividend with
respect to Company Common Stock, entering certain agreements and making capital
expenditures above specified thresholds.
OPERATIONS AFTER THE MERGER
Upon the consummation of the Merger, HAC will be merged with and into the
Company and the separate corporate existence of HAC will cease. The Company will
be the surviving corporation in the Merger and upon completion of the Merger
will be a wholly-owned subsidiary of Household International. Household
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International expects that the Company's current officers and employees will be
elected or appointed as the officers and employees of the surviving corporation
following the Merger.
EFFECT OF THE MERGER ON THE COMPANY EMPLOYEE BENEFIT PLANS AND OPTIONS
Under the terms of the Merger Agreement, each employee of the Company or
its subsidiaries who continues as an employee following the Effective Time will
be entitled, as a new employee of Household International or a subsidiary of
Household International, to participate in such employee benefit plans or
deferred compensation, bonus or incentive plans or other employee benefit or
fringe benefit programs that may be in effect generally for similarly situated
employees of Household International and its subsidiaries, provided such
employee meets the eligibility tests of such plans and programs and is not
participating in a similar plan which is maintained by the Company after the
Effective Time. Household International will, for purposes of recognizing
vesting and any age or period of service requirements for commencement of
participation with respect to any plans or programs in which former employees of
the Company may participate, credit such employee with his or her term of
service with the Company and its subsidiaries. Notwithstanding the foregoing,
Household International has the right to amend, modify or terminate any such
plans or programs.
As of September 12, 1997, options to purchase (a) 407,213 shares of Company
Common Stock were outstanding under the Company's 1995 Stock Option Plan (the
"Company Stock Options") and (b) 80,000 shares of Company Common Stock were
outstanding under the Company's 1995 Directors Stock Option Plan (the "Director
Stock Options"). Immediately following the Effective Time, all unexercised
Company Stock Options will be assumed by Household International in accordance
with the Company's 1995 Stock Option Plan and will be exercisable for the number
of whole shares of HI Stock equal to the number of shares of Company Common
Stock that were issuable upon exercise of such Company Stock Option multiplied
by the number determined by dividing (x) $22.00 by (y) the Weighted Average
Stock Price rounded down to the nearest whole cent (the "Option Exchange
Ratio"). See "-- Interest of Certain Persons in the Merger" below. The exercise
price for each share of HI Stock issuable upon exercise of the assumed options
will be determined by dividing the exercise price for each Company Stock Option
prior to its assumption by Household International by the Option Exchange Ratio,
rounded up to the nearest whole cent. Prior to the Effective Time, the Company
intends to solicit from employee holders of Company Stock Options offers to add
a stock appreciation right ("SAR") feature to their option agreements, which
offers the Company will be free to accept or reject. Provided the Company
accepts such offers and the SARs are exercised prior to the Effective Time, then
immediately prior to the Effective Time the holders of such SARs will receive
for each option share, whether vested or unvested, cash in the amount of $22.00
less the option exercise price. Offers and exercises with respect to SARs will
be in the discretion of the employee holders of Company Stock Options, and to
the extent SARs are not exercised, the SARs will expire and the corresponding
Company Stock Option will be assumed by Household International as described
above. If the Company's stockholders approve the Merger, at the Effective Time
all Director Stock Options granted prior to such date will become fully vested
and exercisable and will be cancelled in exchange for an amount of cash per
share equal to $14.75 (which is equal to the difference between $22.00 and the
exercise price of all Director Stock Options at $7.25 per share).
INTEREST OF CERTAIN PERSONS IN THE MERGER
General. As described below, directors and certain executive officers of
the Company have interests in the Merger in addition to any interest they may
have as stockholders of the Company generally. These interests include, among
others, certain ongoing employee benefits as described below and indemnification
rights under the Merger Agreement. The Company's Board of Directors was aware of
the interests of all of such persons at the time it approved the Merger
Agreement.
Employment Agreements. As a condition to entering the Merger Agreement,
Household International required that the Company's three principal executive
officers, Messrs. Fabiano, Stewart and Burdick, (the "Founders") execute
employment agreements (the "Employment Agreements"). The Employment Agreements
will be effective as of the closing of the Merger and will supersede and replace
the existing employment agreements the Founders have with the Company. See "The
Company -- Management." The Employment
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Agreements are intended to mitigate the uncertainties of future employment
prospects for the Founders in connection with the Merger. Under the terms of the
Employment Agreements, the Company agrees to employ the Founders for periods of
one to three years following the closing of the Merger. The agreements with
Messrs. Fabiano and Stewart also contain "evergreen" provisions which, until
notice is provided to the contrary, automatically extend the term of the
respective agreements each month so that there will be a continuing term of
eighteen months. Each Employment Agreement provides for guaranteed minimum bonus
payments in 1997 and Messrs. Fabiano's and Stewart's Employment Agreements also
guarantee minimum bonus payments in 1998. Each Founder will receive options to
purchase HI Stock that vest over four years in 25% increments. Each Employment
Agreement provides for severance payments that are payable in the event the
Founder resigns within six months of a change in control of Household
International and the successor fails to expressly adopt the Employment
Agreement. Messrs. Fabiano's and Stewart's Employment Agreements also provide
severance payments if following a change in control of Household International
or the Company, the Founder is assigned to a position of lesser status and Mr.
Fabiano's agreement contains provisions for severance payments in additional
circumstances. In connection therewith, each Founder has agreed with certain
qualification to not accept employment with or invest in a competing non-prime
auto lender during terms varying from two to five years after their employment
with the Company ceases.
Stockholder Agreements. Each of the Covenanting Stockholders has entered
into agreements with Household International (the "Stockholder Agreements") to
vote all shares of Company Common Stock held by them in favor of the Merger. The
Covenanting Stockholders hold in the aggregate approximately 71% of the Company
Common Stock. In the Stockholder Agreements, the Covenanting Stockholders have
agreed that they will not exercise any appraisal rights, transfer their shares,
grant any proxy, power-of-attorney or other authorization to vote such shares,
or take any other action that would restrict or interfere with their obligations
under the Stockholder Agreements. In addition, the Covenanting Stockholders have
agreed not to initiate, encourage or participate in any discussion or
negotiations concerning the submission of any competing takeover proposal.
However, such agreements do not restrict the ability of the Company's directors
and officers to fulfill their fiduciary duties to the Company. The Covenanting
Stockholders have also granted irrevocable proxies to officers of Household
International to vote such stockholders' shares of Company Common Stock against
any proposed merger (other than the Merger), consolidation, tender offer, sale
of assets, reorganization, or other action which would hinder or prevent the
Merger. The Stockholder Agreements may be terminated in certain limited
circumstances, which include the termination of the Merger Agreement in
accordance with its terms.
Extent of Agreements to Hold HI Stock. The Founders, who hold approximately
19% of the outstanding Company Common Stock, have agreed to hold all shares of
HI Stock acquired in the Merger for one year and to hold 1/3 of such shares for
three years. In consideration of this obligation, Household International has
agreed to pay to the Founders on the first anniversary of the closing date of
the Merger, a cash payment equal to 5% of the market value, calculated using the
value of HI Stock determined for purposes of the Merger Consideration, of 2/3 of
the shares of HI Stock acquired by such Founders in the Merger. Commitments to
hold HI Stock after the Merger have not been secured from any other holders of
Company Common Stock.
Certain of the Company's stockholders controlling approximately 52% of the
outstanding Company Common Stock have agreed prior to the Effective Time (i) to
not sell, dispose of, purchase or acquire, any shares of HI Stock or Company
Common Stock except that any such stockholder may hedge the aggregate number of
shares of HI Stock that it is reasonably likely to receive pursuant to the
Merger Agreement in compliance with the rules and regulations of the Securities
Act and the Exchange Act, and (ii) to give written notice to Household
International of any such hedging activity and the number of shares of HI Stock
or Company Common Stock involved, if such activity occurs during the HI Stock
Valuation Period.
Stock Options. The Company has granted stock options to the Founders and
other employees under a pre-existing stock option plan. As described under "--
Effects of the Merger on the Company Employee Benefits and Options," each
Company Stock Option which is outstanding and unexercised as of the closing of
the Merger will be assumed by Household International and will be exercisable
for a certain number of shares of HI Stock determined in accordance with the
Option Exchange Ratio. The Board of Directors of the Company has modified the
Company Stock Options granted to the Executives so that each such option will be
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<PAGE> 22
completely vested as of the Effective Time. The Company has also determined that
the Founders and all other holders of Company Stock Options may request stock
appreciation rights with respect to their outstanding options (whether currently
vested or not) which would be paid in cash immediately prior to the closing of
the Merger if accepted by the Company and exercised by the holder at a rate set
forth in "-- Effects of the Merger on the Company Benefits and Options."
The non-employee directors of the Company each hold options to purchase
20,000 shares of Company Common Stock at an exercise price of $7.25 per share.
As of the Effective Time, all such options will become vested and will be
cancelled in exchange for cash in the amount of $14.75 per share (which is equal
to the difference between $22.00 per share and the $7.25 exercise price).
Financial Advisory Fees. The Company has agreed to pay to Strome Susskind
Investment Management, L.P. ("SSIM") a fee in the amount of $125,000 for
consultation provided in connection with the Merger. Jeffrey E. Susskind, a
director of the Company, is a Vice President and a director of the general
partner of SSIM. Jeffrey S. Lambert, a director of the Company, is the Chief
Financial Officer and a director of SSIM. The Company has entered certain other
transactions with SSIM unrelated to the Merger.
Director Fees. Each of the four non-employee directors of the Company will
receive additional compensation of $75,000 in recognition of their additional
advisory activities in connection with the Merger.
Indemnification and Insurance. The Merger Agreement provides that Household
International shall insure that all rights to indemnification and defense and
all limitation of liability existing in favor of any person who was or is, or
who becomes prior to the Effective Time, a director or officer of the Company or
any of its subsidiaries (an "Indemnified Party"), as provided in the Company's
certificate of incorporation and bylaws and similar governing documents of any
of its subsidiaries or indemnification agreements, with respect to claims or
liabilities arising from facts or events existing or occurring prior to the
Effective Time, shall survive the Merger and shall continue in full force and
effect. Household International further agreed to indemnify and defend each
Indemnified Party to the fullest extent permissible by applicable law, against
losses, expenses, claims, damages and liabilities paid in settlement of claims
during such Indemnified Party's service as an officer or director of the Company
at or prior to the Effective Time.
Existing indemnification agreements between the Company and its directors
will be maintained in full force and effect in accordance with their terms.
The Merger Agreement further provides that, in the event of any actual
claim, action, suit, proceeding or investigation based in whole or in part on,
or arising in whole or in part out of, or pertaining to, the fact that a person
was an Indemnified Party at or prior to the closing of the Merger (including
those contemplated in the Merger Agreement) Household International will cause
the Company, subject to the conditions set forth in the Merger Agreement, to
indemnify, defend and hold harmless any Indemnified Party against any and all
losses, claims, damages, liabilities, costs, expenses (including attorneys' fees
and expenses), judgments and fines, and amounts paid in settlement, in
connection with any such claim, action, suit, proceeding or investigation.
The Company and its subsidiaries maintain in effect policies providing
insurance coverage for their directors and officers. Pursuant to the Merger
Agreement, Household International will cause the Company and its subsidiaries
to maintain such current director and officer liability policies, or to replace
such policies with policies providing terms which are no less advantageous to
such directors and officers, with respect to actions or omissions occurring at
or prior to the Effective Time for a period of five years after the Effective
Time.
RESALES BY AFFILIATES
The shares of HI Stock issuable to the Company's stockholders upon
consummation of the Merger have been registered under the Securities Act, but
such registration does not cover resales by any person who, directly or
indirectly, controls or is controlled by, or is under common control with, the
Company (the "Affiliates") at the time the Merger Agreement and Merger is
presented to the Company's stockholders for approval. HI Stock received and
beneficially owned by holders of Company Common Stock who are deemed
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to be Affiliates may be resold without registration as provided for by Rule 145
under the Securities Act, or as otherwise permitted by applicable laws.
Rule 145(d) requires that persons deemed to be Affiliates resell their HI
Stock pursuant to certain of the requirements of Rule 144 under the Securities
Act if such HI Stock is sold within the first two years after the receipt
thereof. After one year, if such person is not an affiliate of Household
International and Household International is current in the filing of its
periodic reports pursuant to the Exchange Act, a former Affiliate of the Company
may freely resell the HI Stock received in the Merger without limitation. After
two years from the issuance of the HI Stock, if such person is not an affiliate
of Household International at the time of sale or for at least three months
prior to such sale, such person may freely resell such HI Stock, without
limitation, regardless of the status of Household International's periodic
reports.
The Company has agreed to use reasonable best efforts to cause each person
who is at the Effective Time or was, at the time of the Special Meeting, an
Affiliate to execute and deliver to Household International a written agreement
to the effect that no sale will be made of any shares of HI Stock received in
the Merger by such Affiliate except in accordance with the Securities Act (the
"Affiliate Agreements"). The Affiliate Agreements provide that the HI Stock
certificates issued to Affiliates of the Company in the Merger may contain an
appropriate restrictive legend, and appropriate stock transfer orders may be
given to the transfer agent for such certificates. Further, pursuant to the
Affiliate Agreements each Affiliate who desires to resell the HI Stock received
in the Merger must sell such HI Stock either (i) pursuant to an effective
registration statement under the Securities Act, (ii) in accordance with the
applicable provisions of Rule 145 under the Securities Act or (iii) in a
transaction which, in the opinion of counsel for such Affiliate or as described
in a "no-action" or interpretive letter from the Staff of the Commission, in
each case reasonably satisfactory in form and substance to Household
International, is exempt from the registration requirements of the Securities
Act.
BACKGROUND OF AND COMPANY REASONS FOR THE MERGER
Other than statements of historical fact, the statements made in this
section, including without limitation, the statements as to the benefits
expected to result from the Merger and as to the future financial performance
and analyses performed by ACC's financial advisor, are forward-looking
statements within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act. Actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors.
Factors that could cause or contribute to such differences include, without
limitation, those discussed in "The Company" as well as those discussed
elsewhere in this Prospectus and Proxy Statement.
The Company's Board of Directors believes that the Merger is fair and in
the best interests of the Company and its stockholders, and the Company's Board
of Directors has unanimously approved the Merger Agreement and the Merger. In
reaching this determination, the Company's Board considered a number of factors,
including the following:
(1) The Merger is expected to provide the Company's stockholders with HI
Stock and cash at a significant premium over the market price for shares of
Company Common Stock prevailing prior to the public announcement of the Merger.
(2) Following the Merger, the Company's stockholders will be able to
participate in the potential growth of Household International.
(3) Based solely upon historical trading volumes of HI Stock and Company
Common Stock, the Merger should provide the Company's stockholders with
securities with greater liquidity than Company Common Stock.
(4) Based upon the differing sizes and amounts of diversification of the
businesses of the two companies, the Company believes that the Merger should
provide the Company's stockholders with ownership in a stock with less inherent
risk of stock price volatility, based upon economic or other factors adversely
affecting the non-prime automobile finance sector generally, the credit
performance problems of the Company's competitors, or other factors causing
below expectation growth in the Company's earnings per share.
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(5) The Merger could reduce the risk that the price of Company Common Stock
and the Company's access to capital could be adversely affected by negative
events affecting the Company's competitors.
(6) The Merger should provide the Company with greater access to capital at
a lower cost of capital to support its ongoing growth in non-prime automobile
consumer installment contract purchases, originations and servicing, thereby
enhancing the Company's business.
(7) By reducing its cost of capital, the Merger should enhance the
Company's ability to compete with much larger non-prime automobile finance
companies for installment contracts, with credit quality consistent with the
Company's existing underwriting standards.
In addition to the factors set forth above, in the course of its
deliberations concerning the Merger, the Company's Board consulted with the
Company's financial and legal advisors as well as the Company's management, and
reviewed a number of other factors relevant to the Merger, including (i) reports
from management and legal and financial advisors on specific terms of the Merger
Agreement and ancillary transaction documents, (ii) the financial presentations
made by Credit Suisse First Boston ("CSFB") and CSFB's opinion to the effect
that, as of August 24, 1997, and based upon and subject to certain matters
stated in the opinion, the Merger Consideration was fair, from a financial point
of view, to the holders of Company Common Stock (See "-- Opinion of the
Company's Financial Advisor"), (iii) information concerning the Company's and
Household International's respective businesses, prospects, financial
performances, financial conditions and operations, (iv) the expected tax
treatment of the Merger, (v) the fact that the Merger Agreement would permit the
Company's Board of Directors to terminate the agreement under certain
circumstances and (vi) the termination fees potentially payable by the Company
upon termination for certain reasons.
The Company's Board also considered a number of potentially negative
factors in its deliberations concerning the Merger, including (i) the risk that
the transaction will not be a tax-free exchange with respect to the stock
component of the Merger Consideration, (ii) the risks associated with obtaining
necessary approvals of the Merger and the possibility that the Merger may not be
consummated, (iii) the possibility of a decline in the value of HI Stock which
is not fully adjusted for by the pricing formula or which occurs post-Merger;
and (iv) the risk that the potential benefits of the Merger will not be
realized. The Company's Board concluded that the benefits of the transaction to
the Company and its stockholders outweighed the risks associated with the
foregoing factors.
The foregoing discussion of the information factors considered by the
Company's Board in connection with the evaluation of the Merger is not intended
to be exhaustive but is intended to include all of the material factors
considered by the directors. In view of the factors considered by the Company's
Board, the Company's Board did not find it practical to quantify or otherwise
attempt to assign any relative or specific weights to the specific factors
considered, and individual directors may have given differing weights to
different factors.
RECOMMENDATION OF THE COMPANY'S BOARD OF DIRECTORS
AT A SPECIAL MEETING OF THE COMPANY'S BOARD OF DIRECTORS HELD ON AUGUST 24,
1997, THE DIRECTORS UNANIMOUSLY DETERMINED THAT THE MERGER IS FAIR TO AND IN THE
BEST INTERESTS OF THE COMPANY AND ITS STOCKHOLDERS, UNANIMOUSLY APPROVED THE
MERGER AGREEMENT AND THE MERGER, AND UNANIMOUSLY RECOMMENDED APPROVAL AND
ADOPTION OF THE MERGER AGREEMENT AND APPROVAL OF THE MERGER BY THE COMPANY'S
STOCKHOLDERS.
MATERIAL CONTACTS AND BOARD DELIBERATIONS
On May 1, 1997, a representative of JP Morgan & Co. ("JP Morgan") contacted
the Company's Chairman of the Board and Chief Executive Officer ("CEO") on
behalf of Household International and expressed Household International's
interest in learning more about the Company. The Company's Board of Directors
was subsequently apprised of this approach.
On May 12, 1997, the Company's CEO and its Chief Operating Officer and
Chief Financial Officer ("COO") met with JP Morgan to provide them with publicly
available information concerning the Company.
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On June 4 and 5, 1997, the Company's CEO, President and COO met with
members of Household International's management and JP Morgan to provide further
publicly available information about the Company, its business and its business
philosophy. There were no discussions of the specifics of any business
transaction at this meeting.
On June 16, 1997, the Company's CEO met with Household International's
Group Executive -- Private Label, United Kingdom, Insurance, Canada, U.S.
Consumer Banking and Auto Finance (the "Group Executive") to further discuss
business philosophies and management issues.
Later in June, after execution of a mutual non-disclosure agreement, CSFB
began discussions with Household International and JP Morgan regarding valuation
and structuring issues. Financial information about the Company was provided to
Household International via CSFB and, at a meeting on July 1, 1997, among the
Company's COO, members of Household International's management and each party's
financial advisors, a range of values that might be acceptable to the Company's
Board of Directors and major stockholders was discussed.
On July 16, 1997, the Company's CEO, President and COO met with Household
International's Group Executive and Chief Financial Officer. At this meeting a
preliminary offer for a tax-free reorganization valued at $18 per share was
presented by Household International. The Company's management indicated that an
offer at that value was unlikely to be considered acceptable by the Company's
Board or its major stockholders. Household International indicated that any
higher offer would have to be preceded by a meeting between Household
International's Chief Executive Officer and the Company's senior management.
Following this meeting, the Company's CEO informally discussed the current
status of negotiations with members of the Board, including representatives of
major stockholders, and the Company's other major founding stockholder.
On July 21, 1997, Household International's CEO, Chief Financial Officer
and Group Executive met with the Company's senior management at the Company's
headquarters. At this meeting the Company's senior management indicated that
they believed a transaction would have to be priced at $22 per share or above to
be approved by the Company's Board of Directors and the major stockholders.
By letter dated July 25, 1997, and received on July 28, 1997, Household
International proposed a tax-free reorganization at a fixed exchange ratio of
.175 shares of HI Stock for each share of Company Common Stock, worth
approximately $20.83 per share of Company Common Stock, based upon the closing
price of HI Stock on July 24, 1997 of $119, with a collar of approximately $18
to $22 per share of Company Common Stock. Under this proposal, the Company's
senior management stockholders would agree to "lock up" their shares for between
one and two years with respect to two-thirds of the HI Stock received as merger
consideration and five years with respect to one-third of such HI Stock. Senior
management would be granted a total of 50,000 stock options under a Household
International stock plan.
On July 29, 1997, the Company's Board considered and rejected this offer.
Discussions on July 30 and 31 failed to resolve differences in valuation and
discussions were terminated on July 31.
Discussions resumed shortly thereafter with the Company repeating the need
for an offer of at least $22. During early August a number of conversations
occurred between the managements of Household International and the Company and
among the Company and its financial and legal advisors and among Household
International and its financial and legal advisors to discuss deal structure.
On August 7, 1997, Household International conveyed an offer of primarily
HI Stock to be valued at $22 per share in a taxable transaction. Under this
structure, members of the Company's management would agree to "lock up" their
shares for one to three years but would receive 30% of their consideration in
cash, which they could use to pay taxes. The other shareholders would receive a
small component of cash and HI Stock with a total value of $22 per share, with
the exchange ratio to be fixed either shortly before the Company's stockholder
meeting, if any, or shortly before the closing of an exchange offer.
During the week of August 10, Household International conducted a due
diligence investigation of the Company.
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On August 14, 1997, a Company Board meeting was held at which the status
and proposed terms of the transaction, including its structure, was reviewed. On
August 15, 1997, following further discussions between the management of the
Company and Household International and discussions among the financial and
legal advisors of the Company and Household International, Household
International offered to restructure the transaction as a tax-free reverse
subsidiary merger, with a combination of cash and HI Stock. A preliminary draft
of an Agreement and Plan of Merger was proposed, including a $10 million breakup
fee in the event the transaction was terminated due to (i) failure of the
Company to receive stockholder approval of the Merger, (ii) breach of any
Company representations and warranties or comments and (iii) termination as a
result of a subsequent offer that the Company's Board of Directors concluded
required them to terminate the transaction with Household International to avoid
breaching fiduciary duties.
On August 18, 1997, the proposed terms of the transaction, including the
structure, were reviewed by the Company's Board of Directors. Thereafter
proposed changes to the transaction documents were conveyed to Household
International.
On August 19, 1997, the Household International Board approved the proposed
transaction with the Company.
During the period from August 20, and August 24, 1997, there were numerous
daily phone calls and meetings among the Company's and Household International's
management, certain major stockholders of the Company, and their respective
legal and financial advisors, to negotiate the terms of definitive agreements,
including, among others, the relative amounts of cash and stock consideration,
the formula to be used to value HI Stock and determine the Exchange Ratio, the
intention that the Merger constitute a tax-free reorganization, the treatment of
outstanding stock options, condition issues and termination issues and
termination fees.
On August 24, 1997, a meeting of the Company's Board of Directors was held.
The Board of Directors reviewed the transaction and reviewed presentations from
its financial and legal advisors. At this meeting, the Company's Board of
Directors received an oral opinion from CSFB to the effect that, as of such
date, the consideration to be received by the stockholders of the Company was
fair, from a financial point of view, to such stockholders. The Board of
Directors unanimously authorized the management of the Company to complete the
negotiations of definitive agreements consistent with the terms presented to the
Board and to execute a definitive agreement. The definitive agreement was
thereafter finalized and executed on August 24, 1997.
OPINION OF THE COMPANY'S FINANCIAL ADVISOR
General
CSFB was retained by the Company to act as its exclusive financial advisor
in connection with the Merger. CSFB is an internationally recognized investment
banking firm and was selected by the Company based on CSFB's experience and
expertise. As part of its investment banking business, CSFB regularly is engaged
in the valuation of businesses and securities in connection with mergers and
acquisitions, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes.
In connection with CSFB's engagement, the Company requested that CSFB
evaluate the fairness, from a financial point of view, of the consideration to
be received by the stockholders of the Company in the Merger, taken as a whole.
The form and amount of consideration to be received by the stockholders of the
Company in the Merger was determined by arms'-length negotiations between the
Company and Household International. On August 24, 1997, CSFB rendered to the
Board of Directors of the Company its oral opinion, which was confirmed by its
written opinion dated as of such date, to the effect that, as of such date and
based upon and subject to certain matters stated therein, the consideration to
be received by the stockholders of the Company in the Merger was fair to such
stockholders from a financial point of view.
The full text of CSFB's written opinion dated August 24, 1997, which sets
forth the assumptions made, matters considered and limitations on the review
undertaken, is attached as Annex C to this Prospectus and Proxy Statement and is
incorporated herein by reference. Holders of the Company Common Stock are urged
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to carefully read this opinion in its entirety. CSFB's opinion is directed only
to the Company's Board of Directors and to the fairness of the consideration to
be paid to the stockholders of the Company in the Merger from a financial point
of view and does not address any other aspect of the Merger, nor does it
constitute a recommendation as to how any stockholder of the Company should vote
at the Special Meeting. The summary of the opinion of CSFB set forth in this
Prospectus and Proxy Statement is qualified to its entirety by reference to the
full text of such opinion.
In arriving at its opinion, CSFB, (i) reviewed the Merger Agreement and
certain publicly available business and financial information relating to the
Company and Household International; (ii) reviewed certain other information,
including financial forecasts, provided by the Company; (iii) met with the
management of the Company and Household International to discuss the business
and prospects of the Company and Household International; (iv) considered
certain financial and stock market data of the Company and Household
International and compared such data with similar data for other publicly held
companies in businesses similar to those of the Company and Household
International; (v) considered the financial terms of certain other similar
transactions which have recently been effected; and (vi) considered such other
information, financial studies, analyses and investigations and financial,
economic and market criteria which CSFB deemed relevant.
In connection with its review, CSFB did not assume responsibility for
independent verification of any of the information provided to or otherwise
reviewed by CSFB and relied upon such information being complete and accurate in
all material respects. With respect to the financial forecasts reviewed, CSFB
assumed that such forecasts were reasonably prepared on bases reflecting the
best currently available estimates and judgments of the Company's management as
to the future financial performance of the Company. In addition, CSFB did not
make an independent evaluation or appraisal of the assets or liabilities
(contingent or otherwise) of the Company or Household International, nor was
CSFB furnished with any such evaluations or appraisals. CSFB's opinion is
necessarily based on financial, economic, market and other conditions as they
existed and could be evaluated on the date of its opinion. CSFB expressed no
opinion as to what the value of the HI Stock actually will be when issued to the
Company's stockholders pursuant to the Merger or the prices at which such HI
Stock will trade subsequent to the Merger. CSFB was not requested to, and did
not, solicit third party indications of interest in acquiring all or any part of
the Company.
In preparing its opinion for the Company's Board of Directors, CSFB
performed a variety of financial and comparative analyses and considered a
variety of factors of which the material analyses and factors are described
below. The summary of such analyses does not purport to be a complete
description of the analyses underlying CSFB's opinion. The preparation of a
fairness opinion is a complex analytic process involving various determinations
as to the most appropriate and relevant methods of financial analyses and the
application of those methods to the particular circumstances, and, therefore,
such an opinion is not readily susceptible to summary description. In arriving
at its opinion, CSFB did not attribute any particular weight to any analysis or
factor considered by it, but rather made qualitative judgments as to the
significance and relevance of each analysis and factor. Accordingly, CSFB
believes that its analyses must be considered as a whole and that selecting
portions of its analyses or portions of the factors considered by it, without
considering all analyses and factors, could create a misleading view of the
processes underlying such analyses and its opinion. In its analyses, CSFB made
numerous assumptions with respect to the Company, Household International and
their affiliates, industry performance, general business, regulatory, economic,
market and financial conditions and other matters, many of which are beyond the
control of the Company and Household International. No public company utilized
as a comparison is identical to the Company and none of the comparable
transactions utilized as a comparison to the Merger is identical to the Merger.
These analyses are not necessarily indicative of actual values or predictive of
future results or values, which may be significantly more or less favorable than
those suggested by such analyses, and do not purport to be appraisals or to
reflect the prices at which businesses or securities actually may be sold.
Accordingly, because such estimates are inherently subject to substantial
uncertainty, none of the Company, Household International or CSFB nor any other
person assumes responsibility for their accuracy.
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The following is a summary of the material analyses performed by CSFB in
connection with its opinion dated as of August 24, 1997:
In its review of the financial terms of the Merger with the Company's Board
of Directors, CSFB also noted several key aspects of the proposed transaction,
including the premium to both the Company's historical stock price as well as
key implied multiples to standard valuation measures. The proposed Merger
represented a 40%, 62% and 81% market premium to the Company's 30, 60 and 90 day
average closing stock price prior to announcement, respectively. Furthermore,
the proposed Merger represented a multiple to latest twelve months' income, one
year forward income, two years forward income and book value of 23.9x, 18.3x,
15.2x, and 6.3x, respectively. All projected earnings multiples were based on
the consensus net income estimates as of August 22, 1997 compiled by the
Institutional Brokers Estimates System ("I/B/E/S"). I/B/E/S is a data service
that monitors and publishes compilations of earnings estimates produced by
selected research analysts regarding companies of interest to institutional
investors.
Comparable Company Analysis
CSFB reviewed and compared certain actual and estimated financial,
operating and stock market information of the Company with selected publicly
traded auto finance companies considered by CSFB to be reasonably comparable to
the Company. These companies included Arcadia Financial Ltd., AmeriCredit Corp.,
Consumer Portfolio Services, Inc., Credit Acceptance Corporation, Union
Acceptance Corporation and WFS Financial Inc. CSFB compared market values as a
multiple of both income reported by each company for the twelve months ended
June 30, 1997 and the estimated income for the twelve-month periods ended
December 31, 1997 and 1998 and most recent book value. CSFB also compared the
premium to originations, which is defined as the market value of each company's
common stock less its respective book value divided by most recent quarter
originations annualized. The valuation multiples of the comparable companies
were adjusted to reflect an acquisition premium of 30%, which was derived from
an analysis of acquisitions of publicly traded companies which were deemed by
CSFB to be comparable to the Company. This analysis indicated a range of
multiples for the comparable companies of latest twelve months' income,
estimated income for the twelve month periods ended December 31, 1997 and 1998,
most recent book value and premium to originations of 16.7x to 27.0x (with an
average of 20.7x), 14.7x to 23.6x (with an average of 17.9x), 9.8x to 19.0x
(with an average of 13.6x), 1.5x to 5.0x (with an average of 3.3x), and 4% to
71% (with an average of 34%), respectively. CSFB then applied the average
multiples derived from these analyses to the corresponding financial data of the
Company, resulting in a reference range for the Company of approximately $12.60
to $22.20 per share of Company Common Stock. All projected earnings multiples
for the comparable companies were based on the consensus net income estimates
compiled by I/B/E/S. The foregoing analyses were based on closing stock prices
as of August 22, 1997.
Comparable Transaction Analysis
Using publicly available information, CSFB analyzed the purchase prices and
multiples paid in selected recent merger or acquisition transactions involving
auto finance companies. Transactions analyzed included Barnett Banks,
Inc./Oxford Resources Corp., Southern National Corp./Regional Acceptance
Corporation and KeyCorp/AutoFinance Group. CSFB compared the purchase price as a
multiple of net income reported by the acquired company for the twelve months
prior to the announcement of the acquisition, estimated one year forward net
income, the current book value of the acquired company at the time of the
acquisition announcement and the premium to market value one month prior to the
time of the announcement of the acquisition. This analysis indicated a range of
multiples for the comparable transactions of latest twelve months' income,
estimated one year forward income, most recent book value and premium to market
value one month prior to the acquisition announcement of 19.5x to 34.0x (with an
average of 26.3x), 16.7x to 24.6x (with an average of 21.5x), 3.8x to 5.4x (with
an average of 4.5x), and 25% to 60% (with an average of 37%), respectively. CSFB
then applied the average multiples derived from these analyses to the
corresponding financial data of the Company, resulting in a reference range for
the Company of approximately $16.20 to $25.80 per share of Company Common Stock.
All projected earnings multiples for the comparable transactions were based on
the consensus net income estimates compiled by I/B/E/S.
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Discounted Cash Flow Analysis
CSFB performed a discounted cash flow analysis of the projected cash flow
of the Company for the periods 1997 through 2001, based in part upon certain
operating and financial assumptions, forecasts and other information provided by
the management of the Company and in part on public market estimates. Based on
discount rates of 13% to 15% and exit multiples of 12.0x to 15.0x projected net
income, this analysis yielded a reference range for the Company of approximately
$15.20 to $25.40 per share of Company Common Stock. All projected earnings
estimates for the Company were based on the consensus net income estimates
compiled by I/B/E/S.
Miscellaneous
For its services in connection with the Merger, CSFB will receive an
aggregate fee comprised of (i) an initial advisory fee (the "Advisory Fee") of
$100,000 plus (ii) a transaction fee (the "Transaction Fee") equal to 1.0% of
the amount equal to the product of the number of shares of Company Common Stock
outstanding as of August 25, 1997 and the $22.00 per share in consideration to
be received by the stockholders of the Company in connection with the Merger,
payable upon consummation of the Merger. Such fees were agreed upon by
negotiation between the Company and CSFB. The Advisory Fee will be credited, to
the extent paid, against the Transaction Fee. The Company also has agreed to
reimburse CSFB for its out-of-pocket expenses, including the fees and expenses
of legal counsel and other advisors, and to indemnify CSFB and certain related
persons or entities against certain liabilities, including liabilities under the
federal securities laws relating to or arising out of its engagement.
In the ordinary course of its business, CSFB and its affiliates actively
trade the debt and equity securities of both the Company and Household
International for their own account and for the accounts of customers and,
accordingly, may at any time hold a long or short position in such securities.
CSFB has performed certain investment banking services for the Company in the
past and received customary fees for such services. In addition, CSFB acts as
agent and underwriter on Household International's behalf on a regular basis and
receives customary fees for such services.
HOUSEHOLD INTERNATIONAL REASONS FOR THE MERGER
Household International believes that the acquisition of the Company will
provide Household International with a meaningful expansion of Household
International's existing non-prime used auto finance operations. Such expansion
will provide Household International with the opportunity to become a
significant national competitor in the non-prime auto finance business without
incurring significant start-up costs and time delays in achieving that position.
The expertise of the Company's personnel was of particular importance to
Household International's management when evaluating the Company.
CONDITIONS TO THE MERGER; AMENDMENT; TERMINATION
Consummation of the Merger is subject to satisfaction of a number of
conditions, including:
(1) the receipt of all necessary approvals of the transactions
contemplated by the Merger Agreement by governmental agencies and
authorities, and each of such approvals shall remain in full force and
effect at the Effective Time;
(2) no action shall have been taken, and no legal restraint shall have
been taken, and no legal restraint shall have been enacted, entered,
promulgated or enforced by any court having proper jurisdiction or
governmental authority which restrains, enjoins or otherwise prohibits the
consummation of the Merger;
(3) compliance by the Company, Household International and HAC with
their respective covenants and the accuracy of their respective
representations and warranties (subject to a materiality threshold) as set
forth in the Merger Agreement, including the agreement of the Company that,
except
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with the approval of Household International or as otherwise permitted by
the Merger Agreement, it will not, among other things:
(a) pay or declare dividends;
(b) effect any changes in connection with its equity
capitalization, except as related to outstanding stock options; or
(c) become liable for any indebtedness for borrowed money except
under existing facilities, unless any new facility may be terminated
upon less than 90 days notice and require a termination fee not in
excess of $25,000;
(d) mortgage, encumber, sell or transfer any material assets other
than in the ordinary course of business consistent with past practices;
(e) except as may be directed by law, and in accordance with
certain constraints set forth in the Merger Agreement, conduct its
operations other than in the ordinary course of business;
(4) approval and adoption of the Merger Agreement and approval of the
Merger by the requisite affirmative vote of stockholders of the Company;
(5) receipt by Household International of an opinion from the
Company's counsel and receipt by the Company of an opinion from counsel for
Household International and HAC, which opinions are to be in the general
form of those annexed to the Merger Agreement.
(6) the shares of HI Stock to be issued in exchange for the Company
Common Stock shall have been approved for listing on the NYSE; and
(7) the Stockholder Agreements have not been modified or terminated.
Any of the provisions of the Merger Agreement, including the foregoing
conditions, may be waived at any time by the party which is entitled to the
benefits thereof. The Merger Agreement may be amended or modified in whole or in
part by a duly authorized written agreement of the parties. However, after the
stockholders of the Company have approved the Merger Agreement, the Company may
not amend or modify the Merger Agreement if law requires further approval by
such stockholders without obtaining such approvals.
The Merger Agreement may be terminated at any time prior to the Effective
Time, whether before or after approval by the stockholders of the Company, upon
the occurrence of any of the following: (i) in the event of a material breach by
a party of any representation, warranty, condition or agreement contained in the
Merger Agreement that is not cured within 10 business days of the time that
written notice of such breach is received by such party from the other party;
(ii) if the Merger shall not have been approved by the Company's stockholders at
the meeting called to vote with respect thereto; or (iii) the Company receives
an unsolicited alternative acquisition proposal and in exercising its fiduciary
duty to the stockholders, after notice to Household International, the Company's
Board of Directors determines that the Merger Agreement should be terminated and
an agreement providing for the alternative proposal should be accepted.
The Merger Agreement also may be terminated, and the Merger thereby
abandoned (whether before or after approval of the Merger by the Company's
stockholders), by the mutual written consent of the Boards of Directors of the
Company, Household International and HAC at any time prior to the Effective
Time.
If the Merger Agreement is terminated due to receipt of an alternative
acquisition proposal as set forth above, or if approval of the Merger by the
Company Common Stockholders is not obtained following a change in the Company's
Board of Directors' recommendation that the Merger be approved (other than
following a breach of the Merger Agreement by Household International), the
Company will be obligated to pay to Household International a termination fee of
$6,000,000 and the reasonable out-of-pocket expenses (not in excess of $750,000)
incurred by Household International in connection with the Merger.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary describes certain United States Federal income tax
consequences to Company Common Stockholders of the Merger. This summary is based
on the Internal Revenue Code of 1986, as amended (the "Code") and Treasury
regulations, rulings, and judicial decisions as of the date hereof, all of which
may be repealed, revoked or modified so as to result in Federal income tax
consequences different from those described below. Such changes could be applied
retroactively in a manner that could adversely affect a Company Common
Stockholder. In addition, the authorities on which this summary is based are
subject to various interpretations. It is therefore possible that the Federal
income tax treatment of the Merger and the distribution, holding and disposition
of HI Stock and cash received in the Merger may differ from the treatment
described below.
This discussion does not address all aspects of Federal income taxation
that may be relevant to particular Company Common Stockholders and may not be
applicable to stockholders who are not United States holders, who are tax-exempt
entities, or who will acquire HI Stock pursuant to the exercise or termination
of employee stock options or otherwise as compensation, nor does the discussion
address the effect of any applicable foreign, state, local or other tax laws. A
United States holder is the beneficial owner of stock that is (i) for United
States federal income tax purposes a citizen or resident of the United States
(including certain former citizens and former long-term residents), (ii) a
corporation, partnership or other entity created or organized in or under the
laws of the United States or of any political subdivision thereof, (iii) an
estate the income of which is subject to United States federal income taxation
regardless of its source or (iv) a trust with respect to the administration of
which a court within the United States is able to exercise primary supervision
and one or more United States fiduciaries have the authority to control all
substantial decisions of the trust. This discussion assumes that Company Common
Stockholders hold their Company Common Stock as capital assets within the
meaning of Section 1221 of the Code. EACH COMPANY COMMON STOCKHOLDER SHOULD
CONSULT HIS OR HER OWN TAX ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES TO HIM
OR HER OF THE MERGER, AND CASH PAYMENTS RECEIVED PURSUANT TO THE MERGER,
INCLUDING THE APPLICABILITY AND EFFECT OF FOREIGN, STATE, LOCAL, AND OTHER TAX
LAWS.
Qualification as a Reorganization under Section 368(a)(2)(E) of the Code
The parties have structured the Merger with intention that the Merger
qualify as a reorganization under Sections 368(a)(1)(A) and 368(a)(2)(E) of the
Code (a "Reorganization"). No assurance can be given that the Merger will in
fact so qualify, however. If the Merger qualifies as a Reorganization, a Company
Common Stockholder who receives HI Stock in the Merger will recognize taxable
gain only to the extent of the lesser of: (i) the excess of the fair market
value of all consideration received in the Merger (including cash and HI Stock)
over such holder's adjusted basis in Company Common Stock surrendered therefor
(hereinafter referred to as "Overall Gain") or (ii) the cash consideration
received for Company Common Stock surrendered. If the Merger qualifies as a
Reorganization, HI Stock would be received free of Federal income tax and have a
basis in the hands of a former holder of Company Common Stock determined by
reference to the holder's basis in Company Common Stock surrendered in exchange
therefor. (See "-- Holding Period and Basis of HI Stock Received in a
Reorganization" below.) WERE THE MERGER TO FAIL TO QUALIFY AS A REORGANIZATION,
EACH COMPANY COMMON STOCKHOLDER WOULD BE TAXED ON THE FULL AMOUNT OF CASH AND
THE FAIR MARKET VALUE OF HI STOCK RECEIVED (DETERMINED AT THE EFFECTIVE TIME)
OFFSET BY THE AMOUNT OF THE STOCKHOLDER'S BASIS IN COMPANY COMMON STOCK
SURRENDERED, IF ANY. (SEE BELOW.)
NEITHER HOUSEHOLD INTERNATIONAL NOR THE COMPANY HAS OBTAINED OR WILL SEEK A
RULING FROM THE INTERNAL REVENUE SERVICE ("IRS") OR AN OPINION OF COUNSEL THAT
THE MERGER WILL QUALIFY AS A REORGANIZATION.
To qualify as a Reorganization, at least 80% of the Company Common Stock
must be exchanged for HI Stock. Company Common Stockholders who perfect their
appraisal rights under Section 262 of the DGCL
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(see "-- Appraisal Rights of Company Stockholders") will ultimately be entitled
to cash for their Company Common Stock in an amount determined in the appraisal
proceeding (or determined by agreement). In addition, Household International
will pay $2.00 per share of Company Common Stock in cash (and may pay up to
$4.00 per share in cash). While Household International is obligated to exercise
its option to pay cash in excess of $2.00 per share in such a way that exercise
of the option will not cause the cash consideration (together with any other
non-stock consideration) to exceed 19.85% of the total consideration for the
Merger, it is possible that consideration paid in a form other than HI Stock
(i.e., the combination of the $2.00 per share mandatory cash payment and cash
paid to holders who have demanded appraisal rights) could exceed 20% of the
total consideration for the Merger (determined at the Effective Time). Were this
to occur, the Merger would not qualify as a Reorganization. In addition, the IRS
may take the position that certain hedging activities undertaken by holders of
the Company Common Stock, if any, could affect whether the 80% requirement has
been met. See "-- Interest of Certain Persons in the Merger" and "-- Extent of
Agreements to Hold HI Stock" above.
For the Merger to qualify as a Reorganization, a significant portion of
Company Common Stockholders must maintain a continuing proprietary interest in
Household International by continuing to hold the HI Stock received in the
Merger. For purposes of issuing private letter rulings that a merger qualifies
as a Reorganization, the IRS would require representations to the effect that
certain holders owning 50% or more of Company Common Stock have no plan or
intent to dispose of shares of HI Stock received in the Merger that would reduce
the value of the HI Stock held by former holders of Company Common Stock (also
determined at the Effective Time) to less than 50% of the value of all
outstanding stock of the Company (determined at the Effective Time). No such
representations will be obtained with respect to the Merger. Judicial precedent
exists, however, holding that stockholder continuity of approximately 38% of
such value is sufficient. Although it is expected that HI Stock representing
more than 80% of the value of all outstanding Company Common Stock will be
received by holders of Company Common Stock in the Merger, Household
International and Company cannot control the disposition of HI Stock received by
Company Common Stockholders in the Merger. Accordingly, there can be no
assurance that stockholder continuity will be maintained at a level sufficient
that the qualification of the Merger may not be challenged by the IRS. See "--
Interest of Certain Persons in the Merger" and "-- Extent of Agreements to Hold
HI Stock."
In the event that the IRS were to challenge treatment of the Merger as a
Reorganization, Household International will cooperate with efforts of former
Company Common Stockholders to challenge any such determination. However,
Household International has made no commitments to assume the defense or pay the
costs of any such proceedings.
Tax Consequences to Company Common Stockholders If the Merger Qualifies as a
Reorganization
If the Merger qualifies as a Reorganization, a Company Common Stockholder
who receives HI Stock in the Merger will recognize taxable gain in an amount
which is equal to the lesser (i) of the Overall Gain or (ii) the amount of cash
such holder receives, but will not recognize gain or loss on the remaining
portion of the consideration received in the form of HI Stock. No loss will be
recognized by Company Common Stockholders who receive HI Stock in the Merger.
If cash distributed to Company Common Stockholders has the effect of a
distribution of a dividend, the gain recognized which is not in excess of the
holder's ratable share of undistributed earnings and profits will be treated as
a dividend to the holder. The determination as to whether the exchange has the
effect of a dividend will be made on a holder by holder basis in accordance with
the principles enunciated in Commissioner v. Clark, 489 U.S. 726 (1989) and
under the tests provided in Section 302(b) of the Code.
Section 302 of the Code provides three tests which could be utilized to
determine whether a distribution is treated as a sale or exchange of a holder's
shares: (i) the "substantially disproportionate" test is satisfied with respect
to a holder if the percentage of the outstanding HI Stock actually and
constructively owned by the holder immediately following the Merger is less than
80% of the percentage of the outstanding HI Stock which the holder would have
held if the holder and all other holders of Company Common Stock had received
only HI Stock in the Merger in lieu of any cash payment; (ii) the "complete
termination" test is satisfied if
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(a) all shares of Company Common Stock actually and constructively owned by a
holder are sold for cash or (b) all such shares actually owned by the holder are
sold for cash and the holder effectively waives the constructive ownership rules
of the Code in accordance with the procedures described in Section 302(c)(2) of
the Code; and (iii) the "not essentially equivalent to a dividend" test
described below. Of these, only the "not essentially equivalent to a dividend"
test is potentially applicable to a holder of Company Common Stock, absent a
contemporaneous disposition of Company Common Stock immediately before or HI
Stock immediately after the Merger. A distribution to a holder is "not
essentially equivalent to a dividend" if it results in a "meaningful reduction"
in such holder's proportionate interest in Household International. A holder
whose relative stock interest is minimal and who exercises no control over
corporate affairs may be treated by reason of the cash payment as experiencing a
reduction in his or her proportionate interest in Household International under
an IRS published ruling. In applying such ruling it is not clear that minimal
interest or control of corporate affairs can be tested by reference to Household
International, although the ruling should generally be applicable in the case of
holders who meet its tests with reference to their holdings in the Company.
Other IRS published rulings hold that a "meaningful reduction" has occurred when
the transactions significantly reduce the holder's control over corporate
affairs as well as reducing his or her proportionate interest. In certain
events, dispositions of Company Common Stock or HI Stock which occur
contemporaneously with the distribution of cash in the Merger may permit a
holder to satisfy the Section 302(b) tests based on another IRS published ruling
(although such dispositions may affect the qualification of the Merger as a
Reorganization). In determining whether any of these tests has been met, shares
considered to be owned by the holder by reason of constructive ownership rules
set forth in Sections 302(c) and 318 of the Code, as well as shares actually
owned, must be taken into account. Because the determination as to whether any
of the alternative tests of Section 302(b) of the Code will be satisfied with
respect to any particular holder of Company Common Stock depends on the holder's
individual facts and circumstances, holders are advised to consult their own
advisors to determine such tax treatment.
Cash Payments Treated as a Sale or Exchange of Company Common Stock in a
Reorganization
If the Merger qualifies as a Reorganization and to the extent that cash
payments pursuant to the Merger are treated, in accordance with the tests
described above, as gain from the sale or exchange of Company Common Stock, such
cash payments will be taxable to the extent of Overall Gain as capital gains.
For certain noncorporate holders (including individuals), the rate of taxation
of capital gains will depend upon (i) the holder's holding period for the
Company Common Stock (with the lowest rate available only for Company Common
Stock held for more than 18 months before the Effective Time) and (ii) the
holder's marginal tax rate for ordinary income. Holders should consult their tax
advisors with respect to applicable rates and holding periods, and rules for
netting such gains against capital losses sustained on other assets.
Cash Payments Treated as Dividends in a Reorganization
To the extent treated as dividends as described above, cash payments
pursuant to the Merger will be taxable as ordinary income. In the event that
cash payments (other than payments to holders who demanded appraisal rights and
who qualify for redemption treatment and any payments for fractional shares)
should exceed the Company's undistributed earnings and profits, any such
distribution in excess of earnings and profits should be taxed first as a
non-taxable return of capital reducing the holder's tax basis in Company Common
Stock, and then, if the holder's basis in Company Common Stock is exhausted, as
a capital gain. (It is possible that the IRS might contend that Household
International's earnings and profits must also be considered in making this
determination.)
Cash payments to corporate holders of Company Common Stock pursuant to the
Merger (other than payments to holders who demanded appraisal rights and any
payments for fractional shares) which are treated as dividends as described
above will qualify for the 70% dividends received deduction under Section 243 of
the Code if the holding period and other requirements for such deduction are
met, subject to the limitations in Sections 246 and 246A of the Code (although
the benefits of the deductions may be reduced or eliminated by the corporate
alternative minimum tax). Under Section 246(c) of the Code the 70% dividends
received deduction is disallowed for any dividend with respect to stock (i) that
is held for 45 days or less during the
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90-day period beginning 45 days before the ex-dividend date or (ii) if the
taxpayer is under an obligation to make related payments with respect to
positions in substantially similar or related property. In addition, a
taxpayer's holding period for these purposes is suspended during any period in
which the taxpayer has an option to sell, is under a contractual obligation to
sell, or has granted an option to buy, substantially identical stock or
securities, or holds one or more positions with respect to substantially similar
or related property that diminish the risk of loss from holding the stock.
Finally, under Section 246A of the Code, the dividends received deduction may be
reduced or eliminated if a corporate holder's shares of HI Stock are
debt-financed.
Section 1059 of the Code requires a corporate holder of stock to reduce
(but not below zero) its basis in the stock by the "nontaxed portion" of any
"extraordinary dividend" if the holder has not held the stock subject to a risk
of loss for more than 2 years before the date of the announcement, declaration,
or agreement (whichever is earliest) with respect to the extraordinary dividend.
In addition, the "extraordinary dividend" provision may apply without regard to
the period the stock was held if, in a redemption, a distribution is not
pro-rata as to all shareholders, is in partial liquidation of the company, or is
treated as a dividend by reason of options being taken into account under
Section 318(a)(4) of the Code.
A corporate holder will recognize gain in the year the dividend is received
to the extent the nontaxed portion of any extraordinary dividend exceeds the
holder's adjusted tax basis for the stock. Generally, the "nontaxed portion" of
an extraordinary dividend is the amount excluded from income under Section 243
of the Code (relating to the dividends received deduction described above). An
"extraordinary dividend" is a dividend that (i) equals or exceeds 10% of the
holder's adjusted tax basis in common stock (reduced for this purpose by the
nontaxed portion of any prior extraordinary dividend), treating all dividends
having ex-dividend dates within an 85-day period as one dividend, or (ii)
exceeds 20% of the holder's adjusted tax basis in the stock, treating all
dividends having ex-dividend dates within a 365-day period as one dividend,
provided, however, that in either case the fair market value of the stock (as of
the day before the ex-dividend date) may be substituted for stock basis if the
fair market value of the stock can be established by the holder to the
satisfaction of the IRS.
Holding Period and Basis of HI Stock Received in a Reorganization
If the Merger qualifies as a Reorganization, the holding period of the HI
Stock received by a Company Common Stockholder (including any fractional shares
to which he or she may be entitled) will include the period during which the
Company Common Stock surrendered in the Merger was held by such holder, provided
that the Company Common Stock surrendered was a capital asset in the hands of
such holder at the Effective Time. If the Merger qualifies as a Reorganization,
the basis of HI Stock received by a Company Common Stockholder (including any
fractional shares of HI Stock to which he or she may be entitled) will be the
same as the basis of the Company Common Stock surrendered in the Merger by such
holder decreased by any cash received by the Company Common Stockholder and
increased by any gain recognized in the Merger (including any gain treated as a
dividend).
Tax Consequences if the Merger Does Not Qualify as a Reorganization and is
Treated as a Taxable Exchange
If the Merger fails to qualify as a Reorganization, the Merger will be
treated for Federal income tax purposes as if Company Common Stockholders had
sold their shares of Company Common Stock for shares of HI Stock and cash in a
taxable exchange. At the time of the Merger, a Company Common Stockholder will
recognize capital gain or loss measured by the difference between the fair
market value of all the consideration such holder receives in the Merger
(determined at the Effective Time) and the holder's adjusted basis in his or her
shares of Company Common Stock exchanged in the Merger. Each holder's holding
period in any share of HI Stock received in the Merger will begin on the later
of the Effective Time or the date on which the holder no longer holds an
offsetting security. The basis of the shares of HI Stock received in the Merger
will be the fair market value of such shares at the Effective Time. In addition,
were the Merger ultimately determined to be a taxable purchase of the Company
Common Stock by Household International, Household International's basis in the
Company Common Stock acquired in the Merger would be increased to an amount
equal to the cash and the fair market value of HI Stock issued in the Merger.
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<PAGE> 35
Cash Payments in Lieu of Fractional Shares
Cash payments received by a Company Common Stockholder in lieu of a
fractional share of HI Stock will be treated as if the fractional shares were
actually issued by Household International and then redeemed by Household
International for cash. These cash payments generally will be treated as having
been received in full payment for the fractional share of HI Stock so redeemed
since the purpose of the cash distribution is to save the expense and
inconvenience of issuing fractional shares and the cash payments were not
separately bargained for. In these circumstances, the holder will recognize
capital gain or loss equal to the difference between the cash received and the
adjusted basis of the fractional share interests that would have been issued.
Company Common Stockholders Exercising Appraisal Rights
If a Company Common Stockholder demands appraisal rights (See "The Merger
- -- Appraisal Rights of Company Stockholders") and receives solely cash in
exchange for Company Common Stock, such cash will be treated as received in a
distribution in redemption of Company Common Stock, subject to the provisions of
Section 302 of the Code. Where as a result of such distribution, a Company
Common Stockholder owns no HI Stock, either directly or by reason of the
application of Sections 302(c) and 318 of the Code, the redemption will be a
complete termination of interest within the meaning of Section 302(b)(3) of the
Code and such cash will be treated as a distribution in full payment in exchange
for his or her Company Common Stock as provided in Section 302(a) of the Code.
Such a holder will recognize gain or loss measured by the difference between the
amount of cash received and the adjusted basis of the Company Common Stock
surrendered. If the complete termination of interest test is not satisfied by a
holder who receives only cash (because, for example, Company Common Stock owned
by a party related to the holder is exchanged for HI Stock in the Merger), the
holder may receive capital gains treatment if the cash received in exchange for
Company Common Stock satisfies the Section 302(b) tests described above. Holders
should consult their own tax advisors to determine whether these tests are met
in their individual facts and circumstances.
CONVERSION OF SHARES AND EXCHANGE OF CERTIFICATES
Upon consummation of the Merger, the outstanding shares of Company Common
Stock will be converted into cash and shares of HI Stock in accordance with
Household International's designation of the cash component of the Merger
Consideration and the Exchange Ratio. Except in the event that the Company or
Household International shall declare a stock dividend or distribution upon or
subdivide, split up, reclassify or combine their respective Common Stock or
declare a dividend, or make a distribution, on their respective Common Stock in
any security convertible into such Common Stock prior to the time the Merger
becomes effective, no further adjustments will be made in the Exchange Ratio.
However, in the event of such a transaction, appropriate adjustment will be made
in the Exchange Ratio.
As soon as practicable after the Merger becomes effective, instructions and
a letter of transmittal (the "Letter of Transmittal") will be furnished to the
stockholders of the Company for use in exchanging their certificates
representing shares of Company Common Stock for certificates of HI Stock and the
cash portion of the Merger Consideration. The Letter of Transmittal will be
available to holders of Company Common Stock at the Special Meeting and will be
mailed to all stockholders by Harris Trust & Savings Bank (the "Exchange Agent")
as soon as practicable after the Special Meeting. If any certificate for shares
of HI Stock is to be issued in a name other than that in which the certificate
for shares of Company Common Stock surrendered for exchange is registered, the
certificate so surrendered must be properly endorsed or otherwise be in proper
form for transfer and the person requesting such exchange must pay to Household
International or its transfer agent any applicable transfer or other taxes
required by reason of the issuance of the certificates.
Until so surrendered, certificates formerly representing shares of Company
Common Stock will be deemed for all purposes to evidence ownership of the number
of shares of HI Stock into which such shares have been converted. Dividends and
other distributions, if any, that become payable on Company Common Stock pending
exchange of certificates representing shares of Company Common Stock will be
retained by Household International until surrender of such certificates, at
which time such dividends and distributions will be paid, without interest. In
addition, after the Effective Time the holders of certificates formerly
33
<PAGE> 36
representing shares of Company Common Stock shall cease to have rights with
respect to such shares, and, except as aforesaid, their sole right shall be to
exchange such certificates for shares of Company Common Stock and any fractional
share payment in accordance with the Merger Agreement.
FRACTIONAL SHARES
No fractional shares of HI Stock will be issued in exchange for shares of
Company Common Stock. In lieu thereof, each stockholder of the Company having a
fractional interest resulting from the exchange of Company Common Stock for HI
Stock will be paid by Household International an amount in cash equal to the
value of such fractional interest.
ACCOUNTING TREATMENT
Household International expects to account for the acquisition of the
Company as a purchase under generally accepted accounting principles.
Accordingly, all of the assets and liabilities of the Company would be recorded
in Household International's consolidated financial statements at their fair
value at the Effective Time, and the amount, if any, by which the purchase price
paid by Household International exceeds the fair value of the assets acquired by
Household International through the Merger would be recorded as goodwill.
Household International's consolidated financial statements would include the
operations of the Company after the Effective Time.
REQUIRED REGULATORY APPROVALS
The closing of the Merger is subject to the approval of the United States
Federal Trade Commission and the United States Department of Justice pursuant to
the Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended. It is
anticipated that such federal agencies will not object to the Merger, but no
assurance can be given that such approval will be obtained.
TRANSFER AND EXCHANGE AGENTS
Harris Trust & Savings Bank, Chicago, Illinois, serves as Transfer Agent
and as Registrar for HI Stock. Harris Trust & Savings Bank will act as Exchange
Agent in connection with the Merger. ChaseMellon Shareholder Services acts as
Transfer Agent and Registrar for the Company Common Stock.
APPRAISAL RIGHTS OF COMPANY STOCKHOLDERS
Holders of the Company Common Stock may elect to have the fair value of
their shares determined by the Court of Chancery of the State of Delaware
instead of accepting the Merger Consideration by complying with the requirements
of Section 262 of the DGCL, a copy of which is attached as Annex B hereto.
Pursuant to Section 262(d) of DGCL, any holder of the Company Common Stock who
desires to demand appraisal rights must provide written notice of such demand to
the Company prior to the Special Meeting. Such notice must be sufficient for the
Company to identify the stockholder. A proxy or vote by a holder of Company
Common Stock abstaining or against the Merger shall not constitute a sufficient
notice or demand. Thereafter, the stockholder who has demanded his appraisal
rights must continuously hold the shares of the Company Common Stock through the
Effective Time and must not vote for the Merger at the Special Meeting to
perfect this appraisal right. Notwithstanding the foregoing, at any time within
60 days after the Effective Time any holder of Company Common Stock who has
demanded and perfected their appraisal rights may withdraw such demand and
accept the Merger Consideration (without interest). Within 120 days after the
Effective Time a holder of Company Common Stock who has perfected its appraisal
rights or the Company may file a petition in the Court of Chancery of the State
of Delaware demanding a determination of the fair value of all Common Stock for
all holders who have perfected their appraisal rights. From and after the
Effective Time no stockholder who has demanded and perfected their appraisal
rights shall be entitled to vote, or receive any payments or dividends with
respect to, the Company Common Stock or the HI Stock.
34
<PAGE> 37
HOUSEHOLD INTERNATIONAL
DESCRIPTION OF HOUSEHOLD INTERNATIONAL
Household International is a provider of consumer financial services,
primarily offering consumer lending products to "middle-market consumers" in the
United States, Canada and the United Kingdom. Household International offers the
following types of consumer loans: home equity loans, VISA/MasterCard credit
cards, private-label credit cards, student loans and other unsecured products.
Household International's primary target customer for consumer lending is
generally between 25 and 50 years of age with a household income of $15,000 to
$50,000. At December 31, 1996, approximately 85 and 90 percent of the Household
International's owned and managed consumer receivables, respectively, were
located in the United States.
In its consumer lending businesses, Household International competes with
banks, thrifts, finance companies and other financial institutions by offering a
variety of consumer products, maintaining a strong service orientation and
developing innovative marketing programs. Household International has focused on
being a low-cost producer. Highly automated processing facilities have been
developed to support underwriting, loan administration and collection functions
across consumer business lines. By supporting its multiple-distribution networks
with centralized processing centers, Household International has improved
efficiency through specialization and economies of scale. A centralized
collection system for past due accounts is augmented by early collection efforts
in the consumer finance branch network for products other than credit cards.
Underwriting and collection of consumer credit products have been
segregated and centralized over the last several years. These functions are
supported by automated systems which analyze the applicant's ability to repay
the loan and assess the likelihood of bankruptcy. Household International
considers factors such as the applicant's income, expenses, paying habits, value
of collateral, if any, and length and stability of employment in its effort to
determine whether the individual has the ability to support the loan.
Major business units within Household International are described below.
Household Finance Corporation
Household Finance Corporation traces its origins to a loan office
established in 1878. HFC offers a variety of secured and unsecured lending
products to middle-income customers primarily through a network of branch
lending offices (approximately 630 at June 30, 1997) in the United States. This
business is conducted primarily through state-licensed companies. Household
International believes it is one of the largest providers of home equity loans
in the United States.
HFC's operations primarily focus on revolving and closed-end home equity
loans and unsecured lines of credit, which are offered on both a fixed rate and
floating rate basis. Home equity loans and unsecured consumer credit products in
the HFC network represented approximately $16.7 billion or 38 percent of
Household International's managed consumer receivables at June 30, 1997.
Historically, home equity loans have lower chargeoff rates than unsecured
product lines. HFC also offers credit insurance products. HFC offers its
products in 45 states through branch offices, direct mail and telemarketing
solicitations and also purchases loans and credit lines under a wholesale
program.
Household Credit Services
Household Credit Services is the tradename used for the marketing of
VISA/MasterCard credit cards throughout the United States and Puerto Rico by
Household International's national credit card banks and Household Bank, f.s.b.
Corporate and small business credit cards, revolving lines of credit insurance
products are also offered. Household Credit Services had $16.7 billion of
VISA/MasterCard managed receivables at June 30, 1997. As of June 30, 1997
Household International has been ranked as the sixth largest issuer of VISA and
MasterCard credit cards in the United States.
Household International strives to build its VISA/MasterCard business by
developing strategic alliances with industry leaders to effectively create and
market general purpose credit cards to targeted consumers. In
35
<PAGE> 38
accordance with this philosophy, in 1996, Household International acquired the
Union Privilege affinity card portfolio and selected credit card receivables of
Barnett Banks, Inc. while establishing new alliances with those organizations.
In prior years, Household International established programs with other
organizations for co-branded credit cards, most notably with General Motors
Corporation to issue the GM Card. Household International continues to explore
affinity relationships with various other entities.
The VISA/MasterCard business is a highly competitive industry. Household
International believes its size provides substantial competitive advantages over
smaller credit card issuers through operating efficiencies. Currently, Household
International's largest account base is in California supplemented by
significant hubs in the Midwestern and Eastern United States. Household
International's focus is to develop a diverse customer franchise to promote
operating and marketing efficiencies without creating over-dependence on a
single geographic area that would potentially expose Household International to
regional credit risk and usage patterns.
Household International solicits applications through direct mail,
telemarketing and event marketing efforts, as well as on-counter displays. In an
effort to further expand the credit card portfolio, in 1996, Household
International increased its marketing expenditures with respect to the credit
card operations.
Household Retail Services
Household Retail Services ("HRS") operates a revolving private-label credit
card business, in all 50 states and Puerto Rico, which accounted for
approximately 9 percent of total managed receivables at June 30, 1997. HRS
purchases and services revolving charge accounts originated by merchants. These
accounts result from consumer purchases of electronics, furniture, appliances,
home improvement products and other durable merchandise, and generally are
without credit recourse to the originating merchant. HRS also originates
closed-end sales contracts and offers credit insurance products. Products are
marketed through dealer networks and retail stores, as well as direct mail
solicitations. Loans are underwritten by HRS based on its credit standards. The
private-label business is an important source of new customers for Household
International's consumer finance business. HRS has been ranked as the second
largest provider of private-label credit cards in the United States. This
business is conducted through state-licensed companies and through Household
Bank (Nevada), National Association, which originates accounts directly with
consumers.
International Operations
International operations in Canada and the United Kingdom accounted for
approximately 15 percent of owned receivables and 10 percent of total managed
receivables at June 30, 1997.
In the United Kingdom, Household International owns HFC Bank plc, a fully
licensed United Kingdom bank. HFC Bank plc had 142 branches at June 30, 1997 and
offers secured and unsecured lines of credit, secured and unsecured closed-end
loans, credit cards (including The GM Card from Vauxhall and the Goldfish Card
under an alliance with British Gas) and credit insurance products. It operates
in England, Scotland, Wales and Northern Ireland and solicits loans through the
branch network, merchants and direct mail marketing.
Due to the similarities of operations and in order to lower operating
costs, Household International integrated certain operations previously
conducted in Canada with operations in the United States. The Canadian consumer
finance business operates under the HFC tradename through 74 branch offices in
10 provinces at June 30, 1997. Home equity and unsecured lines of credit,
secured and unsecured closed-end loans, private-label credit cards and credit
insurance products are offered through branch office, direct mail and
telemarketing sales.
Credit Insurance
Through its consumer lending operations and where applicable laws permit,
Household International makes credit life, credit accident, health and
disability, term and specialty insurance products available to its customers.
Such products are currently offered in 46 states, Canada and the United Kingdom.
Insurance is generally directly written by or reinsured with Household Life
Insurance Company or its affiliates.
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<PAGE> 39
Other Businesses
Since Household International's exit from the consumer banking business,
Household Bank, f.s.b. (the "Bank"), a federally chartered savings bank, has
operated primarily as a vehicle for managing credit card, real estate secured,
student loan and other unsecured receivables. The Bank offers its products
through telemarketing and direct mail solicitations throughout the United
States.
During 1995 Household International began developing its auto finance
business, initially focusing in the Midwest. Household International principally
offers this product through a dealer network and alliances.
SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial information
of Household International as of and for the preceding five years ended December
31, 1996, and as of and for the six months ended June 30, 1996 and 1997. The
statement of income and balance sheet data have been derived from Household
International's audited Consolidated Financial Statements and Notes thereto. The
statement of income and balance sheet data as of and for the six months ended
June 30, 1996 and 1997 are unaudited but include, in the opinion of management,
all adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation of such data. The results of operations for the six
months ended June 30, 1997 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1997. The information set forth
below should be read in conjunction with Household International's 1996
Consolidated Financial Statements and Notes thereto, Household International's
Quarterly Report on Form 10-Q for the period ended June 30, 1997 and other
financial information incorporated by reference or included in this Prospectus.
<TABLE>
<CAPTION>
AT OR FOR THE
SIX MONTHS
ENDED
AT OR FOR THE YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------- -------------------
1992 1993 1994 1995 1996 1996 1997
---- ---- ---- ---- ---- ---- ----
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA
Finance income.................................... $2,584.4 $2,561.4 $2,642.3 $2,878.8 $2,949.9 $1,380.8 $1,481.5
Interest income from noninsurance investment
securities...................................... 152.8 129.3 131.9 123.4 80.6 59.3 24.0
Interest expense.................................. 1,420.2 1,149.5 1,242.7 1,557.1 1,520.6 737.1 726.9
-------- -------- -------- -------- -------- -------- --------
Net interest margin............................... 1,317.0 1,541.2 1,531.5 1,445.1 1,509.9 703.0 778.6
Provision for credit losses on owned
receivables..................................... 671.5 735.8 606.8 761.3 759.6 367.8 545.0
-------- -------- -------- -------- -------- -------- --------
Net interest margin after provision for credit
losses.......................................... 645.5 805.4 924.7 683.8 750.3 335.2 233.6
-------- -------- -------- -------- -------- -------- --------
Securitization income............................. 376.0 436.0 655.5 873.6 1,149.0 559.9 675.0
Insurance revenues................................ 281.2 288.3 282.0 322.1 253.4 122.3 133.9
Investment income................................. 523.7 574.0 514.4 470.2 153.2 93.2 62.1
Fee income........................................ 164.5 292.6 250.5 196.4 240.3 103.2 154.8
Other income...................................... 98.0 172.9 126.7 279.9 232.4 163.9 97.7
-------- -------- -------- -------- -------- -------- --------
Total other revenues.............................. 1,443.4 1,763.8 1,829.1 2,142.2 2,028.3 1,042.5 1,123.5
-------- -------- -------- -------- -------- -------- --------
Salaries and fringe benefits...................... 535.9 615.4 656.6 545.6 534.5 271.7 303.8
Occupancy and equipment expense................... 187.1 225.3 243.4 222.1 209.8 115.3 104.0
Other marketing expenses.......................... 151.0 228.5 327.4 359.5 498.1 242.2 229.2
Other servicing and administrative expenses....... 423.0 510.2 533.7 470.6 484.8 262.2 194.0
Policyholders' benefits........................... 513.9 539.1 464.4 474.5 229.1 126.4 95.3
-------- -------- -------- -------- -------- -------- --------
Total costs and expenses.......................... 1,810.9 2,118.5 2,225.5 2,072.3 1,956.3 1,017.8 926.3
-------- -------- -------- -------- -------- -------- --------
Income before income taxes........................ 278.0 450.7 528.3 753.7 822.3 359.9 430.8
Income taxes...................................... 87.1 152.0 160.7 300.5 283.7 124.8 149.0
-------- -------- -------- -------- -------- -------- --------
Net income........................................ $ 190.9 $ 298.7 $ 367.6 $ 453.2 $ 538.6 $ 235.1 $ 281.8
======== ======== ======== ======== ======== ======== ========
Net income available to common shareholders....... $ 165.6 $ 270.5 $ 340.0 $ 426.8 $ 521.9 $ 226.8 $ 275.7
======== ======== ======== ======== ======== ======== ========
PER COMMON SHARE DATA
Net income........................................ $ 1.93 $ 2.85 $ 3.50 $ 4.30 $ 5.30 $ 2.30 $ 2.78
Dividends declared................................ 1.15 1.18 1.23 1.31 1.46 0.68 0.78
Book value........................................ 18.65 22.01 22.78 27.70 30.30 27.82 38.83
</TABLE>
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<PAGE> 40
<TABLE>
<CAPTION>
AT OR FOR THE
SIX MONTHS ENDED
AT OR FOR THE YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------------------ -----------------------
1992 1993 1994 1995 1996 1996 1997
---- ---- ---- ---- ---- ---- ----
(ALL DOLLAR AMOUNTS ARE STATED IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Total assets(1):
Owned............................... $31,128.4 $32,961.5 $ 34,338.4 $ 29,218.8 $ 29,594.5 $ 29,827.4 $ 31,201.1
Managed............................. 39,074.7 42,789.3 46,833.5 44,103.4 48,120.9 46,705.4 51,013.7
Managed receivables(2)(3):
First mortgage...................... $ 4,513.8 $ 3,534.1 $ 3,364.2 $ 2,066.9 $ 725.6 $ 1,741.8 $ 510.4
Home equity......................... 7,742.9 7,880.4 7,940.2 8,810.1 7,985.4 8,520.4 11,167.1
VISA/MasterCard..................... 5,726.6 8,842.6 11,100.2 13,343.1 18,737.4 17,044.7 17,452.4
Private label....................... 2,666.3 2,949.1 3,433.1 4,446.2 5,587.0 4,746.5 5,691.2
Other unsecured..................... 4,085.4 4,320.8 5,378.2 6,660.8 8,620.2 7,290.6 8,932.0
Commercial.......................... 3,279.6 2,831.2 1,834.8 1,289.6 937.8 1,122.7 857.0
--------- --------- ---------- ---------- ---------- ---------- ----------
Total managed receivables............. 28,014.6 30,358.2 33,050.7 36,616.7 42,593.4 40,466.7 44,610.1
Receivables serviced with limited
recourse............................ (7,946.3) (9,827.8) (12,495.1) (14,884.6) (18,526.4) (16,878.0) (19,812.6)
--------- --------- ---------- ---------- ---------- ---------- ----------
Owned receivables..................... $20,068.3 $20,530.4 $ 20,555.6 $ 21,732.1 $ 24,067.0 $ 23,588.7 $ 24,797.5
========= ========= ========== ========== ========== ========== ==========
Deposits(4)........................... $ 8,030.3 $ 7,516.1 $ 8,439.0 $ 4,708.8 $ 2,365.1 $ 2,273.5 $ 1,971.0
Total other debt...................... 14,267.7 14,755.9 14,646.2 17,887.3 21,230.1 21,178.7 21,865.4
Company obligated mandatorily
redeemable preferred securities of
subsidiary trusts................... -- -- -- 75.0 175.0 175.0 175.0
Convertible preferred stock........... 36.0 19.3 2.6 -- -- -- --
Preferred stock....................... 300.0 320.0 320.0 205.0 205.0 205.0 150.0
Common shareholders' equity(3)........ 1,545.6 2,078.3 2,200.4 2,690.9 2,941.2 2,699.5 4,143.6
SELECTED FINANCIAL RATIOS
Return on average owned assets........ 0.62% 0.91% 1.08% 1.34% 1.82% 1.62% 1.93%
Return on average common shareholders'
equity.............................. 10.7 14.2 16.0 17.4 18.9 16.8 18.0
Total shareholders' equity as a
percent of owned assets(5).......... 5.93 7.28 7.34 10.17 11.22 10.32 14.32
Total shareholders' equity as a
percent of managed assets(5)........ 4.72 5.60 5.38 6.74 6.90 6.59 8.76
Managed net interest margin........... 6.47 6.92 6.70 6.43 6.98 6.77 7.33
Managed consumer net chargeoff
ratio............................... 3.45 2.91 2.84 2.95 3.35 3.15 4.36
Managed basis efficiency ratio,
normalized.......................... 51.9 51.8 52.7 46.0 40.8 42.4 37.3
Common dividends to net income........ 49.3 36.9 32.1 28.1 26.3 28.1 28.2
</TABLE>
- -------------------------
(1) In 1994, the Company sold its Australian subsidiary and its retail
securities brokerage business. In 1995, the Company sold its first mortgage
servicing portfolio and servicing business as well as the individual life
and annuity product lines of its life insurance business.
(2) In 1996, the Company acquired credit card portfolios with outstandings of
$4.1 billion. In addition, the Company sold $1.7 billion of lower-margin
loans primarily from the previously divested mortgage and consumer banking
businesses.
(3) On June 23, 1997, Household International and a wholly-owned subsidiary of
Household Finance Corporation (a wholly-owned subsidiary of Household
International) acquired the capital stock of Transamerica Financial Services
Holding Company ("TFS"), the branch-based consumer finance subsidiary of
Transamerica Corporation ("TA"). The company paid $1.1 billion for the stock
of TFS and repaid approximately $2.8 billion of TFS debt owed to affiliates
of TA. The acquisition added approximately $3.2 billion of receivables, of
which approximately $3.1 billion are home equity loans secured primarily by
home mortgages. The acquisition of TFS was accounted for as a purchase, and
accordingly, TFS' operations have been included in the company's results of
operations from June 24, 1997. The acquisition of TFS was not material to
the company's consolidated financial statements.
In June 1997, the company completed a public underwritten offering of 9.1
million shares of its common stock for approximately $1.0 billion. Net
proceeds from the offering were used to repay certain short-term borrowings
in connection with the acquisition of TFS.
(4) The Company sold its domestic consumer banking operations, including $3.4
and $2.8 billion in deposits in 1995 and 1996, respectively. The Company's
Canadian subsidiary also sold $725 million in deposits in 1995.
(5) Total shareholders' equity at December 31, 1995 and 1996 and June 30, 1996
and 1997 includes common shareholders' equity, preferred stock and company
obligated mandatorily redeemable preferred securities of subsidiary trusts.
Total shareholders' equity excludes convertible preferred stock that was
fully converted or redeemed during 1995.
38
<PAGE> 41
DESCRIPTION OF HOUSEHOLD INTERNATIONAL CAPITAL STOCK
GENERAL
The following description of the capital stock of Household International
is qualified in its entirety by reference to its Restated Certificate of
Incorporation, as amended, which has been filed with and is available from the
offices of the Commission as referred to under "Available Information."
Household International's Restated Certificate of Incorporation authorizes
the issuance of 258,155,004 shares of capital stock of which 8,155,004 shares
shall be designated preferred stock, without par value ("Preferred Stock"), and
250,000,000 shares shall be designated common stock, par value $1.00 per share
("HI Stock"). Although 8,155,004 shares of preferred stock are authorized,
3,454,635 shares are reserved in the Restated Articles of Incorporation for a
series of convertible preferred stock that was issued in 1981, all of which
shares have been converted to HI Stock, redeemed or repurchased by Household
International. As of September 12, 1997, of the remaining 4,700,369 authorized
shares of preferred stock, 400,000 shares were issued and outstanding or
reserved for issuance as follows: 50,000 shares of 8 1/4% Cumulative Preferred
Stock, Series 1992-A ("1992 Preferred") and 100,000 shares of 7.35% Cumulative
Preferred Stock, Series 1993-A ("1993 Preferred") were issued and outstanding
and 250,000 shares of Series A Junior Participating Preferred Stock ("Junior
Preferred") were reserved for issuance. As of September 12, 1997, 106,886,874
shares of HI Stock were issued and outstanding. All outstanding shares of HI
Stock and Preferred Stock are fully paid and non-assessable.
PREFERRED STOCK
The Preferred Stock of Household International may be issued from time to
time in one or more series as authorized by the Board of Directors or a duly
authorized committee of the Board of Directors. The Board of Directors has
adopted a resolution creating an Offering Committee of the Board with the power
to authorize the issuance and sale of one or more series of Preferred Stock
("Preferred Shares") and to determine the particular designations, powers,
preferences and relative, participating, optional or other special rights (other
than voting rights which shall be fixed by the Board of Directors) and
qualifications, limitations or restrictions of the Preferred Shares. The
following description sets forth certain general terms and provisions of the
Preferred Stock of Household International.
Dividends. Holders of shares of Preferred Stock are entitled to receive,
when and as declared by the Board of Directors of Household International out of
any funds legally available for that purpose, dividends in cash at such
respective rates, payable on such dates in each year and in respect of such
dividend periods, as stated in Household International's Restated Certificate of
Incorporation or applicable Certificate of Designation, Preferences and Rights
for each series of Preferred Stock, before any dividends may be declared or paid
or set apart for payment upon HI Stock. No dividend may be declared or paid on
any series of Preferred Stock unless at the same time a dividend in like
proportion to the respectively designated dividend rates shall be declared or
paid on each other series of Preferred Stock then issued and outstanding ranking
prior to or on a parity with such particular series with respect to the payment
of dividends. Dividends may be either cumulative or non-cumulative.
Liquidation Preference. In the event of dissolution, liquidation or winding
up of Household International, whether voluntary or involuntary, holders of
Preferred Stock of each series (if any shares thereof are then issued and
outstanding) will be entitled to payment of the applicable liquidation price or
prices, out of the available assets of Household International, after payment to
Household International's creditors but in preference to the holders of the HI
Stock. Household International's Restated Certificate of Incorporation, as
amended, provides that a consolidation, merger or sale by Household
International of its assets as an entirety or substantially as an entirety shall
not be deemed to be a liquidation, dissolution or winding up of Household
International.
Redemption. No Preferred Stock or HI Stock may be purchased by Household
International if any dividends on any shares of Preferred Stock are in arrears,
and no Preferred Stock may be redeemed in such case unless all shares of issued
and outstanding Preferred Stock are redeemed.
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Voting Rights. Voting rights of the holders of Preferred Stock are
non-cumulative. Holders of Preferred Stock have such voting rights as are set
forth in Household International's Restated Certificate of Incorporation, as
amended, or applicable Certificate of Designation, Preferences and Rights or as
otherwise provided for by law.
Household International's Restated Certificate of Incorporation, as
amended, provides that, without the vote or consent of the holders of at least
two-thirds of the outstanding shares of all series of Preferred Stock (except
for a series of Preferred Stock in which the right is expressly withheld) voting
as a single class, Household International may not (i) consolidate or merge with
another corporation or corporations or sell its assets as an entirety or
substantially as an entirety; (ii) issue any shares of Preferred Stock of any
series if the cumulative dividends payable on shares of any series of
outstanding Preferred Stock are in arrears; (iii) adopt any amendment to
Household International's Restated Certificate of Incorporation which adversely
alters the preferences, powers and special rights of the Preferred Stock,
provided, however, that if any such amendment would adversely alter any
preference, power or special right of one or more but not all of the series of
the Preferred Stock, then only the vote or consent of the outstanding shares of
all series of Preferred Stock so affected, voting as one class, shall be
required; or (iv) increase the authorized amount of the Preferred Stock, or
create or issue any class of stock ranking prior to or on a parity with the
Preferred Stock, or any series thereof, as to the payment of dividends or the
distribution of assets. In addition, the holders of the outstanding shares of
all series of Preferred Stock (except for a series of Preferred Stock in which
the right is expressly withheld) shall be entitled to elect one-third of the
members of the Board of Directors of Household International out of the number
fixed by Household International's Bylaws in the event Household International
fails to declare and pay any four quarterly cumulative dividends, whether
consecutive or not, on any series of Preferred Stock and shall be entitled to
elect a majority of said directors should any eight quarterly cumulative
dividends, whether consecutive or not, be unpaid. Any such right to elect
members of the Board of Directors of Household International shall continue
until all unpaid dividends upon all series of Preferred Stock shall have been
paid in full.
Under current provisions of the General Corporation Law of the State of
Delaware, the holders of issued and outstanding Preferred Stock are entitled to
vote as a class upon a proposed amendment to Household International's Restated
Certificate of Incorporation (whether or not entitled to vote thereon by
Household International's Restated Certificate of Incorporation), with the
consent of a majority of said class being required to increase or decrease the
aggregate number of authorized shares of Preferred Stock, increase or decrease
the par value of shares of Preferred Stock, or alter or change the powers,
preferences or special rights of the Preferred Stock as to affect them
adversely. If any proposed amendment would alter or change the powers,
preferences or special rights of one or more series of Preferred Stock as to
affect them adversely, but would not affect the entire class of Preferred Stock,
then only the shares of the series so affected by the amendment would be
considered a separate class for the purpose of determining who is entitled to
vote on the proposed amendment.
Preemptive Rights. Holders of Preferred Stock have no preemptive rights to
purchase any securities of Household International.
DESCRIPTION OF AUTHORIZED SERIES OF PREFERRED STOCK
The following summary descriptions of the authorized series of Preferred
Stock of Household International are qualified in their entirety by reference to
Household International's Restated Certificate of Incorporation, as amended
(including the respective Certificates of Designation, Preferences and Rights
relating to such series).
1992 PREFERRED AND 1993 PREFERRED
General. The 1992 Preferred and 1993 Preferred rank on a parity as to the
payment of dividends and distribution of assets of Household International upon
the voluntary or involuntary liquidation, dissolution, or winding up of
Household International.
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1992 Preferred. Holders of the 1992 Preferred are entitled to receive
quarterly cumulative dividends at an annual rate of $82.50 per share. All
dividends on the 1992 Preferred have been paid to date. In the event of the
liquidation, dissolution or winding up of Household International, whether
voluntary or involuntary, holders of the 1992 Preferred are entitled to receive
$1,000 per share plus accrued and unpaid dividends. The 1992 Preferred is not
redeemable prior to October 15, 2002. The 1992 Preferred is redeemable, at the
option of Household International, in whole or in part, from time to time on or
after October 15, 2002, at $1,000 per share plus an amount equal to accrued and
unpaid dividends. The 1992 Preferred is not entitled to the benefits of any
sinking fund.
1993 Preferred. Holders of the 1993 Preferred are entitled to receive
quarterly cumulative dividends at an annual rate of $73.50 per share. All
dividends on the 1993 Preferred have been paid to date. In the event of the
liquidation, dissolution or winding up of Household International, whether
voluntary or involuntary, holders of the 1993 Preferred are entitled to receive
$1,000 per share plus accrued and unpaid dividends. The 1993 Preferred is not
redeemable prior to October 15, 1998. The 1993 Preferred is redeemable, at the
option of Household International, in whole or in part, from time to time on or
after October 15, 1998, at $1,000 per share plus an amount equal to accrued and
unpaid dividends. The 1993 Preferred is not entitled to the benefits of any
sinking fund.
Voting Rights. The 1992 Preferred and 1993 Preferred have the right, voting
as a class with each other and any other series of Preferred Stock ranking on a
parity thereto as to the payment of dividends or the distribution of assets and
upon which like voting rights have been conferred and are exercisable, to elect
two members of the Board of Directors of Household International at the meeting
of stockholders called for such purpose after six quarterly cumulative dividends
on such Preferred Stock, whether consecutive or not, shall be in arrears. The
right of such holders of Preferred Stock to elect said members to the Board of
Directors shall continue until such time as all dividends accrued on such stock
shall have been paid in full, at which time such right shall terminate.
On any item with respect to which the holders of the 1992 Preferred and
1993 Preferred are entitled to vote, such holders shall be entitled to one vote
for each share held.
Conversion Rights. The holders of the 1992 Preferred and 1993 Preferred do
not have any rights to convert the shares thereof into shares of any other class
or series of capital stock (or any other security) of Household International.
JUNIOR PREFERRED
Issuance. Currently, there are no shares of Junior Preferred issued or
outstanding. Rights to purchase shares or fractions thereof of the Junior
Preferred ("Rights") have been distributed to holders of HI Stock. Each Right
entitles the registered holder to purchase from Household International one
thousandth of a share of the Junior Preferred at a price of $300 per one
thousandth of a share, subject to adjustment in the event of any dividend of
shares of HI Stock or any subdivision, combination, reclassification or change
of the HI Stock. The designation and terms of the Rights are set forth in a
Rights Agreement ("Rights Agreement") between Household International and Harris
Trust and Savings Bank, as Rights Agent, a copy of which has been filed with and
is available from the offices of the Commission as referred to under "Available
Information."
The Rights are not exercisable until the "Distribution Date," which will be
the date which is ten days following (i) a public announcement that a person or
group of affiliated or associated persons acquired 15% or more of the
outstanding shares of HI Stock or (ii) the commencement or announcement of an
intention to make a tender offer or exchange offer for 15% or more of the
outstanding shares of HI Stock. The Rights will expire on July 31, 2006, unless
the expiration date is extended or the Rights are earlier redeemed or exchanged
by Household International, in each case, as described below.
In the event that Household International is acquired in a merger or other
business combination transaction or 50% or more of its consolidated assets or
earning power are sold to a person or a group, the Rights Agreement provides
that each holder of a Right shall receive, upon the payment of the then current
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exercise price of the Right, that number of shares of the common stock of the
surviving company which at the time of such transaction would have a market
value of two times the exercise price of the Right. In the event that any person
or group of affiliated or associated persons acquires beneficial ownership of
15% or more of HI Stock, proper provision shall be made so that each holder of a
Right, other than Rights beneficially owned by such person or group (which will
thereafter be void), will thereafter have the right to receive upon exercise
that number Household International common shares having a market value of two
times the exercise price of the Right.
At any time prior to the public announcement that a person or group of
affiliated persons has acquired, or obtained the right to acquire, beneficial
ownership of 15% or more of the outstanding shares of HI Stock, Household
International may redeem the Rights in whole, but not in part, at a price of
$.01 per Right ("Redemption Price"). The redemption of the Rights may be made
effective at such time on such basis with such conditions as the Board of
Directors, in its sole discretion, may establish. Immediately upon the action of
the Board of Directors of Household International electing to redeem the Rights,
the right to exercise the Rights will terminate and the only right of the
holders of Rights will be to receive the Redemption Price.
Dividends. The holders of the Junior Preferred will be entitled to receive,
when, as and if declared by the Board of Directors out of funds legally
available for that purpose, quarterly dividends payable in cash commencing after
such shares or a fraction thereof are issued. Quarterly dividends will be in an
amount per share (rounded to the nearest cent) equal to the greater of (a) $1 or
(b) subject to adjustment as described below, 1,000 times the aggregate per
share amount of all cash dividends and 1,000 times the aggregate per share
amount (payable in kind) of all non-cash dividends or other distributions, other
than a dividend payable in shares of HI Stock or a subdivision, combination or
reclassification thereof, declared on HI Stock since the immediately preceding
quarterly dividend payment date or the date of the first issuance of the Junior
Preferred if the first dividend date has not yet occurred. In the event
Household International shall at any time declare or pay any dividend on HI
Stock payable in shares of HI Stock, or effect a subdivision, combination or
reclassification of the outstanding shares of HI Stock into a greater or lesser
number of shares of HI Stock, then in each such case the amount of dividends to
which holders of Junior Preferred are entitled to shall be adjusted.
Dividends will begin to accrue and be cumulative on the Junior Preferred
from the dividend date next preceding the date of issue unless that date of
issue is prior to the date for the first dividend date, in which case dividends
will accrue and be cumulative from the date of issue. Dividends paid on shares
of Junior Preferred in an amount less than the total amount of such dividends at
the time accrued and payable on such shares shall be allocated pro rata on a
share-by-share basis among all such shares at the time outstanding.
Conversion, Sinking Fund Redemption. The Junior Preferred will not have any
rights to convert to any other security issued by Household International and
such shares are not redeemable at the option of Household International. In
addition, there is no sinking fund for the Junior Preferred.
Voting Rights. The Junior Preferred generally votes together with HI Stock
as one class. Each share of Junior Preferred is entitled to 1,000 votes on all
matters submitted to a vote of the stockholders of Household International. In
the event Household International declares or pays any dividend on its HI Stock
payable in shares of HI Stock, or subdivides, combines or reclassifies its
shares of HI Stock into a greater or less number of shares of HI Stock, then the
number of votes per share of the Junior Preferred shall be adjusted.
Additionally, the Junior Preferred will have the right (as described under
"Description of Household International Capital Stock -- Preferred Stock --
Voting Rights") to vote, together with all other outstanding series of Preferred
Stock for which such voting right has not been expressly withheld, to elect
directors in the event dividends on any series of Preferred Stock are in
arrears. In addition, the Restated Certificate of Incorporation of Household
International shall not be amended in any manner which would materially alter or
change the powers, preferences or special rights of the Junior Preferred so as
to affect the Junior Preferred adversely without the affirmative vote of the
holders of two-thirds or more of the outstanding shares of Junior Preferred,
voting together as a single class. The Certificate of Designation, Preferences
and Rights of the Junior Preferred expressly withholds all other special voting
rights to which holders of Preferred Stock are entitled, except for voting
rights otherwise provided by law.
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Liquidation Preference. No distribution shall be made on any shares of
stock ranking junior to the Junior Preferred upon any voluntary liquidation,
dissolution or winding up of Household International unless the holders of the
Junior Preferred have received the greater of (i) $1,000 per share plus accrued
and unpaid dividends or (ii) 1,000 times the aggregate amount to be distributed
per share to holders of HI Stock. This liquidation amount shall be adjusted in
the event Household International declares a stock split of HI Stock or pays any
dividend on HI Stock payable in shares of HI Stock, or effects a subdivision,
combination or reclassification of HI Stock into a greater or lesser number of
shares. In the event the assets of Household International are insufficient to
satisfy the liquidation preference of the Junior Preferred, the Junior Preferred
shall share ratably with each series of Preferred Stock ranking on a parity (as
to dividends or liquidation) with the Junior Preferred.
In the event of any merger, consolidation or other transaction in which
shares of HI Stock are exchanged, each Preferred Share will be entitled to
receive 1,000 times the amount received per share of HI Stock. These rights are
protected by customary anti-dilution provisions.
COMMON STOCK
Holders of HI Stock are entitled to receive dividends out of any funds
legally available for that purpose as and if declared by the Board of Directors
of Household International, subject to the prior dividend rights of Preferred
Stock.
Subject to certain voting rights of the Preferred Stock described elsewhere
herein, the holders of shares of HI Stock are entitled to vote at all meetings
of the stockholders and are entitled to one vote for each share of HI Stock
held.
The issued and outstanding shares of HI Stock are fully paid and
non-assessable. The holders of HI Stock are not entitled to preemptive rights or
conversion or redemption rights. The HI Stock does not have cumulative voting
rights in the election of directors.
In the event of the voluntary dissolution, liquidation or winding up of
Household International, holders of HI Stock will be entitled to receive, pro
rata, after satisfaction in full of the prior rights of creditors and holders of
Preferred Stock, all of the remaining assets of Household International
available for distribution.
PREFERRED SHARE PURCHASE RIGHTS
In July 1996, Household International entered into a Rights Agreement with
Harris Trust and Savings Bank, as Rights Agent. The Rights Agreement is intended
to address the threat of certain types of takeover activity deemed abusive and
unfair to stockholders and to assure that all stockholders receive fair and
equal treatment in the event of an unsolicited takeover of Household
International. The Rights Agreement also enhances the bargaining position of the
Household International's Board of Directors in negotiating on behalf of
stockholders with potential acquirors of Household International. The Rights
Agreement provides that attached to each share of HI Stock is one right to
purchase from Household International one thousandth of a share of Junior
Preferred at a price of $300 per one thousandth of a share, subject to
adjustment. See "Junior Preferred" above.
DIVIDENDS
Household International is principally a holding company whose primary
source of funds is cash received from its subsidiaries, primarily in the form of
dividends and borrowings under intercorporate agreements. Dividend distributions
to Household International from its savings and loan, banking and insurance
subsidiaries may be restricted by federal and state laws and regulations.
Dividend distributions from its foreign subsidiaries may also be restricted by
exchange controls of the country in which the subsidiary is located. Also, as a
holding company the rights of any creditors or stockholders of Household
International to participate in the assets of any subsidiary upon the latter's
liquidation or recapitalization will be subject to the prior claims of the
subsidiary's creditors, except to the extent that Household International may
itself be a creditor with recognized claims against the subsidiary.
Nevertheless, there are no restrictions that currently materially limit
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Household International's ability to make payments to its creditors or to pay
dividends on its Preferred Stock or HI Stock at current levels nor are there any
restrictions which Household International reasonably believes are likely to
limit materially such payments in the future.
SPECIAL CHARTER PROVISIONS
The Rights Agreement was adopted to address the threat of certain types of
takeover activity deemed abusive and unfair to stockholders and to assure that
all stockholders receive fair and equal treatment in the event of an unsolicited
takeover of Household International. The Rights Agreement also enhances the
bargaining position of Household International's Board of Directors in
negotiating on behalf of stockholders with potential acquirors of Household
International.
The Household International's Restated Certificate of Incorporation, as
amended, contains provisions, in accordance with Section 102(b)(7) of DGCL,
eliminating the personal liability of a director to Household International or
its stockholders for money damages for breach of fiduciary duty as a director,
provided that the liability of a director may not be eliminated or limited (i)
for any breach of the directors' duty of loyalty to Household International or
its stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174
(relating to liability for unauthorized acquisitions or redemptions of, or
dividends on, capital stock) of DGCL, or (iv) for any transaction from which the
director derived an improper personal benefit.
THE COMPANY
DESCRIPTION OF THE COMPANY
Unless the context otherwise requires, all references in this Prospectus
and Proxy Statement to the Company refer collectively to all of ACC Consumer
Finance Corporation ("ACC"); Accent Financial Services, Inc. ("Accent"), a
wholly-owned subsidiary of ACC that engages in direct financing of Contracts;
OFL-A Receivables Corp. ("OFL-A"), a wholly-owned special purpose subsidiary of
ACC that takes title to Contracts and is the record lienholder of all financed
vehicles; ACC Receivables Corp. ("Receivables"), and ACC Funding Corp. ("ACC
Funding"), wholly-owned special purpose subsidiaries of ACC formed to
participate in the Company's issuance of asset-backed securities; and ACC
Liquidity L.L.C. ("ACC Liquidity"), a wholly-owned, special purpose limited
liability company owned by Receivables and ACC Funding and formed in connection
with the Company's warehouse facility. ACC provides the Contract acquisition and
portfolio servicing functions and incurs virtually all of the Company's
operating expenses. However, its special purpose subsidiaries own substantially
all of the earning assets of the Company and perform services described in this
Prospectus and Proxy Statement that are not performed directly by ACC.
Other than statements of historical fact, the statements made in this
section, including without limitation, the statements regarding the Company's
plans and objectives for future operations, the Company's future financial
performance and assumptions relating to such future operations or future
financial performance, are forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. Actual
results could differ materially from those anticipated in these forward-looking
statements as a result of certain factors. Factors that could cause or
contribute to such differences include, without limitation, those discussed
below, factors discussed in the "Risk Factors" in the Company's Annual Report on
Form 10-K for the year ended December 31, 1996, risks discussed in the Company's
Quarterly Reports on Form 10-Q for the three-month periods ended March 31, 1997,
and June 30, 1997, as well as those discussed elsewhere in this Prospectus and
Proxy Statement.
The Company specializes in the indirect financing of Contracts originated
primarily by franchised Dealers for Non-Prime Borrowers. The Company commenced
business operations in July 1993. By purchasing Contracts financing primarily
late-model used vehicles as well as some new vehicles, the Company provides an
alternative source of financing for Non-Prime Borrowers who might not be able to
qualify for traditional automobile loans. The Company's business strategy
currently calls for the sale of all Contracts through asset
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securitizations, rather than holding Contracts to maturity. To this end, the
Company periodically securitizes pools of its Contracts in order to redeploy its
capital, reduce interest rate risk and realize a gain on the sale of these
Contracts. The Company believes that its competitive advantages include its
national presence, risk-based pricing, financial resources, nationwide
consistency of credit decisions and quality Dealer service.
Non-Prime Automobile Finance Industry
Automobile financing is one of the largest consumer finance markets in the
United States, with $393 billion in automobile-related credit outstanding as of
June 1997. In general, the automobile finance industry can be divided into two
principal segments: a prime credit market and a non-prime credit market.
Traditional automobile finance companies, such as commercial banks, savings and
loans, credit unions and captive finance companies of automobile manufacturers,
generally provide credit to the most creditworthy borrowers, or so-called "prime
borrowers."
The so-called "non-prime" credit market, in which the Company operates,
provides financing to Non-Prime Borrowers, who are those borrowers who have had
past credit problems (including bankruptcy), have limited or no credit histories
and/or have low incomes. Historically, traditional automobile financing sources
have not serviced the non-prime market or have done so only through programs
that were not consistently available. An industry group of independent finance
companies specializing in non-prime automobile financing has been established
but the industry remains highly fragmented, with no company having a significant
share of this non-prime market.
The Company is unable to estimate the size of the non-prime automobile
market. The Company believes that the number of Non-Prime Borrowers is
increasing due to, among other factors, declining real wages, the greater
willingness on the part of consumers to seek bankruptcy protection, the high
cost of new automobiles relative to consumer incomes and the greater
availability of late-model used vehicles coming off short-term lease programs.
The Company's program is designed to provide financing to this market segment.
Business Strategy
The Company's primary objective is to increase its net income by expanding
market share. The Company believes it has or can build the operational and
administrative capacity to expand its business and attain this objective. The
Company's strategies for achieving this objective, which focus on credit
quality, efficiency of operations and expansion, are as follows:
- Enforcing nationwide consistency of underwriting standards and controls,
including verification and document review;
- Increasing the volume of Contract purchases from existing Dealers;
- Increasing the number of active Dealers in the Company's existing
geographic markets;
- Entering selected new markets in metropolitan areas where the Company can
recruit experienced regional sales managers;
- Using the Company's Contract database to refine underwriting standards,
program pricing and overall credit risk evaluation capabilities;
- Attracting and retaining qualified employees;
- Maintaining reliable funding sources;
- Approving applications and funding Contract purchases in a timely manner;
and
- Maintaining and improving the Company's delinquency monitoring and
collection processes.
Overall, the Company's strategy is to purchase Contracts with yields, after
discounts, that compensate the Company for the credit risk inherent in the
non-prime market, and to manage this credit risk through the Company's internal
credit evaluation and its proactive collection processes.
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Purchase of Contracts
Sales and Marketing. The Company markets its financing program primarily to
franchised Dealers and to a limited number of independent used automobile
Dealers. Before purchasing Contracts from a Dealer, ACC and the Dealer enter
into an agreement ("Dealer Agreement") that provides the Company with recourse
to the Dealer in cases of Dealer fraud or a breach of the Dealer's
representations and warranties. As of June 30, 1997, the Company had 1,810
active Dealers, defined as Dealers from which the Company had purchased at least
one Contract in the last six months, compared to 1,055 active Dealers as of June
30, 1996.
The Company typically solicits business from Dealers through its regional
sales managers ("RSMs"), each of whom is assigned an exclusive territory. The
Company typically hires RSMs who have experience with the purchase of non-prime
Contracts and who have pre-existing, established relationships with Dealers in a
particular major metropolitan area. As of June 30, 1997, the Company had 55
RSMs. The announcement of the Merger may adversely affect the Company's ability
to retain some of its more productive RSMs.
RSMs meet regularly with Dealers and provide information about the
Company's program, train Dealer personnel as to the Company's program
requirements and assist Dealers in identifying consumers who qualify for ACC's
program. As of August 31, 1997, the Company marketed its program to Dealers in
33 states. The Company targets major metropolitan areas because it believes they
provide concentrations of high volume Dealers, which can be effectively serviced
by its RSMs.
RSMs typically target the late-model used vehicle business of franchised
Dealers. The Company believes that late-model used vehicles represent the
largest segment of the used vehicle market, while posing less risk of default
due to mechanical problems than do older used vehicles. The Company targets
franchised Dealers because the financial requirements and customer service
standards imposed on these dealers by automobile manufacturers generally result
in a high level of financial stability and customer satisfaction. As a result,
the Company believes that, in general, Contracts from these Dealers expose the
Company to less risk of Dealer misrepresentation and lower levels of borrower
default.
Dealer Reviews. Each month, senior management reviews Dealer performance
reports that track, by Dealer, the number of applications submitted, the number
of applications approved, the number of applications funded, the ratio of
applications funded to applications received ("efficiency ratio"), delinquency
ratios and default rates. Senior management maintains a Dealer "watch list" to
track the performance of Dealers with low efficiency ratios, high delinquency
ratios or high loss levels relative to the overall portfolio.
Regional Credit Centers. The Company serves its Dealers on a regional basis
through its regional credit centers. The Company believes that these regional
centers provide a sufficient local market presence to meet the needs of its
Dealers, without incurring the reduction in operating controls and economies of
scale that can result from operating a large number of small branches. The
Company currently has regional credit centers in Atlanta, Georgia; Dallas,
Texas; Miami, Florida; Newark, Delaware; St. Louis, Missouri; and San Diego,
California.
Application Processing and Purchase Criteria. Dealers submit credit
applications to one of the Company's regional credit centers, typically by
facsimile. Upon the Company's receipt of a credit application, a credit
processor uses an automated system to obtain credit histories, determine the
wholesale value of the vehicle and calculate the credit score of the
application. The Company's credit officers use the credit score as a guide to
evaluate applications, but the approval/declination decision is not based solely
on the credit score. Individual credit officers have limited approval authority
and the approval of a more senior credit manager is required when the credit
score or the amount financed exceeds the individual credit officer's approval
limits. The Company's regional credit centers then notify Dealers by facsimile
of a credit decision, usually within three hours of receipt of the application.
During the six-month period ended June 30, 1997, the Company approved
approximately 37% of the applications it received and funded approximately 25%
of the applications that were approved compared to 43% and 22%, respectively,
during the six-month period ended June 30, 1996. The Company believes Dealers
select among finance companies based upon price, term, advance, down payment
requirements, stipulations, timeliness of the finance company's approval and the
historic reliability of the finance company's funding of
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purchases. The Company strives to maintain its competitiveness by meeting Dealer
needs without compromising its credit standards.
The Non-Prime Borrowers under Contracts of the type typically purchased by
the Company generally have credit histories which include past bankruptcies,
significant charged-off accounts and/or multiple collection accounts. Further,
other Contracts may be purchased by the Company for borrowers with limited or no
credit histories. In light of the deficiencies in the borrowers' credit
histories, the Company's credit officers evaluate other potential offsetting
factors such as the borrowers' residence stability, employment stability, income
level relative to expenses and past performance on other automobile-related and
other debt. If, in the credit officers' judgment, there are enough offsetting
positive factors, such Contracts may be approved for purchase by the Company.
To be eligible for purchase, a Contract must be fully amortizing and
provide for level payments over the term of the Contract, must grant a first
priority security interest in the financed vehicle to OFL-A, must prohibit the
sale or transfer of the financed vehicle without the Company's consent and must
allow for acceleration of the maturity of the Contract if the vehicle is sold or
transferred without this consent. The portions of payments on Contracts
allocable to principal and interest are, for payoff and deficiency purposes,
determined in accordance with the law of the state in which the Contract was
originated.
Each Contract includes a requirement that the borrower maintain fire, theft
and collision insurance on the financed vehicle and name the Company as a loss
payee. As part of the funding process, the Company verifies by telephone that
insurance is in place on the financed vehicle; however, as of June 30, 1997,
approximately 16% of borrowers had canceled their insurance or allowed their
insurance policies to lapse. Although the Contracts permit the Company to
force-place insurance, the Company, as a matter of policy, generally does not
force-place insurance due to the added collection and litigation risk.
Funding Package Completion, Verification and Funding. After receiving an
approval from one of the Company's regional credit centers and compiling a set
of documents the Dealers believe to be consistent with the Company's
documentation requirements, the Dealers send these funding packages to the
Company's central funding group in San Diego. The Company generally requires
that funding packages include proof of the borrower's residency, income,
insurance and title.
The Company's funding department reviews each Contract and verifies the
application data and Contract documentation. The funding department also
confirms or reconfirms the borrower's employment and the insurance on the
vehicle. The Company believes one of the most important verifications is a
direct telephone interview of the borrower to confirm the terms of the Contract,
the source of the down payment and the equipment on the vehicle. The Company
typically will not fund a Contract without a prior telephone interview of the
borrower. The Company believes this process reduces the risk of
misrepresentation by Dealers and/or borrowers and provides a basis for future
borrower contact.
A funding package may be returned if it does not comply with the terms of
the initial approval or if the Company discovers facts that were not disclosed
during the approval process. The Company returns unfunded approximately 10% of
all completed funding packages for these reasons, a portion of which are
resubmitted in approvable form. As an additional quality control check, the
Company's data processing systems perform an automated review of the Contracts
and identify any characteristics not in compliance with the Company's minimum
underwriting standards.
Post-Funding Quality Reviews. The Company uses its automated systems to
continue to monitor Contracts after funding. In addition, the Company's quality
control manager, who reports directly to the Chief Executive Officer, completes
a full quality control review of a random sample of 5% of the newly-originated
Contracts. This review focuses on compliance with underwriting standards, the
quality of the credit decision and the completeness of Contract documentation.
On a periodic basis, the Company's quality control manager issues a report to
the Company's senior management summarizing (by credit processor and credit
officer) policy exceptions, processing errors, documentation deficiencies and
credit decisions which the quality control manager considered overly aggressive.
The bonuses of the Company's credit officers are, in part, dependent upon
results of these quality control reviews.
47
<PAGE> 50
Risk-Based Pricing. The Company uses statistical information and its
automated Contract purchasing systems to establish different pricing programs by
geographic region, by borrower credit characteristics or, in some cases, by
Dealer; all tied to the expected economic value of each program to the Company.
The Company maintains a database which tracks key underwriting parameters
for each Contract purchased since the formation of the Company. This database is
updated periodically to reflect the payment performance of each Contract. The
Company uses this information to identify and aggregate a pool of Contracts that
have failed to perform as anticipated. Each Contract in this pool is then
matched against a performing Contract with the same date of purchase. By
statistically comparing the characteristics of these two pools over time, the
Company is able to refine periodically its credit evaluation processes and
believes it is better able to price each of its programs based upon the expected
risk of each program.
Military, Direct Financing and Automobile Auction Programs. The Company has
recently been testing new programs as part of its strategy of growing its
portfolio of Contracts. In January 1997, the Company began testing a program
targeted at military personnel stationed at certain bases in Texas pursuant to
which the Company purchases Contracts from independent dealers located adjacent
to the military bases. The Company believes that the military program will
potentially have higher credit losses than its existing programs because, among
other factors, the military borrowers generally have lower incomes, the vehicles
financed generally have higher mileage (and therefore greater risk of mechanical
failure) and the Contracts are originated with higher advance rates against the
wholesale value of the financed vehicle. The Company has attempted to offset the
higher expected losses through the pricing of the program. Since the program's
inception on March 15, 1997 through June 30, 1997, the Company purchased $1.8
million of Contracts through the military program with an average amount
financed under Contracts of $8,972, an average discount of Contracts of 19%, a
weighted average coupon on Contracts of approximately 20%, an average original
term of Contracts of 43 months, and a median model year for the financed
vehicles of 1992.
The program is staffed by credit officers and credit processors (the
"Military Group") who have specialized knowledge of particular issues concerning
the military borrower (such as salary and stipends, promotions and length of
remaining service term), and application approvals are issued by the Military
Group, subject to the Company's underwriting standards. Because of its
specialized knowledge of military borrowers, the Military Group, rather than the
Company's centralized funding department, also handles funding, application
completion, and verification of application data and then ships funding packages
to San Diego for funding. The Company has not yet determined whether in the
long-term it will keep or expand its military program throughout the country,
but the Company expects to continue to analyze its merits and intends to
purchase approximately $1 million of Contracts per month (or approximately 2% of
its monthly aggregate purchase amount) through the program during 1997.
In December 1996, the Company initiated a program for the direct financing
of vehicles for Non-Prime Borrowers with existing automobile loans who, based
upon the Company's underwriting standards, are eligible for loans at lower
interest rates. This program is still in an early stage and the Company has not
originated a meaningful number of Contracts to compare the characteristics of
this portfolio to its existing portfolio. However, the Company expects the
portfolio to be of better credit quality than its newly purchased Contracts and
to be priced accordingly.
The Company has recently initiated a new program that is targeted at
independent Dealers and is structured in a manner the Company believes will
mitigate the risk of Dealer misrepresentations relating to the vehicles financed
and the risk that title to the financed vehicles will not be transferred into
the Company's name. Under the new program, the Company will facilitate the
financing of the resale to Non-Prime Borrowers of used vehicles purchased by
independent car Dealers at dealer auctions of ADESA Indianapolis, ADESA New
Jersey and Auto Auction of Billings. The Company may open credit offices within
the auction facilities. Contract purchases will be underwritten in accordance
with ACC's underwriting standards and Contract advances will be based upon the
Dealer's basis in the Contracts as evidenced by auction receipts. Funding of
Contract purchases will be made through the Company's normal funding process,
except the Company will fund purchases directly through Automotive Finance
Corporation, an affiliate of ADESA that provides inventory financing to Dealers
participating in the auctions ("AFC"), to retire the Dealer's obligation
48
<PAGE> 51
to AFC. Under this structure, the Dealer should not acquire title to the
financed vehicles and the Company's lien should be recorded by AFC. As a result
of this new program, the percentage of Contracts purchased from independent
Dealers may increase from the existing levels; however, the Company does not
expect to alter its primary strategy of targeting franchised Dealers for its
programs. There is no assurance this new program will be successful or will
mitigate the risks of purchasing Contracts from independent Dealers. If the
program is successful, the Company plans to expand the program to other
auctions.
There is no assurance that the military program, the direct financing
program or the automobile auction program will be successful for the Company, or
that the Company will continue such programs in the future.
Contract Portfolio
The following table sets forth certain data for the Contracts purchased by
the Company for the periods indicated.
<TABLE>
<CAPTION>
CONTRACTS PURCHASED DURING THE THREE MONTHS ENDED:
-----------------------------------------------------------------
JUNE 30, MAR. 31, DEC. 31, SEPT. 30, JUNE 30,
1997 1997 1996 1996 1996
-------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
Amount of Contracts (000s)................. $120,654 $76,653 $61,474 $53,431 $45,253
Average Amount Financed Under Contracts.... 12,829 12,666 12,704 12,475 12,290
Average Coupon on Contracts................ 20.46% 20.59% 20.53% 20.74% 20.72%
Average Original Term of Contracts
(months)................................. 58 58 58 57 57
Average Discount of Contracts, including
Acquisition Fees......................... 4.35% 4.42% 4.15% 4.37% 5.16%
</TABLE>
The Company expects from time to time to make changes to its underwriting
guidelines and program requirements to respond to competitive conditions in the
non-prime automobile financing market. These changes are likely to affect the
characteristics of the portfolio, may increase portfolio risk and/or reduce the
Company's discounts and interest margins. In the quarter ended September 30,
1996, the Company instituted several programs that provided its Dealers with
greater pricing options than were previously available, introduced certain new
programs and provided more attractive pricing on certain existing programs. As
expected, this had the effect of lowering the average discount and acquisition
fees on Contracts purchased in this and subsequent periods.
In January 1997, the Company initiated a program that permits up to
72-month original term Contracts for new and low-mileage used vehicles purchased
by customers who meet certain parameters. This new program had the effect of
increasing the average original term of the Contracts. The Company also has its
pilot program for direct financing of vehicles without discounts that may cause
average discounts and average coupons on Contracts to decline in future periods,
depending upon the size and success of the program. In addition, the Company's
portfolio characteristics may be adversely affected by the pricing and
purchasing strategies of its competitors, which, in turn, may be impacted by the
competitors' past credit performance problems and efforts to enhance portfolio
credit quality.
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<PAGE> 52
Concentrations of Contract Purchases
The following table sets forth information by state concerning Contract
purchases and servicing portfolio amounts outstanding for the period and at the
date indicated.
<TABLE>
<CAPTION>
CONTRACTS PURCHASED
DURING THE SIX-MONTH SERVICING PORTFOLIO
PERIOD ENDED JUNE 30, OUTSTANDING BALANCES AS
1997 OF JUNE 30, 1997
--------------------- -----------------------
(000S) (%) (000S) (%)
------ --- ------ ---
<S> <C> <C> <C> <C>
California....................................... $ 37,134 18.82% $ 89,207 22.54%
Texas............................................ 30,140 15.28 70,520 17.82
Florida.......................................... 28,241 14.31 54,178 13.69
Georgia.......................................... 17,567 8.90 29,698 7.51
Pennsylvania..................................... 9,494 4.81 23,031 5.82
All Other........................................ 74,731 37.88 129,061 32.62
-------- ------ -------- ------
$197,307 100.00% $395,695 100.00%
======== ====== ======== ======
</TABLE>
The Company attempts to develop a broad Dealer base to avoid dependence on
a limited number of Dealers. As of June 30, 1997, no Dealer accounted for more
than 3% of the Company's Contract portfolio and the ten Dealers from which the
Company purchased the most Contracts, as a group, accounted for approximately 8%
of the Contract portfolio. The Company's financing program also concentrates on
purchases of Contracts for late-model used vehicles that are originated by
franchised Dealers. As of June 30, 1997, 87% of Contracts serviced by the
Company financed used vehicles and 96% were acquired from franchised Dealers.
The Company's military program, the automobile auction program and other future
programs targeted at independent dealers may reduce the percentage of Contracts
purchased from franchised Dealers and could increase portfolio credit risk.
Servicing of Contracts
General. ACC services all of the Contracts the Company originates, whether
owned by the Company or sold in an asset-backed security. ACC's servicing
generally consists of payment and pay-off processing, collecting, insurance
tracking, title tracking, responding to borrower inquiries, investigating
delinquencies, repossessing and reselling collateral, collection reporting and
credit performance monitoring.
Billing and Collection Process. The Company sends each borrower a monthly
bill, rather than using payment coupon books. All payments are directed to the
Company's lockbox account at a regional commercial bank. On a daily basis, the
lockbox bank retrieves and processes payments received, and then deposits the
entire amount into the lockbox account. A simultaneous electronic data transfer
of borrower payment data is made to the Company for posting to the Company's
computerized records.
The Company's collection process is based on a strategy of closely
monitoring Contracts and maintaining frequent contact with borrowers. As part of
this process, the Company makes early, frequent contact with delinquent
borrowers and attempts to educate borrowers on how to manage monthly budgets.
The Company attempts to identify the underlying causes of a borrower's
delinquency and to make an early collection risk assessment. The Company
believes that its proactive collection process, including the early
identification of payment problems, reduces its repossession rates and loss
levels.
In support of its collection efforts, the Company maintains a collection
software package with customized features designed for high-intensity collection
operations, which includes a high-penetration autodialer. With the aid of the
autodialer, the Company initially attempts to contact any borrower whose account
becomes six days past due. See "The Company -- Management Information Systems."
Although the Company emphasizes telephonic contact, the Company also
typically sends past due notices to borrowers when an account becomes ten days
past due. In some cases, the Company uses the Western Union Quick Collection
Service to collect borrowers' payments and to reduce the incidence of bad
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<PAGE> 53
checks. When necessary, the Company uses a network of independent agencies to
make field visits to borrowers.
All of the Company's collections activity has taken place historically at
the Company's San Diego headquarters. However, the Company expects that it will
open a collection center outside San Diego, where it can conduct a portion of
its early collections activity, while maintaining its more sensitive and complex
collections activity at its headquarters.
Extensions and Modifications. If a borrower has current financial
difficulties, but has previously demonstrated a positive history of payment on
the Contract, the Company will permit a payment extension of not more than two
months during the term of a Contract. Senior management of the Company must
approve each extension. Further, the Company typically permits only one
extension over the term of a Contract and the Company neither restructures
Contracts nor forbears any payments on Contracts. As of June 30, 1997, 1.43% of
the Contracts owned or serviced by the Company had been extended for 30 days or
more, as compared to 1.45% as of December 31, 1996. In addition, the Company
will permit one change to a borrower's monthly due date during the term of a
Contract.
Repossession. The Company repossesses a vehicle when resolution of a
delinquency is not likely or when the Company believes that its collateral is at
risk. The Company makes these judgments based upon its collectors' discussions
with borrowers, the ability or inability to locate the borrowers and/or the
vehicles, the receipt of notices of liens and other information. The Company
uses independent, licensed and bonded repossession agencies to repossess
vehicles as well as the services of an agency that traces skips (where neither
the borrower nor the vehicle can be located) to supplement its own efforts in
locating vehicles. When a vehicle is repossessed, it generally is sold through a
dealer auction within 60 days of the repossession. The Company generally uses
its own staff to pursue recoveries of deficiency balances, but may also use
outside collection agencies which share in any recoveries. If the Company has
reason to believe that a Dealer violated any representations or warranties made
to the Company on a defaulted Contract, the Company may pursue its remedies
against the Dealer under the Dealer Agreement.
The Company generally employs the same policies for charging off Contracts
on both Contracts it owns and on Contracts sold in asset-backed securities. The
Company expects to incur a loss whenever it repossesses a vehicle. When the
Company sells a repossessed vehicle, it records a net loss equal to the
outstanding principal balance of the Contract, less the proceeds from the sale
of the vehicle.
If an account becomes 120 days delinquent (other than accounts in
bankruptcy) and the Company has repossessed the vehicle, but not yet received
the sale proceeds, then the Company records a loss equal to the outstanding
principal balance of the Contract, less the estimated auction value of the
vehicle (which is based upon wholesale used car values published by nationally
recognized firms) and any expected recoveries under its vendor single interest
("VSI") insurance. This VSI insurance protects the Company's interest in the
collateral against uninsured physical damage (including total loss). If an
account becomes 120 days delinquent and the Company has not repossessed the
vehicle, then the Company records a loss equal to the outstanding principal
balance of the Contract. Any recoveries received subsequent to the Contract
being charged-off, including amounts (i) from the borrower's insurance policies
or service contracts, (ii) from Dealers under a breach of the Dealer Agreements
or (iii) from deficiency balances recovered from borrowers, are treated as loss
adjustments in the period when these recoveries are received. See "The Company
- --Management's Discussion and Analysis of Financial Conditions and Results of
Operations" for a discussion of VSI insurance.
Management Information System
The Company relies on automated information management and data processing
systems to maximize productivity, minimize credit losses and maintain data
integrity. The Company operates its information management, accounting and data
processing systems on a Model 300, IBM AS400 ("AS400").
The Company uses its own proprietary Application Processing System and
Contract Management System, both of which operate on the AS400. The Application
Processing System tracks applications through
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<PAGE> 54
the approval process and provides status reports to sales and credit
administration personnel on approved and declined Contracts. This system is also
used for credit scoring and credit review. The Application Processing System
electronically transmits all data to the Contract Management System. The
Contract Management System analyzes Contracts for compliance with the Company's
underwriting standards, tracks key underwriting characteristics for all funded
Contracts, tracks approval trends, analyzes charge-offs, monitors delinquencies
and measures pool performance.
The Company uses the Universal Loan Accounting package resident on the
AS400 for all aspects of its loan accounting and payment processing. The Company
uses the Mosaix high speed autodialer to facilitate its collection process. The
Company's general ledger is maintained on the MAS-90 General Ledger package. The
Company uses collection software that operates on the AS400. The Company also
has installed IBM's ImagePlus(TM) imaging system on the AS400 to make Contract
documents available on-screen, decrease data entry costs and aid disaster
recovery. Further, the Company has installed video teleconference and document
sharing systems, which facilitate interaction between the Company's headquarters
and its regional credit centers.
The Company backs up its systems on a daily basis and stores the backup
tapes off-site. The Company also has implemented a disaster recovery plan that
is intended to restore critical business operations within 48 hours of a
disaster. In an emergency, IBM will deliver replacement parts for the AS400
within 24 hours. Additionally, the Company has the contractual right to access
SunGard's nationwide recovery facilities, which are fully equipped and permit
access to hardware, software and telephones. The Company has made a significant
investment in its hardware and software systems and intends to continue to
upgrade these systems as its needs dictate.
Warehouse Financing
CP Facility. On March 27, 1997, the Company entered into a new $100 million
commercial paper-backed facility (the "CP Facility"), which replaced the
Repurchase Facility. The lenders are a commercial paper conduit and CSFB, and
the borrower is ACC Liquidity. The CP Facility is secured by Contracts pledged
by ACC Liquidity (purchased in a true sale from OFL-A or ACC) and is guaranteed
by Financial Securities Assurance Corp. ("FSA"). The CP Facility bears interest
at the weighted average of the commercial paper issued by the commercial paper
conduit plus commissions and expenses, repriced daily, unless the lenders, in
their sole discretion, determine in good faith that the commercial paper rate is
unavailable or not desirable and apply a rate equal to the Euro-Dollar rate
(defined as the rate per annum at which deposits in United States Dollars are
effected by CSFB in London, England to prime banks in the London interbank
market) plus 75 basis points. In addition, the borrower pays FSA a premium of
approximately 45 basis points of the outstanding advances. The interest rate on
the CP Facility was 5.7% as of June 30, 1997.
Advances under the CP Facility are limited to the borrowing base. The
borrowing base is calculated under a formula that takes into account, among
other factors, the principal balance of the Contracts pledged under the
facility, the current interest rate for United States Treasury securities with a
21-month remaining term or the one-month LIBOR, whichever is greater, and the
weighted average coupon rate of the Contracts pledged under the CP Facility. The
borrowing base cannot exceed 93% of the principal balance of eligible Contracts.
As of June 30, 1997, $32.9 million was outstanding and the advance rate was
91.7% of eligible Contracts, including a 1% liquidity cash reserve. If Treasury
rates or LIBOR rises or the weighted average coupon of Contracts being purchased
by the Company declines, then the advance rate will decline if all other factors
remain the same. A decrease in advance rates will increase the Company's capital
requirements for the facility and adversely affect its liquidity.
The events of default under the CP Facility include, among others, a
downgrade of the claims paying ability of FSA to less than A by S&P or A2 by
Moody's (FSA is currently rated AAA and Aaa by S&P and Moody's, respectively),
the average delinquency rate (as defined in the facility) exceeding 2.5% during
the preceding four months or the occurrence of a servicer event of default. A
servicer event of default includes, among others, (i) total delinquencies as a
percentage of the Company's servicing portfolio in excess of 8%
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<PAGE> 55
during the preceding three months or (ii) annualized charge-offs as a percentage
of average servicing portfolio in excess of 7% during the preceding six months.
The lenders have the right to replace ACC as the servicer upon the occurrence of
a servicer event of default. Norwest Bank Minnesota, N.A. is designated as the
custodian for the collateral and lockbox and is the back-up servicer for the
facility. Norwest is also the back-up servicer on the asset securitizations. In
the event that FSA is downgraded to AA or Aa, then the Company has six months to
replace the facility. The CP Facility expires in March 1998. As of the date of
this Prospectus and Proxy Statement, the Company is in compliance with all of
its covenants under the CP Facility and no event of default has occurred.
NIM Facility
In order to obtain working capital financing, the Company and Cargill
entered into the Subordinated Certificate and Net Interest Margin Certificate
Financing Agreement (the "NIM Facility") on September 15, 1995. The NIM Facility
enables the Company to obtain additional debt financing through a pledge of
OFL-A's interest in the Company's Subordinated Securities and excess servicing
receivables ("ESRs"). OFL-A is obligated to pay Cargill an annual commitment fee
of $100,000, payable in quarterly installments of $25,000. ACC has guaranteed up
to $5 million on the NIM Facility and has pledged all of its OFL-A stock as
collateral for the facility. The NIM Facility can be prepaid at any time upon 30
days' notice. Until the NIM Facility is retired, borrowings under this facility
can be redrawn at the time of an asset-backed securities issuance by
Receivables. The NIM Facility had no outstanding balance as of June 30, 1997 and
a $3 million outstanding balance as of August 31, 1997, and is subject to a
maximum outstanding balance of $10 million, with the borrowing base subject to
the current valuation of the Subordinated Securities and ESRs pledged as
collateral. The NIM Facility expires in May 1998. As of the date of this
Prospectus and Proxy Statement, the Company is in compliance with all of its
covenants under the NIM Facility and no event of default has occurred. Cargill
has the option to terminate the NIM Facility if an event of default occurs under
the NIM Facility. Under the NIM Facility Agreement, the following events, among
others, constitute events of default: (i) a material adverse change in the
financial condition of OFL-A, ACC or Receivables, (ii) failure of ACC, OFL-A or
Receivables to maintain a consolidated stockholders' equity of at least
$2,000,000, $50,000, and $50,000, respectively, if the condition is not remedied
within ten days; (iii) a change in control of ACC, OFL-A or Receivables; (iv)
either (A) any two of Rocco Fabiano, Gary Burdick or Rellen Stewart are no
longer employed by ACC, unless the successors are acceptable to Cargill, or (B)
Rocco Fabiano, Gary Burdick and Rellen Stewart collectively own less than ten
percent of ACC's Common Stock, on a fully diluted basis; (v) except in certain
circumstances, Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's
Ratings Group ("S&P") shall have downgraded any asset-backed security of the
Company other than as result of the downgrading of FSA or other related surety
company; (vi) in connection with any structured finance transaction (including
any subsequent asset-backed security), the initial credit enhancement levels
required to achieve an overall "BBB" rating from either Moody's or S&P is equal
to or greater than nine percent of the aggregate unpaid principal balance of the
Contracts so financed; (vii) Cargill, as sponsor, shall be obligated to make any
payments in respect of any asset securitization or any other eligible
transaction due to a default by the Company; (viii) the occurrence of more than
three collateral events in a pool of Contracts securing any Subordinated
Securities or excess servicing revenues pledged as collateral to Cargill under
the NIM Facility; (ix) except in certain circumstances, the occurrence of
valuation adjustments of an aggregate, cumulative, amount of 20% or more of the
Subordinated Securities and ESRs securing the NIM Facility; or (x) an interest
rate (equal to LIBOR plus seven percent) that is equal to or greater than 18%
for 30 or more consecutive days. A collateral event means with respect to any
pool of Contracts in an asset-backed security, the occurrence of any of the
following events during any monthly period: (i) a trailing three-month
annualized net charge-off rate equal to or greater than ten percent; (ii) a
trailing six-month annualized net charge-off rate equal to or greater than nine
percent, (iii) a trailing three-month delinquency rate equal to or greater than
nine percent; (iv) a trailing six-month delinquency rate equal to or greater
than eight percent; (v) a trailing three-month annualized repossession rate
equal to or greater than 18%; or (vi) a trailing six-month annualized
repossession rate equal to or greater than 17%.
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<PAGE> 56
Securitization of Contracts
In June 1995, the Company began selling its portfolio of Contracts to
investors through the issuance of asset-backed securities. The periodic
securitization of Contracts is an integral part of the Company's business plan.
The issuance of these securities enables the Company to redeploy capital, reduce
its interest rate risk and recognize gains on the sale of the Contracts.
As of August 31, 1997, the Company had completed nine securitizations as
described in the chart below, involving the original sale of $587 million in
securities of which $554 million in securities were rated "AAA" by S&P and "Aaa"
by Moody's based on the FSA guaranty.
<TABLE>
<CAPTION>
SECURITIZATION AGGREGATE PASS-THROUGH RATE
TRANSACTION PRINCIPAL OF SECURITIES ON SENIOR SECURITIES
-------------- ----------------------- --------------------
<S> <C> <C>
1995-A.................................................. $ 51,019,000 6.70%
1995-B.................................................. 50,000,000 6.40
1996-A.................................................. 36,319,000 5.95
1996-B.................................................. 45,508,000 6.90
1996-C.................................................. 48,916,000 6.90
1996-D.................................................. 60,016,000 6.25
1997-A.................................................. 80,000,000 6.75
1997-B.................................................. 100,000,000 6.70
1997-C.................................................. 115,000,000 6.40
------------
Total.............................................. $586,778,000
============
</TABLE>
These asset-backed securities were treated as sales of the Contracts, and
Contracts sold in a security were removed from the consolidated balance sheet of
the Company. To date, each of the securitizations has been privately placed.
The 1995 and 1996 transactions were generally structured as follows: ACC
repurchased a pool of Contracts from Cargill under the Repurchase Facility and
simultaneously sold the pool to Receivables, which then sold the pool to a trust
in exchange for interest-bearing certificates of an amount equal to the
aggregate principal balance of the Contracts. The certificates were then sold to
one or more institutional investors. The Company retained the Subordinated
Securities and ESRs created in each transaction.
For the 1997 transactions, the Company restructured the securitizations.
Under the new structure, ACC purchases the Contracts from ACC Liquidity, then
sells them to a Delaware business owner trust owned by Receivables and ACC
Funding, in exchange for ESRs and the Subordinated Securities. The trust then
pledges its assets to secure payment of the senior notes and the Subordinated
Securities. In addition, the relevant Indenture requires the establishment of a
cash reserve fund equal to one percent (1%) of the outstanding balance of
Contracts owned by the trust as additional collateral for the Subordinated
Securities.
The new structure is designed to enable the transfer of the Contracts to a
trust to be treated as a sale for accounting purposes, and as an issuance of
indebtedness for tax purposes. As a result, the Company will not be required to
pay income tax on the gain on sale of Contracts in the period in which the
Contracts are delivered. Instead, the Company will pay income taxes as it
receives cash from the corresponding ESRs. In addition, the new structure
improves the marketability of the Subordinated Securities, because under this
structure, once the credit enhancement reserve requirements are met, all excess
cash flows are initially used to pay down the principal of the Subordinated
Securities. The Company has sold the Subordinated Securities from each of the
1997 transactions.
In all of the securitizations, the Company retains the right to service the
Contracts sold to the trust and receives monthly base servicing fees of
approximately 3% per annum on the outstanding balance of the Contracts that were
sold. In addition, Receivables (or OFL-A if Receivables' rights are assigned to
OFL-A for pledge under the NIM Facility) is entitled to receive excess interest
arising from collections, to the extent that these collections exceed the
aggregate of payments to investors, base servicing fees and certain other fees.
Generally, certificates or notes are sold to investors without recourse, except
that the representations and
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<PAGE> 57
warranties provided by Dealers to the Company are similarly provided by the
Company to the investors and to FSA, along with certain indemnities. These
indemnities are secured by a pledge of all of the stock of Receivables.
Receivables is obligated to repurchase a Contract from the trust if the Contract
fails to conform to normal representations and warranties relating to the
collateral. Receivables bears the risk of loss on Contracts it repurchases.
Each Securitization Transaction results in the recognition of a gain on
sale of Contracts on the Company's consolidated statement of operations for the
period in which the Contracts were delivered. These gains are recognized to the
extent that the net proceeds from the sale are greater than the allocated basis
of that portion of the Contracts sold. This gain is subject to the provisions of
the Emerging Issues Task Force ("EITF") Issue No. 88-11. (See Footnote 1(i) of
the Notes to Consolidated Financial Statements for the methodology used to
calculate the gain on sale.)
Under the servicing agreement for each security, the Company is obligated
to service all Contracts sold to the trusts in accordance with the Company's
standard procedures. The servicing agreements generally provide that the Company
will bear all costs and expenses incurred in connection with the management,
administration and collection of the Contracts serviced. The servicing
agreements can be terminated by the investor in the event of certain defaults by
the Company and under certain other circumstances.
Competition
The automobile financing business is highly competitive. The Company
competes with a growing number of publicly and privately held national, regional
and local automobile finance companies that specialize in non-prime automobile
finance, many of which compete directly with the Company for Contracts. These
competitors include AmeriCredit Corp., Consumer Portfolio Services, Inc., and GE
Capital Corporation.
In addition, the Company competes, or may compete in the future, for
business with more traditional automobile financing sources, such as commercial
banks, savings and loans, thrift and loans, credit unions and captive finance
companies of automobile manufacturers such as General Motors Acceptance
Corporation, Ford Motor Credit Corporation (including the Ford Fairlane
subsidiary), Chrysler Financial Corporation, Toyota Motor Credit Corporation,
Nissan Motors Acceptance Corporation and American Honda Finance. These
traditional automobile finance companies may lower credit standards or introduce
programs for Non-Prime Borrowers to attract more financing business or, in the
case of the captive finance companies, to stimulate new vehicle sales.
Many of the Company's competitors and potential competitors have
substantially greater financial, marketing and other resources than the Company
and may be more successful in expanding into new geographic markets, building
Dealer networks and increasing market share through internal growth or
acquisition. The larger, more established companies have access to unsecured
commercial paper, investment-grade corporate debt and to other funding sources
that may provide them with an advantageous cost of capital relative to the
Company's cost of capital.
The captive finance companies and many of the other traditional automobile
finance companies have long-standing relationships with Dealers that may give
them a competitive advantage in establishing dealer networks for the purchase of
Contracts. Many of these companies provide other types of financing, including
inventory financing, which is not offered by the Company.
The Company believes that the industry competes for Dealers on the basis of
the price charged to the Dealer for the purchase of Contracts (which is a
function of the discount to the face value of a Contract and any applicable
fees), advance limitations, down payment requirements, stipulations, the
timeliness of the finance company's response to an application, the approved
Contract terms, documentation requirements for purchase of the Contract and the
historic reliability of the finance company's funding of purchases. The Company
believes that its competitive advantages include geographic diversification,
risk-based pricing, financial resources, nationwide consistency of credit
decisions and quality Dealer service.
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Government Regulation
The Company has obtained and maintains licenses and registrations required
by certain states' sales finance company laws and/or laws regulating purchases
of installment or conditional sales Contracts, and is in the process of
obtaining licenses to permit either ACC or Accent to originate directly
non-prime automobile installment Contracts. The Company intends to obtain and
maintain any and all additional qualifications, registrations and licenses
necessary for the lawful conduct of its business and operations.
Numerous federal and state consumer protection laws, including the Federal
Truth-In-Lending Act, the Federal Equal Credit Opportunity Act, the Fair Credit
Reporting Act, the Federal Fair Debt Collection Practices Act, the Federal Trade
Commission Act, the Federal Reserve Board's Regulations B and Z, and state motor
vehicle retail installment sales acts, retail installment sales acts and other
similar laws regulate the origination and collection of consumer receivables and
impact the Company's business. The relevant laws, among other things, (A)
require the Company to (i) obtain and maintain certain licenses and
qualifications, (ii) limit the finance charges, fees and other charges on the
Contracts purchased or originated and (iii) provide specified disclosures to
consumers; (B) limit the terms of the Contracts; (C) regulate the credit
application and evaluation process; (D) regulate certain servicing and
collection practices; and (E) regulate the repossession and sale of collateral.
In addition, certain laws applicable to military personnel, which may relieve
such personnel of certain debt obligations during wartime and under certain
other circumstances, may specifically impact the Company's military borrower
program. These laws impose specific statutory liabilities upon creditors who
fail to comply with their provisions and may give rise to defense to payment of
the consumer's obligation. In addition, certain of the laws make the assignee of
a consumer installment Contract liable for the violations of the assignor.
The Dealer Agreement contains representations and warranties by the Dealer
that, as of the date of assignment, the Dealer has complied with all applicable
laws and regulations with respect to each Contract. The Dealer is obligated to
indemnify the Company for any breach of any of the representations and
warranties and to repurchase any non-conforming Contracts. The Company generally
verifies Dealer compliance with usury laws, but does not audit a Dealer's full
compliance with applicable laws. There is no assurance the Company will detect
all Dealer violations or that individual Dealers will have the financial ability
and resources either to repurchase Contracts or indemnify the Company against
losses. Accordingly, failure by Dealers to comply with applicable laws, or with
their representations and warranties, could have a material adverse effect on
the Company.
The Company believes it is currently in compliance in all material respects
with applicable laws, but there can be no assurance that the Company will be
able to maintain such compliance. The failure to comply with such laws, or a
determination by a court that the Company's interpretation of law was erroneous,
could have a material adverse effect upon the Company. Furthermore, the adoption
of additional laws, changes in the interpretation and enforcement of current
laws or the expansion of the Company's business into jurisdictions that have
adopted more stringent regulatory requirements than those in which the Company
currently conducts business, could have a material adverse effect upon the
Company.
If a borrower defaults on a Contract, the Company as the servicer of the
Contract is entitled to exercise the remedies of a secured party under the
Uniform Commercial Code ("UCC"), which typically includes the right to
repossession by self-help means unless such means would constitute a breach of
peace. The UCC and other state laws regulate repossession and sales of
collateral (A) by requiring reasonable notice to the borrower of (i) the date,
time and place of any public sale of the collateral, (ii) the date after which
any private sale of the collateral may be held and (iii) the borrower's right to
redeem the financed vehicle prior to any such sale; and (B) by providing that
any such sale must be conducted in a commercially reasonable manner. Financed
vehicles repossessed generally are resold by the Company through unaffiliated
wholesale automobile networks or auctions which are attended principally by used
automobile Dealers.
Under the UCC and other laws applicable in most states, a creditor is
entitled, subject to possible prohibitions or limitations, to obtain a
deficiency judgment from a borrower for any deficiency on repossession and
resale of the vehicle securing the unpaid balance of the borrower's installment
Contract. Since a deficiency judgment against a borrower would be a personal
judgment for the shortfall, and the defaulting
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borrower may have very little capital or few sources of income, in many cases it
is not prudent to seek a deficiency judgment against a borrower or, if one is
obtained, it may be settled at a significant discount.
Property
The Company's headquarters are located in San Diego, California, where it
leases approximately 26,000 rentable square feet of general office space in
several buildings from unaffiliated lessors. The various headquarters leases
expire at various times between January 1998 and March 2002. The base monthly
rent for all San Diego properties leased by the Company is $41,000. The Company
has negotiated a termination of its existing primary headquarters lease
effective October 15, 1997 and of certain other smaller facility leases shortly
thereafter, which will not result in a charge to the Company's statement of
operations.
The Company has entered into an agreement to lease new corporate
headquarters space in San Diego, California from an unaffiliated lessor. The
building is currently under construction and the Company is expected to move and
begin paying rent in October 1997. The new office space consists of
approximately 46,000 rentable square feet. The base monthly rent is
approximately $76,000, subject to annual increases. The lease expires in October
2005 and the Company has options to lease additional space in future buildings
in the complex.
The Company leases from unaffiliated lessors four offices that it uses as
regional credit centers, located in Dallas, Texas; Atlanta, Georgia; Miami,
Florida; and Newark, Delaware. The office in Dallas consists of approximately
2,075 square feet for which the lease expires January 1, 1998. The base monthly
rent is $2,334. The Company has an option to renew the lease for an additional
three years, on substantially similar terms. The office in Atlanta consists of
approximately 2,100 square feet for which the lease expires January 31, 1998.
The monthly rent is $2,481. The office in Miami consists of approximately 1,662
square feet for which the lease expires June 10, 2001. The base monthly rent is
$2,100. The office in Newark consists of approximately 3,414 square feet for
which the lease expires April 15, 1999. The base monthly rent is $5,050. The
office in St. Louis, Missouri consists of approximately 3,500 square feet with a
base monthly rent of $6,600 and the lease expires August 31, 2002.
Employees
As of August 31, 1997, the Company had 363 full-time employees. The Company
believes that its relations with its employees are good. The Company is not a
party to any collective bargaining agreement.
Legal Proceedings
As of the date of this Prospectus and Proxy Statement, the Company is
involved as a defendant in certain litigation and threatened litigation arising
in the normal course of business. While the outcome of the pending and
threatened litigation cannot be predicted with certainty, the Company's
management believes that all pending and threatened claims will be resolved on
terms and for amounts that will not have a material effect on the Company's
business or consolidated financial condition.
The Company regularly initiates and intends to continue initiating legal
proceedings as a plaintiff in connection with its routine collection activities.
Risks Relating to ACC's Business
The Company's business is subject to numerous risks, including credit
risks, interest rates risks and risks relating to liquidity and capital
resources, competition, geographic concentration, government regulation,
dependence on key personnel and other factors. A full discussion of these risks
and other risks associated with the Company's business may be found in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996, and
its Quarterly Reports on Form 10-Q for the quarters ended March 31 and June 30,
1997.
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SELECTED COMPANY FINANCIAL INFORMATION
The following table sets forth selected consolidated financial information
for the Company. The statement of operations data for the period from July 15,
1993 (inception) through June 30, 1994, the six-month transition period ended
December 31, 1994 and the years ended December 31, 1995 and 1996, and the
balance sheet data as of December 31, 1995 and 1996, have been derived from the
Company's Consolidated Financial Statements which have been audited by KPMG Peat
Marwick LLP, independent auditors, whose report with respect thereto appears
elsewhere in this Prospectus and Proxy Statement. The balance sheet data as of
December 31, 1994, has been derived from audited Consolidated Financial
Statements of the Company which are not presented herein. The statement of
operations and balance sheet data as of and for the six-month periods ended June
30, 1996 and 1997, are unaudited but include, in the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation of such data and results of operations for those periods. The
results for the six-month period ended June 30, 1997, are not necessarily
indicative of results that may be expected for the year ending December 31,
1997. The information set forth below should be read in conjunction with the
Company's Consolidated Financial Statements and related notes thereto. See "The
Company -- Management's Discussion and Analysis of Financial Condition and
Results of Operations."
<TABLE>
<CAPTION>
JULY 15, 1993 SIX-MONTH
(INCEPTION) TRANSITION SIX-MONTH PERIOD
THROUGH PERIOD ENDED YEAR ENDED DECEMBER 31, ENDED JUNE 30,
JUNE 30, DECEMBER 31, ------------------------- -------------------------
1994(1) 1994(1) 1995(1) 1996(1) 1996 1997
------------- ------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Net interest income............. $ 606,177 $ 2,187,843 $ 3,332,354 $ 4,700,124 $ 2,034,604 $ 2,603,162
Gain on sale of contracts....... -- -- 8,056,136 15,186,889 6,584,609 12,736,139
Servicing income and ancillary
fees.......................... 6,653 28,237 1,757,257 4,914,668 1,811,747 4,450,249
Litigation settlement income.... -- 325,000 -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Total revenues.................. 612,830 2,541,080 13,145,747 24,801,681 10,430,960 19,789,550
Provision for contract losses... 592,325 902,361 673,802 1,113,069 348,784 481,196
Operating expenses.............. 2,608,467 2,630,925 8,796,590 14,896,921 6,763,069 11,380,773
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before taxes and
extraordinary loss............ (2,587,962) (992,206) 3,675,355 8,791,691 3,319,107 7,927,581
Income tax provision............ -- -- 209,000 3,692,000 1,394,000 3,330,000
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before
extraordinary loss............ (2,587,962) (992,206) 3,466,355 5,099,691 1,925,107 4,597,581
Extraordinary loss on
extinguishment of repurchase
facility, net of tax.......... -- -- -- -- -- 1,037,827
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)............... $(2,587,962) $ (992,206) $ 3,466,355 $ 5,099,691 $ 1,925,107 $ 3,559,754
=========== =========== =========== =========== =========== ===========
Preferred stock dividends....... (152,673) (82,621) (215,419) (123,741) (116,818) --
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) available to
common shareholders........... $(2,740,635) $(1,074,827) $ 3,250,936 $ 4,975,950 $ 1,808,289 $ 3,559,754
=========== =========== =========== =========== =========== ===========
Net income per common share and
common share equivalent (2):
Income before extraordinary
loss........................ $ -- $ -- $ 0.61 $ 0.68 $ 0.29 $ 0.54
Extraordinary loss............ -- -- -- -- -- 0.12
----------- ----------- ----------- ----------- ----------- -----------
Net income.................... $ -- $ -- $ 0.61 $ 0.68 $ 0.29 $ 0.42
=========== =========== =========== =========== =========== ===========
Weighted average shares
outstanding................... -- -- 5,661,046 7,542,371 6,724,938 8,523,623
=========== =========== =========== =========== =========== ===========
</TABLE>
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<TABLE>
<CAPTION>
SIX-MONTH PERIOD ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------- -------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Total assets................... $42,331,518 $46,908,938 $64,633,390 $53,942,978 $96,921,828
Net installment contracts
Held-for-sale............... -- 28,187,778 21,078,692 22,365,001 40,239,260
Held-for-investment......... 38,613,239 509,388 3,428,643 220,830 2,294,302
Allowance for contract
losses(3)................... 1,181,004 476,808 565,000 388,200 413,000
Asset-backed securities,
available-for-sale.......... -- -- 7,832,174 -- 6,328,000
Asset-backed securities,
held-to-maturity............ -- 3,910,080 -- 6,684,022 --
Excess servicing receivables... -- 5,590,878 15,573,618 9,365,618 23,041,000
Warehouse facilities, net...... 40,492,594 29,708,252 11,026,130 23,598,232 32,676,451
Redeemable 10.25% subordinated
notes due 2003.............. -- -- 19,196,110 -- 19,163,378
Other borrowings............... -- 7,439,597 -- 2,388,036 --
Total liabilities.............. 41,433,745 40,624,138 40,113,674 32,721,312 66,390,222
Redeemable preferred stock..... 4,358,377 6,279,049 -- -- --
Shareholders' equity........... (3,460,604) 5,751 24,519,716 21,221,666 30,531,606
SELECTED FINANCIAL RATIOS(6)
Return (loss) on average
assets(4)................... (6.65)% 6.92% 9.24% 6.58% 10.18%
Return (loss) on average
equity(4)(5)................ (160.91) 102.37 30.81 35.61 34.13
Net charge-offs as a percentage
of average servicing
portfolio(7)................ 1.08 3.64 4.47 3.85 4.88
Operating expense ratio(8)..... 16.4 10.7 8.4 9.5 7.3
</TABLE>
- -------------------------
(1) Effective as of January 1, 1995, the Company changed its fiscal year end
from June 30 to December 31. Each of the periods ended June 30, 1994,
December 31, 1994, December 31, 1995, and December 31, 1996 is an audited
period.
(2) Due to the significant changes in the capital structure of the Company,
historical net income (loss) per common share prior to the year ended
December 31, 1995, is not presented.
(3) Allowance for Contract losses does not include the estimated undiscounted
recourse loss allowance contained within the valuation of the ESRs (as
defined herein). As of December 31, 1994, 1995 and 1996 and June 30, 1997,
the estimated undiscounted recourse loss allowance embedded in the ESRs
(excluding accrued interest) was zero, $7.1 million, $19.2 million and $31.6
million, respectively.
(4) The calculations of return (loss) on average assets and return (loss) on
average equity, for the six months ended June 30, 1997, exclude an
extraordinary loss of $1.0 million on extinguishment of a warehouse
facility.
(5) The calculation of return (loss) on average equity for December 31, 1994,
and 1995 includes redeemable preferred stock.
(6) Ratios have been annualized for the six-month transition period ended
December 31, 1994 and the six month periods ended June 30, 1996 and 1997.
(7) After December 31, 1996, the average servicing portfolio is calculated as of
the beginning and the end of each month during the period. For the prior
periods, the average servicing portfolio is calculated as of the beginning
and the end of each quarter in the period presented. The net charge-offs
exclude the effect of accrued interest, discounts paid by the Dealers and
potential recoveries from legal proceedings against borrowers.
(8) Operating expenses as a percentage of average Contracts owned and serviced
for others.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion is qualified in its entirety by the more detailed
information and consolidated financial statements, including the notes thereto,
appearing elsewhere in this Prospectus and Proxy Statement. Other than
statements of historical fact, the statements made in this section are
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act that involve risks and uncertainties.
The Company's actual results could differ materially from those discussed
herein. Factors that could cause or contribute to such differences include, but
are not limited to, those discussed in "The Company -- Description of the
Company" as well as those discussed elsewhere in this Prospectus and Proxy
Statement.
From the inception of the Company on July 15, 1993 through May 1995, the
primary source of revenue for the Company was net interest income on the
Contracts owned by the Company. In May 1995, the Company initiated an
asset-backed securitization program. From the inception of the program through
the 1996-D Transaction, the Company sold Contracts and retained subordinated
asset-backed securities ("Subordinated Securities") or performing Contracts
pledged as credit enhancements ("Spread Receivables"), and excess servicing
receivables ("ESRs") and credit enhancement cash reserves. During the six months
ended June 30, 1997, the Company began selling the Subordinated Securities as
part of its securitization transactions. There can be no assurance that the
Company will continue to sell Subordinated Securities or that there will be a
market for such securities.
Since initiation of the asset-backed securitization program, the Company's
earnings have been increasingly attributable to the gains recognized on the sale
of the Contracts and servicing revenues generated in conjunction with servicing
those sold Contracts. In contrast, interest income is expected to continue to
decline as a portion of total revenues.
Until such time as the Contracts are sold in asset-backed securities,
Contracts are pledged as collateral, and are financed with warehouse financing.
Historically, the Company depended upon the Repurchase Facility between ACC,
OFL-A and Cargill Financial Services Corporation ("Cargill"), which under its
terms was to expire in July 1998, to finance its acquisition of Contracts. The
Repurchase Facility was extinguished in March 1997 when the Company exercised an
option to extinguish the facility, which option was granted in exchange for the
issuance of 174,500 unregistered shares of Company Common Stock. The statement
of operations for the six months ended June 30, 1997 reflects an extraordinary
loss of $1.0 million on the extinguishment of the Repurchase Facility. In March
1997, the Company secured a new $100 million CP Facility. The CP Facility is
secured by Contracts pledged by ACC Liquidity and is guaranteed by FSA. The
Company currently has the option of pledging the Company's interest in
Subordinated Securities, ESRs and credit enhancement cash reserves for
borrowings under the NIM Facility, which expires in May 1998.
On May 16, 1996, the Company sold, in an initial public offering, 2,000,000
shares of its Common Stock, which generated net proceeds of approximately $12.5
million. The proceeds were used to partially pay-down the NIM Facility (included
in Other Borrowings on the Company's Consolidated Balance Sheet), temporarily
reduce advances on the Repurchase Facility and for other general corporate
purposes. In addition, each share of the Company's redeemable Preferred Stock
automatically converted into 23 shares of Common Stock upon consummation of the
offering. Total cumulative dividends of $574,454 were paid to the holders of the
redeemable preferred stock subsequent to the conversion. On November 18, 1996,
the Company issued $20 million of 10.25% subordinated notes due 2003 in a public
offering (the "Notes"), which generated net proceeds of approximately $19.0
million after deducting the underwriting discount and issuance costs. The
proceeds were used to pay down the outstanding balance of the NIM Facility,
temporarily reduce advances on the Repurchase Facility and for other general
corporate purposes.
RESULTS OF OPERATIONS
The Six-Month Period Ended June 30, 1997 Compared to the Six-Month Period Ended
June 30, 1996
During the six-month period ended June 30, 1997, the Company's income
before extraordinary loss increased 142% to $4.6 million, or $0.54 per share,
from $1.9 million, or $0.29 per share, during the six-month
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period ended June 30, 1996. Net income for the six months ended June 30, 1997
was $3.6 million, or $0.42 per share. This increase is primarily due to
increases in the gain on sale of Contracts, and servicing and ancillary fees
totaling $8.8 million, which resulted from an increase in Contracts sold in
asset-backed securities and in the average balance of Contracts serviced for
others. During the six-month period ended June 30, 1997, an aggregate of $175.1
million of Contracts were sold by the Company and the average balance of
Contracts serviced for others was $281 million, compared to $81.8 million of
Contracts sold and an average balance of Contracts serviced for others of $111
million during the same period in 1996. Partially offsetting these increases was
an increase in operating expenses of $4.6 million as a result of the Company's
expanded purchasing and servicing operations. The Company purchased $197.3
million of Contracts during the six-month period ended June 30, 1997, as
compared to $79.0 million during the same period in the prior year.
Additionally, the Company recognized a $1.0 million loss upon extinguishment of
the Repurchase Facility, net of tax, as an extraordinary loss during the
six-month period ended June 30, 1997. The Company reported net income of $3.6
million during the six-month period ended June 30, 1997, compared to $1.9
million for the six-month period ended June 30, 1996.
Net Interest Income. The Company earned approximately $2.6 million of net
interest income during the six-month period ended June 30, 1997, compared to
$2.0 million during the six-month period ended June 30, 1996. The principal
source of the Company's net interest income was the net yield on Contracts
(yield on Contracts less the cost of the warehouse facility) which increased to
$2.0 million during the six-month period ended June 30, 1997, from $1.8 million
during the six-month period ended June 30, 1996. This increase resulted
primarily from a higher yield on Contracts and a lower rate paid on the
warehouse facility during the six-month period ended June 30, 1997, as compared
to the same period in the prior year. The yield on Contracts increased to 21.8%
during the six-month period ended June 30, 1997, from 21.4% during the six-month
period ended June 30, 1996. The average rate paid on the warehouse facility was
8.1% during the six-month period ended June 30, 1997, compared to 9.1% during
the six-month period ended June 30, 1996.
During the six-month period ended June 30, 1997, the Company earned
interest income of $1.9 million on asset-backed securities and cash balances
held in restricted accounts and as credit enhancement cash reserves, compared to
$786,000 during the six-month period ended June 30, 1996. This increase is due
to significantly higher volumes of asset-backed securities issued during the
six-month period ended June 30, 1997, compared to the same period in the prior
year. During the period from the cut-off date and the closing date of a
securitization (the "Closing Period"), the Company earns interest on the senior
and subordinated certificates or notes. The Company earned approximately
$874,000 on $180.0 million of asset-backed securities during the Closing Period
of the 1997-A and 1997-B Transactions during the six-month period ended June 30,
1997, compared to $197,000 on $81.8 million of asset-backed securities during
the Closing Period of the 1996-A and 1996-B Transactions during the same period
in 1996.
The Company recognized interest expense on other borrowings (total amounts
owed in connection with the Notes, the NIM Facility and the lease liability) of
$1.2 million during the six-month period ended June 30, 1997, compared to
$586,000 in the prior year. The increase in interest expense is due to interest
payments on the Notes, partially offset by reduced interest payments on the NIM
Facility. During the six-month period ended June 30, 1997, the Company
recognized $1.0 million of interest expense on the Notes, and $103,000 in
interest expense on the NIM Facility, compared to $531,000 in interest expense
on the NIM Facility during the six-month period ended June 30, 1996. The average
balance of the NIM Facility during the six-month period ended June 30, 1997 was
$476,000, as compared to $7.3 million during the six-month period ended June 30,
1996.
Contract Loss Provision. The Company recorded a provision for Contract
losses of $481,000 for the six-month period ended June 30, 1997, compared to
$349,000 for the six-month period ended June 30, 1996. The allowance for
Contract losses is maintained at a level deemed by management to be adequate to
provide for losses in the held-for-investment portfolio.
Servicing Revenues. The Company recorded $4.5 million of servicing and
ancillary fees for the six-month period ended June 30, 1997, compared to $1.8
million for the six-month period ended June 30, 1996. This substantial increase
in servicing revenues arose from an increase in the average balance of Contracts
serviced
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for others to $281 million during the six-month period ended June 30, 1997, from
$111 million during the same period in 1996. Future servicing revenues could be
adversely affected, if the levels of charge-offs, prepayments or market discount
rates in any pool of Contracts sold exceeds the estimates of such levels used by
the Company from time to time to value its Subordinated Securities and ESRs.
Gain on the Sale of Contracts. The Company recognized a gain on sale of
Contracts of $12.7 million during the six-month period ended June 30, 1997,
representing approximately 7.3% of the $175.1 million of Contracts sold in
asset-backed securities; compared to a gain of $6.6 million, or approximately
8.0% of the $81.8 million of Contracts sold in asset-backed securitizations
during the six-month period ended June 30, 1996. The decrease in the gain on
sale as a percentage of Contracts sold is primarily a result of (i) increases in
charge-off expectations on the Contracts sold, (ii) increases in pass-through
rates on the asset-backed securities issued and (iii) costs recognized in
connection with the prefunded portion of the 1997 transactions during the
six-month period ended June 30, 1997, as compared to the same period in the
prior year. These negative effects were partially offset by the elimination of
the repurchase fees upon extinguishment of the Repurchase Facility during the
six-month period ended June 30, 1997.
Operating Expenses. The Company reported operating expenses of $11.4
million during the six-month period ended June 30, 1997, compared to $6.8
million for the six-month period ended June 30, 1996. The increase in expenses
reflected the growth in the amount of Contracts purchased and serviced by the
Company. The operating expense ratio (annualized operating expenses as a
percentage of average Contracts owned and serviced for others) improved to 7.3%
for the six-month period ended June 30, 1997, from 9.5% during the six-month
period ended June 30, 1996.
Personnel expenses for the six-month period ended June 30, 1997, were $5.8
million, compared to $3.8 million during the six-month period ended June 30,
1996. Personnel expenses consist primarily of salaries and wages, performance
incentives, employee benefits and payroll taxes. The overall increase in
personnel expenses reflected the growth of the Company's full-time employees
from 175 as of June 30, 1996, to 340 as of June 30, 1997. The Company expects
that its number of full-time employees will continue to increase with the growth
of the Contract portfolio.
The Company's general and administrative expenses increased to $3.3 million
for the six-month period ended June 30, 1997, from $1.7 million for the
six-month period ended June 30, 1996. These expenses consisted primarily of
telecommunications expenses, travel expenses, credit bureau expenses and
management information expenses. The increase in general and administrative
expenses reflected the substantial expansion of the Company's operations.
Servicing expenses increased to $1.5 million for the six-month period ended
June 30, 1997, compared to $758,000 for the six-month period ended June 30,
1996, due to the substantial growth of the total Contracts owned and serviced by
the Company. These expenses consisted primarily of out-of-pocket collection,
repossession and liquidation expenses.
Occupancy and equipment expenses increased to $484,000 for the six-month
period ended June 30, 1997, from $214,000 for the six-month period ended June
30, 1996. The increase in occupancy and equipment expenses reflected the
expansion of the Company's headquarters office space and its regional operations
since June 30, 1996. During the six-month period ended June 30, 1997, the
Company entered into an agreement to lease new corporate headquarters space in
San Diego, California from an unaffiliated lessor. The building is currently
under construction and the Company is expected to move in and begin paying rent
in October 1997. The new office space consists of approximately 46,000 square
feet and the monthly rent approximates $76,000 subject to annual increases.
Currently, the Company leases approximately 26,000 square feet and pays
approximately $41,000 per month and has negotiated a termination of the lease
effective October 15, 1997, which will not result in a charge to the Company's
statement of operations.
Income Taxes. The effective tax rate for each of the six-month periods
ended June 30, 1997 and 1996, was 42%.
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The Year Ended December 31, 1996, Compared to the Year ended December 31, 1995
During the year ended December 31, 1996, income before taxes increased 138%
from $3.7 million, or $0.61 per share, to $8.8 million, or $0.68 per share. This
increase is primarily due to increases in the gain on sale of Contracts and
servicing and ancillary fees totaling $10.3 million which resulted from an
increase in the sale of Contracts and an increase in the average balance of sold
Contracts. During the year ended December 31, 1996, Contracts sold were $191
million and the average balance of sold Contracts was $142 million, compared to
$101 million sold and an average balance of sold Contracts of $45 million during
the same period in 1995. Partially offsetting these increases was an increase in
operating expenses of $6.1 million as a result of the Company's expanded
purchasing and servicing operations. The Company reported net income after taxes
of $5.1 million during the year ended December 31, 1996, compared to $3.5
million for the year ended December 31, 1995.
Net Interest Income. The Company earned approximately $4.7 million of net
interest income during the year ended December 31, 1996, compared to $3.3
million during the year ended December 31, 1995. The principal source of the
Company's net interest income was the net yield on Contracts (yield on Contracts
less the cost of the warehouse facility) which amounted to $3.9 million during
the year ended December 31, 1996, compared to $2.9 million during the year ended
December 31, 1995. This increase resulted primarily from a higher yield on
Contracts and a lower rate paid on the warehouse facility during the year ended
December 31, 1996, compared to the same period in 1995. The yield on Contracts
increased to 21.4% and the average rate on the warehouse facility decreased to
9.2% during the year ended December 31, 1996, compared to 19.3% and 9.7%,
respectively, during the year ended December 31, 1995.
During the year ended December 31, 1996, the Company earned interest income
of $2.0 million on asset-backed securities, cash balances held in restricted
accounts and as credit enhancement cash reserves, compared to $927,000 during
the year ended December 31, 1995. This increase is primarily due to significant
expansion of the asset-backed security program during the year ended December
31, 1996, as compared to the year earlier.
The Company recognized interest expense on other borrowings (total amounts
owed in connection with the Notes, the NIM Facility and the lease liability) of
$1.2 million during the year ended December 31, 1996, compared to $490,000 in
the prior year. This increase is primarily due to a higher average outstanding
NIM Facility balance during the year ended December 31, 1996, as compared to the
year ended December 31, 1995. The average balance of the NIM Facility was $5.3
million and $2.1 million during the years ended December 31, 1996, and 1995,
respectively. The average NIM Facility balance increased due to the Company's
growth and cash needs. During the year ended December 31, 1996, the Company
recognized $842,000 of interest expense in connection with the NIM Facility as
compared to $319,000 of interest expense during 1995. Additionally, during the
year ended December 31, 1996, the Company recognized $252,000 of interest
expense in connection with the Notes, issued on November 18, 1996.
Contract Loss Provision. The Company recorded a provision for Contract
losses of $1.1 million for the year ended December 31, 1996, compared to
$674,000 for the year ended December 31, 1995. The allowance for Contract losses
is maintained at a level deemed by management to be adequate to provide for
losses in the held-for-investment portfolio. The provision for 1996 included a
$440,000 loss allowance for Contracts that are ineligible for sale due to
delinquency status as well as a $125,000 allowance for losses for the Spread
Receivables, which, although performing, are deemed held-for investment. The
1995 provision related only to delinquent Contracts and included a provision of
$1.1 million and a one-time recapture of $400,000 from the allowance for
Contract losses provided for in a prior period on Contracts sold in conjunction
with the 1995-A Transaction.
Servicing Revenues. The Company recorded $4.9 million of servicing and
ancillary fees for the year ended December 31, 1996, compared to $1.8 million
for the year ended December 31, 1995. This substantial increase in servicing
revenues arose from an increase in the average balance of sold Contracts to $142
million during the year ended December 31, 1996, as compared to $45 million
during the same period in 1995. Until the completion of the 1995-A Transaction
in May 1995, the Company did not service Contracts for others and recognized no
servicing revenue other than ancillary fees. Future servicing revenues could be
adversely
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affected if the level of charge-offs, prepayments or market discount rates in
any pool of Contracts sold exceeds the Company's estimate of such levels used by
the Company from time to time to value its subordinated securities and ESRs.
Gain on the Sale of Contracts. The Company recognized a gain on sale of
Contracts of $15.2 million during the year ended December 31, 1996, representing
approximately 8.0% of the $191 million of Contracts sold in connection with
asset-backed securitizations, compared to $8.1 million, or approximately 8.0% of
the $101 million of Contracts sold in connection with asset-backed
securitizations during the year ended December 31, 1995.
Operating Expenses. The Company reported operating expenses of $14.9
million during the year ended December 31, 1996, compared to $8.8 million for
the year ended December 31, 1995. The increase in expenses reflected the growth
in the amount of Contracts purchased and serviced by the Company. The operating
expense ratio improved to 8.4% for the year ended December 31, 1996, from 10.7%
during the year ended December 31, 1995.
Personnel expenses for the year ended December 31, 1996, were $8.3 million,
compared to $5.3 million during the year ended December 31, 1995. Personnel
expenses consisted primarily of salaries and wages, performance incentives,
employee benefits and payroll taxes. The overall increase in personnel expenses
reflected the growth of the Company's full-time employees from 139 as of
December 31, 1995, to 225 as of December 31, 1996. The Company expects that its
number of full-time employees will continue to increase commensurate with the
growth of the Company's Contract portfolio.
The Company's general and administrative expenses increased to $3.8 million
for the year ended December 31, 1996, from $2.4 million for the year ended
December 31, 1995. These expenses consisted primarily of telecommunications
expenses, travel expenses, marketing expenses, professional fees, insurance
expenses, credit bureau expenses and management information systems expenses.
The increase in general and administrative expenses reflected the substantial
expansion of the Company's operations.
Servicing expenses increased to $1.8 million for the year ended December
31, 1996, compared to $408,000 for the year ended December 31, 1995, due to the
substantial growth of the total Contracts owned and serviced. These expenses
consisted primarily of out-of-pocket collection, repossession and liquidation
expenses.
Occupancy and equipment expenses increased to $521,000 for the year ended
December 31, 1996, from $372,000 for the year ended December 31, 1995. The
increase in occupancy and equipment expenses reflected the expansion of the
Company's headquarters office space and its regional operations since December
31, 1995. The Company expects its occupancy expenses to continue to increase as
the Company expands its headquarters facility to accommodate the expansion of
the Company's operations.
Income Taxes. For the year ended December 31, 1996, the effective tax rate
was 42%, compared to 5.7% for the year ended December 31, 1995. The low
effective tax rate for the year ended December 31, 1995, was due to the reversal
of the valuation allowance on gross deferred tax assets of $1.4 million during
the year ended.
The Year Ended December 31, 1995, Compared to the Six-Month Transition Period
Ended December 31, 1994, and the Period from July 15, 1993 (inception), through
June 30, 1994
At the inception of the Company on July 15, 1993, the Company adopted a
fiscal year end of June 30. The Company's initial fiscal year ended June 30,
1994 (the "Initial Fiscal Year"). On January 23, 1996, the Company elected to
change its fiscal year end to December 31, with the change effective as of
January 1, 1995. The purpose of this change was to conform the Company's fiscal
year to the fiscal year adopted by its primary competitors. As a result of the
change in fiscal year end, the transition period from July 1, 1994, through
December 31, 1994, (the "Transition Period") constitutes an audited period.
Neither the actual results of the Transition Period nor the annualized results
of the Transition Period are indicative of the results that would have been
achieved in a 12-month fiscal year.
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The Company reported net income of $3.5 million during the year ended
December 31, 1995, compared to net losses of $992,000 for the Transition Period
and $2.6 million for the Initial Fiscal Year. The Company's purchasing and
servicing operations expanded significantly during the year ended December 31,
1995, compared to the Transition Period and the Initial Fiscal Year. During the
year ended December 31, 1995, the Company sold $101 million of Contracts in
asset-backed securities and recognized an $8.1 million gain on the sale of such
Contracts. The Company did not sell Contracts during the Transition Period or
the Initial Fiscal Year.
Net Interest Income. The Company generated approximately $3.3 million of
net interest income during the year ended December 31, 1995, compared to $2.2
million in the Transition Period and $606,000 in the Initial Fiscal Year. The
principal source of the Company's net interest income was the net yield on
Contracts, which amounted to $2.9 million during the year ended December 31,
1995 compared to $2.2 million during the Transition Period and $557,000 during
the Initial Fiscal Year.
During the year ended December 31, 1995, the Company recognized interest
income of $114,000 from discount amortization, compared to $424,000 during the
Transition Period and $96,000 during the Initial Fiscal Year. As of January 1,
1995, the Company deemed all of its Contracts to be held-for-sale, except
Contracts which were 31 or more days delinquent. Thereafter, the Company
discontinued the amortization of the purchase discounts, except in the case of
Contract payoffs.
In addition, during the year ended December 31, 1995, the Company earned
interest income of $927,000 on asset-backed securities and cash balances held in
restricted accounts, and paid interest of $490,000 on other borrowings.
Contract Loss Provision. The Company recorded a provision for Contract
losses of $674,000 for the year ended December 31, 1995, compared to $902,000
for the Transition Period and $592,000 for the Initial Fiscal Year. The
allowance for Contract losses is maintained at a level deemed by management to
be adequate to provide for losses in the held-for-investment portfolio.
Servicing Revenues. The Company recorded $1.8 million of servicing and
ancillary fees during the year ended December 31, 1995, compared to $28,000 for
the Transition Period and $7,000 for the Initial Fiscal Year. The substantial
increase in servicing revenues in the year ended December 31, 1995, arose from
eight months of servicing on the 1995-A Transaction and four months of servicing
on the 1995-B Transaction. Since the Company had not yet sold any Contracts in
asset-backed securities in the Transition Period or the Initial Fiscal Year, the
Company's servicing revenues were limited to ancillary fees during those
periods.
Gain on the Sale of Contracts. The Company recognized a gain on sale of
$8.1 million in the year ended December 31, 1995, representing 8.0% of the
principal amount of $101 million in Contracts sold in connection with
asset-backed securitizations. There were no securitization transactions in the
Transition Period or in the Initial Fiscal Year.
Litigation Settlement Income. During the Transition Period, the Company
received a payment of $325,000 in connection with the settlement of litigation.
Management does not expect this source of income to be recurring.
Operating Expenses. The Company reported operating expenses of $8.8 million
during the year ended December 31, 1995, compared to $2.6 million for the
Transition Period and $2.6 million for the Initial Fiscal Year. The increase in
expenses reflected the growth in the amount of Contracts purchased and serviced
by the Company. The operating expense ratio improved to 10.7% for the year ended
December 31, 1995, from 16.4% for the Transition Period and 82.6% for the
Initial Fiscal Year.
Personnel expenses for the year ended December 31, 1995, were $5.3 million,
compared to $1.7 million for the Transition Period and $1.9 million for the
Initial Fiscal Year. The increase in personnel expenses reflected the growth of
the Company's full-time employees from 64 as of June 30, 1994, to 82 as of
December 31, 1994, and 139 as of December 31, 1995.
The Company's general and administrative expenses increased to $2.4 million
for the year ended December 31, 1995, from $701,000 for the Transition Period
and $493,000 for the Initial Fiscal Year. These
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expenses consisted primarily of telecommunications expenses, travel expenses,
marketing expenses, professional fees, insurance expenses, credit bureau
expenses and management information systems expenses. The increase in general
and administrative expenses reflected the substantial growth of the Company.
Servicing expenses increased to $408,000 for the year ended December 31,
1995, as compared to $56,000 for the Transition Period. The increase in
servicing expenses is due to the substantial growth of the portfolio of owned
and sold Contracts. Due to the low collection and repossession activity
experienced by the Company during the Initial Fiscal Year, the Company incurred
no servicing expenses during that period.
Occupancy and equipment expenses increased to $372,000 for the year ended
December 31, 1995, from $101,000 for the Transition Period and $101,000 for the
Initial Fiscal Year. The increase in occupancy and equipment expenses reflected
the expansion of the corporate headquarters office space and its regional
operations since December 1994.
Income Taxes. For the year ended December 31, 1995, representing the
Company's first year of earnings, the effective tax rate was 5.7% compared to
zero for the Transition Period and the Initial Fiscal Year. This low effective
tax rate for the year ended December 31, 1995, was due to the reversal of the
valuation allowance on gross deferred tax assets of $1.4 million during the
year.
CREDIT PERFORMANCE
The tables below provide the Company's historic delinquency experience and
net charge-off experience with respect to its entire Contract portfolio, which
includes Contracts owned by the Company and Contracts sold in asset-backed
securities, at the dates, and for the periods, indicated. All amounts and
percentages are based on the full amount remaining to be repaid on each
Contract, net of any unearned finance charges.
<TABLE>
<CAPTION>
DELINQUENCY EXPERIENCE
---------------------------------------------------------------------------
JUNE 30, MAR. 31, DEC. 31, SEPT. 30, JUNE 30, MAR. 31, DEC. 31,
1997 1997 1996 1996 1996 1996 1995
-------- -------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Gross Servicing Portfolio(000s)......... $395,695 $303,986 $251,751 $209,761 $172,562 $139,969 $117,539
Period of Delinquencies(000s)(1):
31-60 Days............................ 12,636 8,149 8,323 6,234 4,827 2,256 3,217
61-90 Days............................ 4,217 2,957 2,847 1,832 1,347 1,010 1,171
91 Days or more....................... 1,787 1,512 1,516 1,088 662 561 608
-------- -------- -------- -------- -------- -------- --------
Total Delinquencies(000s)............... $ 18,640 $ 12,618 $ 12,686 $ 9,154 $ 6,836 $ 3,827 $ 4,996
======== ======== ======== ======== ======== ======== ========
Total Delinquencies as a Percentage of
Servicing Portfolio................... 4.71% 4.15% 5.04% 4.36% 3.96% 2.73% 4.25%
Amount in Repossession(000s)(2)......... $ 3,080 $ 2,454 $ 2,216 $ 1,685 $ 1,369 $ 1,130 $ 861
Amount in Repossession as a Percentage
of Servicing Portfolio................ 0.78% 0.81% 0.88% 0.80% 0.79% 0.81% 0.73%
Payment Extensions of 30 days or more
Granted as a Percentage of Servicing
Portfolio(1).......................... 1.43 1.69 1.45 1.56 1.56 1.74 1.53
</TABLE>
<TABLE>
<CAPTION>
NET CHARGE-OFF EXPERIENCE
FOR THE THREE-MONTH PERIOD ENDED
---------------------------------------------------------------------------
JUNE 30, MAR. 31, DEC. 31, SEPT. 30, JUNE 30, MAR. 31, DEC. 31,
1997 1997 1996 1996 1996 1996 1995
-------- -------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Average Servicing Portfolio
Outstanding(000s)(3).................. $350,132 $274,507 $232,617 $191,162 $156,266 $128,754 $108,784
Net Charge-offs(000s)(4)(5)............. 4,082 3,543 2,945 2,227 1,329 1,417 1,233
Annualized Net Charge-offs as a
Percentage of Average Servicing
Portfolio............................. 4.66% 5.16% 5.06% 4.66% 3.40% 4.40% 4.53%
</TABLE>
- ------------------------
(1) The Company considers a Contract delinquent when an obligor fails to make at
least 90% of a contractual payment by the stated due date. The period of
delinquency is based upon the number of days payments are contractually past
due. Contracts not yet 31 days past due are not considered to be delinquent.
The Company does not consider delinquent payment extensions which are not
yet 31 days past the extended date.
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(2) Amount in repossession represents the outstanding principal on Contracts for
which vehicles have been repossessed, but not yet liquidated.
(3) After December 31, 1996, the average servicing portfolio is calculated as of
the beginning and the end of each month during the period. For the prior
periods, the average servicing portfolio is calculated as of the beginning
and the end of the period presented.
(4) Charge-off amounts exclude the effect of accrued interest, discounts paid by
the dealers and potential recoveries from legal proceedings against
borrowers.
(5) Net charge-offs are net of recoveries and include the remaining Contract
balance at time of charge-off. In the case of repossession, net charge-offs
include the remaining Contract balance at the time of repossession less
liquidation proceeds (for disposed vehicles), NADA wholesale value (for
vehicles repossessed but not sold) or claims receivable under the Company's
VSI insurance. Net charge-offs do not include repossessions that are less
than 120 days delinquent and are not yet charged-off.
The management of the Company believes that the payment practices of its
borrowers are partially a function of the time of year. Since these borrowers
typically have low disposable incomes, they tend with more frequency to become
late in payments on their Contracts during the fall and early winter months,
when the holiday season generates competing demands for their limited disposable
income and when these borrowers encounter weather-related work slow-downs. As a
result, if all other factors are equal, management expects delinquencies to be
highest in the fourth calendar quarter. Due to the 60-120 day lag between
initial delinquency and charge-off, management expects these seasonal factors to
cause charge-offs to be highest in the fourth and first calendar quarters. The
increase in charge-offs and delinquencies during the three-month periods ended
June 30, 1997 and March 31, 1997, as compared to the prior year three-month
periods is primarily due to the seasoning of the total Contract portfolio.
Additionally, higher repossession rates and a weaker auction market for
repossessed vehicles contributed to a higher net loss rate during the
three-month period ended June 30, 1997 as compared to the same period in the
previous year.
Since January 1, 1995, the Company has maintained, at its own expense, VSI
insurance that protects the Company's interest in the collateral against
uninsured physical damage (including total loss). For the periods presented
above, the Company's recoveries on its VSI insurance reduced its net charge-offs
(including Contracts owned and serviced for others) by $2.1 million and the
total premiums paid by the Company were $1.6 million. Commencing January 1,
1997, the Company's VSI insurance no longer covers losses due to skips.
Historically, most skips have been located either by the Company or by the VSI
insurance provider, and the Company believes that it can internally manage skips
more efficiently. Proceeds collected in connection with skips were approximately
$330,000 in aggregate for the periods in the table above in which the VSI policy
covered skips. The average net loss rate for periods in which the VSI policy
covered skips for those same periods was 4.5%, annually. Had the VSI policy not
covered skips, the average net loss rate would have been 4.6% annually for those
same periods.
ALLOWANCE FOR CONTRACT LOSSES
The Company maintains an allowance for losses on Contracts that are
held-for-investment. The Company determines an allowance for Contract losses
based on an estimate of the losses inherent in the held-for-investment
portfolio, including estimates of the frequency of defaults for various
delinquency ranges and the expected average severity of losses on these
defaults. As of June 30, 1997, and December 31, 1996, in addition to delinquent
Contracts, Contracts held-for-investment included Contracts pledged as
additional credit enhancement in connection with the 1996-D Transaction (the
"Spread Receivables"). The allowance for Contract losses as of June 30, 1997,
was $413,000, or 15% of the total Contracts held-for-investment as compared to
$565,000 or 14% of total contracts held-for-investment at December 31, 1996. As
of December 31, 1995, the allowance for Contract losses was $477,000, or 46% of
the total Contracts held-for-investment, which consisted entirely of delinquent
Contracts.
In connection with the valuation of the ESRs, the Company projects losses
in the pool of Contracts which effectively represents the estimated undiscounted
recourse loss allowance contained within the valuation of the ESRs. Beginning
January 1, 1997, the Company adopted SFAS No. 125 and began marking its ESRs to
fair value each quarter. The estimated undiscounted recourse loss allowance
embedded in the ESRs (excluding
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accrued interest) was $31.6 million at June 30, 1997, compared to $19.2 million
and $7.1 million at December 31, 1996 and 1995, respectively.
The combined allowance for losses on Contracts held-for-investment and the
recourse loss allowance embedded in the ESRs was 8.1% of the Contracts owned and
serviced for others as of June 30, 1997, as compared to 7.9% and 6.4% at
December 31, 1996 and 1995, respectively.
FINANCIAL CONDITION AND LIQUIDITY
The Company's financing needs are primarily driven by three factors. First,
the Company requires working capital to fund its operating expenses, interest on
its indebtedness and income taxes, because the net interest income earned on the
Contracts owned by the Company and interest and excess servicing cash flows on
Subordinated Securities and ESRs owned by the Company are or have been
restricted and are not available for general operating purposes. Second, as of
March 27, 1997, the Company also requires cash to fund a portion of the
Contracts purchased, since the CP Facility does not cover 100% of a Contract
purchase price. Third, the securitization program is capital intensive as the
Company must fund credit enhancement and securitization expenses. The Company
expects to have an ongoing need for cash to support operations, Contract
purchases and the securitization program. Other than cash received from fees
generated from servicing Contracts owned or serviced for others, ACC relies on
intercompany loans from its subsidiaries to fund operating expenses and to
service ACC's indebtedness. These intercompany loans are eliminated during
consolidation of the financial statements of the Company.
Prior to March 31, 1997, the Company financed its acquisition of Contracts
primarily through the Repurchase Facility, which financed 100% of the purchase
price of eligible Contracts. In January 1997, the Company entered into an
agreement with Cargill granting the Company the option to extinguish the
Repurchase Facility at any time through May 31, 1997. In exchange for the
option, the Company issued to Cargill 174,500 shares of unregistered Common
Stock. The Company exercised this option and extinguished the Repurchase
Facility on March 31, 1997 and recognized a $1.0 million extraordinary loss, net
of tax.
On March 27, 1997, the Company entered into the CP Facility. The lenders
are a commercial paper conduit and CSFB, and the borrower is ACC Liquidity. The
CP Facility is secured by Contracts pledged by ACC Liquidity (purchased in a
true sale from OFL-A or ACC) and is guaranteed by FSA. The CP Facility bears
interest at the weighted average of the commercial paper issued by the conduit
plus commissions and expenses, repriced daily, unless the lenders, in their sole
discretion, determine in good faith that the commercial paper rate is
unavailable or not desirable and apply a bank rate. The interest rate on the CP
Facility was 5.7% as of June 30, 1997. Under the CP Facility, the Company is
obligated to secure an additional warehouse facility from another lender, with a
minimum line of credit of $50 million.
Advances under the CP Facility are limited to the borrowing base. The
borrowing base is calculated under a formula that takes into account, among
other factors, the principal balance of the Contracts pledged under the
facility, the current interest rate for United States Treasury securities with a
21-month remaining term or the one-month LIBOR, whichever is greater, and the
weighted average coupon rate of the Contracts pledged under the CP Facility. The
borrowing base cannot exceed 93% of the principal balance of eligible Contracts.
As of June 30, 1997, $32.9 million of advances were outstanding and the advance
rate was 91.7% of eligible Contracts, including a 1% liquidity cash reserve. If
Treasury rates or LIBOR rises or the weighted average coupon of Contracts being
purchased by the Company declines, then the advance rate will decline if all
other factors remain the same. A decrease in advance rates will increase the
Company's capital requirements for the facility and adversely affect its
liquidity.
Historically, the Company has operated on a negative cash flow basis and,
depending upon the Company's growth of Contract purchase volumes and its
Contract securitization program, its negative cash flow may continue into the
foreseeable future. The Company has funded its negative operating cash flows
principally through borrowings under the NIM Facility (and the bridge facility
retired by the NIM Facility), and proceeds from the issuance of the Notes and
equity securities. Additionally, the Company has sold the Subordinated
Securities created in connection with the 1997-A and 1997-B Transactions which
generated $10.5 million in cash during the six-month period ended June 30, 1997.
The Company may continue this practice in future transactions, but there is no
assurance that there will be a liquid market for such
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<PAGE> 71
Subordinated Securities. During the six-month period ended June 30, 1997, the
Company also reduced its current cash requirements by changing the structure of
its asset securitization transactions to a structure that permits deferral of
income taxes on the gain on sale. In all prior securitization transactions, the
gain on sale has resulted in a cash tax obligation in the current period. As of
June 30, 1997, there were no advances outstanding on the NIM Facility and the
NIM Facility had a borrowing base of $10 million based upon collateral available
to be pledged. If the Company continues to sell the Subordinated Securities in
connection with future securitization transactions, the Company's available
borrowing base under the NIM Facility, which is based upon the NIM Facility's
valuation of Subordinated Securities and ESRs pledged as collateral, may decline
to less than $10 million.
In order to execute its business strategy, the Company is dependent upon
its warehouse facility, its asset securitization program and its ongoing ability
to access capital markets to obtain long term debt and equity capital. Factors
that affect the Company's access to capital markets and sources of financing,
and the cost of capital, include, among others, interest rates, general economic
conditions, the performance of the Company's competitors, the performance of the
Company's asset securitizations, and the Company's results of operations,
financial condition, business prospects (including competitive conditions) and
leverage. In addition, covenants in the indenture for the Notes and in
outstanding and future debt securities and financing facilities may
significantly restrict the Company's ability to incur additional indebtedness or
issue new equity securities.
The Company anticipates that the funds available under the CP Facility, the
additional facility and the NIM Facility, proceeds from the sale of Subordinated
Securities and cash flows from ESRs, will be sufficient to satisfy the Company's
estimated cash requirements for at least the next 12 months. If these funds are
not available for any reason or if the Company's cash requirements increase, the
Company may be required to seek additional funding. The Company also may sell
additional equity and or debt securities to improve its cash position or fund
increased growth in Contract purchases.
Prior to March 27, 1997, cash generated from payments received on Contracts
financed under the warehouse facility were used to reduce indebtedness under, or
was deposited into restricted accounts as additional collateral for, the
warehouse facility. Since March 27, 1997 through June 30, 1997, approximately
$2.5 million of payments received on Contracts financed under the warehouse
facility were distributed, or approved for distribution, to the Company.
Proceeds from the securitization of Contracts were also used by the Company to
reduce indebtedness under the warehouse facility. Following each of the asset
securitization transactions, excess servicing cash flows were deposited into
restricted accounts to build credit enhancement cash reserves. Once the amounts
in these credit enhancements reach required levels, any additional excess
servicing revenues are distributed to the Company. Under normal circumstances,
for securitization transactions executed without the sale of Subordinated
Securities, the Company expects to reach required credit enhancement levels
eight to twelve months following the effective date of the securitizations. For
securitizations involving the sale of Subordinated Securities, the Company
expects to reach required credit enhancement levels 18 to 24 months after the
effective date, as all excess distributions from the credit enhancement cash
reserves will be used initially to pay down the Subordinated Securities.
However, there is no assurance that this expectation will be met and the
occurrence of any triggering event would delay release of excess cash by
increasing credit enhancement cash reserve requirements on those transactions.
During the six-month period ended June 30, 1997, $3.9 million was distributed,
or was approved for distribution, to the Company from the credit enhancement
cash reserves.
During the six-month period ended June 30, 1997, the Company successfully
renegotiated the net loss, default and delinquency trigger levels for its
outstanding securitization transactions and increased the required credit
enhancement levels from 7% to 8% of the outstanding Contracts. As of June 30,
1997, the net loss, default and delinquency levels of the various securitized
Contract pools were below the renegotiated trigger levels.
During the six-month period ended June 30, 1997, the Company used net cash
from operations of $21.9 million, compared to $4.4 million during the six-month
period ended June 30, 1996. This increase in cash used by operating activities
is primarily due to an increase in Contracts held-for-sale and a net increase in
net cash deposited into restricted accounts.
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During the year ended December 31, 1996, the Company used net cash from
operations of $8.8 million, compared to net cash provided by operations of
$771,000 during the year ended December 31, 1995. The decrease in cash provided
by operations was primarily due to a net decrease in cash from the acquisition
and sale of Contracts held-for-sale of $8.4 million. The Company owned Contracts
of $26 million as of December 31, 1996, compared to $31 million as of December
31, 1995. The Company sold $191 million of Contracts and acquired $194 million
of Contracts in the year ended December 31, 1996, compared to the sale of $101
million of Contracts and the acquisition of $99 million of Contracts in the year
ended December 31, 1995. Additionally, the Company deposited $4.8 million into
restricted cash accounts and credit enhancement cash reserves during the year
ended December 31, 1996, as compared to $3.2 million during 1995. The net cash
used by operation in the Transition Period and the Initial Fiscal Year was $1.7
million and $3.4 million, respectively. The increase in net cash provided by
operations in the year ended December 31, 1995, as compared to the Transition
Period and the Initial Fiscal Year was primarily due to the income associated
with the sale and servicing of Contracts in the 1995-A Transaction and 1995-B
Transaction. Prior to 1995 the Company's sole source of servicing income was
ancillary fees and, as the Company had made no loan sales, there was no excess
servicing income.
The net cash provided by investing activities was $84,000 during the
six-month period ended June 30, 1997, compared to $1.6 million in the six-month
period ended June 30, 1996. This decrease in cash provided was primarily due to
an increase in Contracts held-for-investment and a reduction in proceeds from
liquidation of repossessed automobiles partially offset by an increase in
principal collections on asset-backed securities.
The net cash provided by investing activities was $2.6 million during the
year ended December 31, 1996, compared to net cash used of $808,000 in the year
ended December 31, 1995. This increase in cash provided was primarily due to
income associated with a larger portfolio of asset-backed securities, as well as
a smaller balance of Contracts held-for-investment during the year ended
December 31, 1996, as compared to the year ended December 31, 1995. The cash
used in investing activities was $24.3 million and $16.1 million during the
Transition Period and the Initial Fiscal Year, respectively. The decrease in
cash used by investing activities during the year ending December 31, 1995,
compared to the Transition Period and the Initial Fiscal Year, was the result of
the classification of the Contracts to a held-for-sale status during the quarter
ended March 31, 1995.
The net cash provided by financing activities for the six-month period
ended June 30, 1997 was $22.8 million, $21.4 million of which was generated
through the warehouse facility (including the Repurchase Facility which was
extinguished during March 1997). The net cash provided by financing activities
for the six-month period ended June 30, 1996, was $2.7 million. The Company
raised over $13.5 million in common and preferred stock issuances during the
six-month period ended June 30, 1996. These proceeds were used to reduce
advances under the warehouse facility resulting in a net decrease in the
warehouse facility balance of $6.2 million and to pay down the NIM Facility
balance resulting in a net decrease of $5.1 million.
The net cash provided by financing activities was $7.1 million for the year
ended December 31, 1996, compared to net cash provided of $14,000 during the
year ended December 31, 1995. Increases in cash provided by financing activities
were primarily the result of the following 1996 transactions: $12.5 million
raised in the Company's initial public equity offering, $19.0 million raised in
the Company's Notes offering and $1.0 million from the issuance of redeemable
Preferred stock. Significantly offsetting these increases were increases in
total amounts paid to reduce the warehouse facility and NIM Facility (included
in other borrowings on the consolidated balance sheets) in the year ended
December 31, 1996, compared to the year ended December 31, 1995. The company
used net cash to reduce the total outstanding balance of these facilities of
$26.4 million in 1996, compared to $3.5 million in 1995. The net cash provided
by financing activities for the Transition Period and the Initial Fiscal Year
was $26.2 million and $19.6 million, respectively, essentially all of which was
due to increases in the warehouse facility. The Company does not anticipate the
need for significant capital expenditures in connection with its new corporate
headquarters facility (due to the inclusion of tenant improvements in base rent)
or in connection with its management information systems in the next 12 months.
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<PAGE> 73
RECENT DEVELOPMENTS
During August 1997, the Company completed the sale of $115 million of
asset-backed securities in the 1997-C Transaction, including $60 million in a
prefunding account for delivery of Contracts before November 1997. This
transaction included the sale of the Subordinated Securities.
INTEREST RATE RISK MANAGEMENT
The Company maintains an ongoing hedging program for the purpose of
mitigating the potential impact of changing interest rates on the gain on the
sale of Contracts. The hedging strategy is implemented through the Forward sale
of two-year Treasury notes or futures contracts on two-year Treasury
instruments. Gains and losses on the hedging program are recorded as an
adjustment to the accounting basis of the Contracts until such time that the
Contracts are sold. At the time of sale, the unrealized gains or losses are
recognized as an adjustment to the gain on the sale of the Contracts.
The market value of these futures contracts responds inversely to changes
in the value of the Contracts. The Company recognized net losses on the hedging
program of $36,000 during the six-month period ended June 30, 1997, as compared
to net gains of $20,000 during the six-month period ended June 30, 1996. As of
June 30, 1997, the Company had unrealized losses under the hedging program of
$30,000. The Company recognized net gains on the hedging program of $206,000
during the year ended December 31, 1996, as compared to net losses of $927,000
during the year ended December 31, 1995. As of December 31, 1996, and December
31, 1995, the Company had unrealized losses under the hedging program of $30,000
and $225,000, respectively.
The Company began actively using the hedging program in January 1995 and
the extent to which the Contracts held by the Company are hedged has varied and
will continue to vary from time to time, depending upon prevailing interest
rates and other economic factors. The Company may choose not to maintain the
hedging program based on management's assessment of interest rate risk and the
costs associated with the hedging program. As of June 30, 1997, the Company
owned $37.2 million of Contracts (excluding approximately $2.6 million of
performing Contracts pledged as credit enhancements and $4.9 million of
Contracts set aside in connection with the 1997-B Transaction) and maintained a
$35 million hedge position. As of December 31, 1996, the Company owned $23.1
million of Contracts (excluding approximately $3.0 million of performing
Contracts pledged as credit enhancements) and maintained a $15 million hedge
position. As of June 30, 1997 and December 31, 1996, the Company's hedge
position consisted of futures contracts on two-year Treasury instruments.
The Securities and Exchange Commission has approved rule amendments to
clarify and expand existing disclosure requirements for derivative financial
instruments. The amendments require enhanced disclosure of accounting policies
for derivative financial instruments in the footnotes to the consolidated
financial statements. In addition, the amendments expand existing disclosure
requirements to include quantitative and qualitative information about market
risk inherent in market risk sensitive instruments. The required quantitative
and qualitative information should be disclosed outside the consolidated
financial statements and related notes thereto. The enhanced accounting policy
disclosure requirements are effective for the three-month period ended June 30,
1997. As the Company believes that the derivative financial instrument
disclosure contained within the notes to the consolidated financial statements
for its fiscal year ended December 31, 1996 Annual Report filed on Form 10-K
substantially conforms with the accounting policy requirements of these
amendments, no further interim period disclosure has been provided.
CURRENT ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities". This statement specifies when financial assets
and liabilities are to be removed from an entity's financial statements, the
accounting for servicing assets and liabilities and the accounting for assets
that can be contractually prepaid in such a way that the holder would not
recover substantially all of its recorded investment. Interest-only strips and
retained interests are to be recorded at fair value. Changes in fair value are
included in operations, if classified as
71
<PAGE> 74
trading securities, or in shareholders' equity as unrealized holding gains or
losses, net of the related tax effect, if classified as available-for-sale.
Beginning January 1, 1997, the Company adopted SFAS No. 125 and recorded its
ESRs at fair value. An adjustment to the ESRs carrying value of $1.2 million was
included in the shareholders' equity as unrealized gains, net of tax.
In February 1997, the FASB issued Statement of Accounting Standards No.
128, "Earnings per Share" ("SFAS No. 128"). SFAS No. 128 simplifies the
standards for computing and presenting earnings per share ("EPS") as previously
prescribed by Accounting Principles Board Opinion No. 15, "Earnings per Share".
SFAS No. 128 replaces primary EPS with basic EPS and fully diluted EPS with
diluted EPS. Basic EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other outstanding contracts to issue common stock
were exercised or converted into common stock or resulted from issuance of
common stock that then shared in earnings. SFAS No. 128 also requires dual
presentation of basic and diluted EPS on the face of the statement of operations
and a reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS computation.
SFAS No. 128 is effective for financial statements issued for periods ending
after December 15, 1997, and earlier application is not permitted.
In June 1997, the FASB issued Statement of Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general-purpose
financial statements. SFAS No. 130 requires that all items that are required to
be recognized under accounting standards as components of comprehensive income
be reported in a financial statement that is displayed with the same prominence
as other financial statements. SFAS No. 130 does not require a specific format
for that financial statement but requires that an enterprise display an amount
representing total comprehensive income for the period in that financial
statement. SFAS No. 130 also requires that an enterprise (a) classify items of
other comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of a
statement of financial position. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997. Reclassification of financial statements for
earlier periods provided for comparative purposes is required.
MANAGEMENT OF THE COMPANY
EXECUTIVE OFFICERS
The information set forth below describes the executive officers of the
Company as of August 31, 1997 and who are expected to be appointed as executive
officers of the Company following the Effective Time.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Rocco J. Fabiano.......................... 41 Chairman of the Board, Chief Executive Officer
Gary S. Burdick........................... 41 President
Rellen M. Stewart......................... 44 Chief Operating Officer, Chief Financial Officer,
Treasurer
</TABLE>
ROCCO J. FABIANO, CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER. Mr.
Fabiano is a Founder of ACC and is the Chairman of the Board and Chief Executive
Officer. In 1991, Mr. Fabiano co-founded Consumer Portfolio Services, Inc. and
acted as a consultant to that company until December 1992, at which time he
began work on the formation of ACC. He also has been the Chairman of the Board
of Far Western Bank, an Executive Vice President of Imperial Corporation of
America, Chief Operating Officer of Ameristar Mortgage Corporation and Senior
Consultant for KPMG Peat Marwick LLP. Mr. Fabiano holds a BS in Genetics and an
MS in Protein Chemistry from Colorado State University and an MBA in Finance
from Cornell University.
72
<PAGE> 75
GARY S. BURDICK, PRESIDENT. Mr. Burdick is a Founder of ACC and has been
the President since September 1995. Mr. Burdick was Chairman of the Board and
Chief Executive Officer of ACC from July 1993 to September 1995. Mr. Burdick
worked from January through June of 1993 as an advisor to the Ministry of
Privatization for the Czech Republic in Prague as part of a United States State
Department Aid to Developing Nations program. From May 1991 to December 1992,
Mr. Burdick was an independent consultant and contributed time to Rebuild LA.
Mr. Burdick was a Director of Prudential Securities from 1989 to April 1991. He
also has specialized in mortgage finance and asset securitizations as a Vice
President of Goldman Sachs and a Vice President of Lehman Brothers. Mr. Burdick
holds a BA in Economics and a BS in Environmental Studies from the University of
California at Santa Barbara.
RELLEN M. STEWART, CHIEF OPERATING OFFICER, CHIEF FINANCIAL OFFICER AND
TREASURER. Mr. Stewart is a Founder of ACC and has been the Chief Operating
Officer and Chief Financial Officer of ACC since July 1993. Mr. Stewart was also
President of ACC from July 1993 to September 1995. From 1988 to July 1993, Mr.
Stewart was an Executive Vice President of EurekaBank. From 1977 to 1988, Mr.
Stewart was employed by KPMG Peat Marwick LLP becoming a Partner in 1984 and
later becoming the firm's National Practice Director for consulting to the
mortgage industry. He also has been a Financial Analyst for Wells Fargo Bank.
Mr. Stewart holds a BS in Business Administration and an MBA in Finance from the
University of California at Berkeley.
EXECUTIVE COMPENSATION
The following table shows, for the Company's 1995 and 1996 fiscal years,
the cash compensation paid by the Company as well as all other compensation paid
or accrued for those years to Messrs. Fabiano, Stewart and Burdick.
<TABLE>
<CAPTION>
ANNUAL LONG TERM
COMPENSATION(1) COMPENSATION
YEAR ENDED -------------------- STOCK OPTION
DEC. 31 SALARY BONUS SHARE AWARDS
---------- ------ ----- ------------
<S> <C> <C> <C> <C>
Rocco J. Fabiano................................. 1996 $195,000 $174,887 23,092
Chairman of the Board and Chief Executive 1995 217,233 90,000(3) 30,000
Officer (2)
Gary S. Burdick.................................. 1996 $195,000 $174,887 21,896
President (2) 1995 183,900 90,000(3) 30,000
Rellen M. Stewart................................ 1996 $195,000 $174,887 16,000
Chief Operating Officer, Chief Financial 1995 183,900 90,000(3) 30,000
Officer and Treasurer(2)
</TABLE>
- -------------------------
(1) The compensation described in this table does not include medical insurance,
retirement benefits and other benefits received by the foregoing executive
officers that are available generally to all employees of the Company; and
it does not include perquisites and other personal benefits received by the
foregoing executive officers of the Company, the value of which did not
exceed the lesser of $50,000 or 10% of the executive officer's cash
compensation in the table.
(2) Until September 1995, Mr. Fabiano was a consultant to the Company, Mr.
Burdick was Chairman of the Board and Chief Executive Officer and Mr.
Stewart was President, Chief Operating Officer and Chief Financial Officer.
(3) In 1996, the Company changed its fiscal year-end from June 30 until December
31. Prior to the change, the Company accrued bonuses during the fiscal year,
which were paid within 60 days following June 30. The 1995 bonus reflects
the amount of bonus attributable to the six-month period from January 1
through June 30, 1995. Messrs. Fabiano, Burdick and Stewart waived their
right to receive a bonus for the six-month period ended December 31, 1996.
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<PAGE> 76
STOCK OPTION GRANTS TABLE
The following table shows certain information concerning stock options
granted during fiscal year 1996 to Messrs. Fabiano, Stewart and Burdick:
FISCAL YEAR 1996 STOCK OPTION GRANTS
<TABLE>
<CAPTION>
% OF TOTAL POTENTIAL REALIZABLE
OPTIONS VALUE(3)
OPTIONS GRANTED TO EXERCISE EXPIRATION ---------------------
NAME GRANTED(1) EMPLOYEES PRICE(2) DATE @5% @10%
---- ---------- ---------- -------- ---------- --- ----
<S> <C> <C> <C> <C> <C> <C>
Rocco J. Fabiano................... 23,092 27% $6.60 2006 $84,000 $207,000
Gary S. Burdick.................... 21,896 26% $6.60 2006 $80,000 $196,000
Rellen M. Stewart.................. 16,100 19% $6.60 2006 $59,000 $144,000
</TABLE>
- -------------------------
(1) These options were granted pursuant to the Company's 1995 Stock Option Plan
on January 23, 1996. The options granted to Messrs. Fabiano, Burdick and
Stewart covered 1,004 shares, 952 shares and 700 shares respectively, with
an exercise price of $151.80 per share, vesting at the rate of 25% per year
on each anniversary date of the grant. The number of shares and the exercise
price shown above have been adjusted to reflect a 23-for-1 stock split of
Company Common Stock which occurred subsequent to the stock option grants
but prior to the offering of the Company Common Stock to the public in May
1996.
(2) The exercise price may be paid in cash or, at the discretion of the
Company's Compensation Committee, by tendering shares of Company Common
Stock, or the delivery of an irrevocable direction to a securities broker to
sell shares and deliver the sales proceeds to the Company in payment of all
or part of the exercise price, instead of cash.
(3) The potential realizable value is calculated pursuant to Commission
regulations by assuming the indicated annual rates of stock price
appreciation for the option term. Actual realized value will depend on the
actual annual rate of stock price appreciation for the option term.
AGGREGATED STOCK OPTION EXERCISES AND FISCAL YEAR-END STOCK OPTION VALUE TABLE
The following table sets forth certain information regarding the number and
value of specified unexercised options held by Messrs. Fabiano, Stewart and
Burdick as of December 31, 1996:
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
------------------------------ ---------------------------
EXERCISABLE UNEXERCISABLE(1) EXERCISABLE UNEXERCISABLE
----------- ---------------- ----------- -------------
<S> <C> <C> <C> <C>
Rocco J. Fabiano............................. 7,500(2) 22,500 $13,125 $39,375
5,773(3) 17,319 13,855 41,566
Gary S. Burdick.............................. 7,500(2) 22,500 13,125 39,375
5,474(3) 16,422 13,138 39,413
Rellen M. Stewart............................ 7,500(2) 22,500 13,125 39,375
4,025(3) 12,075 9,660 28,980
</TABLE>
- -------------------------
(1) The value of the Exercisable and Unexercisable In-The-Money Options is based
upon the closing price of Company Common Stock on the Nasdaq National Market
on March 5, 1997.
(2) Reflects options to purchase Company Common Stock at an exercise price of
$7.25 per share granted pursuant to the 1995 Stock Option Plan.
(3) Reflects options to purchase Company Common Stock at an exercise price of
$6.60 per share granted pursuant to the 1995 Stock Option Plan.
FABIANO, BURDICK AND STEWART EMPLOYMENT AGREEMENTS
Messrs. Fabiano, Burdick and Stewart are employed under separate employment
agreements, each of which expires on December 31, 1998. If the Company
terminates any employment agreement without cause
74
<PAGE> 77
or if Mr. Fabiano, Mr. Burdick or Mr. Stewart terminates his employment for
"good reason" (defined in the agreement as termination following either an
uncured breach by the Company, a reduction in duties, a reduction in
compensation or an involuntary relocation), then the terminated employee is
entitled to severance pay in an amount equal to the greater of the remaining
base salary that would have been payable through the end of the term of the
employment agreement or one-year's base salary, plus a prorated portion of the
bonus he would have otherwise received for the year in which such termination
occurred. During 1996, each of them was paid a base annual salary of $195,000.
Mr. Fabiano's base annual salary was increased to $240,000 under his employment
agreement for 1997 and 1998. Each of them is entitled to an annual bonus of 50%
to 100% of his base salary, based on a straight line sliding scale, if the
Company achieves Return on Average Equity ("ROAE") between 15% and 35%. ROAE is
calculated at the end of each calendar year as the sum of the ending book value
of the Company for each of preceding five quarters divided by five. Each of them
is also entitled to insurance benefits, an automobile allowance of $9,000 per
year and participation in employee benefit plans adopted by the Company for
senior executives. Each of Messrs. Fabiano, Burdick and Stewart has executed an
employment agreement with Household International which become effective as of
the consummation of the Merger. See "The Merger -- Interests of Certain Persons
in the Merger."
FOUNDERS' STOCK
In connection with the founding of the Company, Messrs. Fabiano, Burdick
and Stewart purchased for the then current aggregate fair market value of
$22,000, $22,000 and $16,000, respectively, 506,000, 506,000 and 368,000 shares,
respectively, of Company Common Stock.
1995 STOCK OPTION PLAN
The Company's 1995 stock option plan ("Employee Plan") covers 450,000
shares of Company Common Stock. The Employee Plan permits the grant of incentive
stock options or non-qualified options to any employees of the Company.
Incentive stock options may not have an exercise price of less than the fair
market value of the Company Common Stock on the date of grant, except options
granted to holders of more than 10% of Company Common Stock may not have an
exercise price of less than 110% of the fair market value of the Company Common
Stock on the date of the grant. The Compensation Committee of the Board of
Directors administers the Employee Plan and determines the employees who may
participate, the amount and timing of each option grant and the vesting schedule
for options. Under the Employee Plan, all options must vest at a rate of at
least 25% per year and may not have a term in excess of 10 years. At June 30,
1997, an aggregate 419,838 shares of Company Common Stock were subject to
outstanding options. The options vest over four years from the date of grant at
a rate of 25% per year and expire 10 years from the date of grant.
401(K) PLAN
Effective February 1, 1994, the Company established a tax-deferred savings
plan (the "401(k) Plan") that is intended to qualify under Section 401(a) of the
Internal Revenue Code of 1986, as amended. All full-time employees of the
Company who have attained age 21 and have completed three months of service to
the Company are eligible to participate in the 401(k) Plan. A participant may
elect to contribute a percentage of his or her compensation to the 401(k) Plan
on a pretax basis, subject to statutory limitations. The Company may, in its
sole discretion, make matching contributions. Each participant's individual
account is invested in selected investment alternatives as directed by the
trustees of the 401(k) Plan. The current trustees of the 401(k) Plan are Messrs.
Fabiano, Burdick and Stewart. A participant's 401(k) contributions are fully
vested and non-forfeitable at all times. Matching contributions made by the
Company are subject to divestment provisions until a participant has been
employed by the Company for three years. With certain exceptions, participants
in the 401(k) Plan shall receive benefits in the form of an immediate annuity
for the life of the participant, with a survivor annuity for the life of the
participant's spouse. Under the same matching program available to all
employees, the Company has contributed $1,000 per year to the individual
accounts of each of the Founders.
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<PAGE> 78
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Company's Certificate of Incorporation (the "Certificate") eliminates
the personal liability of directors for monetary damages for breach of fiduciary
duties to the fullest extent permitted by the Delaware General Corporation Law.
The Company's Certificate and Bylaws also provide that the Company shall
indemnify its directors and officers to the fullest extent permitted by the
Delaware General Corporation Law. The Company has entered into indemnification
agreements with each of its directors and certain of its officers providing for
such indemnification and advancement of expenses. The Company also maintains
directors' and officers' liability insurance providing total coverage of $10
million.
PRINCIPAL STOCKHOLDERS OF THE COMPANY
COMMON STOCK
The following table sets forth the number and percentage of shares of
Common Stock owned beneficially as of August 21, 1997: (i) by each person known
to the Company to be the beneficial owner of more than 5% of the outstanding
Common Stock, (ii) each of the Company's directors and (iii) all directors and
executive officers of the Company as a group. Except as noted below, and subject
to applicable community property and similar laws, each shareholder has sole
voting and investment power with respect to the shares shown.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
BENEFICIAL PERCENT OF
NAME OF BENEFICIAL OWNER OWNERSHIP(1) CLASS(2)
------------------------ ------------ ----------
<S> <C> <C>
Strome Offshore Limited(3).................................. 1,637,255 19.3%
Strome Partners, L.P.(3).................................... 1,613,933 19.1%
Cargill Financial Services Corporation(4)................... 1,132,450 13.4%
Rocco J. Fabiano(5)......................................... 650,277 7.7%
Gary S. Burdick(6).......................................... 607,694 7.2%
Rellen M. Stewart(7)........................................ 437,141 5.1%
Ethan J. Falk(8)............................................ 16,500 *
Jack P. Fitzpatrick(9)...................................... 67,615 *
Jeffrey S. Lambert(10)...................................... 15,000 *
Jeffrey E. Susskind(10)..................................... 25,000 *
Directors/Officers as a group (10 persons)(11).............. 1,765,612 20.6%
</TABLE>
- -------------------------
* Less than 1%.
(1) Includes the ownership of the named individual or member of a group of
shares of Common Stock obtainable within 60 days upon the exercise of
options.
(2) Based on 8,485,778 shares of Company Common Stock outstanding as of August
21, 1997. Each beneficial owner's percentage ownership is determined
assuming that shares that may be acquired by such person or group within 60
days following August 21, 1997, have been acquired but that shares
acquirable by other beneficial owners within the same 60 days have not been
acquired.
(3) The address of Strome Partners, L.P., is 100 Wilshire Boulevard, 15th
Floor, Santa Monica, California 90401. The address of Strome Offshore
Limited is c/o Meespierson (Cayman) Ltd., British Amer Centre, POB 2003,
Dr. Roy's Drive Georgetown, Grand Cayman, Cayman Islands. SSIM is the
beneficial owner of such shares. The address of SSIM is 100 Wilshire
Boulevard, 15th Floor, Santa Monica, California 90401.
(4) The stockholder's address is 6000 Clearwater Drive, Minnetonka, Minnesota
55343-9497.
(5) The stockholder's address is the same address as the Company's address. The
shares in the table include 57,615 shares held in the name of the Fabiano
Irrevocable Trust. Mr. Fabiano disclaims beneficial ownership of such
shares. The shares also include vested options to purchase 13,273 shares of
Company
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<PAGE> 79
Common Stock. The balance of the shares in the table are held in the name of the
Fabiano Revocable Trust of March 28, 1991, of which Mr. Fabiano and his wife,
Joan Fabiano, are trustees.
(6) The stockholder's address is the same address as the Company's address. The
shares include vested options to purchase 12,974 shares of Company Common
Stock.
(7) The stockholder's address is the same address as the Company's address. The
shares include vested options to purchase 11,525 shares of Company Common
Stock.
(8) The director holds vested options to purchase 10,000 shares of Company
Common Stock. The director's address is 660 South Figueroa Street, Suite
1600, Los Angeles, California 90017-3474.
(9) The number of shares in the table includes 57,615 shares held in the name
of the Fabiano Irrevocable Trust for which Mr. Fitzpatrick serves as
trustee. Also, the director holds vested options to purchase 10,000 shares
of Company Common Stock. The director's address is 9775 Town Center Drive,
Suite 110, San Diego, California, 92121.
(10) The director holds vested options to purchase 10,000 shares of Company
Common Stock. The director's address is 100 Wilshire Boulevard, 15th Floor,
Santa Monica, California 90401.
(11) The shares include vested options to purchase 81,772 shares of Company
Common Stock.
LEGAL MATTERS
The validity of the shares of HI Stock offered hereby will be passed upon
for Household International by John W. Blenke, Vice President -- Corporate Law
and Assistant Secretary for Household International. Mr. Blenke is a full-time
employee and an officer of Household International and owns and holds options to
purchase shares of HI Stock. Certain legal matters in connection with the Merger
will be passed upon for Household International by Wilmer, Cutler & Pickering,
Washington, D.C.
EXPERTS
The financial statements of Household International and its subsidiaries
incorporated by reference in this Prospectus, to the extent and for the periods
indicated in its reports, have been audited by Arthur Andersen LLP, independent
public accountants, and are incorporated herein by reference in reliance upon
the authority of said firm as experts in giving said reports.
The consolidated financial statements of the Company as of December 31,
1996 and 1995 and for the years ended December 31, 1996 and 1995, the six-month
transition period ended December 31, 1994 and the period from July 15, 1993
(inception) through June 30, 1994, have been included herein and in the
Prospectus, in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing.
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<PAGE> 80
INDEX TO DEFINED TERMS
<TABLE>
<CAPTION>
DEFINED TERM PAGE(S)
------------ -------
<S> <C>
</TABLE>
1992 Preferred.............................................. 39
1993 Preferred.............................................. 39
ACC......................................................... Cover, 5, 44
ACC Funding................................................. 44
ACC Liquidity............................................... 44
Accent...................................................... 44
Affiliates.................................................. 20
Bank........................................................ 37
Bloomberg................................................... Cover, 10, 17
Cargill..................................................... 60
Code........................................................ 12, 29
Commission.................................................. 4
Company..................................................... Cover, 5
Company Common Stock........................................ Cover, 5
Company Common Stockholders................................. 17
Company Stock Options....................................... 18
Contracts................................................... 5
Covenanting Stockholders.................................... 14
CP Facility................................................. 52
CSFB........................................................ 12, 22
DGCL........................................................ 11, 17
Dealers..................................................... 5
Dealer Agreement............................................ 46
Director Stock Options...................................... 18
Effective Time.............................................. 10, 17
Employment Agreements....................................... 18
Exchange Act................................................ 4
Exchange Agent.............................................. 12, 33
Exchange Ratio.............................................. 10, 17
Expiration Date............................................. Cover, 10, 17
FSA......................................................... 52
Founders.................................................... 18
HAC......................................................... Cover, 5
HFC......................................................... 7
HI Stock.................................................... Cover, 5, 39
HI Stock Valuation Period................................... Cover, 10, 17
HRS......................................................... 36
Household International..................................... Cover, 5
I/B/E/S..................................................... 26
Indemnified Party........................................... 20
IRS......................................................... 29
JP Morgan................................................... 22
78
<PAGE> 81
<TABLE>
<CAPTION>
DEFINED TERM PAGE(S)
------------ -------
<S> <C>
Junior Preferred............................................ 39
Letter of Transmittal....................................... 12
Merger...................................................... Cover, 5, 10
Merger Agreement............................................ 5
Merger Consideration........................................ 5, 10, 17
NASDAQ-NMS.................................................. 4
NIM Facility................................................ 53
NYSE........................................................ 4, 15
Non-Prime Borrowers......................................... 5
OFL-A....................................................... 44
Option Exchange Ratio....................................... 18
Overall Gain................................................ 29
Preferred Shares............................................ 39
Preferred Stock............................................. 39
Prospectus.................................................. Cover
Prospectus and Proxy Statement.............................. Cover
RSMs........................................................ 46
Receivables................................................. 44
Record Date................................................. 11, 14
Registration Statement...................................... 4
Reorganization.............................................. 29
Rights...................................................... 41
Rights Agreement............................................ 41
SAR......................................................... 18
SSIM........................................................ 20
Securities Act.............................................. 4
Special Meeting............................................. Cover, 5
Stockholder Agreements...................................... 19
TFS......................................................... 7, 38
Trading Days................................................ 10, 17
VSI......................................................... 51
Weighted Average Stock Price................................ 17
</TABLE>
79
<PAGE> 82
CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY
INDEX TO FINANCIAL STATEMENTS
CONTENTS
<TABLE>
<S> <C>
Audited Consolidated Financial Statements:
Independent Auditors' Report........................... F-2
Consolidated Balance Sheets at December 31, 1996 and
1995.................................................. F-3
Consolidated Statements of Operations for the years
ended December 31, 1996 and 1995, the six-month
transition period ended December 31, 1994 and the
period from July 15, 1993 (Inception) through June 30,
1994.................................................. F-4
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1996 and 1995, the six-month
transition period ended December 31, 1994 and the
period from July 15, 1993 (Inception) through June 30,
1994.................................................. F-5
Consolidated Statements of Cash Flows for the years
ended December 31, 1996 and 1995, the six-month
transition period ended December 31, 1994 and the
period from July 15, 1993 (Inception) through June 30,
1994.................................................. F-6
Notes to Consolidated Financial Statements............. F-8
Unaudited Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheet as of June 30,
1997 (unaudited)...................................... F-27
Condensed Consolidated Statements of Income for the six
months ended June 30, 1997 and June 30, 1996
(unaudited)........................................... F-28
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 1997 and June 30, 1996
(unaudited)........................................... F-29
Notes to Condensed Consolidated Financial Statements
(unaudited)........................................... F-30
</TABLE>
F-1
<PAGE> 83
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
ACC Consumer Finance Corporation:
We have audited the accompanying consolidated balance sheets of ACC
Consumer Finance Corporation and subsidiaries (the Company) as of December 31,
1996 and 1995, and the related consolidated statements of operations,
shareholders' equity and cash flows for the years ended December 31, 1996 and
1995, the six-month transition period ended December 31, 1994 and the period
from July 15, 1993 (inception) through June 30, 1994. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of ACC Consumer
Finance Corporation and subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for the years ended December
31, 1996 and 1995, the six-month transition period ended December 31, 1994 and
the period from July 15, 1993 (inception) through June 30, 1994, in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
San Diego, California
January 26, 1997
F-2
<PAGE> 84
ACC CONSUMER FINANCE CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AT DECEMBER 31, AT DECEMBER 31,
1996 1995
--------------- ---------------
<S> <C> <C>
ASSETS
Cash and Cash Equivalents................................. $ 1,101,598 $ 120,672
Restricted Cash........................................... 1,561,293 1,032,683
Credit Enhancement Cash Reserves.......................... 8,353,180 4,052,524
Installment Contracts Held-for-Sale, Net.................. 21,078,692 28,187,778
Installment Contracts Held-for-Investment, Net............ 3,428,643 509,388
Asset-Backed Securities Held-to-Maturity.................. -- 3,910,080
Asset-Backed Securities Available-for-Sale................ 7,832,174 --
Excess Servicing Receivables.............................. 15,573,618 5,590,878
Accounts Receivable....................................... 3,229,933 1,423,112
Interest Receivable....................................... 324,889 386,673
Fixed Assets, Net......................................... 1,140,525 842,016
Repossessed Vehicles...................................... 297,565 211,619
Prepaid Expenses.......................................... 394,571 427,456
Other Assets.............................................. 316,709 214,059
----------- -----------
Total Assets.......................................... $64,633,390 $46,908,938
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Repurchase Facility, Net.................................. $11,026,130 $29,708,252
Subordinated Notes, Net................................... 19,196,110 --
Other Borrowings.......................................... -- 7,439,597
Amount Due to Bank........................................ 3,070,453 1,537,290
Lease Liability........................................... 332,259 519,486
Tax Liability............................................. 3,305,287 123,909
Accounts Payable and Accrued Liabilities.................. 3,183,435 1,295,604
----------- -----------
Total Liabilities..................................... 40,113,674 40,624,138
Redeemable Preferred Stock:
$.001 Par Value, Authorized 182,282 Shares
Series A: 162,831 Shares Issued and Outstanding at
December 31, 1995
Series B: 11,538 Shares Issued and Outstanding at
December 31, 1995
Series C: No Shares Issued and Outstanding at December
31, 1995
Total Redeemable Preferred Stock............................ -- 6,279,049
Shareholders' Equity:
Preferred Stock, $.001 Par Value, 1,817,718 Shares
authorized
and No Shares Issued and Outstanding...................... -- --
Common Stock, $.001 Par Value, Authorized 18,000,000,
8,292,478 and 2,099,992 Shares Issued and Outstanding as
of December 31, 1996, and 1995,
respectively.............................................. 8,292 2,100
Additional Paid-in Capital.................................. 19,931,825 117,464
Unrealized Gain on Asset-Backed Securities, Net............. 168,175 --
Retained Earnings (Accumulated Deficit)..................... 4,411,424 (113,813)
----------- -----------
Total Shareholders' Equity............................ 24,519,716 5,751
Commitments and Contingencies
Total Liabilities and Shareholders' Equity............ $64,633,390 $46,908,938
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 85
ACC CONSUMER FINANCE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX-MONTH JULY 15, 1993
TRANSITION (INCEPTION)
YEAR ENDED DECEMBER 31, PERIOD ENDED THROUGH
------------------------- DECEMBER 31, JUNE 30,
1996 1995 1994 1994
----------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest Income........................... $ 9,311,087 $ 7,531,690 $ 3,496,763 $ 811,516
Interest Expense.......................... 4,610,963 4,199,336 1,308,920 205,339
----------- ----------- ----------- -----------
Net Interest Income.................. 4,700,124 3,332,354 2,187,843 606,177
CONTRACT LOSSES
Provision for Contract Losses............. 1,113,069 673,802 902,361 592,325
----------- ----------- ----------- -----------
Net Interest Income after Provision for
Contract Losses........................ 3,587,055 2,658,552 1,285,482 13,852
OTHER INCOME
Servicing and Ancillary Fees.............. 4,914,668 1,757,257 28,237 6,653
Litigation Settlement Income.............. -- -- 325,000 --
Gain on Sale of Contracts................. 15,186,889 8,056,136 -- --
----------- ----------- ----------- -----------
Total Other Income................... 20,101,557 9,813,393 353,237 6,653
Total Income......................... 23,688,612 12,471,945 1,638,719 20,505
EXPENSES
Personnel................................. 8,276,196 5,280,161 1,691,212 1,924,588
General and Administrative................ 3,835,635 2,449,217 701,366 493,056
Servicing................................. 1,788,156 408,231 56,299 --
Occupancy and Equipment................... 520,505 372,254 101,333 100,779
Depreciation and Amortization............. 476,429 286,727 80,715 90,044
----------- ----------- ----------- -----------
Total Expenses....................... 14,896,921 8,796,590 2,630,925 2,608,467
Income (Loss) Before Taxes........... 8,791,691 3,675,355 (992,206) (2,587,962)
Income Tax Provision................. 3,692,000 209,000 -- --
----------- ----------- ----------- -----------
Net Income (Loss)........................... $ 5,099,691 $ 3,466,355 $ (992,206) $(2,587,962)
=========== =========== =========== ===========
Preferred Stock Dividends................. (123,741) (215,419) (82,621) (152,673)
----------- ----------- ----------- -----------
Net Income (Loss) Available to Common
Shareholders........................... $ 4,975,950 $ 3,250,936 $(1,074,827) $(2,740,635)
=========== =========== =========== ===========
NET INCOME PER COMMON SHARE AND COMMON SHARE
EQUIVALENT:
Net Income................................ $ 0.68 $ 0.61 -- --
Shares Used in Computing Net Income Per
Common Share and Common Share
Equivalent............................. 7,542,371 5,661,046 -- --
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 86
ACC CONSUMER FINANCE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
NOTES UNREALIZED RETAINED
COMMON STOCK ADDITIONAL RECEIVABLE GAIN ON EARNINGS
------------------- PAID-IN FROM ASSET-BACKED (ACCUMULATED
SHARES AMOUNT CAPITAL SHAREHOLDERS SECURITIES, NET DEFICIT)
--------- ------ ---------- ------------ --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at July 15, 1993
(Inception)................. -- $ -- $ -- $ -- $ -- $ --
Issuance of Common Stock...... 2,099,992 2,100 117,464 -- -- --
Issuance of Notes Receivable
from Shareholders........... -- -- -- (33,628) -- --
Net Loss...................... -- -- -- -- -- (2,587,962)
--------- ------ ----------- -------- -------- -----------
Balance at June 30, 1994...... 2,099,992 2,100 117,464 (33,628) -- (2,587,962)
Payment on Notes Receivable
from Shareholders........... 33,628
Net Loss...................... -- -- -- -- -- (992,206)
--------- ------ ----------- -------- -------- -----------
Balance at December 31,
1994........................ 2,099,992 2,100 117,464 -- -- (3,580,168)
Net Income.................... -- -- -- -- -- 3,466,355
--------- ------ ----------- -------- -------- -----------
Balance at December 31,
1995........................ 2,099,992 2,100 117,464 -- -- (113,813)
Issuance of Common Stock,
Net......................... 2,000,000 2,000 12,538,509 -- -- --
Non-cash Conversion of
Preferred Stock to Common
Stock....................... 4,192,486 4,192 7,275,852 -- -- --
Net Income.................... -- -- -- -- -- 5,099,691
Payment of Preferred Stock
Dividends................... -- -- -- -- -- (574,454)
Unrealized Gain on
Asset-Backed Securities,
Net......................... -- -- -- -- 168,175 --
--------- ------ ----------- -------- -------- -----------
Balance at December 31,
1996........................ 8,292,478 $8,292 $19,931,825 $ -- $168,175 $ 4,411,424
========= ====== =========== ======== ======== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 87
ACC CONSUMER FINANCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SIX-MONTH JULY 15, 1993
DECEMBER 31, TRANSITION PERIOD (INCEPTION)
--------------------------- ENDED THROUGH
1996 1995 DECEMBER 31, 1994 JUNE 30, 1994
------------ ------------ ----------------- -------------
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net Income (Loss)................... $ 5,099,691 $ 3,466,355 $ (992,206) $ (2,587,962)
Adjustments to Reconcile Net Income
(Loss) to Net Cash (Used In)
Provided By Operating Activities:
Gain on Sale of Contracts........... (15,186,889) (8,056,136) -- --
Amortization and Depreciation....... 5,247,702 2,382,908 (289,041) 26,548
Provision for Contract Losses....... 1,113,069 673,802 902,361 592,325
Provision for Deferred Income
Taxes, Net....................... 1,765,000 174,000 -- --
Net Cash Deposited into Restricted
Accounts......................... (4,829,266) (3,166,292) (1,245,225) (673,689)
Deferred Acquisition Expenses....... (1,778,750) (911,027) (248,874) (138,772)
Changes in Operating Assets:
Net Decrease (Increase) in
Contracts Held-for-Sale........ (1,522,079) 6,919,206 -- --
Interest Receivable.............. 61,784 192,896 (402,845) (176,723)
Accounts Receivable.............. (1,806,821) (1,307,343) 357,338 (473,107)
Other Assets..................... (132,421) (43,144) (52,468) (177,177)
Prepaid Expenses................. 32,885 (354,052) (60,234) (13,170)
Changes in Operating Liabilities:
Accounts Payable and Accrued
Liabilities.................... 3,182,426 800,213 282,653 162,647
------------ ------------ ------------ ------------
Net Cash (Used In) Provided By
Operating Activities........... (8,753,669) 771,386 (1,748,541) (3,459,080)
Cash Flows from Investing Activities:
Net Increase in Contracts Held-for-
Investment....................... (1,021,867) (2,617,056) (24,364,384) (15,314,261)
Principal Paydowns of Asset-Backed
Securities....................... 2,582,842 710,880 -- --
Fees for Arranging Financing
Facility......................... -- -- -- (360,000)
Proceeds from Liquidation of
Repossessed Vehicles............. 1,835,401 1,706,800 244,000 --
Purchases of Fixed Assets, Net...... (745,167) (609,094) (224,762) (399,750)
------------ ------------ ------------ ------------
Net Cash Provided By (Used In)
Investing Activities............. $ 2,651,209 $ (808,470) $(24,345,146) $(16,074,011)
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 88
ACC CONSUMER FINANCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED SIX-MONTH JULY 15, 1993
DECEMBER 31, TRANSITION PERIOD (INCEPTION)
--------------------------- ENDED THROUGH
1996 1995 DECEMBER 31, 1994 JUNE 30, 1994
------------ ------------ ----------------- -------------
<S> <C> <C> <C> <C>
Cash Flows from Financing Activities:
Net Proceeds from Issuance of
Subordinated Notes............... $ 19,183,447 $ -- $ -- $ --
Net (Decrease) Increase in
Repurchase Facility.............. (18,806,062) (10,907,271) 25,476,742 15,448,076
Proceeds from Other Borrowings...... 7,906,396 9,939,597 -- --
Repayment of Other Borrowings....... (15,513,381) (2,500,000) -- --
Net (Decrease) Increase in Capital
Leases........................... (187,227) 313,567 205,919 --
Increase in Amount Due to Bank...... 1,533,163 1,247,358 232,780 57,153
Payment on Notes Receivable from
Shareholders..................... -- -- 33,628 --
Net Proceeds from Issuance of Common
Stock............................ 12,540,509 -- -- 85,936
Net Proceeds from Issuance of
Preferred Stock.................. 1,000,995 1,920,672 249,977 3,980,400
Payment of Preferred Stock
Dividends........................ (574,454) -- -- --
------------ ------------ ------------ ------------
Net Cash Provided By Financing
Activities....................... 7,083,386 13,923 26,199,046 19,571,565
Increase (Decrease) in Cash and Cash
Equivalents...................... 980,926 (23,161) 105,359 38,474
Cash and Cash Equivalents at
Beginning of Period.............. 120,672 143,833 38,474 --
------------ ------------ ------------ ------------
Cash and Cash Equivalents at
End of Period.................... $ 1,101,598 $ 120,672 $ 143,833 $ 38,474
============ ============ ============ ============
Supplemental Disclosure:
Interest Paid....................... $ 4,078,069 $ 4,073,177 $ 1,038,586 $ 97,839
Taxes Paid.......................... $ 632,405 $ -- $ -- $ --
Non-Cash Conversion of Preferred
Stock............................ $ 7,280,044 $ -- $ -- $ --
Non-Cash Issuance of Common Stock in
Exchange for Notes Receivable.... $ -- $ -- $ -- $ 33,628
Non-Cash Issuance of Warrants in
Conjunction with Repurchase
Facility......................... $ -- $ -- $ -- $ 128,000
Non-Cash Transfer of Asset-Backed
Securities from Held-to-Maturity
to Available-for-Sale............ $ 7,542,216 $ -- $ -- $ --
Unrealized Gain on Transfer of
Asset-Backed Securities to
Available-for-Sale Status........ $ 289,958 $ -- $ -- $ --
Transfers of Contracts:
Held-for-Sale to Asset-Backed
Securities....................... $ 5,804,000 $ 4,484,392 $ -- $ --
Held-for-Investment to Repossessed
Vehicles......................... $ 1,921,347 $ 1,722,194 $ 440,225 $ --
Held-for-Investment to
Held-for-Sale.................... $ 986,196 $ 40,907,980 $ -- $ --
Held-for-Sale to
Held-for-Investment.............. $ 5,914,990 $ 2,972,453 $ -- $ --
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 89
ACC CONSUMER FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995, THE SIX-MONTH TRANSITION PERIOD
ENDED
DECEMBER 31, 1994 AND THE PERIOD FROM JULY 15, 1993 (INCEPTION) THROUGH JUNE 30,
1994
(1) NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Nature of Business
ACC Consumer Finance Corporation (ACC) initiated business in California on
July 15, 1993, under the name American Credit Corporation. The Company changed
its name in October 1995 and was reincorporated in Delaware in November 1995.
ACC and its wholly-owned subsidiaries, OFL-A Receivables Corp. (OFL-A) and ACC
Receivables Corp. (Receivables) (collectively, the Company), engage primarily in
the business of purchasing, selling and servicing automobile installment sale
contracts (Contracts). The Company specializes in Contracts with borrowers who
generally would not qualify for traditional financing, such as that provided by
commercial banks or captive finance companies of automobile manufacturers. The
Company purchases Contracts directly from automobile dealers, with the intent to
resell them to institutional investors in the form of securities backed by the
Contracts (the Securitization Transactions).
The Company conducts its activities through three legal entities. The
Company's operations (underwriting and Contract servicing) are conducted by ACC.
The Contracts are purchased and held until sale by OFL-A, which is a special
purpose financing corporation. Upon sale, the Contracts are concurrently
transferred from OFL-A to ACC, from ACC to Receivables, and then from
Receivables to a trust (Securitization Trust). Receivables retains excess
servicing receivables (ESRs) in the Securitization Transactions. Receivables
will also retain subordinated asset-backed securities (Subordinated Securities),
if created, or Contracts pledged as additional credit enhancement in the
Securitization Transactions (Spread Receivables).
Until such time as the Contracts are sold in asset-backed securities, these
Contracts are pledged as collateral to, and are financed under a financing
facility (Repurchase Facility). The Company also has the option of pledging the
Subordinated Securities, ESRs and credit enhancement cash reserves for
borrowings under a separate financing facility (NIM Facility), which expires in
May 1998.
In May 1996, the Company sold, in an initial public offering, 2,000,000
shares of its Common Stock which generated net proceeds of approximately $12.5
million. The proceeds were used to partially pay-down the NIM Facility (included
in Other Borrowings on the Consolidated Balance Sheet), temporarily reduce
advances on the Repurchase Facility and for other working capital purposes. In
addition, each share of the Company's redeemable Preferred Stock automatically
converted into 23 shares of Common Stock upon consummation of the offering.
Total cumulative dividends of $574,454 were paid to the holders of the
redeemable Preferred Stock subsequent to the conversion. In November 1996, the
Company issued, $20 million of 10.25% subordinated notes due 2003 (Notes) in a
public debt offering which generated net proceeds of approximately $19.0 million
after deducting the underwriting discount and issuance costs. The proceeds were
used to pay-off the outstanding balance of the NIM Facility, temporarily reduce
advances on the Repurchase Facility and for other general corporate purposes.
(b) Basis of Presentation
The consolidated financial statements include the accounts of ACC, OFL-A,
and Receivables. All significant intercompany accounts and transactions have
been eliminated in consolidation.
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities to prepare these
consolidated financial statements in conformity with generally accepted
accounting principals. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change in
the near term include allowances for credit losses, valuation of ESRs and
estimated gain on sale of Contracts calculation. While management believes that
these estimates are currently adequate, future additions may be necessary based
on changes in economic conditions. Additionally, certain amounts in the prior
periods have been reclassified to conform to the 1996 presentation.
F-8
<PAGE> 90
ACC CONSUMER FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At the inception of the Company on July 15, 1993, the Company adopted a
fiscal year end of June 30. The Company's Initial Fiscal Year ended June 30,
1994 (the Initial Fiscal Year). On January 23, 1996, the Company elected to
change its fiscal year end to December 31, with the change effective as of
January 1, 1995. The purpose of this change was to conform the Company's fiscal
year to the fiscal year adopted by its primary competitors. As a result of the
change in fiscal year end, the Transition Period from July 1, 1994, through
December 31, 1994, (the Transition Period) constitutes an audited period.
Neither the actual results of the Transition Period nor the annualized results
of the Transition Period are indicative of the results that would have been
achieved in a 12-month fiscal year.
(c) Cash and Cash Equivalents
For purposes of the consolidated financial statements, cash and cash
equivalents include highly liquid debt and investment instruments with an
original maturity of three months or less. Additionally, the Company is subject
to covenants within the indenture under which the Notes were issued (See
Footnote 10) that require that an amount equal to six months of interest
payments on the Notes be held in a segregated account for the ten calendar days
proceeding a monthly interest payment due date. As of December 31, 1996,
approximately $1 million was held in such an account.
(d) Installment Contracts Held-For-Sale
The Contracts are acquired from automobile dealers, usually at a discount,
and are recorded net of discount and provide for interest of approximately 20%.
The Company also recognizes the interest accrued on Contracts through the date
of purchase as an addition to the discount. Non-refundable fees and related
direct costs are deferred and netted against the Contract balances. Each
Contract provides for full amortization, equal monthly payments and can be fully
prepaid by the borrower at any time. The Company has purchased the Contracts
with the intent to resell them in the future. Contracts held-for-sale are stated
at the lower of aggregate cost or market value.
The Contracts are financed under the terms of the Repurchase Facility with
Cargill Financial Services Corporation (Cargill) and are accounted for as a
financing of the Contracts. Under the terms of the agreement, the Company
maintains the essential elements of ownership of the Contracts, particularly
credit risk and interest rate risk.
The Company enters into forward contracts as hedges relating to the
Contract portfolio. These financial instruments are designed to minimize
exposure and reduce risk from interest rate fluctuations. Gains and losses on
forward contracts are deferred and recognized as adjustments to the basis of the
Contracts until such time that the Contracts are sold. Such amounts are realized
upon the sale of Contracts that are hedged.
(e) Installment Contracts Held-for-Investment
Since January 1, 1995, all Contracts have been purchased with the intent to
be sold in asset-backed securities. Contracts that are identified as ineligible
for the securitization process (primarily due to their payment history) are
transferred to Contracts held-for-investment until such time that the deficiency
has been resolved. Also included in Contracts held-for-investment are Spread
Receivables. The Spread Receivables are included in the Consolidated Balance
Sheets of the Company, but all cash collections pertaining to them must be
deposited into a credit enhancement cash reserve until certain requirements are
met. These Contracts are transferred at the lower of cost or market value and
are accounted for net of an allowance for Contract losses, as determined by
historical loss experience and current delinquency levels.
(f) Allowance for Contract Losses
The allowance for Contract losses is maintained at a level deemed by
management to be adequate to provide for the inherent risks in the Contracts
held-for-investment. Management considers past loss experience and delinquency
levels in determining the adequacy of the allowance for Contract losses.
F-9
<PAGE> 91
ACC CONSUMER FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's policy is to charge-off the principal balance of all
Contracts which are 120 or more days delinquent, except Contracts which are
involved in bankruptcies which are charged-off at 210 or more days delinquent.
In addition, the Company charges off Contracts prior to becoming 120 or 210 days
delinquent if management has knowledge of specific circumstances that impair the
collectibility of the outstanding balances.
(g) Excess Servicing Receivables
The Company has created ESRs as a result of the sale of Contracts in the
Securitization Transactions. ESRs are determined by computing the present value
of the excess of the weighted average coupon on the Contracts sold (ranging from
19.77% to 20.62%) over the sum of: (i) the coupon on the asset-backed securities
(ranging from 5.95% to 6.90%), (ii) a base servicing fee paid to the Company
(ranging from 3.00% to 3.15%) and (iii) the net charge-offs expected to be
incurred on the portfolio of Contracts sold. For purposes of the projection of
the excess servicing cash flows, historically the Company has assumed that net
charge-offs (including accrued interest) will approximate 11% of the original
principal of the Contracts sold, over the life of the portfolio. Further, the
Company has used an estimated average Contract life ranging from 1.5 to 1.8
years. The cash flows expected to be received by the Company, before expected
losses, are then discounted at a market interest rate that the Company believes
an unaffiliated third-party purchaser would require as a rate of return on such
a financial instrument. Expected losses are discounted using a risk-free rate
equivalent to the rate earned on securities rated AAA/Aaa or better with a
duration similar to the duration estimated for the underlying Contracts. This
results in an effective overall discount rate of approximately 15% on an
annualized basis. The excess servicing cash flows are only available to the
Company to the extent that there is no impairment of the credit enhancements
established at the time the Contracts are sold. ESRs are amortized using the
interest method and are offset against servicing and ancillary fees. To the
extent that the actual future performance results are different from the
estimated excess cash flows, the ESRs will be adjusted on a quarterly basis with
corresponding adjustments made to income.
The carrying value of the ESRs is subject to the provisions of the Emerging
Issues Task Force (EITF) 88-11 pronouncement which states that an enterprise
that sells the right to receive the interest payments, the principal payments,
or a portion of either or both, relating to a loan should allocate the recorded
investment in that loan between the portion of the loan sold and the portion
retained based on the relative fair values of those portions.
(h) Asset-Backed Securities
Securities held-to-maturity are reported at amortized cost (subject to the
provisions of the EITF 88-11 as discussed in the preceding Footnote). Securities
available-for-sale are reported at fair value. If management has the intent and
ability at time of purchase to hold securities until maturity, they are
classified as held to maturity. Securities to be held for indefinite periods of
time, but not necessarily to be held to maturity, or on a long-term basis are
classified as available-for-sale. Unrealized holding gains and losses on
available-for-sale securities are reported as a separate component of equity,
net of tax.
(i) Gain on Sale of Contracts
Each Securitization Transaction results in the recognition of a gain on
sale of Contracts on the Company's consolidated statement of operations for the
period in which the sale was made. These gains are recognized to the extent that
the net proceeds from the sale are greater than the allocated basis of that
portion of the Contracts sold. This gain is subject to the provisions of the
EITF 88-11.
(j) Repossessed Vehicles
Vehicles acquired for non-payment of indebtedness are recorded at the lower
of the estimated fair market value or the outstanding Contract balance. Such
assets are generally sold within 60 days of repossession and
F-10
<PAGE> 92
ACC CONSUMER FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
any difference between the sales price, net of expenses, and the carrying amount
is treated as a charge-off or recovery. In addition, the Company recognizes
claims submitted pursuant to a vendor single interest policy as accounts
receivables.
(k) Fixed Assets
Furniture, fixtures and equipment are initially recorded at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets (six months to five years).
(l) Organizational Expenses
The Company incurred expenses in connection with the organization of the
business. These expenses were capitalized and are amortized on a straight-line
basis over a five-year period.
(m) Deferred Financing Fees
The Company incurred fees in connection with the creation of the Repurchase
Facility. These fees reflected cash payments made and the estimated value of
Preferred Stock warrants issued in conjunction with the creation of the
Repurchase Facility. The Repurchase Facility costs were deferred and are
amortized over the five-year term of the Repurchase Facility as an adjustment to
interest expense. The carrying amount of these deferred fees would be
written-off if the Company elects to exercise the option to terminate the
Repurchase Facility (as described in Footnote 19). The Company has incurred fees
in connection with the issuance of the Notes. These fees reflected the
underwriting discount and issuance costs. These costs have been deferred and are
amortized over the seven-year term of the Notes as an adjustment to interest
expense.
(n) Servicing and Ancillary Fees
Servicing fees are reported as income when earned, net of related
amortization of capitalized excess servicing fees receivable. Additionally, the
Company has the right to collect late payment fees and non-sufficient funds fees
from borrowers, as well as collection costs incurred in connection with
delinquent accounts. Ancillary fees are accounted for on a cash basis.
Collection expenditures are recorded as expenses in the period incurred. Any
reimbursements of collection costs are recognized as an expense recovery in the
period that the proceeds are received.
(o) Income Taxes
The Company filed consolidated federal income and combined state franchise
tax returns on a fiscal year basis through December 31, 1995, and has filed on a
calendar basis thereafter. The Company accounts for income taxes under the asset
and liability method, whereby deferred income taxes are recognized based on
future tax consequences due to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using tax rates expected
to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred taxes of a change in
tax rates is recognized in income in the period that includes the enactment
date.
(p) Net Income (Loss) Per Share
Due to the significant changes in the capital structure of the Company upon
the closing of the initial public offering as discussed at Footnote 1(a),
historical net income (loss) per share prior to the year ended December 31,
1995, is not presented. Net income per share is computed using the weighted
average number of shares of Common Stock outstanding and common equivalent
shares, unless the effect of common stock equivalents are anti-dilutive.
However, pursuant to Securities and Exchange Commission Staff Accounting
Bulletins, Common Stock and common equivalent shares issued during the 12-month
period prior to the filing of the offering document have been included in the
calculation as if they were outstanding for all periods
F-11
<PAGE> 93
ACC CONSUMER FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
presented, even if anti-dilutive. In addition, net income per share reflects the
23 for 1 stock split which occurred in connection with the Company's initial
public offering.
(q) Accounting for Stock-Based Compensation
In November 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." This statement establishes financial accounting standards for
stock-based employee compensation plans. SFAS No. 123 permits the Company to
choose either a fair value-based method or the intrinsic value-based method that
is contained in APB Opinion 25. SFAS No. 123 requires pro forma disclosures of
net income and earnings per share computed as if the fair value based method has
been applied in financial statements of companies that continue to follow
current practice in accounting for such arrangements under Opinion 25. SFAS No.
123 applies to all stock-based employee compensation plans in which an employer
grants shares of its stock or other equity instruments to employees except for
employee stock ownership plans. SFAS No. 123 also applies to plans in which the
employer incurs liabilities to employees in amounts based on the price of the
employer's stock (i.e., stock option plans, stock purchase plans, restricted
stock plans and stock appreciation rights). The statement also specifies the
accounting for transactions in which a company issues stock options or other
equity instruments for services provided by non-employees or to acquire goods or
services from outside suppliers or vendors. The recognition provisions of SFAS
No. 123 for companies choosing to adopt the new fair value based method of
accounting for stock-based compensation arrangements may be adopted immediately
and will apply to all transactions entered into fiscal years that begin after
December 15, 1995. The disclosure provisions of SFAS No. 123 are effective for
fiscal years beginning after December 15, 1995; however, disclosure of the pro
forma net income and earnings per share, as if the fair value method of
accounting for stock-based compensation had been elected, is required for all
awards granted in fiscal years beginning after December 31, 1994. The Company
has elected to continue to account for stock-based compensation under APB
Opinion 25 and, as a result, pro forma disclosures have been provided. (See
Footnote 17.)
(r) New Accounting Pronouncements
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities". This statement
specifies when financial assets and liabilities are to be removed from an
entity's financial statements, the accounting for servicing assets and
liabilities and the accounting for assets that can be contractually prepaid in
such a way that the holder would not recover substantially all of its recorded
investment. Under SFAS No. 125, an entity recognizes only assets it controls and
liabilities it has incurred, discontinues recognition of assets only when
control has been surrendered, and discontinues recognition of liabilities only
when they have been extinguished. SFAS No. 125 requires that the selling entity
continue to carry retained interests relating to assets it no longer recognizes.
Such retained interests are based on the relative fair values of the retained
interests of the subject assets at the date of transfer. Transfers not meeting
the criteria for sale recognition are accounted for as a secured borrowing with
a pledge of collateral. Under SFAS No. 125, certain collateralized borrowings
may result in assets no longer being recognized if the assets are provided as
collateral and the secured party takes control of the collateral. This
determination is based upon whether: (1) the secured party is permitted to
repledge or sell the collateral and (2) the debtor does not have the right to
redeem the collateral on short notice. Extinguishments of liabilities are
recognized only when the debtor pays the creditor and is relieved of its
obligation for the liability, or when the debtor is legally released from being
the primary obligor under the liability, either judicially or by the creditor.
SFAS No. 125 requires an entity to recognize its obligation to service financial
assets that are retained in a transfer of assets in the form of a servicing
asset or liability. The servicing asset is to be amortized in proportion to, and
over the period of, net servicing income. Servicing assets and liabilities are
to be assessed for impairment based on their fair value. SFAS No. 125 modifies
the accounting for interest-only strips or retained interests in
securitizations, such as capitalized servicing fees receivable, that can be
contractually prepaid or otherwise settled in such a way that the holder would
not recover substantially all of its recorded
F-12
<PAGE> 94
ACC CONSUMER FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
investment. In this case, it requires that they be classified as
available-for-sale or as trading securities. Interest-only strips and retained
interests are to be recorded at fair value. Changes in fair value are included
in operations, if classified as trading securities, or in shareholders' equity
as unrealized holding gains or losses, net of the related tax effect, if
classified as available for sale. Beginning January 1, 1997, the Company adopted
SFAS No. 125 and recorded its ESRs at fair value. The adjustment to carrying
value was included in shareholders' equity as unrealized gains at that time.
(2) RESTRICTED CASH AND CREDIT ENHANCEMENT CASH RESERVES
With regard to Contracts owned, the Company is required to deposit all
borrower payments, Contract liquidation proceeds and certain other receipts into
restricted bank accounts under the control of a custodian. These accounts are
owned by the Company, but funds may only be released by the custodian under the
terms of the Repurchase Facility. Generally, the funds will be released only
upon the repurchase and sale of the Contracts.
The Company is a party to certain agreements in connection with the sale of
Contracts in asset-backed securities. The terms of some of these agreements have
provided that simultaneous with the sale of bonds to investors, the Company must
make a cash contribution, as a credit enhancement, to a credit enhancement cash
reserve under the control of a trustee. Subsequent to the sale, all cash
received from the ESRs, Subordinated Securities and the Spread Receivables, is
deposited into credit enhancement cash reserves. The credit enhancement cash
reserve is owned by the Company, but funds will only be released by the trustee
when certain credit enhancement requirements are met. The agreement provides
that the amount of cash to be maintained in the credit enhancement cash reserve
shall be at a specified percentage of the principal balance of the senior bonds.
Additionally, there are provisions within the agreements that state that if the
performance of any Securitization Trust is not sufficient to meet the cash
requirements of the senior bondholders and the credit enhancement reserves of
that pool have been depleted, the shortfall can be drawn from credit enhancement
cash reserves relating to other Securitization Trusts. As principal payments are
made to the bondholders, and if the pledged cash is in excess of the specified
percentage of the principal balance of the bonds, the trustee will release the
excess amount to the Company.
(3) INSTALLMENT CONTRACTS HELD-FOR-SALE
Installment Contracts held-for-sale are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
<S> <C> <C>
Principal Balance........................................... $21,888,020 $29,517,717
Purchase Discount........................................... (1,071,263) (1,161,892)
Net Deferred Expenses (Fees)................................ 231,586 (392,889)
Unrealized Hedge Losses..................................... 30,349 224,842
----------- -----------
$21,078,692 $28,187,778
=========== ===========
</TABLE>
As of December 31, 1996, and 1995, respectively, approximately $22 million
and $31 million of the Contracts, including certain Contracts
held-for-investment, have been pledged to Cargill subject to the terms of the
Repurchase Facility. These Contracts are held by a custodian until such time
that they are repurchased. (See Footnotes 4 and 9.)
The Company maintains an ongoing hedging program to minimize the impact of
changing interest rates on the value of the Contracts. The hedging strategy is
implemented through the forward sale of two-year Treasury notes or futures
contracts of two-year Treasury instruments with remaining terms of approximately
1.5 years to 2 years, with Cargill acting as a counterparty to these hedging
transactions. As of December 31, 1996, the Company had two-year Treasury futures
contracts with a notional amount of $15 million for sale in
F-13
<PAGE> 95
ACC CONSUMER FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
March 1997. As of December 31, 1995, the Company had sold forward $25 million of
Treasury notes for delivery in January 1996.
Unrealized gains and losses on the hedging transactions are reflected as an
adjustment to the basis of the Contracts. Gains and losses are recognized upon
sale of the Contracts. The Company recognized $206,000 of net gains on the
hedging program during the year ended December 31, 1996. The Company recognized
$927,000 of net losses on the hedging program during the year ended December 31,
1995. Prior to the year ended December 31, 1995, there were no hedging
transactions.
In addition to the Contracts owned by the Company, the Company serviced
$225 million and $87 million of Contracts for others as of December 31, 1996,
and 1995, respectively. The Company services Contracts for borrowers residing in
approximately 40 states, with the largest concentrations of Contracts in
California, Texas, Florida and Pennsylvania. An economic slowdown or recession
or a change in the regulatory or legal environment in one or more of these
states could have a material adverse effect on the performance of the Company's
existing servicing portfolio and on its Contract purchases.
During the year ended December 31, 1996, and 1995, the Company sold $191
million and $101 million, respectively, of Contracts in connection with the
securitization transactions. For the same periods, the Company recognized gains
associated with these securitizations of $15.2 million and $8.1 million,
respectively. No Contracts were sold prior to the year ended December 31, 1995.
Contract packages are submitted to the Company for funding by automobile
dealers. The Company evaluates each borrower's creditworthiness on a
case-by-case basis. Contract packages representing $4.5 million and $2.1
million, were approved and submitted to the Company for funding as of December
31, 1996, and 1995, respectively.
(4) INSTALLMENT CONTRACTS HELD-FOR-INVESTMENT
Contracts held-for-investment represent Contracts that are ineligible for
sale (primarily due to their delinquent status) or represent Contracts which
management had no present intention to sell. These Contracts are subject to the
terms of the Repurchase Facility or the Spread Receivables pledge agreement and
are held by a custodian. Included are performing Contracts with a principal
balance of $2.9 million, which are pledged in connection with the 1996-D
Transaction. The Contracts held-for-investment are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
<S> <C> <C>
Principal Balance........................................... $4,151,152 $1,040,695
Purchase Discount........................................... (200,292) (40,727)
Net Deferred Expenses (Fees)................................ 42,783 (13,772)
Allowance for Contract Losses............................... (565,000) (476,808)
---------- ----------
$3,428,643 $ 509,388
========== ==========
</TABLE>
F-14
<PAGE> 96
ACC CONSUMER FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company maintains an allowance for Contract losses based on the
outstanding principal balance of Contracts held-for-investment. A summary of the
activity in the allowance for Contract losses is as follows:
<TABLE>
<CAPTION>
SIX-MONTH
YEAR ENDED TRANSITION JULY 15, 1993
--------------------------- PERIOD ENDED (INCEPTION)
DECEMBER 31, DECEMBER 31, DECEMBER 31, THROUGH
1996 1995 1994 JUNE 30, 1994
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Beginning Balance.......................... $ 476,808 $ 1,181,004 $ 580,462 $ --
Provision................................ 1,113,069 673,802 902,361 592,325
Charge-offs.............................. (1,223,252) (1,435,224) (302,735) (11,863)
Recoveries............................... 198,375 57,226 916 --
----------- ----------- ---------- --------
Ending Balance............................. $ 565,000 $ 476,808 $1,181,004 $580,462
=========== =========== ========== ========
</TABLE>
(5) ASSET-BACKED SECURITIES
In connection with securitizations, the Company has retained Subordinated
Securities representing 5% of the principal balance of the Contracts sold. These
have pass-through rates from 5.95% to 6.90%. At time of purchase and as of
December 31, 1995, these securities were deemed to be held-to-maturity and had
been valued at a discount to yield approximately 13%. During the year ended
December 31, 1996, the Company reclassified these securities as
available-for-sale and the carrying amount approximates the fair value based on
market rates as of December 31, 1996.
(a) Asset-Backed Securities Available-for-Sale.
A summary of the activity in asset-backed securities available-for-sale is
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
Beginning Balance........................................... $ --
Transfers from Asset-Backed Securities Held-to-Maturity... 7,542,216
Unrealized Gain........................................... 289,958
----------
Ending Balance.............................................. $7,832,174
==========
</TABLE>
There were no asset-backed securities available-for-sale prior to the year
ended December 31, 1996.
(b) Asset-Backed Securities Held-to-Maturity
A summary of the activity in asset-backed securities held-to-maturity is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Beginning Balance........................................... $3,910,080 $ --
Additions from Securitizations............................ 5,804,000 4,484,392
Principal Reductions...................................... (2,582,842) (710,880)
Amortization of Purchase Discount......................... 410,978 136,568
Transfers to Asset-Backed Securities Available-for-Sale... (7,542,216) --
---------- -----------
Ending Balance.............................................. $ -- $ 3,910,080
========== ===========
</TABLE>
F-15
<PAGE> 97
ACC CONSUMER FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
There were no asset-backed securities held-to-maturity prior to the year
ended December 31, 1995. The transfers of asset-backed securities to
available-for-sale status during 1996 were the result of a revised cash
management strategy of the Company.
(6) EXCESS SERVICING RECEIVABLES
A summary of the activity in ESRs is as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
<S> <C> <C>
Beginning Balance........................................... $ 5,590,878 $ --
Additions from Securitizations............................ 14,864,000 7,700,699
Amortization of Excess Servicing.......................... (4,881,260) (2,109,821)
----------- -----------
Ending Balance.............................................. $15,573,618 $ 5,590,878
=========== ===========
</TABLE>
In connection with the valuation of ESRs, the Company projects losses in
the pool of Contracts which effectively represents the estimated undiscounted
recourse loss allowance offset against the ESRs. As of December 31, 1996, and
1995, the estimated undiscounted recourse loss allowance embedded in the ESRs,
excluding accrued interest, was $19.2 million and $7.1 million, respectively.
This recourse loss allowance represents 8.8% and 8.1% of the Contracts serviced
for others as of December 31, 1996, and 1995, respectively.
There were no ESRs prior to the year ended December 31, 1995.
(7) ACCOUNTS RECEIVABLE
As of December 31, 1996, and 1995, the Company had approximately $1.5
million and $626,000, respectively, due from Cargill for Contracts funded by the
Company which were delivered to a custodian, but not yet funded through the
Repurchase Facility. Additionally, the Company had $1.7 million and $616,000, as
of December 31, 1996, and 1995, respectively, of servicing fees, excess
servicing fees and principal and interest payments on the subordinated
securities, due from the Securitization Trusts.
(8) FIXED ASSETS, NET
Furniture, fixtures and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
<S> <C> <C>
Furniture, Fixtures & Equipment............... $1,087,670 $ 679,826
Leasehold Improvements........................ 100,051 70,889
Computer Equipment............................ 577,437 482,891
---------- ----------
1,765,158 1,233,606
Less Accumulated Depreciation................. (624,633) (391,590)
---------- ----------
Fixed Assets, Net........................ $1,140,525 $ 842,016
========== ==========
</TABLE>
The Company has entered into lease arrangements with Cargill Leasing
Corporation, an affiliate of Cargill, for the sale and leaseback of certain of
its furniture and equipment. These leases are accounted for as capital leases.
The original cost of the equipment subject to the capital leases is $731,000.
(See Footnote 14.)
(9) REPURCHASE FACILITY, NET
The Company has entered into a financing arrangement, the object of which
is to provide interim financing for the Contracts purchased. Contractually, the
Repurchase Facility expires in July 1998; however,
F-16
<PAGE> 98
ACC CONSUMER FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
in January 1997, the Company entered into an agreement with Cargill that gives
the Company the option to terminate the Repurchase Facility through May 31,
1997. (See Footnote 19.)
Under the terms of the Repurchase Facility, the Company will sell Contracts
to Cargill with an agreement to repurchase the Contracts. The repurchase is
intended to occur concurrent with the sale of the Contracts. The Repurchase
Facility requires Contracts to be held by a custodian and requires the Company
to deposit borrower payments into restricted bank accounts. When the Contracts
are repurchased from Cargill, the Company is obligated to pay Cargill a
repurchase fee that is calculated as a percentage of the Contracts ranging from
2% to 0.5%, depending upon the cumulative amount of Contract dispositions. The
Company is obligated to repurchase Contracts in the event that: (i) the
Contracts do not conform to the terms of the Repurchase Facility, (ii) a breach
of a representation or warranty has occurred or (iii) the Company has defaulted
under the terms of the Repurchase Facility. In addition, the Repurchase Facility
contains certain restrictive covenants that include, without limitation,
achieving specific Contract purchase volumes. If these covenants are not met, a
termination of the facility could occur. As of December 31, 1996, and 1995,
management believes the Company was in compliance with such covenants. The
parent company has guaranteed $5.0 million of the amount outstanding under the
Repurchase Facility and the NIM Facility (included in Other Borrowings on the
Consolidated Balance Sheet (See Footnote 11) in the event of a default under
either facility.
The Repurchase Facility balance is net of deferred costs of $186,000, and
$310,000 as of December 31, 1996, and 1995, respectively. The interest rate on
the Repurchase Facility is the one-month LIBOR, plus 3.25%. The relevant LIBOR
was 5.5% as of December 31, 1996, and 5.7% as of December 31, 1995. In addition
to amounts in the restricted cash accounts, advances on the Repurchase Facility
were secured by Contracts aggregating approximately $23 million and $31 million
as of December 31, 1996, and 1995, respectively. These amounts include $1.5
million and $642,000 of Contracts which were delivered, but not yet funded by
Cargill, as of December 31, 1996, and 1995, respectively.
(10) SUBORDINATED NOTES, NET
On November 18, 1996, the Company received net cash proceeds of $19.0
million from the issuance of the Notes in an underwritten public offering, after
deducting the underwriting discount and issuance costs. The proceeds were used
to repay borrowings under the NIM Facility (included in other borrowing on the
consolidated balance sheets), partially repay borrowings under the Repurchase
Facility and as other general working capital. Interest on the Notes is payable
monthly commencing January 1, 1997, at an interest rate of 10.25% per annum,
until December 1, 2003, when the entire $20 million principal is due in full.
Interest expense, including amortization of underwriting discount and issuance
costs, was $252,000 for the year ended December 31, 1996. The Company recognizes
interest and amortization expenses related to the Notes using a method which
approximates the effective interest method over the expected redemption period.
The Notes are redeemable at the option of the Company after December 1, 1999. If
the Company redeems the Notes prior to maturity, it will pay in cash a
redemption price equal to the following percentages of the principal amount of
the Notes redeemed, plus interest to the date fixed for redemption:
<TABLE>
<CAPTION>
IF REDEEMED DURING REDEMPTION
THE 12 MONTHS BEGINNING: PRICE
------------------------ ----------
<S> <C>
December 1, 1999............................................ 104%
December 1, 2000............................................ 102%
December 1, 2001 and thereafter............................. 100%
</TABLE>
The Notes are redeemable at the option of the holders in the event of the
death of a holder (subject to certain individual and aggregate annual
limitations) and in the event of a fundamental structural change in the Company
or fundamental change of business as defined in the indenture pursuant to which
the Notes were
F-17
<PAGE> 99
ACC CONSUMER FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
issued. The Notes are subordinated to certain existing and future indebtedness
of the Company as defined in the indenture. The indenture requires the Company
to comply with their covenants. Management believes that the Company was in
compliance with these covenants at December 31, 1996.
As of December 31, 1996, the $20 million outstanding principal balance of
the Notes is reported net of unamortized underwriting discount and issuance
costs of approximately $1.0 million.
(11) OTHER BORROWINGS
In September 1995, the Company entered into the NIM Facility with Cargill,
which is collateralized by the Subordinated Securities and the ESRs. (See
Footnote 19.) The NIM Facility and the Repurchase Facility have cross-default
and cross-collateralization clauses which state that the Company must be in
compliance with all covenants relating to both agreements at all times. In
November of 1996, the Company paid-off the entire outstanding balance with
proceeds from the issuance of the Notes, but may draw on the facility as
required to pay securitization costs and expenses. As of December 31, 1995, the
Company had drawn $7.4 million under this facility. The interest rate on the NIM
Facility is the one-month LIBOR, plus 7%. The Company also pays an annual
commitment fee payable in four quarterly installments. The NIM Facility has a
contractual maturity date of May 22, 1998. The NIM Facility is subject to
certain restrictive covenants. If these covenants are not met, a termination of
the facility could occur. As of December 31, 1996, and 1995, management believes
the Company was in compliance with its covenants. In January 1997 (unaudited),
the Company entered into an agreement changing certain terms of the NIM Facility
and reducing the commitment amount to $10 million and reducing the annual fee to
$100,000.
The Company retired a bridge financing facility of $2.5 million with
proceeds of the NIM Facility. The bridge financing facility had an interest rate
of 12%.
(12) PREFERRED STOCK
(a) Redeemable Preferred Stock
Each outstanding share of redeemable Preferred Stock was converted into 23
shares of Common Stock in May 1996 when the Company completed the initial public
offering of its Common Stock. In June 1996, $574,454 of dividends were paid to
the holders of the redeemable Preferred Stock.
The holders of the Series A, Series B and Series C Preferred Stock were
entitled to receive cumulative dividends of 4%, 6% and 4%, respectively, of the
stated value of the shares when and as declared by the Board of Directors. No
dividends were to be paid prior to the earlier of: (i) July 15, 1998, (ii) 30
days following the Company's initial public offering or (iii) a liquidation of
the Company. Upon liquidation, holders of the Preferred Stock were entitled to
receive, in preference to any payment on the Common Stock, an amount equal to
the stated value of the shares, plus any accrued and unpaid dividends. The
Preferred Stock was redeemable, at the option of the holder, five years (for the
Series A and Series C) or two years (for the Series B) from the date of issue at
the stated value, plus accumulated dividends. Each share of redeemable Preferred
Stock automatically converted into 23 shares of Common Stock upon the closing of
the Company's initial public offering of its Common Stock.
F-18
<PAGE> 100
ACC CONSUMER FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The changes in redeemable Preferred Stock are as follows:
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C
PREFERRED PREFERRED PREFERRED TOTAL TOTAL
STOCK STOCK STOCK SHARES AMOUNT
---------- --------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1994........... $4,108,400 $ -- $ -- 120,000 $ 4,108,400
Issuance of Series A Preferred..... 249,977 -- -- 7,537 249,977
---------- --------- ----------- -------- -----------
Balance at December 31, 1994....... 4,358,377 -- -- 127,537 4,358,377
Issuance of Series B Preferred..... -- 749,970 -- 11,538 749,970
Exercise of Warrants............... 1,170,702 -- -- 35,294 1,170,702
---------- --------- ----------- -------- -----------
Balance at December 31, 1995....... 5,529,079 749,970 -- 174,369 6,279,049
Issuance of Series C Preferred..... -- -- 1,000,995 7,913 1,000,995
Conversion to Common Stock......... (5,529,079) (749,970) (1,000,995) (182,282) (7,280,044)
---------- --------- ----------- -------- -----------
Balance at December 31, 1996....... $ -- $ -- $ -- -- $ --
========== ========= =========== ======== ===========
</TABLE>
(b) Blank Check Preferred Stock
The Company's Certificate of Incorporation authorizes the issuance of
1,817,718 shares of Preferred Stock that have not been designated or issued
(blank check preferred) and may be subject, without shareholder approval, to
being issued in one or more series with such preferences, limitations and
relative rights as are determined by the Board of Directors of the Company at
the time of the issuance.
(c) Warrants
In July 1993, the Company issued to Cargill a warrant in connection with
the Repurchase Facility for 35,294 shares of the Company's Series A redeemable
Preferred Stock. The warrant entitled Cargill to acquire a like number of shares
of Series A redeemable Preferred Stock for an exercise price in the range of
$33.17 per share to $66.17 per share based upon the net book value per share of
the Common Stock. The warrant was to expire on the earlier of: (i) July 15,
1999, (ii) the closing of an initial public offering or (iii) the termination of
the Repurchase Facility by Cargill due to a material breach by Cargill. The
warrant was fully exercised by Cargill in September 1995, at an exercise price
of $33.17 per share.
F-19
<PAGE> 101
ACC CONSUMER FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company discloses estimated fair values for its financial instruments,
as well as the methods and significant assumptions used to estimate fair values.
The following information does not purport to represent the aggregate net fair
value of the Company.
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
-------------------------- --------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Financial Instrument:
Installment Contracts Held-for-Sale..... $21,078,692 $21,888,000 $28,187,778 $29,518,000
Installment Contracts
Held-for-Investment.................. 3,428,643 3,540,000 509,388 509,000
Asset-Backed Securities:
Held-to-Maturity..................... -- -- 3,910,080 4,251,000
Available-for-Sale................... 7,832,174 7,832,000 -- --
Excess Servicing Receivables............ 15,573,618 17,297,000 5,590,878 5,753,000
Repurchase Facility..................... 11,026,130 11,026,000 29,708,252 29,708,000
Subordinated Notes Payable.............. 19,196,110 19,196,000 -- --
Other Borrowings........................ -- -- 7,439,957 7,440,000
Lease Liability......................... 332,259 353,000 519,486 569,000
Hedge Liability......................... 44,000 44,000 223,000 223,000
</TABLE>
Installment Contracts Held-for-Sale
The carrying value of Contracts held-for-sale represents the Company's cost
basis in the Contracts. Also, since the Company intends to hold the Contracts
for a relatively short period of time and then sell them through a
securitization, typically at par, fair values of Contracts held-for-sale is
estimated to be par value.
Installment Contracts Held-for-Investment
Estimates have been made, based on historical experience, of the value of
the Contracts within the held-for-investment portfolio. The carrying value is
reported net of an allowance for the probable losses on these Contracts and is a
reasonable estimate of what management believes to be the fair value of the
Contracts in this portfolio.
Asset-Backed Securities Held-to-Maturity and Excess Servicing Receivables
The fair values of the asset-backed securities held-to-maturity (elsewhere
referred to as Subordinated Securities) and the ESRs are estimated by
discounting future cash flows using credit and discount rates that the Company
believes reflect the current market conditions and estimated credit, interest
rate and prepayment risks associated with similar types of instruments.
Asset-Backed Securities Available-for-Sale
Asset-backed securities available-for-sale are valued based on current
market conditions and estimated credit, interest rate and prepayment risks
associated with similar types of instruments and, thus, the carrying value
approximates fair value.
Subordinated Notes
As the Notes were issued in November 1996, the carrying value approximates
the market value, given market prices and rates for similar debt with similar
remaining terms as of December 31, 1996.
F-20
<PAGE> 102
ACC CONSUMER FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Repurchase Facility and Other Borrowings
The carrying value approximates fair value as these facilities reprice
frequently at market interest rates.
Lease Liability
The fair value of the lease liabilities is estimated by discounting the
future cash obligations using a rate that the Company believes reflects the
market interest rate for similar types of instruments.
Hedge Liability
The carrying value approximates fair value as this position refixes
frequently at market rates. The fair value of the hedge position is based upon
quoted market prices.
(14) COMMITMENTS AND CONTINGENCIES
(a) Leases
The Company leases office space, computers and other equipment under
various operating leases. Future minimum rental payments on these operating
leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------
<S> <C>
1997................................................... $ 864,304
1998................................................... 576,925
1999................................................... 323,952
2000................................................... 306,353
2001................................................... 294,445
Thereafter............................................. 69,963
----------
Total Payments......................................... $2,435,942
==========
</TABLE>
Total lease expense for the years ended December 31, 1996, and 1995, the
Transition Period, and the Initial Fiscal Year was $696,000, $445,000, $134,000
and $103,000, respectively.
The Company also leases furniture and equipment under various capital
leases with a related party. The future minimum lease payments on these capital
leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------
<S> <C>
1997.................................................... $280,784
1998.................................................... 106,898
Thereafter.............................................. --
--------
Total Payments.......................................... 387,682
Less Amount Representing Interest....................... (55,423)
--------
Total Lease Liability................................... $332,259
========
</TABLE>
(b) Litigation
The Company is subject to lawsuits which arise in the ordinary course of
business. Management is of the opinion, based in part upon consultation with its
counsel, that the liability to the Company, if any, arising from existing and
threatened lawsuits would have no material adverse effect on the Company's
financial position and results of operations.
F-21
<PAGE> 103
ACC CONSUMER FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(15) INCOME TAXES
The components of income tax expense for the year ended December 31, 1996,
and 1995, the Transition Period and the Initial Fiscal Year are as follows:
<TABLE>
<CAPTION>
PERIOD FROM
SIX-MONTH JULY 15, 1993
TRANSITION (INCEPTION)
YEAR ENDED YEAR ENDED PERIOD ENDED THROUGH
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994 JUNE 30, 1994
----------------- ----------------- ----------------- -------------
<S> <C> <C> <C> <C>
Current Income Taxes
Federal........................ $1,371,000 $ 12,000 $ -- $ --
State.......................... 556,000 23,000 -- --
---------- ----------- --------- -----------
Subtotal.................... 1,927,000 35,000 -- --
Deferred Income Taxes
Federal........................ 1,437,000 1,171,000 (329,000) (818,000)
State.......................... 450,000 361,000 (24,000) (187,000)
---------- ----------- --------- -----------
Subtotal.................... 1,887,000 1,532,000 (353,000) (1,005,000)
Change in Valuation Allowance.... -- (1,358,000) 353,000 1,005,000
Taxes Allocated to Shareholders'
Equity......................... (122,000) -- -- --
---------- ----------- --------- -----------
Total....................... $3,692,000 $ 209,000 $ -- $ --
========== =========== ========= ===========
</TABLE>
A reconciliation of expected income taxes computed using the federal income
tax rate of 34% to taxes actually provided is set forth as follows:
<TABLE>
<CAPTION>
PERIOD FROM
SIX-MONTH JULY 15, 1993
TRANSITION (INCEPTION)
YEAR ENDED YEAR ENDED PERIOD ENDED THROUGH
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994 JUNE 30, 1994
----------------- ----------------- ----------------- -------------
<S> <C> <C> <C> <C>
Computed Expected Income Taxes... $2,989,000 $ 1,250,000 $(337,000) $ (880,000)
Change in Valuation Allowance,
Net of (Utilization of)
Non-Recognition of Net
Operating
Loss Carryforward.............. -- (1,358,000) 353,000 880,000
State Taxes, Net of Federal
Benefit........................ 664,000 339,000 -- --
Alternative Minimum Tax.......... -- 12,000 -- --
Other............................ 39,000 (34,000) (16,000) --
---------- ----------- --------- -----------
Total Income Taxes.......... $3,692,000 $ 209,000 $ -- $ --
========== =========== ========= ===========
</TABLE>
F-22
<PAGE> 104
ACC CONSUMER FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes result from the temporary differences between the tax
basis of an asset or a liability and its reported amount in the consolidated
balance sheets. The significant components that comprise deferred tax assets and
liabilities at December 31, 1996, and 1995, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
<S> <C> <C>
Deferred Tax Assets:
Allowance for Contract Losses............... $ 257,000 $ 216,000
Net Operating Loss Carryforwards............ -- 452,000
Amortization................................ 1,029,000 245,000
Depreciation................................ 170,000 120,000
State Tax Benefits.......................... 392,000 45,000
Other....................................... 193,000 25,000
----------- -----------
Total Gross Deferred Tax Assets........ 2,041,000 1,103,000
Deferred Tax Liabilities:
Gain on Securitization...................... (3,772,000) (1,020,000)
Deferred Contract Fees...................... (124,000) (161,000)
Unrealized Gain on Asset-Backed
Securities............................... (122,000) --
Other....................................... (84,000) (96,000)
----------- -----------
Total Gross Deferred Tax Liabilities... (4,102,000) (1,277,000)
----------- -----------
Net Deferred Tax Liability.................... $(2,061,000) $ (174,000)
=========== ===========
</TABLE>
Based upon the level of historical taxable income and projections for
future taxable income over the periods in which the deferred tax assets are
deductible, management believes it is more likely than not that the Company will
realize deferred tax assets existing at December 31, 1996, and 1995.
(16) 401(K) PLAN
The Company adopted a defined contribution plan, pursuant to Internal
Revenue Code Section 401(k), effective February 1, 1994. Eligible employees,
generally those who have completed more than 90 days of service, may elect to
contribute from 2% to 20% of their pre-tax compensation. Voluntary Company
contributions to the plan are allocated based on 50% of the employee
contributions up to $1,000 per calendar year. The plan may be terminated by the
Company at any time. Employer contributions to the plan were approximately
$58,000, $37,000, $25,000 and $14,000 for the year ended December 31, 1996, and
1995, the Transition Period and the Initial Fiscal Year.
(17) STOCK OPTION PLANS
The Company's 1995 stock option plan (Employee Plan) covers 450,000 shares
of Common Stock. The Employee Plan permits the grant of incentive stock options
or non-qualified options to any employees of the Company. Incentive stock
options may not have an exercise price of less than the fair market value of the
Common Stock on the date of grant, except options granted to holders of more
than 10% of the Company Common Stock may not have an exercise price of less than
110% of the fair market value of the Common Stock on the date of the grant. The
Compensation Committee of the Board of Directors administers the Employee Plan
and determines the employees who may participate, the amount of timing of each
option grant and the vesting schedule for options. As of December 31, 1996, and
1995, stock options representing 511,338 and 442,500 shares of common stock,
respectively, were outstanding.
The Company's separate stock option plan for its non-employee Directors
(Director Plan) covers 100,000 shares of Common Stock. The Director Plan
provides for the award of non-qualified options, which expire five years from
the date of grant, covering 20,000 shares of Common Stock to each non-employee
director on the
F-23
<PAGE> 105
ACC CONSUMER FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
date of the plan's adoption and to any future elected or appointed non-employee
director. Each of the options granted to the four current non-employee directors
is at an exercise price of $7.25 per share. One-fourth of the option shares were
vested on the date of grant and the balance will vest over the subsequent three
years at a rate of one-third per year. Any future option grant will be at an
exercise price equal to the fair market value of the Common Stock on the date of
the grant. At December 31, 1996, stock options representing 80,000 shares of
Common Stock were outstanding and 40,000 were vested.
Had compensation cost for the Company's stock-based compensation plan been
determined consistent with FASB No. 123, the Company's net income and earnings
per share (EPS) would have been reduced to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
YEAR ENDING YEAR ENDING
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
<S> <C> <C> <C>
Net income...................................... As Reported $5,099,691 $3,466,355
========== ==========
Pro Forma $4,818,459 $3,445,542
========== ==========
Primary EPS..................................... As Reported $ 0.68 $ 0.61
========== ==========
Pro Forma $ 0.64 $ 0.61
========== ==========
Fully Diluted EPS............................... As Reported $ 0.67 $ 0.60
========== ==========
Pro Forma $ 0.64 $ 0.60
========== ==========
</TABLE>
Pro forma net income reflects only options granted in 1996 and 1995. The
full impact of calculating compensation cost for stock options under SFAS No.
123 is not reflected in the pro forma net income amounts presented above because
compensation cost is reflected over the options vesting period and compensation
cost for options granted prior to January 1, 1995, is not considered.
The per share weighted-average fair value of stock options granted during
1996 and 1995 was approximately $3.90. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions: zero dividend yield, expected
volatility of approximately 47%, risk-free interest rates of approximately 7%
and an expected life of approximately six years.
A summary of the status of the Company's employee and director stock option
plans as of December 31, 1996, and 1995, and changes during the years ended on
those dates is presented below.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 YEAR ENDED DECEMBER 31, 1995
----------------------------- -----------------------------
SHARES WEIGHTED-AVERAGE SHARES WEIGHTED-AVERAGE
(000'S) EXERCISE PRICE (000'S) EXERCISE PRICE
------- ---------------- ------- ----------------
<S> <C> <C> <C> <C>
Outstanding at Beginning of Year......... 442,500 $ 7.25 -- $ --
Granted.................................. 84,588 6.51 442,500 7.25
Exercised................................ -- -- -- --
Forfeited................................ (15,750) (7.25) -- --
------- ------- ------- ------
Outstanding at End of Year............... 511,338 $ 7.13 442,500 $7.25
======= ======= ======= ======
</TABLE>
F-24
<PAGE> 106
ACC CONSUMER FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about employee stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
NUMBER OUTSTANDING REMAINING NUMBER EXERCISABLE AS
EXERCISE PRICE AS OF DEC. 31, 1996 LIFE (YEARS) OF DECEMBER 31, 1996
- -------------- ------------------- ------------ ---------------------
<C> <C> <C> <C>
$7.25 426,750 8.9 113,354
$6.60 61,088 9.1 --
$6.25 23,500 9.5 --
</TABLE>
(18) RELATED PARTY TRANSACTIONS
During the year ended December 31, 1995, the Company entered into
employment agreements with its three senior executives, which supersede previous
agreements and extend through December 31, 1998. Additionally, the Company has
other borrowings with shareholders as discussed in Footnotes 9 and 11 and
capital lease arrangements with a related party as discussed in footnotes 8 and
14.
(19) SUBSEQUENT EVENTS (UNAUDITED)
In January 1997, the Company announced that it had entered into an
agreement with Cargill modifying the existing Repurchase Facility between the
Company and Cargill. Under the terms of the agreement, the Company will have the
right, at its option, to terminate the Repurchase Facility at any time through
May 31, 1997, by providing Cargill with 14 days written notice and repaying the
outstanding balance of the facility. In exchange for this early termination
option, the Company issued Cargill 174,500 shares of unregistered Common Stock
with a fair value of $10.88 per share as of the date of issuance. After issuance
of these shares, Cargill's ownership of Company Common Stock increased to 13.4%
from its current 11.6%. If the Company does not elect to exercise its right to
terminate the Repurchase Facility, the market value of these shares will be
credited against future repurchase fees that become due under the Repurchase
Facility. If the Company elects to terminate the Repurchase Facility, the market
value of the Common Stock issued to Cargill, as well as approximately $155,000
of capitalized expenses incurred in connection with the creation of the
Repurchase Facility, will be written-off. Also included in this agreement is a
modification of the NIM Facility (included in Other Borrowings on the
Consolidated Balance Sheet) that reduced maximum borrowings from $15 million to
$10 million.
F-25
<PAGE> 107
ACC CONSUMER FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(20) QUARTERLY RESULTS (UNAUDITED)
The following table sets forth certain unaudited quarterly operating
results for the years ended December 31, 1996, and 1995. This information has
been prepared on the same basis as the audited consolidated financial statements
and includes all adjustments (which consist solely of normal recurring
adjustments) necessary to present fairly the financial information of such
periods.
<TABLE>
<CAPTION>
1996
-------------------------------------------------------------------
FIRST SECOND THIRD FOURTH YEAR
QUARTER QUARTER QUARTER QUARTER ENDED
------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C>
Net Interest Income....................... $ 931,468 $1,103,136 $1,294,713 $1,370,807 $ 4,700,124
Contract Losses........................... (148,863) (199,921) (241,514) (522,771) (1,113,069)
Other Income:
Servicing and Ancillary Fees............ 848,879 962,868 1,476,779 1,626,142 4,914,668
Gain on Sale of Contracts............... 2,901,586 3,683,023 3,830,825 4,771,455 15,186,889
---------- ---------- ---------- ---------- -----------
Total Income.......................... 4,533,070 5,549,106 6,360,803 7,245,633 23,688,612
Total Expenses............................ 3,175,520 3,587,549 3,762,477 4,371,375 14,896,921
---------- ---------- ---------- ---------- -----------
Income Before Taxes....................... 1,357,550 1,961,557 2,598,326 2,874,258 8,791,691
Income Tax Provision...................... 570,000 824,000 1,091,000 1,207,000 3,692,000
---------- ---------- ---------- ---------- -----------
Net Income............................ $ 787,550 $1,137,557 $1,507,326 $1,667,258 $ 5,099,691
========== ========== ========== ========== ===========
Fully-Diluted EPS......................... $ 0.13 $ 0.16 $ 0.18 $ 0.20 $ 0.67
========== ========== ========== ========== ===========
Weighted Average Common and Common Shares
Outstanding............................. 6,295,655 7,166,818 8,346,834 8,369,897 7,588,476
========== ========== ========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
1995
-------------------------------------------------------------------
FIRST SECOND THIRD FOURTH YEAR
QUARTER QUARTER QUARTER QUARTER ENDED
------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C>
Net Interest Income....................... $1,287,048 $ 793,393 $ 860,408 $ 391,505 $ 3,332,354
Contract Losses........................... (221,725) 211,377 (289,842) (373,612) (673,802)
Other Income:
Servicing and Ancillary Fees............ 30,743 469,974 487,313 769,227 1,757,257
Gain on Sale of Contracts............... -- 3,913,477 1,890,600 2,252,059 8,056,136
---------- ---------- ---------- ---------- -----------
Total Income.......................... 1,096,066 5,388,221 2,948,479 3,039,179 12,471,945
Total Expenses............................ 1,614,598 2,535,003 2,178,475 2,468,514 8,796,590
---------- ---------- ---------- ---------- -----------
Income (Loss) Before Taxes................ (518,532) 2,853,218 770,004 570,665 3,675,355
Income Tax Provision (Benefit)............ -- 35,000 282,380 (108,380) 209,000
---------- ---------- ---------- ---------- -----------
Net Income (Loss)..................... $ (518,532) $2,818,218 $ 487,624 $ 679,045 $ 3,466,355
========== ========== ========== ========== ===========
Fully-Diluted EPS......................... $ (0.10) $ 0.49 $ 0.08 $ 0.11 $ 0.60
========== ========== ========== ========== ===========
Weighted Average Common and Common Shares
Outstanding............................. 5,298,717 5,697,427 5,835,593 6,110,479 5,737,258
========== ========== ========== ========== ===========
</TABLE>
F-26
<PAGE> 108
ACC CONSUMER FINANCE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
AT JUNE 30,
1997
-----------
(UNAUDITED)
<S> <C>
ASSETS
Cash and Cash Equivalents................................... $ 2,067,441
Restricted Cash............................................. 2,934,638
Credit Enhancement Cash Reserves............................ 13,120,594
Installment Contracts Held-for-Sale, net.................... 40,239,260
Installment Contracts Held-for-Investment, net.............. 2,294,302
Asset-Backed Securities Available-for-Sale.................. 6,328,000
Excess Servicing Receivables, at fair value................. 23,041,000
Accounts Receivable......................................... 3,449,157
Interest Receivable......................................... 512,940
Fixed Assets, net........................................... 1,470,177
Repossessed Vehicles........................................ 181,775
Prepaid Expenses............................................ 580,117
Other Assets................................................ 702,427
-----------
Total Assets........................................... $96,921,828
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Warehouse Facilities, net................................... $32,676,451
Subordinated Notes, net..................................... 19,163,378
Amount Due to Bank.......................................... 4,505,916
Lease Liability............................................. 222,007
Tax Liability............................................... 5,234,950
Accounts Payable and Accrued Liabilities.................... 4,587,520
-----------
Total Liabilities...................................... 66,390,222
Shareholders' Equity:
Preferred Stock, $.001 Par Value, No Shares Issued and
Outstanding............................................... --
Common Stock, $.001 Par Value, Authorized 18,000,000 Shares;
8,480,478 Shares Issued and Outstanding as of June 30,
1997...................................................... 8,481
Additional Paid-in-Capital.................................. 21,660,467
Unrealized Gain on Securities, net.......................... 891,480
Retained Earnings........................................... 7,971,178
-----------
Total Shareholders' Equity............................. 30,531,606
Commitments and Contingencies
Total Liabilities and Shareholders' Equity............. $96,921,828
===========
</TABLE>
See accompanying notes to condensed unaudited consolidated financial statements.
F-27
<PAGE> 109
ACC CONSUMER FINANCE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX-MONTH PERIOD
ENDED JUNE 30,
-------------------------
1997 1996
----------- -----------
(UNAUDITED)
<S> <C> <C>
Interest Income
Interest Income........................................... $ 5,481,713 $ 4,284,417
Interest Expense.......................................... 2,878,551 2,249,813
----------- -----------
Net Interest Income.................................. 2,603,162 2,034,604
Contract Losses
Provision for Contract Losses............................. 481,196 348,784
----------- -----------
Net Interest Income after Provision for Contract
Losses.............................................. 2,121,966 1,685,820
Other Income
Servicing and Ancillary Fees.............................. 4,450,249 1,811,747
Gain on Sale of Contracts................................. 12,736,139 6,584,609
----------- -----------
Total Other Income................................... 17,186,388 8,396,356
Total Income......................................... 19,308,354 10,082,176
Expenses
Personnel................................................. 5,782,724 3,841,537
General and Administrative................................ 3,278,492 1,740,961
Servicing................................................. 1,549,771 758,109
Occupancy and Equipment................................... 484,206 213,504
Depreciation and Amortization............................. 285,580 208,958
----------- -----------
Total Expenses....................................... 11,380,773 6,763,069
Income Before Taxes....................................... 7,927,581 3,319,107
Income Tax Expense........................................ 3,330,000 1,394,000
----------- -----------
Income Before Extraordinary Loss............................ 4,597,581 1,925,107
Extraordinary Loss on Extinguishment of Repurchase Facility,
net of Tax Benefit........................................ (1,037,827) --
----------- -----------
Net Income........................................... $ 3,559,754 $ 1,925,107
=========== ===========
Preferred Stock Dividends................................... -- (116,818)
----------- -----------
Net Income Available to Common Shareholders................. $ 3,559,754 $ 1,808,289
=========== ===========
Net Income per Common Share and Common Share Equivalent:
Income Before Extraordinary Loss.......................... $ 0.54 $ 0.29
Extraordinary Loss........................................ (0.12) --
----------- -----------
Net Income........................................... $ 0.42 $ 0.29
=========== ===========
Shares Used in Computing Income per Common Share and Common
Share Equivalent.......................................... 8,523,623 6,724,938
=========== ===========
</TABLE>
See accompanying notes to condensed unaudited consolidated financial statements.
F-28
<PAGE> 110
ACC CONSUMER FINANCE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX-MONTH PERIOD
ENDED JUNE 30,
--------------------------
1997 1996
------------ -----------
(UNAUDITED)
<S> <C> <C>
Cash Flows from Operating Activities
Net Income................................................ $ 3,559,754 $ 1,925,107
Adjustments to Reconcile Net Income to Net Cash Used in
Operating Activities:
Gain on Sale of Contracts............................... (12,736,139) (6,584,609)
Amortization and Depreciation........................... 5,278,532 2,543,055
Provision for Contract Losses........................... 481,196 348,784
Deferred Acquisition Expenses........................... (1,749,080) (707,080)
Non-cash Fee Paid Upon Extinguishment of Repurchase
Facility.............................................. 1,789,357 --
Changes in Operating Assets:
Net (Increase) Decrease in Contracts Held for Sale...... (14,066,164) 2,404,376
Net Cash Deposited into Restricted Accounts............. (6,140,759) (2,172,185)
Interest Receivable..................................... (188,051) 92,098
Accounts Receivable..................................... (219,224) (4,594,148)
Other Assets............................................ (401,342) (121,142)
Prepaid Expenses........................................ (256,988) 199,874
Changes in Operating Liabilities:
Accounts Payable and Accrued Liabilities................ 2,718,445 2,315,516
------------ -----------
Net Cash Used in Operating Activities................ (21,930,463) (4,350,354)
Cash Flows from Investing Activities
Net Increase in Contracts Held for Investment............. (1,914,830) (437,392)
Principal Paydowns of Asset Backed Securities............. 1,727,870 1,018,190
Proceeds from Liquidation of Repossessed Automobiles...... 870,375 1,320,400
Purchases of Fixed Assets, net............................ (599,607) (303,911)
------------ -----------
Net Cash Provided by Investing Activities............ 83,808 1,597,287
Cash Flows from Financing Activities
Net Increase (Decrease) in Warehouse Facility Balance..... 21,389,412 (6,171,990)
Increase in Other Borrowing............................... -- 1,948,439
Repayment of Other Borrowing.............................. -- (7,000,000)
Net Decrease in Capital Leases............................ (110,252) (88,032)
Increase in Amount Due to Bank............................ 1,435,463 1,075,980
Net Proceeds from Exercise of Employee Stock Options...... 97,875 --
Net Proceeds from Issuance of Common Stock................ -- 12,540,509
Net Proceeds from Issuance of Preferred Stock............. -- 1,000,995
Payment of Preferred Stock Dividends...................... -- (574,454)
------------ -----------
Net Cash Provided by Financing Activities............ 22,812,498 2,731,447
Increase (Decrease) in Cash and Cash Equivalents............ 965,843 (21,620)
Cash and Cash Equivalents at Beginning of Period............ 1,101,598 120,672
------------ -----------
Cash and Cash Equivalents at End of Period.................. $ 2,067,441 $ 99,052
============ ===========
Supplemental Disclosure
Interest Paid............................................. $ 1,793,654 $ 2,087,757
Taxes Paid................................................ $ 1,155,400 $ 349,831
Unrealized Gain on Asset-Backed Securities and Excess
Servicing Receivables, at Fair Value.................... $ 1,247,078 $ --
Non-cash Conversion of Preferred Stock.................... $ -- $ 7,280,044
Non-cash Issuance of Common Stock......................... $ 1,613,776 $ --
Transfers of Contracts:
Held-for-Sale to Asset Backed Securities................ $ -- $ 3,631,000
Held-for-Investment to Repossessed Automobiles.......... $ 754,585 $ 1,248,256
Held-for-Investment to Held-for-Sale.................... $ 2,746,544 $ 986,196
Held-for-Sale to Held-for-Investment.................... $ 933,154 $ 1,857,286
</TABLE>
See accompanying notes to condensed unaudited consolidated financial statements.
F-29
<PAGE> 111
ACC CONSUMER FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 1997 AND 1996
(1) NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation
The consolidated financial statements include the accounts of ACC Consumer
Finance Corporation (ACC) and its wholly-owned subsidiaries, OFL-A Receivables
Corp. (OFL-A), ACC Receivables Corp. (Receivables), ACC Funding Corp. (Funding),
ACC Liquidity, LLC (Liquidity), and Accent Financial Services Corp. (Accent)
(collectively, the Company). All material intercompany accounts and transactions
have been eliminated. The consolidated financial statements as of June 30, 1997,
and for the six-month periods ended June 30, 1997, and 1996, are unaudited and
reflect all adjustments (consisting of normal recurring adjustments) which are,
in the opinion of management, necessary for a fair presentation of the financial
position and operating results in the interim periods. The consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto for the year ended December 31, 1996. The
results of operations for the six-month period ended June 30, 1997, are not
necessarily indicative of the results of the entire year ending December 31,
1997.
(b) New Accounting Pronouncements
In June 1996, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities". Beginning January 1, 1997, the Company adopted
SFAS No. 125 and recorded its Excess Servicing Receivables (ESRs) and other
retained interests at fair value. An adjustment to the ESRs carrying value of
$1.2 million was included in shareholders' equity as unrealized gains, net of
tax.
(2) INSTALLMENT CONTRACTS HELD-FOR-SALE
Installment Contracts held-for-sale are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30, 1997
-------------
<S> <C>
Principal Balance........................................... $41,891,045
Purchase Discount........................................... (2,448,851)
Net Deferred Expenses....................................... 767,368
Unrealized Hedge Losses..................................... 29,698
-----------
$40,239,260
===========
</TABLE>
In addition to the Contracts owned by the Company, the Company serviced
$351 million of Contracts for others as of June 30, 1997. The Company services
Contracts for borrowers residing in approximately 40 states, with the largest
concentrations of Contracts in California, Florida, Georgia, Pennsylvania, and
Texas. An economic slowdown or recession or a change in the regulatory or legal
environment in one or more of these states could have a material adverse effect
on the performance of the Company's existing servicing portfolio and on its
Contract purchases.
(3) INSTALLMENT CONTRACTS HELD-FOR-INVESTMENT
Installment Contracts held-for-investment represent Contracts that are
ineligible for sale (primarily due to their delinquent status) or represent
Contracts which management has no present intention to sell. Included in
installment Contracts held-for-investment are performing Contracts which are
pledged in connection with
F-30
<PAGE> 112
ACC CONSUMER FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
the ACC Auto Grantor Trust 1996-D Transaction. The principal balance of these
pledged Contracts was $2.6 million as of June 30, 1997. The Contracts
held-for-investment are comprised of the following:
<TABLE>
<CAPTION>
JUNE 30, 1997
-------------
<S> <C>
Principal Balance........................................... $2,807,256
Purchase Discount........................................... (133,807)
Net Deferred Expenses....................................... 33,853
Allowance for Contract Losses............................... (413,000)
----------
$2,294,302
==========
</TABLE>
(4) EXCESS SERVICING RECEIVABLES
The Company has created ESRs as a result of the sale of Contracts in the
securitization transactions. ESRs are determined by computing the present value
of the excess of the weighted average coupon on the Contracts sold (ranging from
19.77% to 20.62%) over the sum of: (i) the coupon on the asset-backed securities
(ranging from 5.95% to 7.03%), (ii) a base servicing fee paid to the Company
(ranging from 3.00% to 3.15%) and (iii) the net charge-offs expected to be
incurred on the portfolio of Contracts sold. For purposes of the projection of
the excess servicing cash flows, the Company has assumed that net charge-offs
(including accrued interest) will approximate a percentage in the range of 11.5%
to 13.0% of the original principal of the Contracts sold, over the life of the
portfolio. Further, the Company used an estimated average Contract life ranging
from 1.5 to 1.8 years. The cash flows expected to be received by the Company,
before expected losses, are then discounted at a market interest rate that the
Company believes an unaffiliated third-party purchaser would require as a rate
of return on such a financial instrument. Expected losses are discounted using a
risk-free rate equivalent to the rate earned on securities rated AAA/Aaa or
better with a duration similar to the duration estimated for the underlying
Contracts. This currently results in an effective overall discount rate of
approximately 15% to 17% on an annualized basis, depending on the age of the
securitization transaction. The excess servicing cash flows are only available
to the Company to the extent that there is no impairment of the credit
enhancements established at the time the Contracts are sold. ESRs are amortized
using the interest method and are offset against servicing and ancillary fees.
To the extent that the actual future performance results are different from the
estimated excess cash flows, the ESRs will be adjusted on a quarterly basis with
corresponding adjustments made to income.
A summary of the activity in ESRs is as follows:
<TABLE>
<CAPTION>
SIX-MONTH
PERIOD ENDED
JUNE 30, 1997
-------------
<S> <C>
Beginning Balance........................................... $15,573,618
Additions from Securitizations............................ 11,218,000
Amortization of Excess Servicing.......................... (5,000,000)
Unrealized Gain........................................... 1,249,382
-----------
Ending Balance.............................................. $23,041,000
===========
</TABLE>
In connection with the valuation of ESRs, the Company projects losses in
the pool of Contracts which effectively represents the estimated undiscounted
recourse loss allowance offset against the ESRs. As of June 30, 1997, the
estimated undiscounted recourse loss allowance embedded in the ESRs, excluding
accrued interest, was $31.6 million. This recourse loss allowance represents
9.0% of the Contracts serviced for others as of June 30, 1997.
F-31
<PAGE> 113
ACC CONSUMER FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
(5) WAREHOUSE FACILITIES, NET
The Company has entered into financing arrangements, the object of which is
to provide financing for the Contracts during the interim period between
purchase of the Contracts and the sale of those Contracts in asset-backed
securities. As of March 31, 1997, the Company's primary warehouse facility was a
commercial paper backed facility sponsored by Credit Suisse First Boston (CSFB)
(the CP Facility). Prior to March 31, 1997, the Company's primary financing
facility was the Repurchase Facility with Cargill Financial Services Corporation
(Cargill).
(a) Commercial Paper-Backed Facility
On March 27, 1997, the Company entered into a $100 million warehouse
facility. The lenders are CSFB and a commercial paper conduit and the borrower
is Liquidity, a newly-formed Delaware limited liability company, wholly-owned by
special purpose subsidiaries of ACC. The facility is secured by Contracts
pledged by Liquidity (purchased in a true sale from OFL-A or ACC) and is
guaranteed by Financial Securities Assurance Corp. (FSA). The facility bears
interest at the weighted average interest rate of the commercial paper conduit
lender plus commissions and expenses, repriced daily, unless the lenders, in
their sole discretion, determine in good faith that the commercial paper rate is
unavailable or not desirable and apply a bank rate equal to the Euro-Dollar rate
plus 75 basis points. The interest rate on the CP Facility was 5.7% and the
outstanding balance was $32.9 million as of June 30, 1997.
Advances under the CP Facility are limited to the borrowing base. The
borrowing base is calculated under a formula that takes into account, among
other factors, the principal balance of the eligible Contracts pledged under the
facility, the current interest rate for US Treasury securities with a 21-month
remaining term or the one-month LIBOR, which ever is greater, and the weighted
average coupon rate of the Contracts pledged under the facility. The borrowing
base cannot exceed 93% of the principal balance of eligible Contracts. The CP
Facility requires the borrower to do a take out financing within four months of
the closing of the CP Facility and at least once each six months thereafter.
Additionally, prior to September 1997, the Company is obligated to secure an
additional warehouse facility from another lender, with a minimum line of credit
of $50 million. The Company is in the process of procuring a second warehouse
line.
The events of default under the CP Facility include a downgrade of the
claims paying ability of FSA by S&P or Moody's, the average delinquency rate on
the Contracts pledged in connection with the facility exceeding 2.5% during the
preceding four months or the occurrence of a servicer event of default. A
servicer event of default includes: (i) total delinquencies as a percentage of
the Company's servicing portfolio in excess of 8% during the preceding three
months and (ii) annualized net charge-offs as a percentage of the average
servicing portfolio in excess of 7% during the preceding six months. The lenders
have the right to replace ACC as the servicer upon the occurrence of a servicer
event of default. In addition, the CP Facility contains certain covenants. If
these covenants are not met, a termination of the facility could occur. As of
June 30, 1997, management believes the Company was in compliance with all such
covenants.
(b) Repurchase Facility
Prior to March 31, 1997 Cargill financed 100% of the purchase-price of the
Contracts under the Repurchase Facility. The interest rate on the Repurchase
Facility was the one-month LIBOR, plus 3.25%. Under the terms of the Repurchase
Facility, the Company would sell Contracts to Cargill with an agreement to
repurchase the Contracts. The repurchase was intended to occur concurrent with
the sale of the Contracts. When the Contracts were repurchased from Cargill, the
Company was obligated to pay Cargill a repurchase fee approximating 2% of the
Contracts.
In January 1997, the Company entered into an agreement with Cargill that
gave the Company the option to extinguish the Repurchase Facility through May
31, 1997. In exchange for this early extinguishment option,
F-32
<PAGE> 114
ACC CONSUMER FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
the Company issued Cargill 174,500 shares of unregistered Common Stock. Also
included in this agreement was a modification of the NIM Facility that reduced
maximum borrowings from $15 million to $10 million. The Company exercised this
option and extinguished the Repurchase Facility on March 31, 1997. The Company
recognized an extraordinary loss of approximately $1.0 million in connection
with this extinguishment, which equals the fair value of the shares issued to
Cargill and certain unamortized debt issuance costs, net of tax.
(6) SUBSEQUENT EVENT
On August 24, 1997, the Company announced that it had signed a definitive
agreement to be purchased by Household International, subject to regulatory and
shareholder approval. Household International will pay $22 for each ACC share in
the form of not less than $2.00 nor more than $4.00 in cash and the remainder in
Household International stock.
F-33
<PAGE> 115
ANNEX A
AGREEMENT AND PLAN OF MERGER
DATED AS OF AUGUST 24, 1997
BY AND AMONG
HOUSEHOLD INTERNATIONAL, INC.,
HOUSEHOLD AUTO CORPORATION
AND
ACC CONSUMER FINANCE CORPORATION
A-1
<PAGE> 116
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE I
DEFINITIONS.......................................................................... A-6
SECTION 1.1 Definitions................................................. A-6
ARTICLE II
THE MERGER........................................................................... A-10
SECTION 2.1 The Merger.................................................. A-10
SECTION 2.2 Effective Time of the Merger................................ A-10
SECTION 2.3 Closing..................................................... A-10
SECTION 2.4 Effects of the Merger....................................... A-10
SECTION 2.5 Certificate of Incorporation and By-Laws.................... A-10
SECTION 2.6 Directors................................................... A-11
SECTION 2.7 Officers.................................................... A-11
ARTICLE III
CONVERSION OF SHARES................................................................. A-11
SECTION 3.1 Conversion of Capital Stock of Merger Sub................... A-11
SECTION 3.2 Conversion of Capital Stock of Garage....................... A-11
SECTION 3.3 Exchange of Certificates.................................... A-12
SECTION 3.4 Dividends, Fractional Shares, Etc........................... A-13
SECTION 3.5 Garage Stock Options........................................ A-14
SECTION 3.6 Tax Treatment............................................... A-14
SECTION 3.7 Appraisal Rights............................................ A-15
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF GARAGE............................................. A-15
SECTION 4.1 Organization and Qualifications; Subsidiaries............... A-15
SECTION 4.2 Certificate of Incorporation and Bylaws..................... A-15
SECTION 4.3 Capitalization.............................................. A-15
SECTION 4.4 Authority Relative to This Agreement........................ A-16
No Conflict; Required Filings and Consents; Certain
SECTION 4.5 Contracts................................................... A-16
SECTION 4.6 Compliance.................................................. A-17
SECTION 4.7 SEC Reports and Financial Statements........................ A-17
SECTION 4.8 Absence of Certain Changes or Events........................ A-17
SECTION 4.9 Litigation.................................................. A-17
SECTION 4.10 Intentionally Omitted....................................... A-18
SECTION 4.11 Employee Benefit Plans...................................... A-18
SECTION 4.12 Labor....................................................... A-19
SECTION 4.13 Insurance................................................... A-19
SECTION 4.14 Brokers..................................................... A-19
SECTION 4.15 Taxes....................................................... A-19
SECTION 4.16 Environmental Matters....................................... A-20
SECTION 4.17 Loans....................................................... A-20
SECTION 4.18 Intellectual Property....................................... A-21
SECTION 4.19 Books and Records........................................... A-21
SECTION 4.20 Transactions with Affiliates................................ A-21
SECTION 4.21 Opinion of Financial Advisor................................ A-21
SECTION 4.22 Reliance.................................................... A-21
SECTION 4.23 Disclosure.................................................. A-21
</TABLE>
A-2
<PAGE> 117
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF HOME AND MERGER SUB................................ A-22
SECTION 5.1 Organization and Qualifications; Subsidiaries............... A-22
SECTION 5.2 Charter and Bylaws.......................................... A-22
SECTION 5.3 Capitalization.............................................. A-22
SECTION 5.4 Authority Relative to This Agreement........................ A-22
SECTION 5.5 No Conflict; Required Filings and Consents.................. A-22
SECTION 5.6 Compliance.................................................. A-23
SECTION 5.7 SEC Reports and Financial Statements........................ A-23
SECTION 5.8 Absence of Certain Changes or Events........................ A-24
SECTION 5.9 Litigation.................................................. A-24
SECTION 5.10 Intentionally Omitted....................................... A-24
SECTION 5.11 Insurance................................................... A-24
SECTION 5.12 Brokers..................................................... A-24
SECTION 5.13 Taxes....................................................... A-24
SECTION 5.14 Reliance.................................................... A-25
SECTION 5.15 Financial Capability........................................ A-25
SECTION 5.16 Disclosure.................................................. A-25
ARTICLE VI
COVENANTS............................................................................ A-25
SECTION 6.1 Notification of Certain Matters............................. A-25
Further Action, Reasonable Efforts; Consents and
SECTION 6.2 Approvals................................................... A-25
SECTION 6.3 Conduct of Business of Garage Pending the Closing........... A-25
SECTION 6.4 Conduct of Business of Home Pending the Closing............. A-27
SECTION 6.5 Access to Information....................................... A-27
SECTION 6.6 No Solicitation............................................. A-27
SECTION 6.7 Stockholder Meeting......................................... A-28
Registration Statements and Joint Proxy
SECTION 6.8 Statement/Prospectus........................................ A-28
SECTION 6.9 Letters of Accountants...................................... A-29
SECTION 6.10 Intentionally Omitted....................................... A-29
SECTION 6.11 Public Announcements........................................ A-29
SECTION 6.12 Blue Sky.................................................... A-30
SECTION 6.13 NYSE Listing................................................ A-30
SECTION 6.14 Affiliates.................................................. A-30
Indemnification with Respect to the Registration
SECTION 6.15 Statement................................................... A-30
SECTION 6.16 Directors' and Officers' Indemnification and Insurance...... A-31
SECTION 6.17 Employee Matters............................................ A-32
SECTION 6.18 Tax-Free Reorganization..................................... A-32
SECTION 6.19 Form S-8.................................................... A-32
ARTICLE VII
CONDITIONS TO THE MERGER............................................................. A-32
Conditions to Each Party's Obligation to Effect the
SECTION 7.1 Merger...................................................... A-32
SECTION 7.2 Conditions to Obligations of Garage to Effect the Merger.... A-33
Conditions to Obligations of Home and Merger Sub to Effect
SECTION 7.3 the Merger.................................................. A-33
ARTICLE VIII
TERMINATION, WAIVER, AMENDMENT AND CLOSING........................................... A-34
SECTION 8.1 Termination................................................. A-34
SECTION 8.2 Effect of Termination....................................... A-35
SECTION 8.3 Amendment or Supplement..................................... A-35
SECTION 8.4 Extension of Time, Waiver, Etc.............................. A-35
SECTION 8.5 Termination Fee............................................. A-35
</TABLE>
A-3
<PAGE> 118
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE IX
MISCELLANEOUS........................................................................ A-36
SECTION 9.1 Governing Law............................................... A-36
SECTION 9.2 Entire Agreement............................................ A-36
SECTION 9.3 Modification; Waiver........................................ A-36
SECTION 9.4 Notices..................................................... A-36
SECTION 9.5 Expenses.................................................... A-37
SECTION 9.6 Assignment.................................................. A-37
SECTION 9.7 No Survival................................................. A-37
SECTION 9.8 Severability................................................ A-37
SECTION 9.9 Successors and Assigns; Third Parties....................... A-37
SECTION 9.10 Counterparts................................................ A-37
SECTION 9.11 Interpretation; References.................................. A-37
SECTION 9.12 Dispute Resolution and Jurisdiction......................... A-38
SECTION 9.13 Exhibits and Schedules...................................... A-38
SECTION 9.14 Attorneys' Fees............................................. A-38
SECTION 9.15 Waiver of Jury Trial........................................ A-38
SECTION 9.16 Further Assurances.......................................... A-38
SECTION 9.17 Negotiation of Agreement.................................... A-38
</TABLE>
A-4
<PAGE> 119
DISCLOSURE SCHEDULES
<TABLE>
<S> <C> <C>
Schedule 4.1 -- Subsidiary
Schedule 4.5 -- Conflicts
Schedule 4.6 -- Compliance
Schedule 4.8 -- Absence of Certain Changes or Events
Schedule 4.9 -- Litigation
Schedule 4.11 -- Employee Benefit Plans
Schedule 4.12 -- Labor
Schedule 4.13 -- Insurance
Schedule 4.14 -- Brokers
Schedule 4.17 -- Loans
Schedule 4.20 -- Transactions with Affiliates
Schedule 6.3 -- Conduct of Business of Garage Pending the Closing
Schedule 6.16 -- Directors' and Officers' Indemnification and Insurance
</TABLE>
EXHIBITS
<TABLE>
<S> <C> <C>
Exhibit A -- Form of Rule 145 Affiliate Agreement
Form of Legal Opinion of J. W. Blenke, Counsel to Home and
Exhibit B -- Merger Sub
Form of Legal Opinion of Cooley Godward LLP, Counsel to
Exhibit C -- Garage
Exhibit D -- Forms of Stockholder Agreements
Exhibit E -- Form of Management Stockholder Agreement
Exhibit F -- Form of Tax Representation Letters
</TABLE>
A-5
<PAGE> 120
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of August 24, 1997 (the
"Agreement"), by and among HOUSEHOLD INTERNATIONAL, INC., a Delaware corporation
("Home"), HOUSEHOLD AUTO CORPORATION, a Delaware corporation and a wholly-owned
subsidiary of Home ("Merger Sub"), and ACC CONSUMER FINANCE CORPORATION, a
Delaware corporation ("Garage").
WHEREAS, Home, Merger Sub and Garage have determined that the merger of
Merger Sub with and into Garage on the terms set forth herein (the "Merger"),
with Garage surviving as a wholly-owned subsidiary of Home, is advisable and in
the best interests of their respective corporations and stockholders and have
approved this Agreement;
WHEREAS, to satisfy a condition to Home entering into this Agreement and
incurring the obligations set forth herein, concurrently with the execution and
delivery of this Agreement, certain stockholders of Garage have entered into
Stockholder Agreements with Home pursuant to which such stockholders have
agreed, on the terms and subject to conditions thereof, to vote certain of their
shares of Garage Common Stock;
WHEREAS, to satisfy a condition to Home entering into this Agreement and
incurring the obligations set forth herein, concurrently with the execution and
delivery of this Agreement, certain management stockholders of Garage have
entered into a Management Stockholder Agreement with Home pursuant to which such
stockholders have agreed, on the terms and subject to conditions thereof, to
vote certain of their shares of Garage Common Stock;
WHEREAS, by executing this Agreement, the parties intend to adopt a plan of
reorganization within the meaning of Section 368 of the Internal Revenue Code of
1986, as amended.
NOW, THEREFORE, in consideration of the mutual representations, warranties
and agreements contained herein and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties
hereto, intending to be legally bound hereby, agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1 Definitions. The capitalized terms used in this Agreement and
not otherwise defined shall have the following meanings (unless the context
otherwise requires, such capitalized terms shall include the singular and plural
and the conjunctive and disjunctive forms of the terms defined):
"Acquisition Proposal" shall have the meaning set forth in Section 6.6.
"Benefit Arrangement" shall mean any benefit arrangement, obligation,
custom, or practice to provide benefits, other than salary, as compensation for
services rendered, to present or former directors, employees, agents, or
independent contractors, other than any obligation, arrangement, custom or
practice that is a Benefit Plan, including, without limitation, employment
agreements, severance agreements, executive compensation arrangements, including
but not limited to stock options, restricted stock rights and performance unit
awards, incentive programs or arrangements, sick leave, vacation pay, severance
pay policies, plant closing benefits, salary continuation for disability,
consulting, or other compensation arrangements, workers' compensation,
retirement, deferred compensation, bonus, stock purchase, hospitalization,
medical insurance, life insurance, tuition reimbursement or scholarship
programs, employee discounts, employee loans, employee banking privileges, any
plans subject to Section 125 of the Code, and any plans providing benefits or
payments in the event of a change of control, change in ownership, or sale of a
substantial portion (including all or substantially all) of the assets of any
business or portion thereof, in each case with respect to any present or former
employees, directors, or agents. Benefit Arrangements exclude any employment
agreements that would, by their terms, terminate on or before the Closing Date
and those that could be terminated immediately after the Closing Date without
additional expense to the Garage Companies.
A-6
<PAGE> 121
"Benefit Plan" shall have the meaning given in Section 3(3) of ERISA and
shall include comparable plans subject to the laws of foreign countries.
"Blue Sky Laws" shall have the meaning set forth in Section 4.5.
"Business Day" shall mean any day other than a Saturday, a Sunday or a day
on which banking institutions in Chicago, Illinois or New York City, New York
are not required to be open.
"Cash Consideration" shall mean (a) the aggregate cash component of the
Merger Consideration determined by Home in accordance with Section 3.2(a) and
Section 3.2(c) of this Merger Agreement plus (b)(x) the number of Dissenting
Shares multiplied by (y) $22 per share. For purposes of making the foregoing
calculation, Dissenting Shares shall be determined as of the Effective Time.
"Certificate of Merger" shall have the meaning set forth in Section 2.2.
"Certificates" shall have the meaning set forth in Section 3.2.
"Claim" shall have the meaning set forth in Section 6.16.
"Closing" shall have the meaning set forth in Section 2.3.
"Closing Date" shall have the meaning set forth in Section 2.3.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Confidential Information" shall have the meaning set forth in Section 6.5.
"Consents" shall have the meaning set forth in Section 6.2.
"Contract" shall mean, with respect to any Person, any note, bond,
indenture, lease, license, permit, franchise, deed of trust, mortgage, loan
agreement or other document, instrument, obligation or agreement, oral or
written, to which such Person or any of its subsidiaries is a party or by which
any of them or their assets or properties is bound or affected.
"DGCL" means the General Corporation Law of the State of Delaware.
"Dissenting Shares" shall have the meaning set forth in Section 3.7.
"Effective Day" shall mean the day on which the Effective Time occurs.
"Effective Time" shall have the meaning set forth in Section 2.2.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended (including without limitation any successor act), and the rules and
regulations promulgated thereunder.
"ERISA Affiliate" shall mean any Person that together with any of the
Garage Companies would be or was at any time treated as a single employer under
Section 414 of the Code or Section 4001 of ERISA and any general partnership of
which any of the Garage Companies is or has been a general partner.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.
"Exchange Agent" shall have the meaning set forth in Section 3.3.
"Exchange Ratio" shall have the meaning set forth in Section 3.2.
"GAAP" shall mean generally accepted accounting principles.
"Garage 1995 Option Plan" shall have the meaning set forth in Section 3.5.
"Garage Benefit Arrangement" shall mean any Benefit Arrangement sponsored
or maintained by the Garage Companies or with respect to which any of the Garage
Companies has or may have any liability (whether actual, contingent, with
respect to any of its assets or otherwise), in each case with respect to any
present or former directors, employees, or agents of the Garage Companies.
"Garage Common Stock" shall mean the common stock, par value, $.001 per
share, of Garage.
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"Garage Companies" shall mean Garage and any subsidiary of Garage that
currently has or previously had employees.
"Garage Directors' Option Plan" shall have the meaning set forth in Section
3.5.
"Garage Financial Advisor" shall have the meaning set forth in Section
4.14.
"Garage Meeting" shall have the meaning set forth in Section 6.7.
"Garage Option Plans" shall mean the Garage 1995 Option Plan and the Garage
Directors' Option Plan.
"Garage Plan" shall mean any Benefit Plan for which any of the Garage
Companies is the "plan sponsor" (as defined in Section 3(16)(B) of ERISA) or any
Benefit Plan maintained by any of the Garage Companies or to which any of the
Garage Companies is obligated to make payments, in each case with respect to any
present or former employees of the Garage Companies. Garage Plan shall include
any Qualified Plan terminated within the preceding six years.
"Garage SEC Reports" shall have the meaning set forth in Section 4.7.
"Garage Stock Options" shall have the meaning set forth in Section 3.5.
"Garage Stockholder Approval" shall have the meaning set forth in Section
6.7.
"Governmental Authority" shall mean any government or any agency, bureau,
board, commission, court, judicial or quasi-judicial body, department,
authority, official, political subdivision, tribunal or other instrumentality of
any government, whether Federal, state or local, domestic or foreign.
"Home Common Stock" shall mean Common Stock, par value $1.00 per share, of
Home.
"Home Registration Statement" shall have the meaning set forth in Section
6.8.
"Home SEC Reports" shall have the meaning set forth in Section 5.7.
"Home Stock Plans" shall have the meaning set forth in Section 5.3.
"HSR Act" shall have the meaning set forth in Section 4.5.
"IRS" shall mean the United States Internal Revenue Service or any
successor agency.
"Indemnified Officers/Directors" shall have the meaning set forth in
Section 6.16.
"Indemnified Party" shall have the meaning set forth in Section 6.15.
"Indemnifying Party" shall have the meaning set forth in Section 6.15.
"Intellectual Property" shall have the meaning set forth in Section 4.18.
"Law" shall mean any law, statute, rule, regulation, ordinance, decree or
order of any Governmental Authority.
"Lien" shall mean any mortgage, pledge, assessment, security interest,
lease, sublease, lien, adverse claim, levy, charge, option, right of others or
restriction (whether on voting, sale, transfer, disposition or otherwise) or
other encumbrance of any kind, whether imposed by agreement, understanding, law
or equity, or any conditional sale contract, title retention contract or other
contract to give or to refrain from giving any of the foregoing.
"Loans" shall have the meaning set forth in Section 4.17.
"Losses" shall have the meaning set forth in Section 6.16.
"Management Stockholder Agreement" shall mean an agreement among certain
stockholders of Garage and Home in the form attached hereto as Exhibit E.
"Material Adverse Effect" shall mean, with respect to any Person, a
material adverse effect on (i) the validity or enforceability of this Agreement,
(ii) the ability of such Person to perform its obligations under this
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Agreement or (iii) the business, assets, condition or results of operations of
the Person and its subsidiaries, taken as a whole; provided, however, that any
adverse change, event or effect that is proximately caused (i) by conditions
affecting the United States economy generally or the economy of the regions in
which the Person conducts a material part of its business, (ii) by conditions
affecting the industry in which the Person competes, (iii) by the announcement
of the Merger or by virtue of the Merger Agreement, including, without
limitation, compliance by such Person with its covenants set forth in this
Agreement or (iv) by the breach by the other Person of any covenant or
obligation set forth in this Agreement shall not be taken into account in
determining whether there has been a Material Adverse Effect.
"Material Subsidiary" shall mean, with respect to any Person, a subsidiary
of such Person that (i) constitutes a "significant subsidiary" of such Person,
within the meaning of Rule 1-02 of Regulation S-X of the SEC, (ii) has a direct
or indirect ownership interest in any other subsidiary of such Person that is a
Material Subsidiary of such Person, or (iii) is otherwise material to the
business or operations of such Person and its subsidiaries, taken as a whole.
"Merger" shall have the meaning set forth in the preamble to this
Agreement.
"Merger Consideration" shall have the meaning set forth in Section 3.2.
"Merger Filing" shall have the meaning set forth in Section 2.2.
"NYSE" means the New York Stock Exchange, Inc.
"Notices" shall have the meaning set forth in Section 9.4.
"Option" shall mean, with respect to any Person, any option, warrant, call,
right, subscription, convertible or exchangeable security or other right,
agreement, arrangement or commitment of any kind or character to which such
Person or any of its subsidiaries is a party relating to the issued or unissued
capital stock of such Person or any of its subsidiaries, or obligating such
Person or any of its subsidiaries to issue, transfer, grant or sell any shares
of capital stock of, or other equity interest in, or securities convertible into
or exchangeable for any capital stock or other equity interest in, such Person
or any of its subsidiaries.
"Organizational Documents" shall mean (i) with respect to a corporation,
its certificate or articles of incorporation and bylaws, (ii) with respect to
any limited liability company, its certificate of formation, articles of
organization, regulations, operating agreement and limited liability company
agreement, as applicable, (iii) with respect to any limited partnership, its
certificate of limited partnership and limited partnership agreement, (iv) with
respect to any general partnership, its partnership agreement, and (v) all other
similar organizational documents.
"Person" shall mean any natural person, corporation, general partnership,
limited partnership, limited liability company, limited liability partnership,
proprietorship, trust, union, association, court, tribunal, agency, government,
department, commission, self-regulatory organization, arbitrator, board, bureau,
instrumentality or other entity, enterprise, authority or business organization.
"Proxy Statement/Prospectus" shall have the meaning set forth in Section
6.8.
"Qualified Plan" shall mean any Garage Plan that meets, purports to meet,
or is intended to meet the requirements of Section 401(a) of the Code.
"Representatives" means, with respect to any Person, the officers,
directors, employees, auditors and other agents and representatives of such
Person.
"Rule 145 Affiliate Agreement" shall have the meaning set forth in Section
6.14.
"Rule 145 Affiliates" shall have the meaning set forth in Section 6.14.
"SEC" shall mean the Securities and Exchange Commission.
"Securities Act" shall mean the Securities Act of 1933, as amended.
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"Stockholder Agreement" shall mean the agreements among certain
stockholders of Garage and Home in the forms attached hereto as Exhibit D.
"Suit" shall have the meaning set forth in Section 9.12.
"Surviving Corporation" shall have the meaning set forth in Section 2.1.
"Tax" or "Taxes" shall mean all Federal, state, local and foreign taxes and
other assessments and governmental charges of a similar nature (whether imposed
directly or through withholdings), including any interest, penalties and
additions to Tax applicable thereto.
"Tax Returns" shall mean all Federal, state, local and foreign returns,
declarations, statements, reports, schedules, forms and information returns
relating to Taxes, and all amendments thereto.
"Total Consideration" shall mean the sum of (i) the Cash Consideration and
(ii)(x) the product of the Exchange Ratio and the closing price per share of
Home Common Stock on the Effective Day multiplied by (y) the total number of
shares of Garage Common Stock issued and outstanding at the Effective Time which
are to be converted pursuant to Section 3.2(a) into shares of Home Common Stock.
"Trading Day" shall a mean day on which Home Common Stock is traded on the
NYSE.
"Transactions" means the transactions contemplated by this Agreement in
Article II.
"Weighted Average Home Stock Price" shall have the meaning set forth in
Section 3.2.
ARTICLE II
THE MERGER
SECTION 2.1 The Merger. Upon the terms and subject to the conditions of
this Agreement, at the Effective Time, in accordance with the DGCL, Merger Sub
shall be merged with and into Garage in accordance with this Agreement and the
separate existence of Merger Sub shall cease. Garage shall be the surviving
corporation in the Merger (hereinafter sometimes referred to as the "Surviving
Corporation").
SECTION 2.2 Effective Time of the Merger. Upon the terms and subject to the
conditions hereof, a certificate of merger (the "Certificate of Merger") shall
be duly prepared, executed and acknowledged by the Surviving Corporation and
thereafter delivered to the Secretary of State of the State of Delaware, for
filing on the Closing Date (as defined in Section 2.3). The Merger shall become
effective as of the date and at such time as the Certificate of Merger pursuant
to Section 251 of the DGCL and any other documents necessary to effect the
Merger in accordance with the DGCL are duly filed (the "Merger Filing") with the
Secretary of State of the State of Delaware or at such subsequent date or time
as shall be agreed by Home and Garage and specified in the Certificate of Merger
(the time the Merger becomes effective pursuant to the DGCL being referred to
herein as the "Effective Time").
SECTION 2.3 Closing. Subject to the satisfaction or waiver of all of the
conditions to closing contained in Article VII, the closing of the Merger (the
"Closing") will take place at 10:00 a.m., eastern time, on a date to be
specified by the parties, which shall be no later than the first Business Day
after the satisfaction or waiver of the conditions to Closing contained in
Article VII, at the offices of Wilmer, Cutler & Pickering, 2445 M Street, N.W.,
Washington, D.C. 20037, unless another date, time or place is agreed to in
writing by the parties hereto. The date and time at which the Closing occurs is
referred to herein as the "Closing Date."
SECTION 2.4 Effects of the Merger. The Merger shall have the effects set
forth in the DGCL. Without limiting the generality of the foregoing, and subject
thereto, at the Effective Time, all the properties, rights, privileges, powers
and franchises of Garage and Merger Sub shall vest in the Surviving Corporation,
and all debts, liabilities and duties of Garage and Merger Sub shall become the
debts, liabilities and duties of the Surviving Corporation.
SECTION 2.5 Certificate of Incorporation and By-Laws. Subject to Section
6.16, the Certificate of Incorporation of Merger Sub in effect immediately prior
to the Effective Time shall become the Certificate of
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Incorporation of the Surviving Corporation. The By-Laws of Merger Sub in effect
immediately prior to the Effective Time shall become the By-Laws of the
Surviving Corporation.
SECTION 2.6 Directors. The directors of Merger Sub immediately prior to the
Effective Time shall be the initial directors of the Surviving Corporation, each
to hold office from the Effective Time in accordance with the Certificate of
Incorporation and By-Laws of the Surviving Corporation and until his or her
successor is duly elected and qualified.
SECTION 2.7 Officers. The officers of Merger Sub immediately prior to the
Effective Time shall be the initial officers of the Surviving Corporation, each
to hold office from the Effective Time in accordance with the Certificate of
Incorporation and By-Laws of the Surviving Corporation and until his or her
successor is duly appointed and qualified.
ARTICLE III
CONVERSION OF SHARES
SECTION 3.1 Conversion of Capital Stock of Merger Sub. At the Effective
Time, each issued and outstanding share of common stock, par value $1.00 per
share, of Merger Sub shall be converted into and become one fully paid and
nonassessable share of common stock, par value $1.00 per share, of the Surviving
Corporation.
SECTION 3.2 Conversion of Capital Stock of Garage.
(a) Except as otherwise provided in Section 3.4 and Section 3.7 and
subject to Section 3.2(c), at the Effective Time, each issued and
outstanding share of Garage Common Stock shall be converted into the right
to receive (i) $2.00 in cash and (ii) that number of shares of Home Common
Stock equal to the Exchange Ratio (together, the "Merger Consideration").
(b) The "Exchange Ratio" shall mean the number determined by dividing
(x) $20 by (y) the Weighted Average Home Stock Price, rounding the result
to the nearest 1/100,000 per share. The "Weighted Average Home Stock Price"
shall mean (i) the sum of the daily volume weighted average prices per
share of Home Common Stock on the NYSE as reported by the Bloomberg Equity
AQR Screen (and confirmed by J.P. Morgan & Co. and Garage Financial
Advisor) for each of the ten consecutive Trading Days ending on the Trading
Day that is the Trading Day prior to the Garage Meeting (the "Pricing
Period"), divided by (ii) ten. In all events the Pricing Period shall begin
on the 11th Trading Day preceding the date on which the Garage Meeting has
been scheduled by notice to the stockholders, unless the meeting is
adjourned or rescheduled in which case the Pricing Period shall begin
eleven (11) Trading Days before the date of the resumption of the adjourned
meeting or the rescheduled meeting date.
(c) Notwithstanding anything to the contrary, Home shall have the
one-time option to elect to increase the cash portion of the Merger
Consideration up to an additional $2 per share of Garage Common Stock in
lieu of a corresponding amount of the Home Common Stock constituting the
Merger Consideration, which option shall be exercisable through a limited
irrevocable written notice of exercise, which may expressly be modified by
Home as required consistent with Section 3.2(d) hereof, delivered to Garage
on or before the close of business on the day preceding the first day of
the Pricing Period. Any increase in the cash portion of the Merger
Consideration pursuant to this Section 3.2(c) shall result in a
corresponding decrease in the dollar amount set forth in Section 3.2(b)(x)
used to calculate the Exchange Ratio.
(d) Notwithstanding anything herein to the contrary, if as of the
close of the NYSE on the Effective Day, the Cash Consideration exceeds
19.85% of the Total Consideration, then, if possible, the cash portion of
the Merger Consideration shall be reduced so that the Cash Consideration
does not exceed 19.85% of the Total Consideration; provided, however, in no
event shall the cash portion of the Merger Consideration be reduced so that
shares of Garage Common Stock converted as provided in Section 3.2(a) above
will receive less than $2 per share in cash. If the cash portion is
reduced, the
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additional stock portion of the Merger Consideration paid to compensate for
such reduction shall equal that number of shares of Home Common Stock equal
to (x) the dollar amount per share by which the cash portion of the Merger
Consideration is reduced, divided by (y) the closing price per share of
Home Common Stock on the Effective Day.
(e) As a result of the Merger and without any action on the part of
the holders thereof, at the Effective Time, all shares of Garage Common
Stock shall no longer be outstanding and shall automatically be cancelled
and retired and shall cease to exist, and each holder of shares of Garage
Common Stock shall thereafter cease to have any rights with respect to such
shares of Garage Common Stock, except the right to receive, without
interest, the Merger Consideration and cash for fractional shares of Home
Common Stock in accordance with Section 3.4 upon the surrender of a
certificate that, immediately prior to the Effective Time, represented an
outstanding share or shares of Garage Common Stock or, in the case of
book-entry securities, appropriate documentation of the book entry
securities maintained through the Depository Trust Company (a
"Certificate").
(f) Notwithstanding anything contained in this Section 3.2 to the
contrary, each share of Garage Common Stock issued and held in Garage's
treasury or by a wholly-owned subsidiary of Garage immediately prior to the
Effective Time, and each share of Garage Common Stock owned by Home or
Merger Sub immediately prior to the Effective Time, if any, shall, by
virtue of the Merger, cease to be outstanding and shall be cancelled and
retired and shall cease to exist without payment of any consideration
therefor.
SECTION 3.3 Exchange of Certificates.
(a) Promptly after the Effective Time, Home shall deposit (or cause to
be deposited) with a bank or trust company to be designated by Home and
reasonably acceptable to Garage (the "Exchange Agent"), for the benefit of
the holders of shares of Garage Common Stock, for exchange in accordance
with this Article III, (i) cash in an amount sufficient to pay the cash
portion of the Merger Consideration and cash in lieu of fractional shares
and (ii) certificates representing the aggregate number of shares of Home
Common Stock that may be issued in respect of shares of Garage Common Stock
in the Merger. Home Common Stock into which Garage Common Stock shall be
converted pursuant to the Merger shall be deemed to have been issued at the
Effective Time.
(b) Promptly after the Effective Time and in any event within five
Business Days, Home shall cause the Exchange Agent to mail to each holder
of record of Garage Common Stock immediately prior to the Effective Time
(i) a letter of transmittal (which shall specify that delivery shall be
effected, and risk of loss and title to the Certificates shall pass, only
upon delivery of the Certificates to the Exchange Agent and shall be in
customary form with such customary provisions as Home may reasonably
specify (the "Letter of Transmittal") and (ii) instructions for use in
effecting the surrender of the Certificates in exchange for the Merger
Consideration. Home shall have the Letter of Transmittal available for
stockholders of Garage to obtain, at such stockholders' request, as of the
close of business on the Closing Date.
(c) Upon surrender of a Certificate, in such form and with such
(i) endorsements, stock powers and signature guarantees as may be required
by the Letter of Transmittal, or (ii) an appropriate guarantee of delivery
of such Certificate from a member of any registered national securities
exchange or of the National Association of Securities Dealers, Inc. or a
commercial bank or trust company in the United States as may be required by
the Letter of Transmittal, for cancellation to the Exchange Agent or to
such other agent or agents as may be appointed by Home, together with the
Letter of Transmittal, duly executed, and such other documents as Home or
the Exchange Agent shall reasonably request, the holder of such Certificate
shall be entitled to receive in exchange therefor, (i) a certified or bank
cashier's check in an amount equal to the cash which such holder has the
right to receive pursuant to the provisions of this Article III and (ii) a
certificate representing the number of shares of Home Common Stock which
such holder has the right to receive pursuant to the provisions of this
Article III (in each case, less the amount of any required withholding
taxes), and the Certificate so surrendered shall forthwith be cancelled.
Until surrendered as contemplated by this Section 3.3(c), each Certificate
shall be deemed at
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any time after the Effective Time to represent only the right to receive
the Merger Consideration with respect to the shares of Garage Common Stock
formerly represented thereby.
SECTION 3.4 Dividends, Fractional Shares, Etc.
(a) Notwithstanding any other provisions of this Agreement, no
dividends or other distributions declared after the Effective Time on Home
Common Stock shall be paid to the holder of any unsurrendered Certificates
until such Certificates are surrendered for exchange as provided in this
Article III. Subject to the effect of applicable laws, following the
surrender of any such Certificate, there shall be paid, without interest,
to the Person in whose name the certificates representing the shares of
Home Common Stock into which the shares of Garage Common Stock formerly
represented by such Certificate were converted are registered, (i) at the
time of such surrender, the amount of all dividends and other distributions
with a record date after the Effective Time theretofore payable with
respect to such whole shares of Home Common Stock and not paid, less the
amount of any withholding taxes which may be required thereon, and (ii) at
the appropriate payment date, the amount of dividends or other
distributions with a record date after the Effective Time but prior to
surrender and a payment date subsequent to surrender payable with respect
to such whole shares of Home Common Stock, less the amount of any
withholding taxes which may be required thereon.
(b) No fractional shares of Home Common Stock shall be issued in the
Merger. All fractional shares of Home Common Stock that a holder of shares
of Garage Common Stock would otherwise be entitled to receive as a result
of the Merger shall be aggregated and, if a fractional share results from
such aggregation, such holder shall be entitled to receive, in lieu
thereof, an amount in cash determined by multiplying (i) the fraction of a
share of Home Common Stock to which such holder would otherwise have been
entitled by (ii) the Weighted Average Home Stock Price. No interest will be
paid or will accrue on any cash paid or payable in lieu of any fractional
shares of Home Common Stock.
(c) At and after the Effective Time, there shall be no further
registration of transfers of shares of Garage Common Stock. If, after the
Effective Time, Certificates are presented to the Surviving Corporation,
they shall be cancelled and exchanged for the consideration provided for,
and in accordance with the procedures set forth, in this Article III.
Certificates surrendered for exchange by any Person constituting an
"affiliate" of Garage for purposes of Rule 145(c) under the Securities Act
shall not be exchanged until Home has received a written Rule 145 Affiliate
Agreement from such Person as provided in Section 6.14.
(d) If any portion of the Merger Consideration is to be paid to a
Person other than the registered holder of the shares of Garage Common
Stock represented by the Certificate or Certificates surrendered in
exchange therefor, it shall be a condition to such payment that the
Certificate or Certificates so surrendered shall be properly endorsed or
otherwise be in proper form for transfer and that the Person requesting
such payment shall pay to the Exchange Agent any transfer or other taxes
required as a result of such payment to a Person other than the registered
holder of such Certificates or establish to the satisfaction of the
Exchange Agent that such tax has been paid or is not payable.
(e) Any portion of the Merger Consideration or cash payable in lieu of
fractional shares made available to the Exchange Agent pursuant to this
Article III that remains unclaimed by the former holders of shares of
Garage Common Stock one year after the Effective Time shall be delivered to
Home. Any such holder who has not theretofore exchanged his Certificates
for the Merger Consideration in accordance with this Article III shall
thereafter look only to Home for payment of the applicable Merger
Consideration, cash in lieu of fractional shares and unpaid dividends and
distributions on the Home Common Stock deliverable in respect thereof,
determined pursuant to this Agreement, in each case, without interest. None
of Home, Garage or the Surviving Corporation shall be liable to any former
holder of shares of Garage Common Stock for any amount paid to a public
official pursuant to any applicable abandoned property, escheat or similar
laws. Any amounts remaining unclaimed by holders of shares of Garage Common
Stock five years after the Effective Time (or such earlier date immediately
prior to such time as such amounts would otherwise escheat to or become the
property of any governmental entity)
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shall, to the extent permitted by applicable law, become the property of
Home free and clear of any claims or interest of any person previously
entitled thereto.
(f) In the event that any Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the Person
claiming such Certificate to be lost, stolen or destroyed and, if required
by Home, the posting by such Person of a bond in a customary amount as
indemnity against any claim that may be made against it with respect to
such Certificate, the Exchange Agent will issue in exchange for such lost,
stolen or destroyed Certificate the applicable Merger Consideration, cash
in lieu of fractional shares, and unpaid dividends and distributions on
shares of Home Common Stock deliverable in respect thereof pursuant to this
Agreement.
(g) If at any time during the period between the date of this
Agreement and the Effective Time, any change in the outstanding shares of
capital stock of Home shall occur, including by reason of any
reclassification, recapitalization, stock split or combination, exchange or
readjustment of shares, or any stock dividend thereon with a record date
during such period, the number of shares of Home Common Stock constituting
all or part of the Merger Consideration shall be appropriately adjusted.
SECTION 3.5 Garage Stock Options.
(a) At the Effective Time, all options to purchase shares of Garage
Common Stock (each a "Garage Stock Option") then outstanding under the
Garage 1995 Stock Option Plan (the "Garage 1995 Option Plan"), whether or
not exercisable, will be assumed by Home. Each Garage Stock Option so
assumed by Home under this Agreement will continue to have, and be subject
to, the same terms and conditions set forth in the Garage 1995 Option Plan
immediately prior to the Effective Time and the stock option agreement by
which it is evidenced, except that (i) each such Garage Stock Option will
be exercisable for that number of whole shares (and no fractional shares)
of Home Common Stock equal to the product of the number of shares of Garage
Common Stock that were issuable upon the exercise of such Garage Stock
Option multiplied by the number determined by dividing (x) $22.00 by (y)
the Weighted Average Home Stock Price, rounded down to the nearest whole
cent (the "Option Exchange Ratio") and (ii) the per share exercise price
for the shares of Home Common Stock issuable upon the exercise of such
assumed Garage Stock Option will be equal to the quotient determined by
dividing the exercise price per share of Garage Common Stock at which such
Garage Stock Option would have been exercisable immediately prior to the
Effective Time by the Option Exchange Ratio, rounded up to the nearest
whole cent. As soon as reasonably practicable after the Effective Time,
Home will issue to each holder of an outstanding Garage Stock Option a
notice describing the foregoing assumption of such Garage Stock Option by
Home.
(b) Garage shall cause to be delivered to Home, prior to the Effective
Time, a list specifying those holders of Garage Stock Options under the
Garage 1995 Option Plan who have exercised stock appreciation rights (a
"Specified Option"). As of the Effective Time, each Specified Option shall
be cancelled and Garage shall pay with respect to each Specified Option
that has not been exercised as of the Effective Time, an amount of cash per
share of Garage Common Stock subject to the Specified Option equal to $22
less the per share exercise price of the applicable Specified Option.
(c) On the date of the Garage Meeting, if Garage Stockholder Approval
has been obtained, Garage shall cause each outstanding Garage Stock Option
issued pursuant to the Garage 1995 Directors' Stock Option Plan (the
"Garage Directors' Option Plan") granted prior to the date of this
Agreement to immediately become fully vested and exercisable, if not fully
vested and exercisable at such time, and each such Garage Stock Option then
outstanding and not exercised shall be cancelled in exchange for an amount
of cash per share of Garage Common Stock for which such Garage Stock Option
was exercisable equal to $14.75 per share of such Garage Stock Option.
SECTION 3.6 Tax Treatment. It is intended by the parties hereto that the
Merger shall constitute a reorganization within the meaning of Section 368 of
the Code. The parties hereto adopt this Agreement as a "plan of reorganization"
within the meaning of Sections 1.368-2(g) and 1.368-3(a) of the United States
Income Tax Regulations.
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SECTION 3.7 Appraisal Rights. Garage Common Stock which is not voted in
favor of the Merger and with respect to which a demand for payment and appraisal
shall have been properly made in accordance with Section 262(d)(1) of the DGCL
("Dissenting Shares") shall not be converted into the right to receive any cash
or stock portions of the Merger Consideration and the holders of Dissenting
Shares shall be entitled only to such rights as may be granted by the DGCL;
provided, however, that if a holder of Dissenting Shares shall withdraw his, her
or its demand for such payment and appraisal or shall become ineligible for such
payment and appraisal, then as of the Effective Time or the occurrence of such
event of withdrawal or ineligibility, whichever later occurs, such holder's
Dissenting Shares shall cease to be Dissenting Shares and shall be converted
into the right to receive the cash portion and stock portion of the Merger
Consideration into which the Dissenting Shares would have been converted
pursuant to Section 3.2.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF GARAGE
Except as disclosed or otherwise referred to in the attached Garage
Disclosure Schedules or in the documents identified in the Garage Disclosure
Schedules, Garage hereby represents and warrants to Home and Merger Sub that:
SECTION 4.1 Organization and Qualifications; Subsidiaries. Garage and each
subsidiary of Garage is a corporation, partnership or other legal entity duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation or organization and has the corporate power
and authority and all necessary governmental approvals to own, lease and operate
its properties and to carry on its business as it is now being conducted, except
where failure to obtain such approvals would not cause a Material Adverse
Effect. Each of Garage and its subsidiaries is duly qualified or licensed as a
foreign corporation or partnership to transact business, and is in good
standing, in each jurisdiction where the character of the properties owned,
leased or operated by it or the nature of its business makes such qualification
or licensing necessary and where the failure to so qualify would cause a
Material Adverse Effect. Each subsidiary of Garage or other person in which
Garage has an equity interest is listed on Schedule 4.1.
SECTION 4.2 Certificate of Incorporation and Bylaws. Complete and correct
copies of the certificate of incorporation and bylaws of Garage, as amended to
date, have been filed (or incorporated by reference) as Exhibits 3.1 and 3.2,
respectively, to Garage's Annual Report on Form 10-K for the year ended December
31, 1996. Such Organizational Documents are in full force and effect and have
not been amended or modified in any respect. Garage is not in violation of any
provision of its Organizational Documents. No subsidiary of Garage is in
violation of any provision of its Organizational Documents.
SECTION 4.3 Capitalization. The authorized capital stock of Garage consists
of 18,000,000 shares of Garage Common Stock and 1,817,718 shares of preferred
stock. As of August 21, 1997, (a)(i) 8,485,728 shares of Garage Common Stock
were issued and outstanding, all of which were validly issued, fully paid and
nonassessable and (ii) no shares of preferred stock were issued and outstanding;
and (b)(i) 529,338 shares of Garage Common Stock were reserved for issuance upon
the exercise of outstanding stock options granted pursuant to the Garage Options
Plans and (ii) 20,662 shares of Garage Common Stock were reserved for issuance
pursuant to options available for grant under the Garage Option Plans. Except as
set forth above, as of August 21, 1997, no shares of capital stock or other
voting securities of Garage were issued, reserved for issuance or outstanding
and, since such date, no shares of capital stock or other voting securities or
options in respect thereof have been issued except upon the exercise of Garage
Stock Options issued under the Garage Option Plans outstanding on August 21,
1997. Except for the Garage Stock Options, there are not now, and at the Closing
there will not be, any Options. All shares of Garage Common Stock subject to
issuance as aforesaid, upon issuance on the terms and conditions specified in
the instruments pursuant to which they are issuable, will be duly authorized,
validly issued, fully paid and nonassessable. There are no outstanding
contractual obligations of Garage or any of its subsidiaries to repurchase,
redeem or otherwise acquire any shares of Garage Common Stock or any other
shares of capital stock of Garage or any of its subsidiaries, or make any
material investment (in the form of a loan, capital contribution or otherwise)
in any subsidiary of
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Garage or any other Person, other than a wholly-owned subsidiary of garage or a
person wholly-owned by one or more wholly-owned subsidiaries of Garage. Each
outstanding share of capital stock of each subsidiary of Garage is duly
authorized, validly issued, fully paid and nonassessable and each such share
owned by Garage or any subsidiary of Garage is owned free and clear of any
Liens.
SECTION 4.4. Authority Relative to This Agreement. Garage has all necessary
corporate power and authority to execute and deliver this Agreement, to perform
its obligations hereunder and, subject to the adoption of this Agreement by the
stockholders of Garage as contemplated herein and the Merger Filing, to
consummate the Transactions. The execution and delivery of this Agreement by
Garage, the performance by Garage of its obligations hereunder and the
consummation by Garage of the Transactions have been duly and validly authorized
by all necessary corporate action and approved by the affirmative vote of a
majority of the entire Board of Directors of Garage and no other corporate
proceedings on the part of Garage are necessary to authorize this Agreement or
to consummate the Transactions (other than the Garage Stockholder Approval and
the Merger Filing). This Agreement has been duly and validly executed and
delivered by Garage and, assuming the due authorization, execution and delivery
thereof by Home and Merger Sub, constitutes the legal, valid and binding
obligation of Garage, enforceable against Garage in accordance with its terms,
except as enforceability may be limited by bankruptcy and other similar laws and
general principles of equity.
SECTION 4.5 No Conflict; Required Filings and Consents; Certain Contracts.
(a) Except as set forth on Schedule 4.5, the execution and delivery of
this Agreement by Garage does not, and the performance of its obligations
under this Agreement and the consummation of the Transactions by Garage
will not, (i) conflict with, result in a breach of, cause a dissolution or
require the consent or approval of any Person under, or violate any
provision of, the Organizational Documents of Garage, (ii) require any
consent, approval, authorization or permit of, or filing with or
notification to, any Governmental Authority, except for (A) applicable
requirements of the Exchange Act, the Securities Act, state securities or
"blue sky" laws ("Blue Sky Laws"), and the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 (as amended, the "HSR Act"), in each case,
including any rules and regulations promulgated thereunder, (B) the Merger
Filing, (C) the Garage Stockholder Approval and (D) such other consents,
authorizations, filings, approvals and registrations which if not obtained
or made would not be material to Garage or Home or have a material adverse
effect on the ability of the parties to consummate the Merger, (iii)
subject to the making of the filings and obtaining the approvals identified
in clause (ii), conflict with or violate any Law, judgment, order, writ,
injunction or decree applicable to Garage or by which any property or asset
of Garage is bound or affected, which conflict or violation would result in
a loss of material benefits to or in any material liability to Garage, Home
or the Surviving Corporation, or (iv) conflict with or result in any breach
of or constitute a default (or an event which with notice or lapse of time
or both would become a default) under, result in the loss by Garage or
modification in a manner materially adverse to Garage of any right or
benefit under, or give to others any right of termination, amendment,
acceleration, repurchase or repayment, increased payments or cancellation
of, or result in the creation of a Lien or other encumbrance on any Garage
Common Stock or any material property or asset of Garage or any subsidiary
of Garage pursuant to, any Contract of Garage, except, in each case, such
as would not, individually or in the aggregate have a material adverse
effect on the ability of the parties to consummate the Merger, or
otherwise, individually or in the aggregate, prevent Garage from performing
its obligations under this Agreement in any material respect, and would
not, individually or in the aggregate, have a Material Adverse Effect on
Garage.
(b) Except as set forth in the Contracts filed (or incorporated by
reference) as exhibits to Garage's Annual Report on Form 10-K for the year
ended December 31, 1996 or the other Garage SEC Reports filed thereafter or
except as set forth in Schedule 4.5, there are no Contracts to which Garage
or any subsidiary of Garage is a party or by which Garage or any subsidiary
of Garage or any asset of Garage or any subsidiary of Garage is bound,
which by its terms materially limits the ability of Garage or any
subsidiary of Garage, or to Garage's knowledge, after consummation of the
Transactions, would by its terms materially limit the ability of Home or
any of its affiliates, to engage in any business in any area or for any
period.
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SECTION 4.6 Compliance. Except as set forth on Schedule 4.6, neither Garage
nor any Material Subsidiary of Garage is in conflict with, or in default or
violation of, (a) any Law applicable to such Person or by which any property or
asset of such Person is bound or affected, or (b) any Contract to which Garage
or any subsidiary of Garage is a party or by which such Person or any property
or asset of such Person is bound or affected, except for such conflicts,
defaults, or violations that would not, individually or in the aggregate, have a
Material Adverse Effect.
SECTION 4.7 SEC Reports and Financial Statements. Each form, report,
schedule, registration statement and definitive proxy statement filed with the
SEC by Garage prior to the date hereof (as such documents have been amended
prior to the date hereof, the "Garage SEC Reports"), as of their respective
dates, complied in all material respects with the applicable requirements of the
Securities Act and the Exchange Act and the rules and regulations thereunder.
None of the Garage SEC Reports, as of their respective dates, contained any
untrue statement of a material fact or omitted to state 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, except for such
statements, if any, as have been modified or superseded by subsequent filings
prior to the date hereof. Garage has made available to Home a true, accurate and
complete list of all of the Garage SEC Reports. The consolidated financial
statements of Garage and its subsidiaries included in such reports comply as to
form in all material respects with applicable accounting requirements and with
the published rules and regulations of the SEC with respect thereto, have been
prepared in accordance with GAAP (except as may be indicated in the notes
thereto or, in the case of the unaudited interim financial statements, as
permitted by Form 10-Q of the SEC) and fairly present in all material respects
(subject, in the case of the unaudited interim financial statements, to normal,
year-end audit adjustments) the consolidated financial position of Garage and
its subsidiaries as at the dates thereof and the consolidated results of their
operations and cash flows for the periods then ended. Since December 31, 1996,
neither Garage nor any of its subsidiaries has incurred any liabilities or
obligations (whether absolute, accrued, fixed, contingent, liquidated,
unliquidated or otherwise and whether due or to become due) of any nature,
except liabilities, obligations or contingencies (a) which are reflected on the
consolidated balance sheet of Garage and its subsidiaries as at December 31,
1996 (including the notes thereto) or (b) which (i) were incurred in the
ordinary course of business after December 31, 1996, (ii) are disclosed in the
Garage SEC Reports filed after December 31, 1996 or (iii) would not,
individually or in the aggregate, have a Material Adverse Effect on Garage.
Since June 30, 1996, Garage has timely filed with the SEC all forms, reports and
other documents required to be filed prior to the date hereof, and no subsidiary
of Garage has filed, or been required to file, any form, report or other
document with the SEC, in each case, pursuant to the Securities Act, the
Exchange Act or the rules and regulations thereunder. Since December 31, 1996,
there has been no change in any of the significant accounting (including tax
accounting) policies, practices or procedures of Garage or any subsidiary of
Garage, except changes to comply with changes in accounting pronouncements of
the Financial Accounting Standards Board, other changes in GAAP or changes in
applicable laws or rules or regulations thereunder.
SECTION 4.8 Absence of Certain Changes or Events. Except as contemplated by
this Agreement or as disclosed in any Garage SEC Report or as set forth on
Schedule 4.8, since June 30, 1997, (a) Garage and its subsidiaries have
conducted their respective businesses only in the ordinary course, and have not
taken any of the actions set forth in paragraphs (a) through (j) of Section 6.3
and (b) as of the date hereof, there has not occurred or arisen any event that,
individually or in the aggregate, has had or, insofar as reasonably can be
foreseen, is likely in the future to have, a Material Adverse Effect on Garage.
SECTION 4.9 Litigation. Except as disclosed in the Garage SEC Reports or as
set forth on Schedule 4.9, as of the date hereof, there are no claims, suits,
actions or proceedings pending or, to Garage's knowledge, threatened or
contemplated, nor are there any investigations or reviews by any Governmental
Authority pending or, to Garage's knowledge, threatened or contemplated,
against, relating to or affecting Garage or any of its subsidiaries, which
would, individually or in the aggregate, have a Material Adverse Effect on
Garage or prohibit or materially restrict the consummation of the Transactions,
nor is there any judgment, decree, order, injunction or writ of any Governmental
Authority or any arbitrator outstanding against Garage or any of its
subsidiaries. In addition, as of the date hereof, there have not been any
developments with respect
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to any of the claims, suits, actions, proceedings, investigations or reviews
disclosed in the Garage SEC Reports which, insofar as can be reasonably
foreseen, in the future are likely to have a Material Adverse Effect on Garage.
SECTION 4.10 Intentionally Omitted.
SECTION 4.11 Employee Benefit Plans. With respect, as applicable, to
Benefit Plans and Benefit Arrangements: neither Garage nor any ERISA Affiliate
has maintained or contributed to any Qualified Plans since July 1, 1993 other
than the American Credit Corporation 401(k) Salary Savings Plan (the "401(k)
Plan"). Schedule 4.11 completely and accurately lists all Garage Plans and
Garage Benefit Arrangements and specifically identifies any that are Qualified
Plans. The Qualified Plan has always qualified in form and operation under Code
Section 401(a) and has a currently applicable determination letter from the
Internal Revenue Service, and its trust has always been exempt under Code
Section 501(a), and nothing has occurred with respect to such plan and trust
that could cause the loss of such qualification or exemption or the imposition
of any liability, lien, penalty, or tax under ERISA or the Code, except any
failure to qualify or occurrence that will not have a Material Adverse Effect on
Garage. Each Garage Plan and each Garage Benefit Arrangement has been maintained
in accordance with its constituent documents and with all applicable provisions
of the Code, ERISA and other domestic and foreign laws, including federal,
state, and foreign securities laws and all laws respecting reporting and
disclosure, except any failure to comply that will not have a Material Adverse
Effect on Garage. No Garage Plan holds employer securities. No Garage Company or
other ERISA Affiliate (since July 1, 1993) has sponsored, maintained, or had any
liability (direct or indirect, actual or contingent) with respect to any Benefit
Plan subject to Title IV of ERISA. No Garage Company and no ERISA Affiliate has
ever made or been obligated to make, or reimbursed or been obligated to
reimburse another employer for, contributions to any multiemployer plan (as
defined in ERISA Section 3(37)). There are no pending claims or lawsuits by,
against, or relating to any non-garage benefit plans or non-Garage Benefit
Arrangements that would, if successful, result in liability for the Garage
Companies, and no claims or lawsuits (other than routine benefit claims) have
been asserted, instituted or, to the knowledge of the Garage Companies,
threatened by, against, or relating to any Garage Plan or Garage Benefit
Arrangement, and the Garage Companies do not have knowledge of any fact that
could form the basis for any such claim or lawsuit. The Garage Plans and Garage
Benefit Arrangements are not presently under audit or examination (and have not
received notice of a potential audit or examination) by any governmental
authority, and no matters are pending with respect to the Qualified Plan under
any governmental compliance programs. No Garage Plan or Garage Benefit
Arrangement contains any provision or is subject to any law that would give rise
to any vesting of benefits (other than if the 401(k) Plan is terminated),
severance, termination, or other payments or liabilities as a result of the
Transactions, and the Garage Companies have not declared or paid any bonus or
other incentive compensation or established any severance plan, program, or
arrangement in contemplation of the Transactions. To Garage's knowledge, with
respect to each Garage Plan, there have been no violations of Code Section 4975
or ERISA Sections 404 or 406 as to which successful claims would result in any
liability for the Garage Companies or the Merger Sub or any Person required to
be indemnified by them. The Garage Companies have made all required
contributions to the Garage Plans as of the last day of the each plan's most
recent fiscal year; all benefits accrued under any unfunded Garage Plan or
Garage Benefit Arrangement will have been paid, accrued, or otherwise adequately
reserved in accordance with GAAP as of the Balance Sheet Date; and all monies
withheld from employee paychecks with respect to Garage Plans have been
transferred to the appropriate plan within the timing required by governmental
regulations. To Garage's knowledge, the Garage Companies and their ERISA
Affiliates have complied with the health continuation rules of Code Sections
4980B (and its predecessor) and with Code Section 5000. The Garage Companies
have no liability (whether actual, contingent, or otherwise) with respect to any
Benefit Plan or Benefit Arrangement that is not a Garage Benefit Arrangement or
with respect to any Benefit Plan sponsored or maintained (or which has been or
should have been sponsored or maintained) by any ERISA Affiliate that is not an
Garage Company; and no facts exist that could reasonably be expected to result
in such liability, as a result of a termination, withdrawal or funding waiver
with respect to any such plan, program, or arrangement. No employee or former
employee of the Garage Companies nor beneficiary of any such employee or former
employee is, by reason of such employee's or former employee's employment,
entitled to receive any benefits subject to reporting under Statement of
Financial Accounting Standards No. 106, other than as required by
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Code Section 4980B or other applicable law. There are no contracts, agreements,
plans or arrangements, including but not limited to the provisions of this
Agreement, covering any employee or former employee of the Garage Companies
that, individually or collectively, could give rise to the payment of any amount
(or portion thereof) that would not be deductible pursuant to Code Sections
280G, 404 or 162.
SECTION 4.12 Labor. With respect to employees of the Garage Companies: the
Garage Companies are and have been in compliance in all material respects with
all applicable laws respecting employment and employment practices, terms and
conditions of employment and wages and hours, including without limitation any
such laws respecting employment discrimination, workers' compensation, family
and medical leave, the Immigration Reform and Control Act, and occupational
safety and health requirements, and have not and are not engaged in any unfair
labor practice. The employees of the Garage Companies are not and have never
been represented by any labor union, and no collective bargaining agreement is
binding and in force against, or currently being negotiated by, any of the
Garage Companies, and to the Garage Companies' knowledge, no labor
representation organization effort exists nor has there been any such activity
within the past three years. All Persons classified by the Garage Companies as
independent contractors do satisfy and have satisfied the requirements of law to
be so classified, and the Garage Companies have fully and accurately reported
their compensation on IRS Forms 1099 when required to do so, except to the
extent that any misclassification of any such Person will not have a Material
Adverse Effect on Garage. Since December 31, 1996, no employee of the Garage
Companies, or group of employees, the loss of whom would have a Material Adverse
Effect on the business of any of the Garage Companies, has notified any of the
Garage Companies of his or their intent to (A) terminate his or their
relationship with the Garage Companies or (B) make any demand for material
payments or modifications of his or their arrangements with the Garage
Companies. Each of the Garage Companies has complied with all garnishment orders
it has received and has made available to the Purchaser all garnishment orders
it has received in the last year, except where the failure to so comply will not
cause a Material Adverse Effect on Garage. There is no charge or compliance
proceeding actually pending or, to the knowledge of Garage, threatened against
any Garage Company before the Equal Employment Opportunity Commission or any
state, local, or foreign agency responsible for the prevention of unlawful
employment practices, except as disclosed on Schedule 4.12.
SECTION 4.13 Insurance. Schedule 4.13 sets forth (a) an accurate summary
description of each insurance policy providing coverage for liability exposure
(including policies providing property, casualty, liability and workers'
compensation coverage and bond and surety arrangements) to which Garage is
currently, or has been during the past three years, a party, a named insured or
otherwise the beneficiary of coverage and (b) all insurance loss runs or
worker's compensation claims received for the past three policy years. With
respect to each such insurance policy: to the knowledge of Garage, (a) the
policy is legal, valid, binding, enforceable and in full force and effect; (b)
there will be no breach or other violation of the policy resulting from the
Transactions; and (c) Garage is not in breach or default (including with respect
to the payment of premiums or the giving of notices), and no event has occurred
which, with notice or the lapse of time, would constitute such a breach or
default, or permit termination, modification or acceleration, under the policy.
SECTION 4.14 Brokers. Other than Credit Suisse First Boston (the "Garage
Financial Advisor") and Strome Susskind Investment Management, each of whom
shall be paid pursuant to the agreement and in the amount set forth on Schedule
4.14, no broker, finder or investment banker is entitled to any brokerage,
finder's or other fee or commission in connection with the Transactions based on
any arrangement or agreement made by or on behalf of Garage.
SECTION 4.15 Taxes.
(a) Each of Garage and its subsidiaries has timely filed (or has had
timely filed on its behalf) or will file or cause to be timely filed, all
material Tax Returns required by applicable law to be filed by it prior to
or as of the Effective Time. All such Tax Returns and amendments thereto
are, or will be before the Effective Time, true, complete and correct in
all material respects.
(b) Each of Garage and its subsidiaries has paid (or has had paid on
its behalf), or has established (or has had established on its behalf and
for its sole benefit and recourse), or will establish or cause to be
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established on or before the Effective Time, an adequate accrual for the
payment of, all material Taxes due with respect to any period ending prior
to or as of the Effective Time.
(c) No deficiency or adjustment for any material Taxes has been
proposed, asserted or assessed against Garage or any of its subsidiaries
that has not been resolved or paid or for which an adequate accrual has not
been established in accordance with generally accepted accounting
principles. There are no Liens for material Taxes upon the assets of Garage
or any of its subsidiaries, except Liens for current Taxes not yet due.
(d) Neither Garage nor any of its subsidiaries has entered into any
Contract that would result in the disallowance of any tax deductions
pursuant to section 280G of the Code. No "consent" within the meaning of
section 341(f) of the Code has been filed with respect to Garage or any of
its subsidiaries. None of Garage or its subsidiaries has been a United
States real property holding corporation within the meaning of Code sec.
897(c)(2) during the applicable period specified in Code sec.
897(c)(1)(A)(ii).
(e) All Tax sharing agreements (other than agreements between or among
Garage and its subsidiaries), Tax indemnity agreements and similar
agreements to which Garage or any of its subsidiaries is a party are
disclosed in the Garage SEC Reports. None of Garage and its subsidiaries
has been a member of an affiliated group filing a consolidated Federal
income tax return (other than a group of which the common parent was
Garage). None of Garage or its subsidiaries has any liability for the Taxes
of any person (other than Garage and its subsidiaries under Treasury
Regulation sec. 1.1502-6 (or any similar provision of state, local, or
foreign law), as a transferee or successor, by contract, or otherwise.
(f) No federal, state, local or foreign audits or other administrative
or court proceedings are pending or, to the knowledge of any employee of
Garage with responsibility for Taxes, threatened with regard to any Tax
Returns or Taxes of Garage or any of its subsidiaries which, if determined
adversely, would have a Material Adverse Effect on Garage.
SECTION 4.16 Environmental Matters. Garage and its subsidiaries are in
compliance with all environmental laws, rules, regulations and standards
promulgated, adopted or enforced by the Environmental Protection Agency ("EPA")
and of similar agencies in states in which they conduct their respective
businesses, other than where such noncompliance would not reasonably be expected
to result, with respect to Garage, in any Material Adverse Effect. There is no
suit, claim, action or proceeding now pending before any court, governmental
agency or board or other forum or, to the knowledge of Garage, threatened by any
Person, which taken singularly or as a whole, if adversely determined, would
have a Material Adverse Effect on Garage (a) for alleged noncompliance with any
environmental law, rule or regulation or (b) relating to the discharge or
release into the environment of any hazardous material or waste at or on a site
presently or formerly owned, leased or operated by Garage or any of its
subsidiaries.
SECTION 4.17 Loans. All currently outstanding installment contracts owned
by Garage (individually, a "Loan," and collectively, the "Loans") and acquired
from third parties were purchased by Garage in compliance with all applicable
requirements of United States federal and state law and, to the best of Garage's
knowledge, were solicited and originated in material compliance with all
applicable requirements of United States federal and state law, in each case,
except where the failure to comply will not have a Material Adverse Effect on
Garage. All Loans directly originated by Garage or direct extensions of credit
by Garage were solicited and originated in compliance with all applicable
requirements of United States federal and state law, except where the failure to
comply will not have a Material Adverse Effect on Garage. Each note evidencing a
Loan or loan or credit agreement or security instrument or automobile
installment contract related to the Loans constitutes a valid, legal and binding
obligation of the obligor thereunder, enforceable against such obligor in
accordance with the terms thereof (except as enforcement may be limited by
general principles of equity whether applied in a court of law or a court of
equity and by bankruptcy, insolvency and similar laws affecting creditors'
rights and remedies generally), except where the failure thereof, individually
or in the aggregate, would not have a Material Adverse Effect with respect to
Garage. There are no oral modifications or amendments related to the Loans that
are not reflected in Garage's records, no defenses as to the enforcement of any
Loan have been asserted, and there have been no acts or omissions which would
give rise to any claim or right of rescission, set-off, counterclaim or defense,
except where any of the foregoing would
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not have, either individually or in the aggregate, a Material Adverse Effect
with respect to Garage. None of the Loans is presently serviced by third parties
and there is no obligation which could result in any Loan becoming subject to
any third party servicing, except as disclosed on Schedule 4.17. The reserves
established against the Loans have been established based on Garage's prior loss
experience in accordance with GAAP.
SECTION 4.18 Intellectual Property.
(a) Garage owns or has the right to use pursuant to license,
sublicense, agreement, permission or otherwise all patents, copyrights,
software, trademarks, service marks, trade dress, logos, trade names and
corporate names and all applications, registrations and renewals in
connection therewith and all other proprietary rights ("Intellectual
Property"), in each case to the extent necessary for the operation of its
business as presently conducted and except where the failure to own or have
such right would not, individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect on Garage. Each such item of
Intellectual Property owned or used by Garage immediately prior to the
Closing hereunder will continue to be owned or available for use by the
Surviving Corporation on identical terms and conditions immediately
subsequent to the Closing hereunder, except where failure of such ownership
or availability for use will not have a Material Adverse Effect on Garage.
(b) To the knowledge of Garage, Garage has not interfered with,
infringed upon or misappropriated any Intellectual Property rights of third
parties, and has not received any complaint, claim, demand or notice
alleging any such interference, infringement or misappropriation (including
any claim that Garage must license or refrain from using any Intellectual
Property rights of any third party) within the last three years. To
Garage's knowledge, no third party has interfered with, infringed upon,
misappropriated or otherwise come into conflict with any Intellectual
Property rights of Garage.
SECTION 4.19 Books and Records. The books and records, minutes books, stock
record books and other records of Garage and all of its subsidiaries, all of
which have been made available to Home, are complete and correct in all material
respects and have been maintained in accordance with sound business practices,
except for minutes of meetings of the Board of Directors that have not been
completed or approved by the Board of Directors as of the date of this Agreement
(provided, that, summaries of any such minutes have been made available to
Home). The respective minutes books of Garage and each of its subsidiaries
contain accurate and complete records of all meetings held of, and corporate
action taken by, the stockholders, the Boards of Directors and committees of the
Boards of Directors of Garage and each of its subsidiaries.
SECTION 4.20 Transactions with Affiliates. Except as set forth in the
Garage SEC Documents or on Schedule 4.20, since December 31, 1996, neither
Garage nor any of its subsidiaries has entered into any transaction with any
current director or officer of Garage or any subsidiary or any transaction which
would be subject to proxy statement disclosure under the Exchange Act pursuant
to the requirements of Item 404 of Regulation S-K.
SECTION 4.21 Opinion of Financial Advisor. The Garage Financial Advisor has
delivered to Garage an opinion dated the date of this Agreement to the effect
that the Merger Consideration to be received by the holders of the issued and
outstanding shares of the Garage Common Stock is fair from a financial point of
view to the holders of the Garage Common Stock.
SECTION 4.22 Reliance. In entering into this Agreement, Garage has relied
solely on representations made in this Agreement, including the Schedules
hereto, and any certificates and documents required to be provided by Home and
the Merger Sub pursuant to this Agreement. Garage has been represented by
counsel and has had unrestricted opportunity to examine and understand the
business and assets of Home.
SECTION 4.23 Disclosure. No representation or warranty of Garage contained
in this Agreement and no statement contained in any certificate or schedule
furnished or to be furnished by or on behalf of Garage to Home or any of its
Representatives pursuant hereto contains or will contain any untrue statement of
a material fact.
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ARTICLE V
REPRESENTATIONS AND WARRANTIES OF HOME
AND MERGER SUB
Except as disclosed or otherwise referred to in the attached Home
Disclosure Schedule or in the documents identified in the Home Disclosure
Schedule, Home and Merger Sub hereby represent and warrant to Garage that:
SECTION 5.1 Organization and Qualifications; Subsidiaries. Home, Merger Sub
and each subsidiary of Home is a corporation, partnership or other legal entity
duly organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation or organization and has the corporate power
and authority and all necessary governmental approvals to own, lease and operate
its properties and to carry on its business as it is now being conducted, except
where failure to obtain such approvals would have a Material Adverse Effect.
Each of Home, Merger Sub and Home's subsidiaries is duly qualified or licensed
as a foreign corporation, partnership or limited liability company to transact
business, and is in good standing, in each jurisdiction where the character of
the properties owned, leased or operated by it or the nature of its business
makes such qualification or licensing necessary and where the failure to so
qualify would cause a Material Adverse Effect.
SECTION 5.2 Charter and Bylaws. Complete and correct copies of the charter
and bylaws of Home, as amended to date, have been filed (or incorporated by
reference) as exhibits 3.1 and 3.2, respectively, to Home's Annual Report on
Form 10-K for the year ended December 31, 1996. Such Organizational Documents
are in full force and effect and have not been amended or modified in any
respect. Home is not in violation of any provision of its Organizational
Documents. No subsidiary of Home is in violation of any provision of its
Organizational Documents.
SECTION 5.3 Capitalization. The authorized capital stock of Home consists
of 250,000,000 shares of Home Common Stock and 8,155,004 shares of preferred
stock of Home, no par value. As of June 30, 1997, (i) 106,727,186 shares of Home
Common Stock were issued and outstanding, all of which were validly issued,
fully paid and nonassessable; and (ii) (A) 12,370,658 shares of Home Common
Stock were reserved for issuance under Home employee or director benefit
programs or Home's dividend reinvestment plan (collectively, the "Home Stock
Plans"), (B) 17,603,989 shares of Home Common Stock were classified as treasury
shares. Except as set forth above, as of June 30, 1997, no shares of Home Common
Stock or other voting securities of Home (other than Home's Junior Participating
Preferred Stock) were issued, reserved for issuance or outstanding. All shares
of Home Common Stock subject to issuance as aforesaid and all shares of Home
Common Stock subject to issuance as Merger Consideration, upon issuance on the
terms and conditions specified in the instruments pursuant to which they are
issuable, will be duly authorized, validly issued, fully paid and nonassessable.
There are no outstanding contractual obligations of Home to repurchase, redeem
or otherwise acquire any shares of Home Common Stock or any other shares of
capital stock of Home, or make any material investment (in the form of a loan,
capital contribution or otherwise) in any subsidiary of Home or any other
Person, other than a wholly-owned subsidiary of Home or a Person wholly-owned by
one or more wholly-owned subsidiaries of Home. Each outstanding share of capital
stock of each subsidiary of Home is duly authorized, validly issued, fully paid
and nonassessable and each such share owned by Home or any subsidiary of Home is
owned free and clear of any Liens.
SECTION 5.4 Authority Relative to This Agreement. This Agreement has been
duly and validly executed and delivered by Home and Merger Sub and, assuming the
due authorization, execution and delivery thereof by Garage, constitutes the
legal, valid and binding obligation of Home and Merger Sub, enforceable against
Home and Merger Sub in accordance with its terms, except as enforceability may
be limited by bankruptcy and other similar laws and general principles of
equity.
SECTION 5.5 No Conflict; Required Filings and Consents. The execution and
delivery of this Agreement by Home and Merger Sub do not, and the performance of
their respective obligations under this Agreement and the consummation of the
Transactions by Home and Merger Sub will not, (a) conflict with, result in a
breach of, cause a dissolution or require the consent or approval of any Person
under, or violate any
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provision of, the Organizational Documents of Home or Merger Sub, (b) require
any consent, approval, authorization or permit of, or filing with or
notification to, any Governmental Authority, except for (i) applicable
requirements, if any, of the Exchange Act, the Securities Act, the Blue Sky Laws
and the HSR Act, in each case, including any rules and regulations promulgated
thereunder, (ii) the Merger Filing, (iii) the Garage Stockholder Approval and
(iv) such other consents, authorizations, filings, approvals and registrations
which if not obtained or made would not be material to Garage or Home or have a
material adverse effect on the ability of the parties to consummate the Merger,
(c) subject to the making of the filings and obtaining the approvals identified
in clause (b), conflict with or violate any Law, judgment, order, writ,
injunction or decree applicable to Home or Merger Sub or by which any property
or asset of Home or Merger Sub is bound or affected, which conflict or violation
would result in a loss of material benefits to or in any material liability to
Garage, Home or the Surviving Corporation, or (d) conflict with or result in any
breach of or constitute a default (or an event which with notice or lapse of
time or both would become a default) under, result in the loss by Home or Merger
Sub or modification in a manner materially adverse to Home or Merger Sub of any
right or benefit under, or give to others any right of termination, amendment,
acceleration, repurchase or repayment, increased payments or cancellation of, or
result in the creation of a Lien or other encumbrance on any Home Common Stock
issued pursuant to the Merger or any material property or asset of Home or
Merger Sub or any subsidiary of Home or Merger Sub pursuant to, any Contract of
Home or Merger Sub, except, in each case, such as would not, individually or in
the aggregate have a Material adverse effect on the ability of the parties to
consummate of the Merger, or otherwise, individually or in the aggregate,
prevent Home or Merger Sub from performing its obligations under this Agreement
in any material respect, and would not, individually or in the aggregate, have a
Material Adverse Effect on Home.
SECTION 5.6 Compliance. Neither Home, Merger Sub nor any Material
Subsidiary of Home is in conflict with, or in default or violation of, (a) any
Law applicable to such Person or by which any property or asset of such Person
is bound or affected, or (b) any Contract to which Home or Merger Sub or any
subsidiary of Home is a party or by which such Person or any property or asset
of such Person is bound or affected, except for any such conflicts, defaults or
violations that would not, individually or in the aggregate, have a Material
Adverse Effect.
SECTION 5.7 SEC Reports and Financial Statements. Each form, report,
schedule, registration statement and definitive proxy statement filed by Home
with the SEC prior to the date hereof (as such documents have been amended prior
to the date hereof, the "Home SEC Reports"), as of their respective dates,
complied in all material respects with the applicable requirements of the
Securities Act and the Exchange Act and the rules and regulations thereunder.
None of the Home SEC Reports, as of their respective dates, contained or
contains any untrue statement of a material fact or omits to state 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, except
for such statements, if any, as have been modified or superseded by subsequent
filings prior to the date hereof. The consolidated financial statements of Home
and its subsidiaries included in such reports comply as to form in all material
respects with applicable accounting requirements and with the published rules
and regulations of the SEC with respect thereto, have been prepared in
accordance with GAAP (except as may be indicated in the notes thereto or, in the
case of the unaudited interim financial statements, as permitted by Form 10-Q of
the SEC) and fairly present in all material respects (subject, in the case of
the unaudited interim financial statements, to normal, year-end audit
adjustments) the consolidated financial position of Home and its subsidiaries as
at the dates thereof and the consolidated results of their operations and cash
flows for the periods then ended. Since December 31, 1996, neither Home nor any
of its subsidiaries has incurred any liabilities or obligations (whether
absolute, accrued, fixed, contingent, liquidated, unliquidated or otherwise and
whether due or to become due) of any nature, except liabilities, obligations or
contingencies (a) which are reflected on the consolidated balance sheet of Home
and its subsidiaries as at December 31, 1996 (including the notes thereto) or
(b) which (i) were incurred in the ordinary course of business after December
31, 1996 and consistent with past practices, (ii) are disclosed in the Home SEC
Reports filed after December 31, 1996, or (iii) would not, individually or in
the aggregate, have a Material Adverse Effect on Home. Since January 1, 1996,
Home has timely filed with the SEC all forms, reports and other documents
required to be filed prior to the date hereof, and no subsidiary of Home has
filed, or been required to file, any form, report or other document with the
SEC, in each case,
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pursuant to the Securities Act, the Exchange Act or the rules and regulations
thereunder. Since December 31, 1996, except as described in the Home SEC
Reports, there has been no change in any of the significant accounting
(including tax accounting) policies, practices or procedures of Home or any
subsidiary of Home, except changes resulting from changes in accounting
pronouncements of Financial Accounting Standards Boards or changes in applicable
laws or rules or regulations thereunder.
SECTION 5.8 Absence of Certain Changes or Events. Except as contemplated by
this Agreement or as disclosed in any Home SEC Report, since December 31, 1996,
(a) Home and its subsidiaries have conducted their respective businesses only in
the ordinary course, consistent with past practice, and (b) as of the date
hereof, there has not occurred or arisen any event that, individually or in the
aggregate, has had or, insofar as reasonably can be foreseen, is likely in the
future to have, a Material Adverse Effect on Home.
SECTION 5.9 Litigation. Except as disclosed in the Home SEC Reports, as of
the date hereof, there are no claims, suits, actions or proceedings pending or,
to Home's knowledge, threatened or contemplated, nor are there any
investigations or reviews by any Governmental Authority pending or, to Home's
knowledge, threatened or contemplated, against, relating to or affecting Home or
any of its subsidiaries, which would have, individually or in the aggregate, a
Material Adverse Effect on Home, or to prohibit or materially restrict the
consummation of the Transactions, nor is there any judgment, decree, order,
injunction, writ or rule of any Governmental Authority or any arbitrator
outstanding against Home or any of its subsidiaries having, or which, insofar as
can be reasonably foreseen, in the future is likely to have, a Material Adverse
Effect on Home. In addition, as of the date hereof, there have not been any
developments with respect to any of the claims, suits, actions, proceedings,
investigations or reviews disclosed in the Home SEC Reports which, insofar as
can be reasonably foreseen, in the future are likely to have a Material Adverse
Effect on Home.
SECTION 5.10 Intentionally Omitted.
SECTION 5.11 Insurance. With respect to each insurance policy providing
coverage for liability exposure (including policies providing property,
casualty, liability and workers' compensation coverage and bond and surety
arrangements) to which Home is currently a party, a named insured or otherwise
the beneficiary of coverage, to the knowledge of Home, (a) the policy is legal,
valid, binding, enforceable and in full force and effect; (b) there will be no
breach or other violation of the policy resulting from the Transactions; and (c)
Home is not in breach or default (including with respect to the payment of
premiums or the giving of notices), and no event has occurred which, with notice
or the lapse of time, would constitute such a breach or default, or permit
termination, modification or acceleration, under the policy.
SECTION 5.12 Brokers. Other than J.P. Morgan & Co., no broker, finder or
investment banker is entitled to any brokerage, finder's or other fee or
commission in connection with the Transactions based on any arrangement or
agreement made by or on behalf of Home.
SECTION 5.13 Taxes.
(a) Home and each of its subsidiaries has timely filed (or has had
timely filed on its behalf) or will file or cause to be timely filed, all
material Tax Returns required by applicable law to be filed by it prior to
or as of the Effective Time. All such Tax Returns and amendments thereto
are, or will be before the Effective Time, true, complete and correct in
all material respects.
(b) Each of Home and its subsidiaries has paid (or has had paid on its
behalf), or has established (or has had established on its behalf and for
its sole benefit and recourse), or will establish or cause to be
established on or before the Closing Date, an adequate accrual for the
payment of, all material Taxes due with respect to any period ending prior
to or as of the Closing Date.
(c) No deficiency or adjustment for any material Taxes has been
proposed, asserted or assessed against Home or any of its subsidiaries that
has not been resolved or paid or for which an adequate accrual has not been
established in accordance with generally accepted accounting principles.
There are no Liens for material Taxes upon the assets of Home or any of its
subsidiaries, except Liens for current Taxes not yet due.
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(d) No federal, state, local or foreign audits or other administrative
or court proceedings are pending or, to the knowledge of any employee of
Home with responsibility for Taxes, threatened with regard to any Tax
Returns or Taxes of Home or any of its subsidiaries which, if determined
adversely, would have a Material Adverse Effect on Home.
SECTION 5.14 Reliance. In entering into this Agreement, Home has relied
solely on representations made in this Agreement, including the Schedules
hereto, and any certificates and documents required to be provided by Garage
pursuant to this Agreement. Home has been represented by counsel and has had
unrestricted opportunity to examine and understand the business and assets of
Garage.
SECTION 5.15 Financial Capability. Home will have on the Closing Date and
immediately prior to and at the Effective Time, funds and authorized and
unissued shares of Home Common Stock sufficient to consummate the Merger and the
transactions contemplated hereby. To the extent that such funds are to be
provided by third party financing, Home will provide Garage with complete and
correct copies of all documents relating to the provision of such financing.
SECTION 5.16 Disclosure. No representation or warranty of Home contained in
this Agreement and no statement contained in any certificate or schedule
furnished or to be furnished by or on behalf of Home to Garage or any of its
Representatives pursuant hereto contains or will contain any untrue statement of
a material fact.
ARTICLE VI
COVENANTS
SECTION 6.1 Notification of Certain Matters. Each of the parties hereto
shall give prompt notice to the other parties hereto of the occurrence or
nonoccurrence of any event the occurrence or nonoccurrence of which would be
likely to cause (a) any representation or warranty contained in this Agreement
to be untrue or inaccurate in any material respect, or (b) any covenant,
condition or agreement contained in this Agreement not to be complied with or
satisfied in any material respect. The delivery of any notice pursuant to this
Section 6.1 shall not limit or otherwise affect the remedies available hereunder
to the party receiving such notice, except that Garage may amend in Disclosure
Schedules to disclose any information that was omitted in good faith at the time
of the Disclosure Schedules were prepared that individually and in the aggregate
do not have a Material Adverse Effect on Garage.
SECTION 6.2 Further Action, Reasonable Efforts; Consents and
Approvals. Upon the terms and subject to the conditions hereof, each of the
parties hereto shall use commercially reasonable efforts to take, or cause to be
taken, all appropriate action, and to do, or cause to be done, all things
necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the transactions contemplated hereby, including,
without limitation, using commercially reasonable efforts to obtain all
licenses, permits, consents, approvals, authorizations, certificates,
qualifications and orders of, and make all filings and required submissions
with, all Governmental Authorities, and all shareholders, lenders and partners
of, and parties to Contracts with, Home, Garage or any other Person, in each
case, as are reasonably necessary for the consummation of the Transactions
(collectively "Consents"), except for such other consents, authorizations
filings, approvals and registrations which if not obtained or made would not be
material to Garage or Home or have a material adverse effect on the ability of
the parties to consummate the Merger. Garage shall, as soon as possible prior to
the Closing, deliver to Home copies of all Consents obtained by Garage. Home
shall, as soon as possible prior to the Closing, deliver to Garage copies of all
Consents obtained by Home. In case at any time after the Closing Date any
further action is necessary or desirable to carry out the purposes of this
Agreement, Home and Garage shall use commercially reasonable efforts to take all
such action. Prior to the Closing, each party shall use its best efforts not to
take any action, or enter into any transaction, that would cause any of its
representations or warranties contained in this Agreement to be untrue.
SECTION 6.3 Conduct of Business of Garage Pending the Closing. From the
date hereof through the Closing, except as expressly permitted or contemplated
by this Agreement or as set forth on Schedule 6.3 hereto, unless Home shall
otherwise agree in writing (which agreement shall not be unreasonably withheld)
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prior to the taking of any action prohibited by the terms of this Section 6.3,
Garage and its subsidiaries shall conduct their operations and business in the
ordinary and usual course of business and use reasonable efforts (which shall
not include any obligation to offer to pay any retention or stay bonus) to keep
available the services of its present officers and key employees and preserve
the goodwill and business relationships with all Persons having business
relationships with it. Without limiting the generality of the foregoing, and
except as otherwise expressly permitted by this Agreement, prior to the Closing,
without the prior written consent of Home, neither Garage nor any of its
subsidiaries shall:
(a) amend or modify its Organizational Documents;
(b) issue, sell, pledge or dispose of, grant or otherwise create, or
agree to issue, sell, pledge or dispose of, grant or otherwise create any
capital stock or other equity securities, any debt or other securities
convertible into or exchangeable for any of its capital stock or other
equity securities, or any Option with respect thereto, except for the
issuance of stock upon the exercise of outstanding options, warrants or
securities convertible into equity securities pursuant to the Garage Option
Plans;
(c) purchase, redeem or otherwise acquire or retire, or offer to
purchase, redeem or otherwise acquire or retire, any of its capital stock
or other equity securities (including any options with respect to any of
its capital stock or other equity securities and any securities convertible
or exchangeable into any of its capital stock or other equity securities)
or any long term debt, except the repurchase of any of its securities from
any former employees in accordance with any existing stock option
agreements or other existing repurchase rights;
(d) declare, set aside, make or pay any dividend or other
distribution, payable in cash, stock, property or otherwise, with respect
to any of its capital stock or other equity securities (except dividends
declared and paid by a subsidiary of Garage only to Garage or a
wholly-owned subsidiary of Garage), or subdivide, reclassify, recapitalize,
split, combine or exchange any of its capital stock or other equity
securities;
(e) incur or become contingently liable with respect to any
indebtedness for borrowed money or guarantee any such indebtedness or issue
any debt securities, except for additional indebtedness incurred under
existing debt agreements or credit facilities, or new credit facilities,
provided, however, such new credit facilities are terminable by Garage on
no more than 90 days notice and Garage is not obligated for any termination
fee, breakage costs or other costs and expenses in excess of $25,000 as a
result of such termination;
(f) acquire or agree to acquire by merging or consolidating with, or
by purchasing a substantial equity interest in or a substantial portion of
the assets of, or by any other manner, any business or any corporation,
partnership, association or other business entity;
(g) mortgage or otherwise encumber or subject to any Lien, or sell,
transfer or otherwise dispose of, any assets or properties that are
material, individually or in the aggregate, to Garage and its subsidiaries,
taken as a whole, other than Liens incurred in the ordinary course of
business consistent with past practice, and sales and dispositions in the
ordinary course of business consistent with past practice; it being
expressly understood that Garage shall be permitted to (i) continue to
utilize the funding options provided by currently existing asset-back
transactions entered into by Garage or an affiliate of Garage on
substantially the same terms and conditions existing as of the date of this
Agreement and (ii) utilize existing credit facilities or new credit
facilities permitted by subsection (e) above;
(h) except as may be required by applicable Law, or as contemplated by
this Agreement, (i) enter into any employment agreement, (ii) increase the
compensation payable or to become payable to its executive officers or
employees, except with respect to non-executive officer employees in the
ordinary course of business consistent with past practice, (iii) grant any
severance or termination pay to any director, executive officer or employee
of Garage or any subsidiary of Garage, except with respect to non-executive
officer employees in the ordinary course of business or pursuant to
existing Garage Benefit Plans, (iv) enter into any severance agreement or
retention agreement with any director, executive officer or employee except
with respect to non-executive officer employees in the ordinary course of
business, or
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(v) establish, adopt, enter into, terminate, withdraw from or amend in any
material respect or take action to accelerate any rights or benefits under
any collective bargaining agreement, any stock option plan, or any employee
benefit plan or policy;
(i) take any action, other than reasonable actions in the ordinary
course of business, with respect to accounting policies or procedures
(including Tax accounting policies, procedures and elections relating to
Taxes that would apply to Garage, Home or the Surviving Corporation after
the Merger), except as may be required by GAAP or changes in law, or settle
any material Audit or, except as required by Law, amend in any material
respect any material Tax Return;
(j) enter into, modify, amend, extend or terminate any agreement or
agreements for goods, property rights or services with (i) any director or
officer, or any legal entity controlled by such Person, or (ii) any other
Person which obligates Garage, or any affiliate of Garage, to pay in excess
of $25,000 in any twelve-month period, provided, however, that Garage may
offer employment to individuals consistent with past practice; and
(k) authorize any of, or commit or agree to take any of, the foregoing
actions.
SECTION 6.4 Conduct of Business of Home Pending the Closing. From the date
hereof through the Closing, except as expressly permitted or contemplated by
this Agreement, unless Garage shall otherwise agree in writing prior to the
taking of any action prohibited by the terms of this Section 6.4, Home and its
subsidiaries shall conduct their operations and business in the ordinary and
usual course of business and consistent with past practice and use reasonable
efforts to keep available the services of its present officers and key employees
and preserve the goodwill and business relationships with all Persons having
business relationships with it.
SECTION 6.5. Access to Information.
(a) From the date hereof to the Effective Time, Garage shall (and
shall cause their respective subsidiaries and Representatives to) afford
the Representatives of Home reasonable access at all reasonable times
during normal business hours to its officers, employees, agents,
properties, offices, plants and other facilities, books, records and Tax
Returns, and shall furnish such Representatives with all financial,
operating and other data and information as may be reasonably requested.
(b) Each of Home, the Merger Sub and Garage covenants and agrees to
maintain the confidentiality of any Confidential Information, as defined
below, it receives from any other party and, except as expressly permitted
in this Agreement or as required by law or in connection with judicial
proceedings, shall not disclose any such Confidential Information to third
parties. A party receiving Confidential Information from another party
shall use at least the same degree of care to maintain its confidentiality
as it uses to maintain its own Confidential Information. A party receiving
Confidential Information shall not, except in connection with this
Agreement, directly or indirectly use Confidential Information of the
disclosing party without the prior written consent of such disclosing
party. As used in this Agreement, "Confidential Information" includes,
without limitation, information not previously disclosed to the public or
to the trade by a party to this Agreement relating to its products,
facilities and methods, trade secrets and other intellectual property,
software, source code, systems, procedures, manuals, confidential reports,
product price lists, customer lists, financial information (including
revenues, costs or profits associated with any product), business plans,
prospects, or opportunities, but shall exclude any information already in
the public domain.
SECTION 6.6 No Solicitation.
(a) Garage shall not, nor shall it permit any of its subsidiaries to,
and it shall instruct its Representatives (including, without limitation,
any investment banker, attorney or accountant retained by Garage or a
subsidiary of Garage) not to, directly or indirectly, (i) initiate, solicit
or encourage any inquiries or proposals that constitute, or could
reasonably be expected to lead to, a proposal or offer for a merger,
consolidation, business combination, sale of assets representing a
substantial portion of the assets of Garage and its subsidiaries, taken as
a whole, sale of shares of capital stock (other than to Garage or a
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subsidiary of Garage or as permitted by Section 6.3 hereto), including,
without limitation, by way of a tender offer or exchange offer by any
person (other than Garage or a subsidiary of Garage) for shares of capital
stock of Garage, other than the Transactions (any of the foregoing
inquiries or proposals being referred to in this Agreement as an
"Acquisition Proposal"), (ii) engage in negotiations or discussions
concerning, or provide to any person or entity any non-public information
or data relating to Garage or any subsidiary of Garage for the purposes of,
or otherwise cooperate with or assist or participate in, facilitate or
encourage, any inquiries or the making of any Acquisition Proposal, (iii)
agree to, approve or recommend any Acquisition Proposal, or (iv) take any
other action inconsistent with the obligations and commitments assumed by
Garage pursuant to this Section 6.6; provided, however, that nothing
contained in this Agreement shall prevent Garage or its Board of Directors
from (A) furnishing nonpublic information to, or entering into discussions
or negotiations with, any person or entity in connection with an
unsolicited bona fide written Acquisition Proposal to Garage or its
stockholders (which may be subject to a "due diligence" condition), if and
only to the extent that (1) the Board of Directors of Garage determines in
good faith (after consultation with outside legal counsel) that such action
is necessary for such Board of Directors to comply with its fiduciary
duties to stockholders under applicable law, and (2) prior to furnishing
such non-public information to, or entering into discussions or
negotiations with, such person or entity, the Board of Directors of Garage
receives from such person or entity an executed confidentiality agreement;
or (B) complying with Rule 14e-2 or Rule 14d-9 promulgated under the
Exchange Act with regard to an Acquisition Proposal or making any other
public disclosure that, in the opinion of Garage's counsel, is required by
applicable law, rule or regulation; provided, that prior to making any such
other public disclosure Garage shall to the extent reasonably practicable
inform Home that it intends to make such disclosure and consult with Home
regarding the necessity for such disclosure. Garage will immediately cease
and cause to be terminated any existing activities, discussions or
negotiations by Garage or its Representatives with any parties conducted
heretofore with respect to any of the foregoing. In addition,
notwithstanding the provisions of this Section 6.6, or any other provision
of this Agreement, Garage may (i) withdraw, modify, or refrain from making
its recommendation in accordance with Section 6.7 and (ii) terminate this
Agreement in accordance with Section 8.1(f).
(b) Garage shall (i) promptly notify Home in writing after receipt by
Garage (or its Representatives) of any Acquisition Proposal or any
inquiries indicating that any person is considering making or wishes to
make an Acquisition Proposal, which notification shall be in writing and
shall contain the principal financial terms of any such Acquisition
Proposal, and (ii) promptly notify Home in writing after receipt of any
request for nonpublic information relating to it or any of its subsidiaries
or for access to its or any of its subsidiaries' properties, books or
records by any person that, to Garage's knowledge, may be considering
making, or has made, an Acquisition Proposal.
SECTION 6.7 Stockholder Meeting. Garage shall take all action necessary, in
accordance with the DGCL and Garage's Organizational Documents, to call a
meeting of its stockholders (the "Garage Meeting") to be held as promptly as
practicable after the effective date of the Home Registration Statement for the
purpose of considering and voting upon this Agreement and the Merger (the
"Garage Stockholder Approval"). The Board of Directors of Garage shall recommend
that the stockholders of Garage approve this Agreement and the Merger; provided,
that the Board of Directors of Garage, by action of a majority of the entire
Board of Directors of Garage, may withdraw, modify or refrain from making such
recommendation if such Board of Directors determines in good faith, after
receipt of an Acquisition Proposal and after consultation with outside legal
counsel, that the withdrawal or modification of or failure to make such
recommendation is necessary for such Board of Directors to comply with its
fiduciary duties under applicable law.
SECTION 6.8 Registration Statements and Joint Proxy Statement/Prospectus.
(a) As promptly as practicable after the execution of this Agreement,
(i) Home and Garage shall prepare and file with the SEC a proxy statement
relating to the Garage Meeting to be held in connection with the
Transactions (together with any amendments thereof or supplements, thereto,
the "Proxy Statement/Prospectus") and (ii) Home shall prepare and file with
the SEC a registration statement on Form S-4 (together with all amendments
thereto, the "Home Registration Statement"), in which the
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Proxy Statement/Prospectus shall be included as a prospectus, in connection
with the registration under the Securities Act of the shares of Home Common
Stock to be issued pursuant to the Merger. Each of Home and Garage (i)
shall cause the Proxy Statement/Prospectus and the Home Registration
Statement to comply as to form in all material respects with the applicable
provisions of the Securities Act, the Exchange Act and the rules and
regulations thereunder, (ii) shall use commercially reasonable efforts to
have or cause the Home Registration Statement to become effective as
promptly as practicable, and (iii) shall take any and all action required
under any applicable Federal or state securities laws in connection with
the issuance of shares of Home Common Stock pursuant to the Merger. Home
and Garage shall furnish to the other all information concerning Home and
Garage as the other may reasonably request in connection with the
preparation of the documents referred to herein. Each of Home and Garage
will notify the other promptly upon the receipt of any comments from the
SEC or its staff or any other governmental officials and of any request by
the SEC or its staff or any other governmental officials for amendments or
supplements to the Registration Statement, Proxy Statement/Prospectus or
any other filing or for additional information and will supply the other
with copies of all correspondence between such party or any of its
representatives, on the one hand, and the SEC, or its staff or any other
governmental officials, on the other hand, with respect to the Registration
Statement, Proxy Statement/Prospectus or other filing. Each of Home and
Garage will cause all documents that it is responsible for filing with the
SEC or other regulatory authorities under this Section 6.8 to comply in all
material respects with all applicable requirements of law and the rules and
regulations thereunder. Whenever Home or Garage obtains knowledge of the
occurrence of any event which is required to be set forth in an amendment
or supplement to the Proxy Statement/Prospectus, the Registration Statement
or other filing, Home or Garage, as the case may be, will promptly inform
the other of such occurrence and cooperate in filing with the SEC or its
staff or any other governmental officials, and or mailing to Stockholders
of Garage such amendment or supplement. As promptly as practicable after
the Home Registration Statement shall have become effective, Garage shall
cause the Proxy Statement/Prospectus to be mailed to its Stockholders.
(b) The information supplied by each of Home and Garage for inclusion
in the Home Registration Statement and the Proxy Statement/Prospectus shall
not (i) at the time the Home Registration Statement is declared effective
and (ii) at the time the Proxy Statement/Prospectus (or any amendment
thereof or supplement thereto) is first mailed to the stockholders of
Garage, (iii) at the time of the Garage Meeting, or (iv) at the Effective
Time, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make
the statements therein not misleading. If, at any time prior to the
Effective Time, any event or circumstance relating to Garage, any
subsidiary of Garage, Home, any subsidiary of Home, or their respective
officers or directors, should be discovered by such party which should be
set forth in an amendment or a supplement to the Home Registration
Statement or the Proxy Statement/Prospectus, such party shall promptly
inform the other thereof and take appropriate action in respect thereof.
SECTION 6.9 Letters of Accountants. Garage shall use commercially
reasonable efforts to cause to be delivered to Home a "comfort" letter of KPMG
Peat Marwick LLP, Garage's independent public accountants, dated and delivered
on the date on which the Home Registration Statement shall become effective and
as of the Effective Time, and addressed to the Board of Directors of Home
relating to the performance of KPMG Peat Marwick LLP of customary procedures
with respect to the financial statements of Garage contained in or incorporated
by reference in the Registration Statement, including a review of the interim
financial statement information as described in SAS No. 71.
SECTION 6.10 Intentionally Omitted.
SECTION 6.11 Public Announcements. At all times at or before the Closing,
neither Garage nor Home shall issue or make, directly or indirectly, any
reports, statements or releases to the public with respect to this Agreement or
the transactions contemplated hereby without the prior written consent of the
other; provided, however, that Garage and Home may, without the prior written
consent of the other, issue or make, directly or indirectly, any report,
statement or release required by Law, its fiduciary obligations or any listing
agreement or arrangement to which such Person is a party with a national
securities exchange or national market system
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if the other parties to this Agreement are so notified as soon as possible in
advance of such report, statement or release and, to the extent practicable,
given a reasonable opportunity to review and comment on the report, statement or
release. The parties have agreed to the text of the press releases announcing
the signing of the Agreement.
SECTION 6.12 Blue Sky. Home shall use its best efforts to obtain prior to
the Effective Time all approvals or permits required to carry out the
transactions contemplated hereby under applicable Blue Sky Laws in connection
with the issuance of shares of Home Common Stock in the Merger and as
contemplated by this Agreement; provided, however, that with respect to such
qualifications neither Home nor Garage shall be required to register or qualify
as a foreign corporation or to take any action which would subject it to general
service of process or taxation in any jurisdiction where any such entity is not
now so subject.
SECTION 6.13 NYSE Listing. Home shall promptly prepare and submit to the
NYSE listing applications covering the shares of Home Common Stock to be issued
in the Merger, and shall use its best efforts to cause such shares to be
approved for listing and trading on the NYSE prior to the Effective Time,
subject to official notice of issuance.
SECTION 6.14 Affiliates. Within five days after the Proxy
Statement/Prospectus is mailed to the stockholders of Garage, (a) Garage shall
deliver to Home a letter identifying all persons who may be deemed to be
affiliates of Garage under Rule 145 of the Securities Act as of the record date
for the Garage Meeting (the "Rule 145 Affiliates") and (b) Garage shall advise
the persons identified in such letter of the resale restrictions imposed by
applicable securities laws and shall use commercially reasonable efforts to
obtain prior to the Effective Date from each person identified in such letter a
written agreement, substantially in the form of Exhibit A hereto (a "Rule 145
Affiliate Agreement").
SECTION 6.15 Indemnification with Respect to the Registration Statement.
(a) Each party hereto shall (i) indemnify (in such role, an
"Indemnifying Party") and hold harmless each other party and their
respective directors, officers and controlling persons (an "Indemnified
Party") against any and all loss, liability, claim, damage and expense
whatsoever to which an Indemnified Party may become subject, under the
Securities Act, the Exchange Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of
any untrue statement or alleged untrue statement of a material fact
contained in the Home Registration Statement or the Proxy
Statement/Prospectus, or any amendment or supplement thereto, or any
preliminary Proxy Statement/Prospectus, or the omission or alleged omission
therefrom of a material fact required to be stated therein or necessary to
make the statements therein not misleading; and (ii) will reimburse the
Indemnified Party for any legal or other expenses reasonably incurred by
the Indemnified Party in connection with investigating or defending any
such loss, claim, damage, liability or action as such expenses are
incurred; provided, however, that (i) Garage shall be liable under this
Section 6.15 only for information provided by Garage and relating to Garage
included or incorporated by reference in the Home Registration Statement or
Proxy Statement/Prospectus, (ii) Home and Merger Sub shall be liable under
this Section 6.15 only for information provided by Home and relating to
Home and Merger Sub included or incorporated by reference in the Home
Registration Statement or Proxy Statement/Prospectus, and (iii) no
Indemnifying Party will be liable in any such case under this Section 6.15
to the extent that any such loss, claim, damage, liability or action arises
out of any untrue statement or alleged untrue statement or omission or
alleged omission made in any of such documents in reliance upon and in
conformity with written information furnished to the Indemnifying Party by
or on behalf of such Indemnified Party specifically for use therein.
(b) Promptly after receipt by an Indemnified Party under this Section
6.15 of notice of any claim or the commencement of any action, the
Indemnified Party shall, if a claim in respect thereof is to be made
against the Indemnifying Party under this Section 6.15, promptly notify the
Indemnifying Party in writing of the claim or the commencement of that
action; provided, however, that the failure to notify or a delay in
notifying the Indemnifying Party shall not relieve it from any liability
which it may have to an Indemnified Party otherwise than under this Section
6.15 except to the extent that such Indemnifying Party is prejudiced
thereby. If any such claim or action shall be brought against an
Indemnified Party,
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and it shall notify the Indemnifying Party thereof, the Indemnifying Party
shall be entitled to participate therein, and, to the extent that it
wishes, jointly with any other similarly notified Indemnifying Party, to
assume the defense thereof with counsel reasonably satisfactory to the
Indemnified Party. After notice from the Indemnifying Party to the
Indemnified Party of its election to assume the defense of such claim or
action, the Indemnifying Party shall not be liable to the Indemnified Party
under this Section 6.15 for any legal or other expenses subsequently
incurred by the Indemnified Party in connection with the defense thereof,
but the fees and expenses of such counsel shall be at the expense of such
Indemnified Party unless (i) the employment thereof has been specifically
authorized by the Indemnifying Party in writing, (ii) such Indemnified
Party shall have been advised by such counsel that there may be one or more
legal defenses available to it which are different from or additional to
those available to the Indemnifying Party and in the reasonable judgment of
such counsel it is advisable for such Indemnified Party to employ separate
counsel or (iii) the Indemnifying Party has failed to assume the defense to
such claim or action and employ counsel reasonably satisfactory to the
Indemnified Party, in which case, if such Indemnified Party notifies the
Indemnifying Party in writing that it elects to employ separate counsel at
the expense of the Indemnifying Party, the Indemnifying Party shall not
have the right to assume the defense of such claim or action on behalf of
such Indemnified Party; it being understood, however, that the Indemnifying
Party shall not, in connection with any one such claim or action or
separate but substantially similar or related claims or actions in the same
jurisdiction arising out of the same general allegations or circumstances,
be liable for the reasonable fees and expenses of more than one separate
firm of attorneys at any time for all such Indemnified Parties, which firm
shall be designated in writing by such Indemnified Parties. Each
Indemnified Party, as a condition of the indemnity agreements contained
herein shall use its best efforts to cooperate with the Indemnifying Party
in the defense of any such claim or action. The Indemnifying Party shall
not be liable for any settlement of any such claim or action effected
without its written consent (which consent shall not be unreasonably
withheld), but if settled with its written consent or if there be a final
judgment in favor of the plaintiff in any such claim or action, the
Indemnifying Party agrees to indemnify and hold harmless any Indemnified
Party from and against any loss or liability by reason of such settlement
or judgment.
SECTION 6.16 Directors' and Officers' Indemnification and Insurance.
(a) From and after the Effective Time, the Surviving Corporation
shall, and Home shall cause the Surviving Corporation to, indemnify, defend
and hold harmless the present and former officers and directors of Garage
(the "Indemnified Officers/Directors") against all losses, expenses
(including attorneys fees), claims, damages, liabilities or amounts
("Losses") that are paid in settlement (provided that such settlement has
been approved by Home, such approval not to be unreasonably withheld) of,
or otherwise in connection with, any claim, action, suit, proceeding or
investigation (a "Claim"), based in whole or in part on the fact that such
person is or was a director or officer of Garage and arising out of actions
or omissions occurring at or prior to the Effective Time (including,
without limitation, the Transactions), in each case, to the full extent
permitted under the DGCL and Garage's certificate of incorporation and
bylaws (to the extent permitted by applicable law) as in effect on the date
of this Agreement. The Surviving Corporation shall pay any expenses in
advance of the final disposition of any such Claim to each of the
Indemnified Officers/Directors to the fullest extent permitted under the
DGCL upon receipt from any of the Indemnified Officers/Directors to whom
expenses are advanced of any undertaking to repay such advances as required
under the DGCL. The Surviving Corporation shall cooperate in the defense of
any such matter.
(b) The Surviving Corporation shall, and Home shall cause the
Surviving Corporation to, keep in effect provisions in its certificate of
incorporation and bylaws providing for exculpation of director liability
and its indemnification of the Indemnified Officers/Directors to the
fullest extent permitted under the DGCL, which provisions shall not be
amended except as required by applicable law or except to make changes
permitted by law that would enlarge the right of indemnification of the
Indemnified Officers/ Directors. The Surviving Corporation shall, and Home
shall cause the Surviving Corporation to, keep in effect and to comply with
the terms and conditions of the indemnification agreements between Garage
and each of its directors in effect as of the date of this Agreement.
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(c) For a period of five years after the Effective Time, the Surviving
Corporation shall, and Home shall cause the Surviving Corporation to,
maintain in effect the current policies of directors' and officers'
liability insurance maintained by Garage covering persons who are currently
covered by Garage's officers' and directors' liability insurance policies
with respect to actions or omissions occurring at or prior to the Effective
Time, a true and correct summary of which is set forth on Schedule 6.16, to
the extent that such policies are available; provided, that policies of at
least the same coverage containing terms and conditions which are no less
advantageous to the insureds may be substituted therefor.
(d) From and after the Effective Time, Home agrees to indemnify,
defend and hold harmless the Indemnified Officers/Directors against all
Losses that are paid in settlement (provided that such settlement has been
approved by Home, such approval not to be unreasonably withheld) of, or
otherwise in connection with, a Claim based in whole or in part on the fact
that such Person is or was a director or officer of Garage and arising out
of actions or omissions occurring at or prior to the Effective Time
(including, without limitation, the Transactions), in each case to the
fullest extent permitted by applicable Law and whether or not the Surviving
Corporation is permitted by applicable Law to provide any indemnity with
respect to such Losses. Home shall pay any expenses in advance of the final
disposition of any such Claim to each of the Indemnified Officers/Directors
to the fullest extent permitted by applicable Law. Home shall cooperate in
the defense of any such matter.
(e) The provisions of this Section 6.16 shall survive the consummation
of the Merger and expressly are intended to benefit each of the Indemnified
Officers/Directors.
SECTION 6.17 Employee Matters. The parties' agreement with respect to
certain employee matters is set forth in Annex I hereto.
SECTION 6.18 Tax-Free Reorganization. Home, Merger Sub and Garage each
acknowledges and agrees that (i) it intends the Merger to constitute a
reorganization within the meaning of Section 368(a) of the Code, as amended, and
(ii) to the extent permissible by law, it will report the Merger as such a
reorganization in any and all federal, state and local income Tax returns filed
by it. No party shall take any action either prior to or after the Closing Date
that could reasonably be expected to cause the Merger to fail to qualify as a
"reorganization" under Section 368(a) of the Code. Home, Merger Sub, and Garage
will each execute and deliver to Wilmer, Cutler & Pickering and Cooley Godward
LLP tax representation letters substantially in the forms set forth in Exhibit F
hereto for purposes of the review of the federal income tax consequences of the
Merger and preparation of the discussion of tax consequences of the Merger to be
included in the Home Registration Statement.
SECTION 6.19 Form S-8. Home agrees to file a registration statement on Form
S-8 for shares of Home Common Stock issuable with respect to assumed Garage
Stock Options as soon as reasonably practicable (and in any event within five
days) after the Effective Time.
ARTICLE VII
CONDITIONS TO THE MERGER
SECTION 7.1 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligations of each party to this Agreement to effect the Merger
shall be subject to the following conditions:
(a) All consents, approvals and action of any Governmental Authority
required to permit the consummation of the Transactions shall have been
obtained or made, free of any condition that would have a Material Adverse
Effect on either Home or Garage.
(b) No action shall have been taken, and no statute, rule, regulation,
executive order, judgment, decree, or injunction (other than a temporary
restraining order) shall have been enacted, entered, promulgated or
enforced (and not repealed, superseded, lifted or otherwise made
inapplicable), by any court of competent jurisdiction or Governmental
Authority which restrains, enjoins or otherwise prohibits the consummation
of the Merger (each party agreeing to use its commercially reasonable
efforts to avoid
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the effect of any such statute, rule, regulation or order or to have any
such order, judgment, decree or injunction lifted).
(c) The Home Registration Statement shall have become effective in
accordance with the provisions of all applicable Federal Securities laws,
rules and regulations, and no stop order suspending such effectiveness
shall have been issued and remain in effect.
(d) The shares of Home Common Stock shall have been approved for
listing on the NYSE, subject only to official notice of issuance.
(e) Any applicable waiting period under the HSR Act shall have expired
or been terminated.
(f) Garage shall have received the Garage Stockholder Approval.
SECTION 7.2 Conditions to Obligations of Garage to Effect the Merger. The
obligations of Garage to effect the Merger are subject to the satisfaction of
the following conditions, unless waived by Garage:
(a) (i) The representations and warranties of Home and Merger Sub
contained herein that are qualified as to materiality shall be true and
accurate, and those not so qualified shall be true and accurate in all
material respects, in each case, at and as of the date hereof (except to
the extent a representation or warranty speaks specifically as of an
earlier date or except as contemplated by this Agreement) and (ii) the
representations and warranties of Home and Merger Sub contained herein
shall be true and accurate at and as of the Effective Time as though made
at the Effective Time (except to the extent a representation or warranty
speaks specifically as of an earlier date or has become untrue or
inaccurate because of Transactions contemplated herein) except in such
cases where the failure to be true and accurate would not have a Material
Adverse Effect (determined disregarding any qualification as to materiality
contained in the representation or warranty) on Home or Merger Sub;
provided, that any representation and warranty that is true and accurate as
of the date hereof (or such earlier date as set forth above) shall be
deemed to be true and accurate at and as of the Effective Time except to
the extent that Home or any of its subsidiaries shall have taken any
voluntary action completely within the control of such person that has been
the principal cause of such representation or warranty not being true and
accurate; and provided, further, that the representations and warranties
set forth in Section 5.9 and clause (b) of Section 5.8 shall be true and
accurate only as of the date hereof.
(b) Home and Merger Sub shall have performed, in all material
respects, all obligations and complied, in all material respects, with all
covenants required by this Agreement to be performed or complied with by
them prior to the Effective Time.
(c) Home shall have delivered to Garage a certificate, dated the
Effective Time and signed by its Chief Executive Officer or Chief Financial
Officer and Executive Vice President, evidencing compliance with Sections
7.2(a) and (b).
(d) Garage shall have received an opinion of J.W. Blenke, counsel to
Home and Merger Sub, in form and substance reasonably satisfactory to
Garage, addressing the matters set forth in Exhibit B.
SECTION 7.3 Conditions to Obligations of Home and Merger Sub to Effect the
Merger. The obligations of Home and Merger Sub to effect the Merger are subject
to the satisfaction of the following conditions, unless waived by Home and
Merger Sub:
(a) (i) The representations and warranties of Garage contained herein
that are qualified as to materiality shall be true and accurate, and those
not so qualified shall be true and accurate in all material respects, in
each case at and as of the date hereof (except to the extent a
representation or warranty speaks specifically as of an earlier date or
except as contemplated by this Agreement) and (ii) the representations and
warranties of Garage contained herein shall be true and accurate at and as
of the Effective Time as though made at the Effective Time (except to the
extent a representation or warranty speaks specifically as of an earlier
date or has become untrue or inaccurate because of Transactions
contemplated herein) except in such cases where the failure to be true and
accurate would not have a Material Adverse Effect (determined disregarding
any qualification as to materiality contained in the
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representation or warranty) on Garage; provided, that any representation
and warranty that is true and accurate as of the date hereof (or such
earlier date as set forth above) shall be deemed to be true and accurate at
and as of the Effective Time except to the extent that Garage and its
subsidiaries shall have taken any voluntary action completely within the
control of such person, that has been the principal cause of such
representation or warranty not being true and accurate; and provided,
further, that the representations and warranties set forth in Section 4.9
and clause (b) of Section 4.8 shall be true and accurate only as of the
date hereof.
(b) Garage shall have performed, in all material respects, all
obligations and complied, in all material respects, with all covenants
required by this Agreement to be performed or complied with by it prior to
the Effective Time.
(c) Garage shall have delivered to Home a certificate, dated the
Effective Time and signed by its Chief Executive Officer or Chief Financial
Officer, evidencing compliance with Sections 7.3(a) and (b).
(d) Home and Merger Sub shall have received an opinion of Cooley
Godward LLP, counsel to Garage, in form and substance reasonably
satisfactory to Home and Merger Sub, addressing the matters set forth in
Exhibit C.
(e) The Management Stockholder Agreement shall not have been modified
or terminated without the consent of Home and shall be in full force and
effect.
(f) Each Stockholder Agreement shall not have been modified or
terminated without the consent of Home and shall be in full force and
effect.
ARTICLE VIII
TERMINATION, WAIVER, AMENDMENT AND CLOSING
SECTION 8.1 Termination. This Agreement may be terminated and abandoned at
any time prior to the Effective Time, whether before or after approval of this
Agreement or the Merger by the stockholders of Garage:
(a) by the mutual written consent of Garage and Home;
(b) by Garage or Home, if (i) the Effective Time shall not have
occurred on or before December 31, 1997, (ii) any Governmental Authority,
the consent of which is a condition to the obligations of Garage and Home
to consummate the Transactions, shall have determined not to grant its
consent and all appeals of such determination shall have been taken and
have been unsuccessful or (iii) any court of competent jurisdiction shall
have issued an order, judgment or decree (other than a temporary
restraining order) restraining, enjoining or otherwise prohibiting the
Merger and such order, judgment or decree shall have become final and
nonappealable; provided, however, that the right to terminate this
Agreement pursuant to clause (i) shall not be available to any party whose
failure to fulfill any obligation under this Agreement has been the cause
of, or resulted in, the failure of the Effective Time to occur on or before
such date;
(c) by Garage, if there has been a material breach by Home of any
representation, warranty, covenant or agreement set forth in this
Agreement, which breach has not been cured within ten Business Days
following receipt by Home of notice of such breach from Garage; provided,
however, that the right to terminate this Agreement pursuant to this
Section 8.1(c) shall not be available to Garage if Garage, at such time, is
in material breach of any representation, warranty, covenant or agreement
set forth in this Agreement;
(d) by Home, if there has been a material breach by Garage of any
representation, warranty, covenant or agreement set forth in this
Agreement, which breach has not been cured within ten Business Days
following receipt by Garage of notice of such breach from Home; provided,
however, that the right to terminate this Agreement pursuant to this
Section 8.1(d) shall not be available to Home if Home, at
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such time, is in material breach of any representation, warranty, covenant
or agreement set forth in this Agreement;
(d) by Home or Garage if, at the Garage Meeting (including any
adjournment or postponement thereof) called pursuant to Section 6.7 hereof,
the Garage Stockholder Approval shall not have been obtained; and
(f) by Garage if (i) Garage receives an alternative Acquisition
Proposal, (ii) Garage is not then in breach of Section 6.6, (iii) at least
three Business Days prior to such termination, Garage shall have provided
to Home written notice (A) as to the material terms of any such Acquisition
Proposal and (B) that the Board of Directors of Garage in the exercise of
its good faith judgment as to fiduciary duties to stockholders under
applicable law, after consultation with outside legal counsel, has
determined, by action of a majority of the entire Board of Directors of
Garage that such termination is necessary in order for such Board of
Directors to comply with such duties, and (iv) on the date of such
termination, the Board of Directors of Garage determines, by action of a
majority of the entire Board of Directors of Garage that such termination
continues to be necessary in order for such Board of Directors to comply
with its fiduciary duties to stockholders under applicable law (which
determination shall be made in light of any revised proposal made by Home)
and Garage concurrently enters into a definitive agreement providing for
the implementation of such Acquisition Proposal.
SECTION 8.2 Effect of Termination. In the event of termination of this
Agreement by Garage or Home as provided in Section 8.1 hereof, this Agreement
shall forthwith become void (except Sections 6.5(b), 6.15, 8.2, 8.5, 9.1, 9.2,
9.4, 9.5, 9.6, 9.7, 9.8, 9.9, 9.10, 9.12(b), 9.14 or 9.15) and there shall be no
liability on the part of Garage, Home, Merger Sub or their respective officers
or directors, except for any breach of a party's obligations under Sections
6.5(b), 6.15, 8.2, 8.5, 9.1, 9.2, 9.4, 9.5, 9.6, 9.7, 9.8, 9.9, 9.10, 9.12(b),
9.14 and 9.15. Notwithstanding the foregoing, no party hereto shall be relieved
from liability for any willful, material breach of this Agreement.
SECTION 8.3 Amendment or Supplement. At any time before or after approval
of this Agreement by the stockholders of Garage and prior to the Effective Time,
this Agreement may be amended or supplemented in writing by Garage, Merger Sub
and Home with respect to any of the terms contained in this Agreement, except
that following approval by the stockholders of Garage there shall be no
amendment or supplement which by law requires further approval by such
stockholders without such further approval by the stockholders of Garage.
SECTION 8.4 Extension of Time, Waiver, Etc. At any time prior to the
Effective Time:
(a) Home may extend the time for the performance of any of the
obligations or acts of Garage, and Garage may extend the time for the
performance of any of the obligations or acts of Home or Merger Sub;
(b) Home may waive any inaccuracies in the representations and
warranties of Garage contained herein or in any document delivered pursuant
hereto, and Garage may waive any inaccuracies in the representations and
warranties of Home contained herein or in any document delivered pursuant
hereto; or
(c) Home may waive compliance with any of the agreements of Garage
contained herein, and Garage may waive compliance with any of the
agreements of Home or Merger Sub contained herein; provided, however, that
no failure or delay by Garage or Home in exercising any right hereunder
shall operate as a waiver thereof nor shall any single or partial exercise
thereof preclude any other or further exercise thereof or the exercise of
any other right hereunder.
SECTION 8.5 Termination Fee.
(a) If this Agreement is terminated pursuant to Section 8.1(f) or if
the Board of Directors of Garage shall fail to recommend (for any reason
other than a breach of the Merger Agreement by Home) that the stockholders
of Garage approve the Merger Agreement and the Merger and the Garage
Stockholder Approval is not obtained, then Garage will immediately pay to
Home a termination fee equal
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to $6,000,000 in cash and the reasonable out-of-pocket expenses (not to
exceed $750,000) incurred by Home in connection with this Agreement.
(b) The agreement contained in this Section 8.5 is an integral part of
the Transactions and constitutes liquidated damages in the event of the
circumstances specified in 8.5(a) above and not a penalty.
ARTICLE IX
MISCELLANEOUS
SECTION 9.1 Governing Law. This Agreement and the legal relations among the
parties hereto shall be governed by and construed and enforced in accordance
with the laws of the State of Delaware, without regard to its principles of
conflicts of law.
SECTION 9.2 Entire Agreement. This Agreement, including the exhibits and
schedules attached hereto, constitutes the entire agreement among the parties
pertaining to the subject matter hereof and supersedes all prior agreements,
understandings, letters of intent, negotiations and discussions, whether oral or
written, of the parties, and there are no warranties, representations or other
agreements, express or implied, made to any party by any other party in
connection with the subject matter hereof except as specifically set forth
herein or in the documents delivered pursuant hereto or in connection herewith.
SECTION 9.3 Modification; Waiver. No supplement, modification, extension,
waiver or termination of this Agreement shall be binding unless executed in
writing by the party to be bound thereby. No waiver of any provision of this
Agreement shall be deemed or shall constitute a waiver of any other provision
hereof (whether or not similar), nor shall such waiver constitute a continuing
waiver unless otherwise expressly provided.
SECTION 9.4 Notices. All notices, consents, requests, reports, demands or
other communications hereunder (collectively, "Notices") shall be in writing and
may be given personally, by registered mail, fax or by Federal Express (or other
reputable overnight delivery service):
if to Home or Merger Sub, to it at:
Household International, Inc.
2700 Sanders Road
Prospect Heights, Illinois 60070
Attention: John W. Blenke, Esq.
Tel: (847) 564-6150
Fax: (847) 205-7536
with a copy to:
Wilmer, Cutler & Pickering
2445 M Street, N.W.
Washington, D.C. 20037
Attention: Russell J. Bruemmer, Esq.
Tel: (202) 663-6804
Fax: (202) 663-6363
if to Garage , to it at:
ACC Consumer Finance Corporation
12750 High Bluff Drive, Suite 320
San Diego, California 92130
Attention: Rocco Fabiano
Tel: (619) 793-6300
Fax: (619) 793-6333
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with a copy to:
<TABLE>
<S> <C>
Cooley Godward LLP Cooley Godward LLP
4365 Executive Drive, Suite 1100 Five Palo Alto Square
San Diego, CA 92121-2128 3000 El Camino Real
Attention: Barbara L. Borden, Esq. Pal Alto, CA 94306-2155
Tel: (619) 550-6000 Attention: Michael R. Jacobson, Esq.
Fax: (619) 453-3555 Tel: (415) 843-5000
Fax: (415) 857-0603
</TABLE>
or to such other address or such other person as the addressee party shall have
last designated by notice to the other party. All Notices shall be deemed to
have been given (i) when delivered personally, (ii) three days after being sent
by registered mail, (iii) upon transmission by fax and receipt of confirmation
of such transmission by the sender's fax machine, or (iv) one day after being
sent by Federal Express (or other reputable overnight delivery service).
SECTION 9.5 Expenses. Whether or not the transactions contemplated by this
Agreement shall be consummated, all fees and expenses incurred by any party
hereto in connection with this Agreement shall be borne by such party, except
that the filing fee paid to the SEC in connection with the Proxy Statement/
Prospectus and expenses incurred in connection with printing and mailing the
Proxy Statement/Prospectus shall be paid 50% by Garage and 50% by Home.
SECTION 9.6 Assignment. No party hereto shall have the right, power or
authority to assign or pledge this Agreement or any portion of this Agreement,
or to delegate any duties or obligations arising under this Agreement,
voluntarily, involuntarily, or by operation of law, without the prior written
consent of the other parties hereto.
SECTION 9.7 No Survival. Except as otherwise expressly provided herein,
none of the representations and warranties in this Agreement or in any document
or instrument delivered pursuant to this Agreement shall survive the Merger or
the termination of this Agreement pursuant to Article VIII.
SECTION 9.8 Severability. Any provision or part of this Agreement which is
invalid or unenforceable in any situation in any jurisdiction shall, as to such
situation and such jurisdiction, be ineffective only to the extent of such
invalidity and shall not affect the enforceability of the remaining provisions
hereof or the validity or enforceability of any such provision in any other
situation or in any other jurisdiction.
SECTION 9.9 Successors and Assigns; Third Parties. Subject to and without
waiver of the provisions of Section 9.6, all of the rights, duties, benefits,
liabilities and obligations of the parties shall inure to the benefit of, and be
binding upon, their respective successors, assigns, heirs and legal
representatives. Except as specifically set forth in Section 3.2, 3.3, 3.4, 3.5,
and 6.16 nothing herein expressed or implied is intended or shall be construed
to confer upon or give to any person or entity, other than the parties hereto
and their successors or permitted assigns, any rights or remedies under or by
reason of this Agreement.
SECTION 9.10 Counterparts. This Agreement may be executed in as many
counterparts as may be deemed necessary and convenient, and by the different
parties hereto on separate counterparts each of which, when so executed, shall
be deemed an original, but all such counterparts shall constitute one and the
same instrument.
SECTION 9.11 Interpretation; References. Any use of masculine, feminine or
neuter pronouns herein shall not be limiting, but shall be construed as
referring to persons of any gender, as the context may require. Any use of the
singular or plural form herein shall not be limiting, but shall be construed as
referring to either the plural or singular, as the context may require.
References to a "Schedule" or an "Exhibit" are, unless otherwise specified, to a
Schedule or an Exhibit attached to this Agreement, and references to an
"Article" or a "Section" are, unless otherwise specified, to an Article or a
Section of this Agreement. The Article and Section headings of this Agreement
are for convenience of reference only and shall not be deemed to modify,
explain, restrict, alter or affect the meaning or interpretation of any
provision hereof.
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SECTION 9.12 Dispute Resolution and Jurisdiction.
(a) Each party to this Agreement shall appoint a Representative to
coordinate with the other party the implementation of this Agreement. If
any dispute arises with respect to either party's performance hereunder,
the Representatives shall meet to attempt to resolve such dispute, either
in person or by telephone, within two (2) business days after the written
request of either Representative. If the Representatives are unable to
resolve such dispute, the chief executive officers of Garage and Home shall
meet, either in person or by telephone, within ten (10) business days after
either Representative provides written notice that the Representatives have
been unable to resolve such dispute. If the chief executive officers are
unable to resolve such dispute, either party may submit such dispute to
Deloitte and Touche LLP, or another nationally-recognized accounting firm,
if such dispute is solely of a financial nature.
(b) Any disputes arising out of, in connection with or with respect to
this Agreement, the subject matter hereof, the performance or
non-performance of any obligation hereunder, or any of the transactions
contemplated hereby that cannot be resolved in accordance with subsection
(a) hereof, shall be adjudicated in a state or federal court of competent
civil jurisdiction sitting in the State of Delaware and nowhere else. Each
of the parties hereto hereby irrevocably submits to the jurisdiction of any
such court of the purposes of any suit, civil action or other proceeding
arising out of, in connection with or with respect to this Agreement, the
subject matter hereof, the performance of non-performance of any obligation
hereunder, or any of the transactions contemplated hereby (each, a "Suit").
To the extent permitted by Law, each of the parties hereto hereby waives
and agrees not to assert by way of motion, as a defense or otherwise in any
such Suit, any claim that it is not subject to the jurisdiction of the
above courts, that such Suit is brought in an inconvenient forum, that the
venue of such Suit is improper or that it is entitled to a trial by jury.
SECTION 9.13 Exhibits and Schedules. All exhibits and schedules attached
hereto are hereby incorporated by reference as though set out in full herein.
SECTION 9.14 Attorneys' Fees. In the event that any party hereto brings an
action or proceeding against the other party to enforce or interpret any of the
covenants, conditions, agreements or provisions of this Agreement, the
prevailing party in such action or proceeding shall be entitled to recover all
costs and expenses of such action or proceeding, including, without limitation,
reasonable attorneys' fees, charges, disbursements and the fees and costs of
expert witnesses.
SECTION 9.15 Waiver of Jury Trial. Each party to this Agreement further
waives its respective right to a jury trial of any claim or cause of action
arising out of this Agreement or any dealings between any of the parties hereto
relating to the subject matter of this Agreement. The scope of this waiver is
intended to be all-encompassing of any and all disputes that may be filed in any
court and that relate to the subject matter of this Agreement, including,
without limitation, contract claims, tort claims and all other common law and
statutory claims. This waiver is irrevocable, meaning that it may not be
modified either orally or in writing, and this waiver shall apply to any
subsequent amendments, supplements or modifications to this Agreement or to any
other document or agreement relating to the Transactions.
SECTION 9.16 Further Assurances. Each of the parties shall, without further
consideration, use reasonable efforts to execute and deliver such additional
documents and take such other action as the other parties, or any of them, may
reasonably request to carry out the intent of this Agreement and the
Transactions.
SECTION 9.17 Negotiation of Agreement. Each of the parties acknowledges
that it has been represented by independent counsel of its choice throughout all
negotiations that have preceded the execution of this Agreement and that it has
executed the same with consent and upon the advice of said independent counsel.
Each party and its counsel cooperated in the drafting and preparation of this
Agreement and the documents referred to herein, and any and all drafts relating
thereto shall be deemed the work product of the parties and may not be construed
against any party by reason of its preparation. Accordingly, any rule of law or
any legal decision that would require interpretation of any ambiguities in this
Agreement against the party that drafted it is of no application and is hereby
expressly waived. The provisions of this Agreement shall be interpreted in a
reasonable manner to effect the intentions of the parties and this Agreement.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered as of the date first above written.
HOUSEHOLD INTERNATIONAL, INC.
By: /s/ J. W. BLENKE
------------------------------------
Name: J. W. Blenke
Title: Vice President and Assistant
Secretary
ACC CONSUMER FINANCE CORPORATION
By: /s/ ROCCO J. FABIANO
------------------------------------
Name:
Title:
HOUSEHOLD AUTO CORPORATION
By: /s/ PATRICK D. SCHWARTZ
------------------------------------
Name: Patrick D. Schwartz
Title: Vice President
A-39
<PAGE> 154
ANNEX I
EMPLOYEE MATTERS
EMPLOYEE BENEFITS
Home will cause all Garage employees to be eligible to participate as soon
as practicable (i) in any holiday, sick leave, vacation pay, leave of absence,
or similar policy of Home in which similarly situated employees of Home are
generally eligible to participate without duplication of benefits and (ii) in
the Benefit Plans of Home in which similarly situated employees of Home are
generally eligible to participate. Home will use its best efforts, to the extent
practicable, to admit employees to the foregoing plans no later than the first
entry date following the Closing Date. Prior to admittance of employees to the
foregoing plans, Home will use its reasonable best efforts to maintain the
relevant Garage plans existing prior to the Closing Date. In addition, as of the
Closing Date, Home will cover or maintain coverage of Garage employees and their
dependents under a Home or Garage group health plan and under basic
company-provided life and disability coverage, subject to the rules applicable
to other similarly situated employees of Home, without regard to any preexisting
condition exclusions or, to the extent the Garage employee was covered by such a
plan before the Closing Date, any waiting periods, or similar limitations under
any Benefit Plans of Home and Home shall provide each such employee with credit
for any co-payments previously made and any deductible previously satisfied. For
purposes of any seniority or length of service requirements, waiting periods,
vesting periods, or differential benefits based on length of service in any such
plan or policy of Home as of the Closing Date for which a Garage employee may be
eligible after the Closing, Home shall treat service by such employee with
Garage as though it had been service with Home for all purposes under any such
plan or policy to the extent Garage credited such service under its similar
plans, excluding benefit accruals under any defined benefit plan maintained by
Home, so long as this crediting of service does not violate applicable laws and
is consistent with the rules governing Benefit Plans qualified under Section
401(a) of the Code.
EMPLOYEE COMMUNICATION
Any communications proposed to be delivered to the Garage employees before
the Closing regarding the matters contained in or the transactions contemplated
under the Merger Agreement or this Annex I, or otherwise respecting any changes
or potential changes in employee benefit plans, practices, or procedures that
may or will occur in connection with the transactions contemplated by the Merger
Agreement, shall be subject to the prior approval of Home or Garage,
respectively, which approval shall not be unreasonably withheld and who shall be
deemed to have approved a proposed communication absent objection provided
within 72 hours of receipt of the proposed communications. The proposed
communication to be delivered to the Garage employees on the Business Day
immediately following the execution of the Merger Agreement has been approved by
Home.
NO OTHER RESTRICTIONS; NO THIRD PARTY BENEFICIARIES
Nothing in this Annex I or in the Merger Agreement shall (a) restrict or
otherwise inhibit Home's right to terminate the employment of any Garage
employee on or after the Closing Date or (b) be construed or interpreted to
restrict Home's right or authority to amend or terminate any of its employee
benefit plans, policies, or programs effective on or after the Closing Date.
Nothing expressed or implied in this Annex I or in the Merger Agreement shall
give any Garage employee any third party beneficiary rights or other rights to
sue under or with respect to the Merger Agreement, including Annex I, except as
set forth in Section 9.9 of the Merger Agreement.
<PAGE> 155
ANNEX B
SECTION 262 OF THE GENERAL CORPORATION LAW OF THE STATE OF DELAWARE
SEC.262. APPRAISAL RIGHTS
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to the provisions of
subsection (d) of this section with respect to such shares, who continuously
holds such shares through the effective date of the merger or consolidation, who
has otherwise complied with the provisions of subsection (d) of this Section and
who has neither voted in favor of the merger or consolidation nor consented
thereto in writing pursuant to sec.228 of this Chapter shall be entitled to an
appraisal by the Court of Chancery of the fair value of his shares of stock
under the circumstances described in subsections (b) and (c) of this Section. As
used in this Section, the word "stockholder" means a holder of record of stock
in a stock corporation and also a member of record of a non-stock corporation;
the words "stock" and "share" mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a non-stock
corporation.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to Sections 251, 252, 254, 257, 258 or 263 of this Chapter;
(1) provided, however, that no appraisal rights under this Section
shall be available for the shares of any class or series of stock which, at
the record date fixed to determine the stockholders entitled to receive
notice of and to vote at the meeting of stockholders to act upon the
agreement of merger or consolidation, were either (i) listed on a national
securities exchange or (ii) held of record by more than 2,000 stockholders;
and further provided that no appraisal rights shall be available for any
shares of stock of the constituent corporation surviving a merger if the
merger did not require for its approval the vote of the stockholders of the
surviving corporation as provided in subsection (f) of Section 251 of this
Chapter.
(2) Notwithstanding the provisions of subsection (b)(1) of this
Section, appraisal rights under this Section shall be available for the
shares of any class or series of stock of a constituent corporation if the
holders thereof are required by the terms of an agreement of merger or
consolidation pursuant to Sections 251, 252, 254, 257 and 258 of this
Chapter to accept for such stock anything except (i) shares of stock of the
corporation surviving or resulting from such merger or consolidation; (ii)
shares of stock of any other corporation which at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or held of record by more than 2,000 stockholders; (iii) cash in
lieu of fractional shares of the corporations described in the foregoing
clauses (i) and (ii); or (iv) any combination of the shares of stock and
cash in lieu of fractional shares described in the foregoing clauses (i),
(ii) and (iii) of this subsection.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under Section 253 of this chapter is not owned
by the parent corporation immediately prior to the merger, appraisal rights
shall be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this Section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this Section, including those set forth in subsections (d) and
(e), shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this Section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsections (b) or (c) hereof that
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appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
Section. Each stockholder electing to demand the appraisal of his shares
shall deliver to the corporation, before the taking of the vote on the
merger or consolidation, a written demand for appraisal of his shares. Such
demand will be sufficient if it reasonably informs the corporation of the
identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing to
take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with the
provisions of this subsection and has not voted in favor of or consented to
the merger or consolidation of the date that the merger or consolidation
has become effective; or
(2) If the merger or consolidation was approved pursuant to Section
228 or Section 253 of this Chapter, the surviving or resulting corporation,
either before the effective date of the merger or consolidation or within
10 days thereafter, shall notify each of the stockholders entitled to
appraisal rights of the effective date of the merger or consolidation and
that appraisal rights are available for any or all of the shares of the
constituent corporation, and shall include in such notice a copy of this
Section. The notice shall be sent by certified or registered mail, return
receipt requested, addressed to the stockholder at his address as it
appears on the records of the corporation. Any stockholder entitled to
appraisal rights may, within 20 days after the date of mailing of the
notice, demand in writing from the surviving or resulting corporation the
appraisal of his shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of his shares.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with the provisions of subsections (a) and (d) hereof and who is
otherwise entitled to appraisal rights, may file a petition in the Court of
Chancery demanding a determination of the value of the stock of all such
stockholders. Notwithstanding the foregoing, at any time within 60 days after
the effective date of the merger or consolidation, any stockholder shall have
the right to withdraw his demand for appraisal and to accept the terms offered
upon the merger or consolidation. Within 120 days after the effective date of
the merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall be
entitled to receive from the corporation surviving the merger or resulting from
the consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within 10 days
after his written request for such a statement is received by the surviving or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by one or more publications at
least one week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with the provisions of this Section and who have
become entitled to appraisal rights. The Court may require the
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stockholders who have demanded an appraisal for their shares and who hold stock
represented by certificates to submit their certificates of stock to the
Register in Chancery for notation thereon of the pendency of the appraisal
proceedings; and if any stockholder fails to comply with such direction, the
Court may dismiss the proceedings as to such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this Section and who has submitted his
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that he is
not entitled to appraisal rights under this Section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and in the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such sock. The Court's decree may be enforced as other
decrees in the Court of Chancery may be enforced, whether such surviving or
resulting corporation be a corporation of this State or of any other state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all of
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this Section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this Section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this Section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
(1) The shares of the surviving or resulting corporation into which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
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ANNEX C
CREDIT SUISSE/FIRST BOSTON LETTERHEAD
AUGUST 24, 1997
BOARD OF DIRECTORS
ACC CONSUMER FINANCE CORPORATION
12750 HIGH BLUFF DRIVE, SUITE 320
SAN DIEGO, CA 92130
MEMBERS OF THE BOARD:
You have asked us to advise you with respect to the fairness to the
stockholders of ACC Consumer Finance Corporation (the "Company") from a
financial point of view of the consideration to be received by such stockholders
pursuant to the terms of the Agreement and Plan of Merger, dated as of August
24, 1997 (the "Agreement") among the Company, Household International, Inc.
("Acquiror") and Household Auto Corporation (the "Sub"). The Agreement provides
for the Merger (the "Merger") of the Company with and into the Sub pursuant to
which the Company will become a wholly owned subsidiary of the Acquiror.
Stockholders of the Company will receive consideration equal to $22.00 for each
share of common stock, par value $.001 per share, of the Company, consisting of
not less than $2.00 in cash or more than $4.00 in cash, with the remainder paid
in shares of common stock, par value $1.00 per share, of the Acquiror. The
Acquiror's common stock will be valued based on the volume weighted average
price of the stock during the 10-day trading period ending one day prior to the
Company's stockholders' meeting to approve the Agreement and the Merger. The
terms of the Merger are more fully set forth in the Agreement.
In arriving at our opinion, we have reviewed certain publicly available
business and financial information relating to the Company and the Acquiror, as
well as the Agreement. We have also reviewed certain other information,
including financial forecasts, provided to us by the Company and have met with
the Company's and Acquiror's management to discuss the business and prospects of
the Company and the Acquiror.
We have also considered certain financial and stock market data of the
Company and the Acquiror, and we have compared that data with similar data for
other publicly held companies in businesses we deem similar to those of the
Company and the Acquiror and we have considered the financial terms of certain
other business combinations and other transactions which have recently been
effected. We also considered such other information, financial studies, analyses
and investigations and financial, economic and market criteria which we deemed
relevant.
In connection with our review we have not assumed any responsibility for
independent verification of any of the foregoing information and have relied on
its being complete and accurate in all material respects. With respect to the
financial forecasts, we have assumed that they have been reasonably prepared on
bases reflecting the best currently available estimates and judgments of the
Company's management as to the future financial performance of the Company. In
addition, we have not been requested to make, and have not made, an independent
evaluation or appraisal of the assets or liabilities (contingent or otherwise)
of the Company or the Acquiror, nor have we been furnished with such evaluations
or appraisals. Our opinion is necessarily based upon financial, economic, market
and other conditions as they exist and can be evaluated on the date hereof. We
are not expressing any opinion as to the actual value of the common stock of the
Acquiror when issued to the Company's stockholders pursuant to the Merger or the
prices at which such stock will trade subsequent to the Merger. We were not
requested to, and did not, solicit third party indications of interest in
acquiring all or any part of the Company.
We have acted as financial advisor to the Company in connection with the
Merger and will receive a fee for our services, a significant portion of which
is contingent upon the consummation of the Merger.
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In the ordinary course of our business, we and our affiliates may actively
trade the debt and equity securities of both the Company and the Acquiror for
our own and such affiliates' accounts and for the accounts of customers and,
accordingly, may at any time hold a long or short position in such securities.
It is understood that this letter is for the information of the Board of
Directors of the Company in connection with its consideration of the Merger,
does not constitute a recommendation to any stockholder as to how such
stockholder should vote on the proposed Merger and is not to be quoted or
referred to, in whole or in part, in any registration statement, prospectus or
proxy statement, or in any other document used in connection with the offering
or sale of securities, nor shall this letter be used for any other purposes,
without our prior written consent.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the consideration to be received by the stockholders of the Company
in the Merger is fair to such stockholders from a financial point of view.
Very truly yours,
CREDIT SUISSE FIRST BOSTON CORPORATION
By: /s/ MICHAEL E. MARTIN
- --------------------------------------
Name: Michael E. Martin
Title: Managing Director
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The General Corporation Law of the state of Delaware (Section 102) allows a
corporation to eliminate the personal liability of directors of a corporation to
the corporation or to any of its stockholders for monetary damage for a breach
of his/her fiduciary duty as a director, except in the case where the director
breached his/her duty of loyalty, failed to act in good faith, engaged in
intentional misconduct or knowingly violated a law, authorized the payment of a
dividend or approved a stock repurchase in violation of Delaware corporate law
or obtained an improper personal benefit. The Restated Certificate of
Incorporation, as amended, of Household International, Inc. ("Household
International"), and the Certificate of Incorporation of ACC Consumer Finance
Corporation (the "Company"), each contains a provision which eliminates
directors' personal liability as set forth above.
The General Corporation Law of the state of Delaware (Section 145) gives
Delaware corporations broad powers to indemnify their present and former
directors and officers and those of affiliated corporations against expenses
incurred in the defense of any lawsuit to which they are made parties by reason
of being or having been such directors or officers, subject to specified
conditions and exclusions; gives a director or officer who successfully defends
an action the right to be so indemnified; and authorizes the corporation to buy
directors' and officers' liability insurance. Such indemnification is not
exclusive of any other right to which those indemnified may be entitled under
any bylaw, agreement, vote of stockholders or otherwise.
Household International's Restated Certificate of Incorporation, as
amended, provides for indemnification to the fullest extent as expressly
authorized by Section 145 of the General Corporation Law of the state of
Delaware for directors, officers and employees of Household International and
also to persons who are serving at the request of Household International as
directors, officers or employees of other corporations (including subsidiaries).
This right of indemnification is not exclusive of any other right which any
person may acquire under any statute, bylaw, agreement, contract, vote of
stockholders or otherwise.
Article 9 of the Company's Bylaws generally provides that the Company will
indemnify its directors and officers to the fullest extent authorized or
permitted under the General Corporation Law of the State of Delaware and that
the Company will make advancements of expenses at the request of a director or
officer.
Household International and the Company, as permitted by the General
Corporation Law of the State of Delaware, have purchased liability policies
which indemnify its officers and directors against loss arising from claims by
reason of their legal liability for acts as officers or directors subject to
limitations and conditions as set forth in the policies.
The Company also has agreements with certain of its directors and officers
providing for indemnification and advancement of expenses. Reference is made to
Exhibit 10.7 to this Registration Statement for the complete text of a form of
such agreements.
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ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<C> <S>
2.1 Agreement and Plan of Merger dated as of August 24, 1997
between Household Auto Corporation, ACC Consumer Finance
Corporation and Household International, Inc. (incorporated
by reference to Exhibit 2.1 of ACC Consumer Finance
Corporation's Form 8-K for August 27, 1997; File No.
0-027268).
5 Opinion and Consent of Mr. John W. Blenke, Vice
President--Corporate Law and Assistant Secretary of
Household International, Inc.
8 Opinion and Consent of Wilmer, Cutler & Pickering, re: tax
matters.
10.1 Stockholder Agreement dated as of August 24, 1997 among
Household International, Inc., Strome Offshore Limited and
Strome Partners, L.P., relating to shares of common stock of
ACC Consumer Finance Corporation (incorporated by reference
to Exhibit D to Exhibit 2.1 of ACC Consumer Finance
Corporation's Form 8-K for August 24, 1997; File No.
0-027268).
10.2 Stockholder Agreement dated as of August 24, 1997 among
Household International, Inc. and Cargill Financial
Services, Inc., relating to shares of common stock of ACC
Consumer Finance Corporation (incorporated by reference to
Exhibit D to Exhibit 2.1 of ACC Consumer Finance
Corporation's Form 8-K for August 24, 1997; File No.
0-027268).
10.3 Management Stockholder Agreements dated as of August 24,
1997 among Household International, Inc. and Rocco J.
Fabiano, Joan Fabiano, Gary S. Burdick, Mary Burdick, Rellen
M. Stewart and Claudia Stewart, dated August 24, 1997
(incorporated by reference to Exhibit E to Exhibit 2.1 of
ACC Consumer Finance Corporation's Form 8-K for August 24,
1997; File No. 0-027268).
10.4 Employment Agreement dated August 23, 1997 between Household
International, Inc. and Rocco J. Fabiano.
10.5 Employment Agreement dated August 23, 1997 between Household
International, Inc. and Rellen M. Stewart.
10.6 Employment Agreement dated August 23, 1997 between Household
International, Inc. and Gary S. Burdick.
10.7 Form of Indemnification Agreement between ACC Consumer
Finance Corporation and certain of its directors and
officers (incorporated by reference to Exhibit 10.30 of
ACC's Registration Statement on Form S-1, No. 33-98626).
23.1 Consent of Arthur Andersen LLP, Certified Public
Accountants, relating to the audited financial information
of Household International, Inc.
23.2 Consent of KPMG Peat Marwick LLP, Certified Public
Accountants, relating to the audited financial information
of ACC Consumer Finance Corporation.
23.3 Consent of Mr. John W. Blenke, Vice President--Corporate Law
and Assistant Secretary of Household International, Inc. is
contained in his opinion (Exhibit 5).
23.4 Consent of Wilmer, Cutler & Pickering is contained in their
opinion (Exhibit 8).
23.5 Consent of Credit Suisse First Boston Corporation relating
to fairness opinion.
24 Powers of Attorney (included on page II-4).
99 Form of Proxy to be used by ACC Consumer Finance
Corporation.
</TABLE>
II-2
<PAGE> 162
ITEM 22. UNDERTAKINGS.
Household International, Inc. (the "Registrant") hereby undertakes:
(1) That, for purposes of determining any liability under the
Securities Act of 1933, each filing of the Registrant's annual report
pursuant to section 13(a) or section 15(d) of the Securities Exchange Act
of 1934 (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in this registration statement
shall be deemed to be a new registration statement relating to the
securities offered herein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(2) To deliver or cause to be delivered with the prospectus, to each
person to whom the prospectus is sent or given, the latest annual report to
security holders that is incorporated by reference in the prospectus and
furnished pursuant to and meeting the requirements of Rule 14a-3 or Rule
14c-3 under the Securities Exchange Act of 1934; and, where interim
financial information required to be presented by Article 3 of Regulation
S-X is not set forth in the prospectus, to deliver, or cause to be
delivered to each person to whom the prospectus is sent or given, the
latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
(3) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other Items
of the applicable form.
(4) That every prospectus that is filed pursuant to paragraph (3)
above, or that purports to meet the requirements of section 10(a)(3) of the
Securities Act of 1933 and is used in connection with an offering of
securities subject to Rule 415 (sec.230.415 of this chapter), will be filed
as a part of an amendment to the registration statement and will not be
used until such amendment is effective, and that, for purposes of
determining any liability under the Securities Act of 1933, each such
post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
(5) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act of 1933 and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in
the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of
such issue.
(6) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this
Form S-4, within one business day of receipt of such request, and to send
the incorporated documents by first class mail or other equally prompt
means. This includes information contained in documents filed subsequent to
the effective date of the registration statement through the date of
responding to the request.
(7) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration statement when
it became effective.
II-3
<PAGE> 163
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned thereunto duly authorized in the City of Prospect Heights, and State
of Illinois, on the 15th day of September, 1997.
Household International, Inc.
By: /s/ WILLIAM F. ALDINGER
-----------------------------------
William F. Aldinger
Chairman and
Chief Executive Officer
Each person whose signature appears below constitutes and appoints J. W.
Blenke, L. S. Mattenson and P. D. Schwartz and each or any of them (with full
power to act alone), as his/her true and lawful attorney-in-fact and agent, with
full power of substitution and resubstitution, for him/her in his/her name,
place and stead, in any and all capacities, to sign and file, with the
Securities and Exchange Commission, any and all amendments (including
post-effective amendments) to the Registration Statement, granting unto each
such attorney-in-fact and agent full power and authority to do and perform each
and every act and thing requisite and necessary to be done, as fully to all
intents and purposes as he/she might or could do in person, hereby ratifying and
confirming all that such attorney-in-fact and agent or their substitutes may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities indicated and on the 15th day of September, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ WILLIAM F. ALDINGER Chairman, Chief Executive Officer and Director
- ----------------------------------------------------- (as Principal Executive Officer)
(William F. Aldinger)
/s/ ROBERT J. DARNALL Director
- -----------------------------------------------------
(Robert J. Darnall)
/s/ GARY G. DILLON Director
- -----------------------------------------------------
(Gary G. Dillon)
/s/ JOHN A. EDWARDSON Director
- -----------------------------------------------------
(John A. Edwardson)
/s/ MARY J. EVANS Director
- -----------------------------------------------------
(Mary J. Evans)
Director
- -----------------------------------------------------
(Dudley Fishburn)
/s/ CYRUS F. FREIDHEIM, JR. Director
- -----------------------------------------------------
(Cyrus F. Freidheim, Jr.)
</TABLE>
II-4
<PAGE> 164
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ LOUIS E. LEVY Director
- -----------------------------------------------------
(Louis E. Levy)
/s/ GEORGE A. LORCH Director
- -----------------------------------------------------
(George A. Lorch)
Director
- -----------------------------------------------------
(John D. Nichols)
/s/ JAMES B. PITBLADO Director
- -----------------------------------------------------
(James B. Pitblado)
/s/ S. JAY STEWART Director
- -----------------------------------------------------
(S. Jay Stewart)
/s/ LOUIS W. SULLIVAN, M.D. Director
- -----------------------------------------------------
(Louis W. Sullivan, M.D.)
/s/ DAVID A. SCHOENHOLZ Executive Vice President -- Chief Financial
- ----------------------------------------------------- Officer (as Principal Accounting and Financial
(David A. Schoenholz) Officer)
</TABLE>
II-5
<PAGE> 1
EXHIBIT 5 and
EXHIBIT 23.3
September 15, 1997
Household International, Inc.
2700 Sanders Road
Prospect Heights, Illinois 60070
Re: Household International, Inc. Registration Statement on Form S-4, for
approximately 1,500,000 shares of Common Stock
Gentlemen:
As Vice President-Corporate Law and Assistant Secretary of Household
International, Inc., a Delaware corporation ("Household"), I am generally
familiar with the proceedings in connection with Household's Registration
Statement on Form S-4 (which is also a proxy statement for ACC Consumer Finance
Corporation ("ACC")) pursuant to which approximately 1,500,000 shares of common
stock, par value $1.00 per share of Household (the "Common Stock") is being
registered. The Common Stock will be issued to the stockholders of ACC
pursuant to the terms and conditions of the Agreement and Plan of Merger dated
August 24, 1997 (the "Agreement") by and among Household, Household Auto
Corporation and ACC, a copy of which has been filed as an exhibit to the
Registration Statement.
Based upon my review of the records and documents of Household, I am of the
opinion that:
1. Household is a corporation duly incorporated and validly
existing under the laws of the State of Delaware.
2. When (i) the Registration Statement on Form S-4 filed by
Household with respect to the Common Stock shall have become
effective under the Securities Act of 1933, as amended, and (ii)
the terms and conditions set forth in the Agreement have been
satisfied or waived and the merger described in the Agreement
shall have been consummated, then the Common Stock shall have
been issued, sold and delivered and shall be validly issued,
fully paid and non-assessable and no personal liability for the
debts of Household will attach to the holders of the Common
Stock under the laws of the State of Delaware where Household is
incorporated and the laws of the State of Illinois where its
principal place of business is located.
<PAGE> 2
Household International, Inc.
September 15, 1997
Page 2
I hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to me under the heading "Legal
Matters" in any Preliminary Prospectus, Prospectus or Prospectus Supplement
forming a part of the Registration Statement. In giving said consent, I do not
admit that I am in the category of persons where consent is required under
Section 7 of the Act or the rules and regulations of the Securities and
Exchange Commission thereunder.
Very truly yours,
John W. Blenke
<PAGE> 1
EXHIBITS 8 AND 23.4
September 15, 1997
Household International, Inc.
2700 Sanders Road
Prospect Heights, Illinois 60070
Ladies and Gentlemen:
We have acted as tax counsel to Household International, Inc. in
connection with the preparation and filing with the Securities and Exchange
Commission (the "Commission") of a Registration Statement on Form S-4 (the
"Registration Statement") pursuant to the Securities Act of 1933, as amended.
The Registration Statement relates to registration of shares of common stock of
Household International, Inc. to be issued in the proposed merger of a
wholly-owned subsidiary of Household International, Inc., Household Auto
Corporation, with and into ACC Consumer Finance Corporation ("ACC"). All
capitalized terms not otherwise defined herein shall have the same meaning
ascribed to such terms in the Registration Statement.
We have examined copies of the following documents: (1) the Registration
Statement; (2) the Agreement and Plan of Merger dated as of August 24, 1997, by
and among Household International, Inc., Household Auto Corporation, and ACC
Consumer Finance Corporation; and (3) such other documents as we have deemed
relevant for purposes of the opinion set forth herein.
In our examination of such documents, we have assumed, without
independent inquiry, the genuineness of all signatures, the proper execution of
all documents, the authenticity of all documents submitted to us as originals,
the conformity to originals of all documents
<PAGE> 2
Household International, Inc.
September 15, 1997
Page 2
submitted to us as copies, the authenticity of the originals of any such copies,
and the legal capacity of all natural persons.
Based on and subject to the foregoing, it is our opinion that the
Federal income tax treatment of the Merger as a partially tax-free
reorganization or as a taxable sale will be determined by the factual variables
set forth in the Registration Statement under the heading "The Merger -- Certain
Federal Income Tax Consequences," and we hereby confirm that the discussion set
forth under that heading constitutes, in all material respects, a fair and
accurate summary of the United States federal income tax consequences of the
Merger to shareholders of ACC under current law.
The foregoing opinion is based on relevant provisions of the
Internal Revenue Code of 1986, as amended, the Treasury Regulations issued
thereunder, court decisions, and administrative determinations as currently in
effect, all of which are subject to change, prospectively or retroactively, at
any time. We undertake no obligation to update or supplement this opinion to
reflect any changes in laws that may occur after the date of the Prospectus
contained within the Registration Statement.
This opinion has been prepared solely for your use in connection
with the filing of the Registration Statement and should not be quoted in whole
or in part or otherwise be referred to, nor otherwise be filed with or furnished
to any government agency or other person or entity, for any other purpose
without our express prior written consent.
We hereby consent to the filing of this opinion as an exhibit to
the Registration Statement and to the use of our name therein under the heading
"Legal Matters" in the Registration Statement.
Sincerely,
WILMER, CUTLER & PICKERING
By: /s/ Kenneth W. Gideon
---------------------------------
Kenneth W. Gideon
a partner
<PAGE> 1
EXHIBIT 10.4
August 23, 1997
Rocco J. Fabiano
1646 Lugano Lane
Del Mar, CA 92014
Dear Mr. Fabiano:
SUBJECT: EMPLOYMENT AGREEMENT
We wish you to accept employment with ACC Consumer Finance Corporation (the
"Corporation"), a subsidiary of Household International, Inc. ("Household") as
of the closing date ("Closing Date") of the merger of the Corporation and a
subsidiary of Household, and to provide you with fair and equitable treatment
along with a competitive compensation package. Also, we wish to assure your
continued attention to your duties without any possible distraction arising out
of uncertain personal circumstances in a change in control environment. We
recognize that in the event of a change in control of the Corporation or
Household it is likely that your duties and responsibilities would be
substantially altered.
1. a. Beginning with the Closing Date, you will be employed by the
Corporation as President and Chief Executive Officer. In that
capacity you are entitled to the following:
i. A minimum annual salary of $249,000;
ii. An annual bonus having a targeted value equal to seventy
five per cent (75%) and a maximum value of one hundred
twenty five per cent (125%) of your annualized salary as of
the end of the period in which the bonus is earned. The
amount of bonus for any year that you actually receive,if
any, will depend on the achievement of the corporate and
your individual goals established for that year and the
terms of the Household International Corporate Executive
Bonus Plan, and any successor or substitute plan or plans
(the "Bonus Plan"). However, subject only to the following
sentence, your minimum bonus for calendar 1997 and calendar
1998 will be $249,000 or if greater 100% of your annualized
salary as of the end of the year in which the bonus is
earned. Your bonus
<PAGE> 2
will be prorated based on the number of elapsed months in
the performance period in the case of death, permanent and
total under the Household Retirement Income Plan or any
successor tax qualified defined benefit plan; and
iii. Other compensation, benefits and perquisites as described
in, and in accordance with, Household's compensation,
benefit and perquisite plans (the "Plans") applicable to
senior executives of Household.
b. You will receive, as of the Closing Date, a grant of
an option to purchase 25,000 shares of common stock of
Household. Such option will have a 10-year term, will be
granted with an exercise price equal to the fair market value of
a share of Household common stock on such Closing Date and will
become exercisable at a rate of 25% per annum of the aggregate
number of shares under the option on each of the first, second,
third and fourth anniversaries of the date of the grant. You
will be eligible for future grants of stock options and/or
restricted stock rights under the Household International 1996
Long-Term Executive Incentive Compensation Plan, and any
successor or substitute plan or plans (the "Long-Term Plan").
The amount and frequency of future grants shall be solely
determined by Household's Board of Directors and shall reflect
your level of responsibility with Household or its affiliates.
2. Subject to termination as provided herein, the initial term of this
Agreement shall be for three (3) years from the Closing Date. Thereafter
the term shall be for 18 whole calendar months, and shall be "evergreen";
that is shall continue monthly as an 18 month term, unless the Corporation
gives to you not less that 17 whole calendar months notice that the term
as monthly continued shall not be so continued; provided further, that in
no event shall the term be continued beyond your sixty-fifth birthday.
This Agreement may also be terminated prior to that time by Household or
you, with or without cause, upon ninety (90) days prior written notice and
with the consent of both parties to this Agreement.
3. During your employment with the Corporation or Household (or any
affiliate of Household) you will devote your reasonably full business time
and energies to the faithful and diligent performance of the duties
inherent in, and implied by, your position.
<PAGE> 3
4. In consideration of your employment with the Corporation or Household (or
any affiliate of Household), it is mutually agreed that:
a. In the event your employment is terminated during the term of this
Agreement by Household or the Corporation or such Household affiliate
for any reason other than:
i. misconduct which is willful and deliberate knowing that it is
detrimental in a significant way to the interests of the
Corporation or Household;
ii. death; or
iii. inability, for reasons of disability, reasonably to perform your
duties for 6 consecutive calendar months;
b. In the event that during the term of this Agreement you resign your
position with the Corporation or Household or such Household affiliate
because, within 6 whole calendar months prior to your resignation, any
successor to Household, by acquisition of stock or substantially all
of the assets, by merger or otherwise, failed to expressly adopt or
otherwise repudiated this Employment Agreement; or
c. In the event that during the term of this Agreement you resign your
position with the Corporation or Household or such Household affiliate
because within 6 whole calendar months prior to your resignation one
or more of the following events occurred:
(i) your annual salary was reduced;
(ii) your annual target bonus or your status or responsibilities were
substantially changed;
(iii) your benefits under the Household Retirement Income Plan or any
successor tax qualified defined benefit plan were reduced for
reasons other than to maintain its tax qualified status and such
reductions were not supplemented in the Household Supplemental
Retirement Income Plan ("HSRIP"); or your benefits under HSRIP
were reduced;
(iv) your other benefits or perquisites were reduced and such
reductions were not uniformly applied with respect to all senior
executives of Household;
<PAGE> 4
(v) you were reassigned to a geographical area outside of the San
Diego, California, metropolitan area, but only if such
reassignment occurred on or prior to the second anniversary of
the Closing Date;
(vi) any successor to the Corporation by acquisition of stock or
substantially all of the assets, by merger or otherwise, failed
to expressly adopt or otherwise repudiated this Employment
Agreement;
(vii) you received written notice that your employment contract was
not renewed; or
(viii) over 50% of the Corporation's stock is not held by Household,
or Household sells substantially all of the assets of,
liquidates, or otherwise disposes of, the Corporation;
Household shall be required, and hereby agrees, to make promptly a lump sum
cash payment to you in an amount equal to 100% of your then annual rate of
salary plus 100% of the average of the last two years' cash bonuses;
provided, however, that if your termination of employment should occur
during the initial three (3) year term of this Agreement, such cash payment
shall equal the greater of (i) the amount set forth above or (ii) the
product of (A) the sum of 100% of your then annual rate of salary plus the
greater of 100% of the average of the last two years' cash bonuses or
$249,000, times (B) the number of whole and partial years remaining in such
initial term; and provided further that if the term of this Agreement is
less than 18 months because you are within 18 months of becoming age 65,
the amount shall be multiplied by a fraction the numerator of which is the
number of months left in the term, and the denominator of which is 18.
This payment shall be in addition to all other compensation and benefits
accrued to the date of termination of employment. Household shall also be
required, and hereby agrees, to make promptly an additional cash payment to
you in an amount equal to the product of (i) 75% of your annual salary,
times (ii) a fraction, the numerator of which equals the number of days you
were employed by the Corporation during the calendar year in which your
termination occurs and the denominator of which equals 365. Payments under
this paragraph 4 are in lieu of any other severance that Household may
provide for its employees.
5. You are not required to mitigate the amount of any payments to be made by
the Corporation, Household or any affiliate thereof pursuant to this
Agreement by seeking
<PAGE> 5
other employment, or otherwise, nor shall the amount of any payments
provided for in this Agreement be reduced by any compensation earned by you
as the result of self-employment or your employment by another employer
after the date of termination of your employment with Household, the
Corporation or any affiliate thereof.
6. Except as provided below, if any amounts payable to you (whether or not
such amounts are payable pursuant to this Agreement) (the "Severance
Payments") are subject to the tax (the "Excise Tax") imposed by Section
4999 of the Internal Revenue Code of 1986, as amended (the "Code") (or any
similar federal, state or local tax that may hereafter be imposed), then
Household shall pay to you within 30 days after you are terminated an
additional amount (the "Gross-Up Payment") such that the net amount
retained by you, after deduction of any Excise Tax on the Total Payments
(as hereinafter defined) and any federal, state and local income tax and
Excise Tax upon the payment provided for by this paragraph 6, shall be
equal to the Total Payments. For purposes of determining whether any of
the Severance Payments will be subject to the Excise Tax and the amount of
such Excise Tax: (i) any other payments or benefits received or to be
received by you in connection with a change in ownership or effective
control within the meaning of Section 280G of the Code or your termination
of employment (whether pursuant to the terms of this Agreement or any
other plan, arrangement or agreement with Household or the Corporation,
any person whose actions result in a change in control or any other person
affiliated with Household, the Corporation or such person) (which,
together with the Severance Payments, constitute the "Total Payments")
shall be treated as "Parachute Payments" within the meaning of Section
280G(b)(2) of the Code, and all "Excess Parachute Payments" within the
meaning of Section 280G(b)(1) of the Code shall be treated as subject to
the Excise Tax, unless in the opinion of tax counsel reasonably selected
by Household such other payments or benefits (in whole or in part) do not
constitute Parachute Payments, or such Excess Parachute Payments (in whole
or in part) represent reasonable compensation for services actually
rendered within the meaning of Section 280G(b)(4) of the Code in excess of
the base amount within the meaning of Section 280G(b)(3) of the Code, or
are otherwise not subject to the Excise Tax; (ii) the amount of the Total
Payments which shall be treated as subject to the Excise Tax shall be
equal to the lesser of (A) the total amount of the Total Payments and (B)
the amount of Excess Parachute Payments (after applying this paragraph 6);
and (iii) the value of any non-cash benefits or any deferred payments or
benefit shall be determined by an accounting firm reasonably selected by
Household in accordance with the principles
<PAGE> 6
of Sections 280G(d)(3) and (4) of the Code. For purposes of determining
the amount of the Gross-Up Payment, you shall be deemed to pay federal
income taxes at the highest marginal rate of federal income taxation in the
calendar year in which the Gross-Up Payment is to be made and state and
local income taxes at the highest marginal rate of taxation in the state
and locality of your residence on the event of termination, net of the
maximum reduction in federal income taxes which could be obtained from
deduction of such state and local taxes. In the event that the Excise Tax
is subsequently determined to be less than the amount taken into account
hereunder at the time of the event of termination, you shall repay to
Household within ten days after the time that the amount of such reduction
in Excise Tax is finally determined the portion of the Gross-Up Payment
attributable to such reduction (plus the portion of the Gross-Up Payment
attributable to the Excise Tax and federal and state and local income tax
imposed on the Gross-Up Payment being repaid by you if such repayment
results in a reduction in Excise Tax and/or federal and state and local
income tax deduction) plus interest on the amount of such repayment at the
rate provided in Section 1274(b)(2)(B) of the Code. In the event that the
Excise Tax is determined to exceed the amount taken into account hereunder
at the time of the event of termination (including by reason of any payment
the existence or amount of which cannot be determined at the time of the
Gross-Up Payment), Household shall make an additional gross-up payment in
respect of such excess within ten days after the time that the amount of
such excess is finally determined.
However, if any part or all of the amounts to be paid to you constitute
"Parachute Payments" within the meaning of section 280G(b)(2)(A) of the
Code, and a reduction of the amount by 10% or less would totally avoid the
imposition of any Excise Tax, such amounts shall be reduced so that the
aggregate present value of the amounts constituting such Parachute Payments
will be equal to 299% of your "annualized includible compensation for the
base period," as such term is defined in section 280G(d)(1) of the Code.
For the purpose of this subparagraph, present value shall be determined in
accordance with section 280G(d)(4) of the Code.
7. If a dispute arises regarding the termination of your employment or the
interpretation or enforcement of this Agreement and you obtain a final
judgment in your favor from a court of competent jurisdiction from which
no appeal may be taken, whether because the time to do so has expired or
otherwise, or your claim is settled by Household, the Corporation or its
successor prior to the rendering of such a judgment, all reasonable legal
and
<PAGE> 7
other professional fees and expenses incurred by you in contesting or
disputing any such termination or in seeking to obtain or enforce any right
or benefit provided for in this Agreement or in otherwise pursuing your
claim will be promptly paid by Household, the Corporation or its successor
with interest thereon at the highest statutory rate of your state of
domicile for interest on judgments against private parties from the date of
payment thereof by you to the date of reimbursement to you by Household,
the Corporation or its successor.
8. During the course of your performance under this Agreement, you will
receive and be exposed to confidential and proprietary information
relating to Household's and the Corporation's business practices and
strategies (including the business practices and strategies of the
Corporation's predecessor, ACC Consumer Finance Corporation)
("Confidential Information"). Such Confidential Information may include
but shall not be limited to confidential and proprietary information that
is marked "Confidential" or its equivalent and the Corporation's marketing
and customer support strategies, financial information, including sales,
costs, profits and pricing methods, internal organization, employee lists
and customer lists. At all times during the term of employment and
thereafter, you will hold in strictest confidence and will not disclose or
use any Confidential Information, except as such disclosure or use may be
required in connection with your work for the Corporation or Household.
Notwithstanding the foregoing, "Confidential Information" shall not be
deemed to include information which you can demonstrate: (i) is now, or
hereafter becomes, through no act or failure to act on your part,
generally known or publicly available; or (ii) was known by you prior to
July 15, 1993.
9. During the initial three (3) year term of this Agreement you shall not
invest or engage in any business which is principally a sub-prime consumer
auto lender (the "Competitor"), or accept employment with or render
services to any Competitor within the United States or Canada. During the
twenty-four (24) calendar months following the initial three (3) year term
of this Agreement, you shall not invest or engage in any business which is
a Competitor or accept employment with or render services to any
Competitor within the United States or Canada unless that Competitor has
been in existence and operating for more than three (3) years at that
time. For the period ending one (1) year after the termination of this
Agreement or after your termination of employment, whichever is later, you
will not solicit to hire any employee of the Corporation or Household
which would result in a termination of his or her
<PAGE> 8
employment with the Corporation or Household in order to join any company
or organization in which you have an interest, financially or otherwise.
10. The parties intend that this Agreement shall supersede any employment
agreement entered into by and between you and ACC Consumer Finance and
American Credit Corporation and/or any subsidiary or affiliate thereof,
including the agreement dated November 1, 1995.
11. The provisions of this Agreement shall be construed, to the extent
possible, so as to guarantee their enforceability. In case any one or
more of the provisions contained in this Agreement shall, for any reason,
be held to be invalid, illegal, or unenforceable in any respect, such
invalidity, illegality or unenforceability shall not affect any other
provision of this Agreement, and this Agreement shall be construed as if
such invalid, illegal, or unenforceable provision had never been contained
in it.
12. Any successor to the Household or the Corporation, by acquisition of
stock or substantially all of the assets, by merger or otherwise, shall be
required to adopt and abide by the terms of this Agreement. This
Agreement, and any rights to receive payments hereunder, may not be
transferred, assigned or alienated by you.
13. All benefits under this Agreement shall be general obligations of the
Corporation or Household which shall not require the segregation of any
funds or property. Notwithstanding the foregoing, in the discretion of
the Corporation or Household, the Corporation or Household may establish a
grantor trust or other vehicle to assist it in meeting its obligations
hereunder, but any such trust or other vehicle shall not create a funded
account or security interest for you.
14. This Agreement may only be amended or terminated by written agreement,
signed by both of the parties. It is agreed that Household may assign
this Agreement to the Corporation or any of its affiliates, but such
assignment shall not release Household or Corporation from their
obligations hereunder.
<PAGE> 9
Our signatures below indicate our mutual agreement and acceptance of the
foregoing terms and provisions, all as of the date first above set forth.
Sincerely,
HOUSEHOLD INTERNATIONAL, INC.
By: /s/ Lawrence N. Bangs
--------------------------------
Lawrence N. Bangs
Group Executive
/s/ Rocco J. Fabiano
--------------------------------
Rocco J. Fabiano
<PAGE> 1
EXHIBIT 10.5
August 23, 1997
Rellen M. Stewart
3374 Rocking Horse Circle
Encinitas, CA 92024
Dear Mr. Stewart:
SUBJECT: EMPLOYMENT AGREEMENT
We wish you to accept employment with ACC Consumer Finance Corporation (the
"Corporation"), a subsidiary of Household International, Inc. ("Household") as
of the closing date ("Closing Date") of the merger of the Corporation and a
subsidiary of Household, and to provide you with fair and equitable treatment
along with a competitive compensation package. Also, we wish to assure your
continued attention to your duties without any possible distraction arising out
of uncertain personal circumstances in a change in control environment. We
recognize that in the event of a Change in Control (as such term is defined
herein) of the Corporation or Household it is likely that your duties and
responsibilities would be substantially altered.
1. a. Beginning with the Closing Date, you will be employed by the
Corporation as Chief Operating Officer. In that capacity you are
entitled to the following:
i. A minimum annual salary of $204,000;
ii. An annual bonus having a targeted value equal to seventy five per
cent (75%) and a maximum value of one hundred twenty five per
cent (125%) of your annualized salary as of the end of the period
in which the bonus is earned. The amount of bonus for any year
that you actually receive,if any, will depend on the achievement
of the corporate and your individual goals established for that
year and the terms of the Household International Corporate
Executive Bonus Plan, and any successor or substitute plan or
plans (the "Bonus Plan"). However, subject only to the following
sentence, your minimum bonus for calendar 1997 will be $204,000
and your minimum bonus for calendar 1998 will be 100% of your
annualized salary as of the end of the year in which the bonus is
earned. Your bonus will be prorated based on the number of
<PAGE> 2
elapsed months in the performance period in the case of
death, permanent and total disability (as described in
Section 4(a)(iii)), or retirement under the Household
Retirement Income Plan or any successor tax qualified
defined benefit plan; and
iii. Other compensation, benefits and perquisites as
described in, and in accordance with, Household's
compensation, benefit and perquisite plans (the "Plans")
applicable to senior executives of Household.
b. You will receive, as of the Closing Date, a grant of
an option to purchase 20,000 shares of common stock of
Household. Such option will have a 10-year term, will be
granted with an exercise price equal to the fair market value of
a share of Household common stock on such Closing Date and will
become exercisable at a rate of 25% per annum of the aggregate
number of shares under the option on each of the first, second,
third and fourth anniversaries of the date of the grant. You
will be eligible for future grants of stock options and/or
restricted stock rights under the Household International 1996
Long-Term Executive Incentive Compensation Plan, and any
successor or substitute plan or plans (the "Long-Term Plan").
The amount and frequency of future grants shall be solely
determined by Household's Board of Directors and shall reflect
your level of responsibility with Household or its affiliates.
2. Subject to termination as provided herein, the initial term of this
Agreement shall be for three (3) years from the Closing Date. Thereafter
the term shall be for 18 whole calendar months, and shall be "evergreen";
that is shall continue monthly as an 18 month term, unless the Corporation
gives to you not less that 17 whole calendar months notice that the term
as monthly continued shall not be so continued; provided further, that in
no event shall the term be continued beyond your sixty-fifth birthday.
This Agreement may also be terminated prior to that time by Household or
you, with or without cause, upon ninety (90) days prior written notice and
with the consent of both parties to this Agreement.
3. During your employment with the Corporation or Household (or any
affiliate of Household) you will devote your reasonably full business time
and energies to the faithful and diligent performance of the duties
inherent in, and implied by, your position.
<PAGE> 3
4. In consideration of your employment with the Corporation or Household (or
any affiliate of Household), it is mutually agreed that:
a. In the event your employment is terminated during the term of this
Agreement by Household or the Corporation or such Household affiliate
for any reason other than:
i. misconduct which is willful and deliberate knowing that it is
detrimental in a significant way to the interests of the
Corporation or Household;
ii. death; or
iii. inability, for reasons of disability, reasonably to perform your
duties for 6 consecutive calendar months; or
b. In the event that during the term of this Agreement you resign your
position with the Corporation or Household or such Household affiliate
because, within 6 whole calendar months prior to your resignation, any
successor to Household, by acquisition of stock or substantially all
of the assets, by merger or otherwise, failed to expressly adopt or
otherwise repudiated this Employment Agreement;
Household shall be required, and hereby agrees, to make promptly a lump sum
cash payment to you in an amount equal to 100% of your then annual rate of
salary plus 100% of the average of the last two years' cash bonuses;
provided, however, if the term of this Agreement is less than 18 months
because you are within 18 months of becoming age 65, the amount shall be
multiplied by a fraction the numerator of which is the number of months
left in the term, and the denominator of which is 18. This payment shall
be in addition to all other compensation and benefits accrued to the date
of termination of employment. Payments under this paragraph 4 or paragraph
5 are in lieu of any other severance that Household may provide for its
employees.
5. It is further mutually agreed that should your position be terminated as
a result of a Change in Control or should you resign your position at any
time within sixty (60) whole calendar months following a Change in Control
because you are assigned to a position of lesser rank or status than you
had immediately prior to the Change in Control, Household or its successor
shall pay to you the amounts (including the lump sum payment) described in
paragraph 4 regardless of whether you are otherwise entitled to them under
paragraph 4.
<PAGE> 4
For purposes of this Agreement, a Change in Control shall be deemed
to occur when and if:
A. any "person" (as the term is used in Section 13(d)
and Section 14(d)(2) of the Securities Exchange Act of 1934)
(other than Household or its affiliates or other than a trustee
or other fiduciary of securities held under an employee benefit
plan of Household or the Corporation) becomes the beneficial
owner, directly or indirectly, of securities of Household or the
Corporation representing 20% or more of the combined voting
power of Household's or the Corporation's then outstanding
securities; or
B. persons who were directors of Household or the
Corporation as of the effective date hereof, or successor
directors nominated by those directors or by such successor
directors cease to constitute a majority of the Board of
Directors of Household or the Corporation or their successors by
merger, consolidation or sale of assets.
6. You are not required to mitigate the amount of any payments to be made by
the Corporation, Household or any affiliate thereof pursuant to this
Agreement by seeking other employment, or otherwise, nor shall the amount
of any payments provided for in this Agreement be reduced by any
compensation earned by you as the result of self-employment or your
employment by another employer after the date of termination of your
employment with Household, the Corporation or any affiliate thereof.
7. Except as provided below, it is the intent and desire of Household that
the salary, bonuses and other benefits provided for herein shall be paid
to you without any diminution by reason of the assessment of any "golden
parachute" excise tax pursuant to the Internal Revenue Code of 1986, as
from time to time amended, (hereinafter the "Code"), or state law.
Accordingly, in the event that any excise tax is assessed against you
pursuant to the provisions of sections 280G and 4999 of the Code (or
successor provisions) or comparable provisions of state law, whether with
respect to any payments made to you pursuant to the provisions of this
Agreement or payments otherwise arising out of your employment
relationship, Household or any successor, upon notification of such
assessment, shall promptly pay to you such amount as is necessary to
provide you with the same after-tax benefit that you would have received
had there been no "golden parachute" excise tax. For this purpose,
Household, the Corporation or its successor shall assume that you are
taxed at the highest individual federal and state income tax rates
(without regard to Section 1(g) of the Code or successor provisions
thereto).
<PAGE> 5
However, if any part or all of the amounts to be paid to you constitute
"parachute payments" within the meaning of section 280G(b)(2)(A) of the
Code, and a reduction of the amount by 10% or less would totally avoid the
imposition of any excise tax, such amounts shall be reduced so that the
aggregate present value of the amounts constituting such parachute payments
will be equal to 299% of your "annualized includible compensation for the
base period," as such term is defined in section 280G(d)(1) of the Code.
For the purpose of this subparagraph, present value shall be determined in
accordance with section 280G(d)(4) of the Code.
8. If a dispute arises regarding the termination of your employment or the
interpretation or enforcement of this Agreement and you obtain a final
judgment in your favor from a court of competent jurisdiction from which
no appeal may be taken, whether because the time to do so has expired or
otherwise, or your claim is settled by Household, the Corporation or its
successor prior to the rendering of such a judgment, all reasonable legal
and other professional fees and expenses incurred by you in contesting or
disputing any such termination or in seeking to obtain or enforce any
right or benefit provided for in this Agreement or in otherwise pursuing
your claim will be promptly paid by Household, the Corporation or its
successor with interest thereon at the highest statutory rate of your
state of domicile for interest on judgments against private parties from
the date of payment thereof by you to the date of reimbursement to you by
Household, the Corporation or its successor.
9. During the course of your performance under this Agreement, you will
receive and be exposed to confidential and proprietary information
relating to Household's and the Corporation's business practices and
strategies (including the business practices and strategies of the
Corporation's predecessor, ACC Consumer Finance Corporation)
("Confidential Information"). Such Confidential Information may include
but shall not be limited to confidential and proprietary information that
is marked "Confidential" or its equivalent and the Corporation's marketing
and customer support strategies, financial information, including sales,
costs, profits and pricing methods, internal organization, employee lists
and customer lists. At all times during the term of employment and
thereafter, you will hold in strictest confidence and will not disclose or
use any Confidential Information, except as such disclosure or use may be
required in connection with your work for the Corporation or Household.
Notwithstanding the foregoing, "Confidential Information" shall not be
deemed to include information
<PAGE> 6
which you can demonstrate: (i) is now, or hereafter becomes, through no
act or failure to act on your part, generally known or publicly available;
(ii) was known by you prior to July 15, 1993.
10. Unless this Agreement has been terminated in accordance with paragraphs
4.b. or 5, during the initial three (3) year term of this Agreement, you
shall not invest or engage in any business which is principally a
sub-prime consumer auto lender (the "Competitor"), or accept employment
with or render services to any Competitor within the United States or
Canada. For a period of one (1) year after your termination of
employment, you will not solicit any employee of the Corporation or
Household to terminate his or her employment with the Corporation or
Household to join any company or organization in which you have an
interest, financially or otherwise.
11. The parties intend that this Agreement shall supersede any employment
agreement entered into by and between you and ACC Consumer Finance and
American Credit Corporation and/or any of its subsidiary or affiliate
thereof, including the agreement dated November 1, 1995.
12. The provisions of this Agreement shall be construed, to the extent
possible, so as to guarantee their enforceability. In case any one or
more of the provisions contained in this Agreement shall, for any reason,
be held to be invalid, illegal, or unenforceable in any respect, such
invalidity, illegality or unenforceability shall not affect any other
provision of this Agreement, and this Agreement shall be construed as if
such invalid, illegal, or unenforceable provision had never been contained
in it.
13. Any successor to the Household or the Corporation, by acquisition of
stock or substantially all of the assets, by merger or otherwise, shall be
required to adopt and abide by the terms of this Agreement. This
Agreement, and any rights to receive payments hereunder, may not be
transferred, assigned or alienated by you.
14. All benefits under this Agreement shall be general obligations of the
Corporation or Household which shall not require the segregation of any
funds or property. Notwithstanding the foregoing, in the discretion of
the Corporation or Household, the Corporation or Household may establish a
grantor trust or other vehicle to assist it in meeting its obligations
hereunder, but any such trust or other vehicle shall not create a funded
account or security interest for you.
15. This Agreement may only be amended or terminated by written agreement,
signed by both of the parties. It is agreed that Household may assign
this Agreement to the
<PAGE> 7
Corporation or any of its affiliates, but such assignment
shall not release Household or Corporation from their
obligations hereunder.
Our signatures below indicate our mutual agreement and acceptance of the
foregoing terms and provisions, all as of the date first above set forth.
Sincerely,
HOUSEHOLD INTERNATIONAL, INC.
By: /s/ Lawrence N. Bangs
------------------------------
Lawrence N. Bangs
Group Executive
/s/ Rellen M. Stewart
------------------------------
Rellen M. Stewart
<PAGE> 1
EXHIBIT 10.6
August 23, 1997
Gary S. Burdick
3315 Rocking Horse Circle
Encinitas, CA 92024
Dear Mr. Burdick:
SUBJECT: EMPLOYMENT AGREEMENT
We wish you to accept employment with ACC Consumer Finance Corporation (the
"Corporation"), a subsidiary of Household International, Inc. ("Household") as
of the closing date ("Closing Date") of the merger of the Corporation and a
subsidiary of Household, and to provide you with fair and equitable treatment
along with a competitive compensation package.
1. a. Beginning with the Closing Date, you will be employed by the
Corporation as Executive Vice President. In that capacity you are
entitled to the following:
i. A minimum annual salary of $204,000;
ii. An annual bonus having a targeted value equal to seventy five per
cent (75%) and a maximum value of one hundred twenty five per
cent (125%) of your annualized salary as of the end of the period
in which the bonus is earned. The amount of bonus for any year
that you actually receive,if any, will depend on the achievement
of the corporate and your individual goals established for that
year and the terms of the Household International Corporate
Executive Bonus Plan, and any successor or substitute plan or
plans (the "Bonus Plan"). However, subject only to the following
sentence, your minimum bonus for calendar 1997 will be 100% of
your annualized salary as of the end of the year in which the
bonus is earned. Your bonus will be prorated based on the number
of elapsed months in the performance period in the case of death,
permanent and total disability (as described in Section
4(a)(iii)), or retirement under the Household Retirement Income
Plan or any
<PAGE> 2
successor tax qualified defined benefit plan; and
iii. Other compensation, benefits and perquisites as described in, and
in accordance with, Household's compensation, benefit and
perquisite plans (the "Plans") applicable to senior executives of
Household.
b. You will receive, as of the Closing Date, a grant of an option to
purchase 5,000 shares of common stock of Household. Such option
will have a 10-year term, will be granted with an exercise price
equal to the fair market value of a share of Household common
stock on such Closing Date and will become exercisable at a rate
of 25% per annum of the aggregate number of shares under the
option on each of the first, second, third and fourth
anniversaries of the date of the grant. You will be eligible for
future grants of stock options and/or restricted stock rights
under the Household International 1996 Long-Term Executive
Incentive Compensation Plan, and any successor or substitute plan
or plans (the "Long-Term Plan"). The amount and frequency of
future grants shall be solely determined by Household's Board of
Directors.
2. Subject to termination as provided herein, the term of this Agreement
shall be for one (1) year from the Closing Date. This Agreement may also
be terminated prior to that time by Household or you, with or without
cause, upon ninety (90) days prior written notice and with the consent of
both parties to this Agreement.
3. During your employment with the Corporation or Household (or any
affiliate of Household) you will devote your reasonably full business time
and energies to the faithful and diligent performance of the duties
inherent in, and implied by, your position.
4. In consideration of your employment with the Corporation or Household (or
any affiliate of Household), it is mutually agreed that:
a. In the event your employment is terminated during the term of this
Agreement by Household or the Corporation or such Household affiliate
for any reason other than:
i. misconduct which is willful and deliberate knowing that it is
detrimental in a
<PAGE> 3
significant way to the interests of the Corporation or Household;
ii. death; or
iii. inability, for reasons of disability, reasonably to perform your
duties for 6 consecutive calendar months; or
b. In the event that during the term of this Agreement you resign your
position with the Corporation or Household or such Household affiliate
because, within 6 whole calendar months prior to your resignation, any
successor to Household, by acquisition of stock or substantially all
of the assets, by merger or otherwise, failed to expressly adopt or
otherwise repudiated this Employment Agreement;
Household shall be required, and hereby agrees, to pay you the annual
salary and bonus which you would have received for the remainder of the
year. In addition Household shall make promptly a lump sum cash payment to
you in an amount equal to 100% of your then annual rate of salary plus 100%
of the average of the last two years' cash bonuses. This payment shall be
in addition to all other compensation and benefits accrued to the date of
termination of employment. Payments under this paragraph 4 are in lieu of
any other severance that Household may provide for its employees. After
the term of this Agreement, you will be provided with severance, if any, in
accordance with Household's usual practices applicable to similarly
situated senior executives (who do not have employment agreements) of
Household at the time of your termination.
5. You are not required to mitigate the amount of any payments to be made by
the Corporation, Household or any affiliate thereof pursuant to this
Agreement by seeking other employment, or otherwise, nor shall the amount
of any payments provided for in this Agreement be reduced by any
compensation earned by you as the result of self-employment or your
employment by another employer after the date of termination of your
employment with Household, the Corporation or any affiliate thereof.
6. If a dispute arises regarding the termination of your employment or the
interpretation or enforcement of this Agreement and you obtain a final
judgment in your favor from a court of competent jurisdiction from which
no appeal may be taken, whether because the time to do so has expired or
otherwise, or your claim is settled by Household, the Corporation or its
successor prior to the rendering of such a judgment, all reasonable legal
and other professional fees and expenses incurred by you in
<PAGE> 4
contesting or disputing any such termination or in seeking to obtain or
enforce any right or benefit provided for in this Agreement or in otherwise
pursuing your claim will be promptly paid by Household, the Corporation or
its successor with interest thereon at the highest statutory rate of your
state of domicile for interest on judgments against private parties from
the date of payment thereof by you to the date of reimbursement to you by
Household, the Corporation or its successor.
7. During the course of your performance under this Agreement, you will
receive and be exposed to confidential and proprietary information
relating to Household's and the Corporation's business practices and
strategies (including the business practices and strategies of the
Corporation's predecessor, ACC Consumer Finance Corporation)
("Confidential Information"). Such Confidential Information may include
but shall not be limited to confidential and proprietary information that
is marked "Confidential" or its equivalent and the Corporation's marketing
and customer support strategies, financial information, including sales,
costs, profits and pricing methods, internal organization, employee lists
and customer lists. At all times during the term of employment and
thereafter, you will hold in strictest confidence and will not disclose or
use any Confidential Information, except as such disclosure or use may be
required in connection with your work for the Corporation or Household.
Notwithstanding the foregoing, "Confidential Information" shall not be
deemed to include information which you can demonstrate: (i) is now, or
hereafter becomes, through no act or failure to act on your part,
generally known or publicly available; (ii) was known by you prior to July
15, 1993.
8. Unless this Agreement has been terminated in accordance with paragraph
4.b., during the two (2) year period following the Closing Date, you shall
not invest or engage in any business which is principally a sub-prime
consumer auto lender (the "Competitor"), or accept employment with or
render services to any Competitor within the United States or Canada. For
a period of one (1) year after your termination of employment, you will
not solicit any employee of the Corporation or Household to terminate his
or her employment with the Corporation or Household to join any company or
organization in which you have an interest, financially or otherwise.
9. The parties intend that this Agreement shall supersede any employment
agreement entered into by and between you and ACC Consumer Finance and
American Credit Corporation and/or any subsidiary or affiliate thereof,
including the agreement dated November 1, 1995.
<PAGE> 5
10. The provisions of this Agreement shall be construed, to the extent
possible, so as to guarantee their enforceability. In case any one or
more of the provisions contained in this Agreement shall, for any reason,
be held to be invalid, illegal, or unenforceable in any respect, such
invalidity, illegality or unenforceability shall not affect any other
provision of this Agreement, and this Agreement shall be construed as if
such invalid, illegal, or unenforceable provision had never been contained
in it.
11. Any successor to the Household or the Corporation, by acquisition of
stock or substantially all of the assets, by merger or otherwise, shall be
required to adopt and abide by the terms of this Agreement. This
Agreement, and any rights to receive payments hereunder, may not be
transferred, assigned or alienated by you.
12. All benefits under this Agreement shall be general obligations of the
Corporation or Household which shall not require the segregation of any
funds or property. Notwithstanding the foregoing, in the discretion of
the Corporation or Household, the Corporation or Household may establish a
grantor trust or other vehicle to assist it in meeting its obligations
hereunder, but any such trust or other vehicle shall not create a funded
account or security interest for you.
13. This Agreement may only be amended or terminated by written agreement,
signed by both of the parties. It is agreed that Household may assign
this Agreement to the Corporation or any of its affiliates, but such
assignment shall not release Household or Corporation from their
obligations hereunder.
14. During and after the term of this Agreement, upon your termination of
employment, you will have medical and dental insurance continuation
available as required by the Consolidated Omnibus Budget Reconciliation
Act of 1985, as amended ("COBRA") and as required by any other federal,
state or local laws. Notwithstanding any other provision to the contrary
in this Agreement, unless your termination of employment with Household or
the Corporation or their affiliates is for the reasons specified in
subparagraphs 4.a.i. or 4.a.ii above, then (i) for a period up to eighteen
(18) months following your termination, Household will pay any premiums
due to keep in effect such medical and dental coverage which you had on
the date of your termination of employment and (ii) for a period up to
eighteen (18) months following your termination, Household will reimburse
you for the premiums due on a comparable life insurance policy which you
obtain (either through conversion of the existing basic life insurance or
otherwise) insofar
<PAGE> 6
as the premiums are similar to the premiums paid by Household for
your basic life insurance prior to your termination of
employment.
Our signatures below indicate our mutual agreement and acceptance of the
foregoing terms and provisions, all as of the date first above set forth.
Sincerely,
HOUSEHOLD INTERNATIONAL, INC.
By: /s/ Lawrence N. Bangs
---------------------------
Lawrence N. Bangs
Group Executive
/s/ Gary S. Burdick
---------------------------
Gary S. Burdick
<PAGE> 1
[TO COME]
<PAGE> 1
[TO COME]
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
HOUSEHOLD INTERNATIONAL, INC.:
As independent public accountants, we hereby consent to the incorporation by
reference in this registration statement on Form S-4 to be filed with the
Securities and Exchange Commission on or about September 15, 1997, of our
report dated January 23, 1997, included in Household International, Inc.'s
Form 10-K for the year ended December 31, 1996, and to all references to our
Firm included in this registration statement.
Arthur Andersen LLP
Chicago, Illinois
September 12, 1997
<PAGE> 1
[KPMG PEAT MARWICK LLP LETTERHEAD]
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
ACC Consumer Finance Corporation:
We consent to the inclusion of our report dated January 26, 1997, with
respect to the consolidated balance sheets of ACC Consumer Finance Corporation
and subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of operations, shareholders' equity, and cash flows for the years
ended December 31, 1996 and 1995, the six-month transition period ended December
31, 1994, and the period from July 15, 1993 (inception) through June 30, 1994,
which report appears in the Form S-4 of Household International, Inc. filed
with the Securities and Exchange Commission on or about September 15, 1997.
KPMG Peat Marwick LLP
San Diego, California
September 12, 1997
<PAGE> 1
[CREDIT SUISSE FIRST BOSTON CORPORATION LETTERHEAD]
EXHIBIT 23.5
August 24, 1997
Board of Directors
ACC Consumer Finance Corporation
12750 High Bluff Drive, Suite 320
San Diego, CA 92130
Members of the Board:
We hereby consent to the use of our opinion letter to the Board of Directors of
ACC Consumer Finance Corporation, included as Annex C to the Prospectus and
Proxy Statement which forms a part of the Registration Statement on Form S-4 of
Household International, Inc., and to the references to such opinion in such
Prospectus and Proxy Statement under the captions "Summary," "The Merger -
Background of and Company Reasons for the Merger", "- Material Contacts and
Board Deliberations" and "- Opinion of the Company's Financial Advisor". In
giving such consent, we do not admit that we come 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, nor do we thereby admit that we are experts with respect
to any part of such Registration Statement within the meaning of the term
"experts" as used in the Securities Act of 1933, as amended, or the rules and
regulations of the Securities and Exchange Commission thereunder.
Very truly yours,
CREDIT SUISSE FIRST BOSTON CORPORATION
/s/ Michael E. Martin
- --------------------------
Name: Michael E. Martin
Title: Managing Director
<PAGE> 1
EXHIBIT 99
PROXY/VOTING INSTRUCTION CARD FOR SPECIAL MEETING OF STOCKHOLDERS OF
[ACC LOGO]
ACC CONSUMER FINANCE CORPORATION
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Rocco J. Fabiano, Gary S. Burdick
and Rellen M. Stewart, and each of them, true and lawful proxies, with
power of substitution, to vote all shares of Common Stock of the
undersigned, at the Special Meeting of Stockholders of ACC Consumer
Finance Corporation to be held October 21, 1997, and at any
adjournment thereof, on any business that may properly come before the
meeting, including the proposal set forth on the reverse side of this
card, which is referred to in the Prospectus and Proxy Statement
provided.
IMPORTANT -- THIS PROXY MUST BE SIGNED AND DATED ON THE REVERSE SIDE.
ACC CONSUMER FINANCE CORPORATION
A VOTE FOR IS RECOMMENDED BY THE BOARD OF DIRECTORS. SHARES WILL BE SO
VOTED UNLESS YOU OTHERWISE INDICATE.
<TABLE>
<S> <C> <C> <C> <C>
1. To approve and adopt an Agreement and Plan of Merger dated as of August 24, 1997 For Against Abstain
by and among Household International, Inc., Household Auto Corporation and ACC [ ] [ ] [ ]
Consumer Finance Corporation, and to approve the merger of Household Auto
Corporation with and into ACC Consumer Finance Corporation pursuant to which ACC
Consumer Finance Corporation will become a wholly-owned subsidiary of Household
International, Inc.
</TABLE>
Date:
Please
Sign:
Please
Sign:
NOTE: PLEASE SIGN EXACTLY AS
NAME APPEARS HEREON. FOR JOINT
ACCOUNTS BOTH OWNERS SHOULD
SIGN. WHEN SIGNING AS
EXECUTOR, ADMINISTRATOR,
ATTORNEY, TRUSTEE OR GUARDIAN,
ETC., PLEASE SIGN YOUR FULL
TITLE.
