Rule 424(b)(3), File No. 333-4656
MONACO FINANCE, INC.
CLASS A COMMON STOCK
($.01 PAR VALUE)
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING AT PAGE 3.
This Prospectus relates to 482,418 shares of Class A Common Stock
registered for sale by certain purchases (the "7% Noteholders") of the
Company's 7% Convertible Subordinated Notes (the "7% Notes") due March 1,
1998. The Company sold an aggregate of $3 million in principal amount of 7%
Notes in a private placement on March 15, 1993. Of that $3 million, the
remaining principal balance, convertible at $3.42 per share, is $1.385
million. Certain 7% Noteholders have previously exercised their conversion
option and sold the underlying common stock. Other 7% Noteholders have
exercised their conversion option and hold available for sale an aggregate of
77,447 shares of Class A Common Stock. This Prospectus also relates to 117,500
shares of Class A Common Stock issuable upon exercise of certain warrants
issued by the Company to D.H. Blair & Co., Inc. ("Blair"), New York, New York,
in connection with the private placement of the 7% Notes (the "Placement
Warrants"). The Placement Warrants are exercisable at a price of $3.50 per
share and expire on March 15, 1998. The Company will receive no proceeds from
the conversion of the Notes into Class A Common Stock; however, the Company
will receive proceeds with respect to and to the extent of the exercise of the
Warrants. The 7% Noteholders and the holders of the Placement Warrants are
identified herein under "Selling Security Holders."
In addition, this Prospectus relates to 1,081,081 shares of Class A
Common Stock registered for sale by certain purchasers (the "12% Noteholders")
of the Company's 12% Convertible Senior Subordinated Notes (the "12% Notes")
due January 9, 2001, sold by the Company in a private placement on January 9,
1996. The 12% Notes are convertible by the 12% Noteholders anytime prior to
maturity into the Class A Common Stock at a conversion price, subject to
adjustment, of $4.625 per share. The conversion price of the 12% Notes may be
reduced to not less than $4.00 per share based on the market price of the
Class A Common Stock in the five-day period following public announcement of
the Company's second quarter 1996 earnings. Subject to shareholder approval,
the conversion price will be fixed at $4.00 per share. In the event the
conversion price is reduced to $4.00 per share, the 12% Noteholders will be
entitled to 1,250,000 shares of Class A Common Stock upon conversion. See
"Description of Securities." The Company will receive no proceeds from the
conversion of the Notes into Class A Common Stock. The 12% Noteholders are
identified herein under "Selling Security Holders." The 7% Noteholders and
12% Noteholders may be collectively referred to herein as the "Noteholders."
This Prospectus also relates to an indeterminate number of shares of
Class A Common Stock underlying up to $5,000,000 in principal amount of 12%
Notes (the "Additional 12% Notes") which may be purchased on or before January
9, 1998, by one of the 12% Noteholders or its designee(s)(the "Note Purchase
Option"). The conversion price will be based on the market price of the Class
A Common Stock on or about the date the Note Purchase Option is exercised. On
June 28, 1996, the Note Purchase Option was conditionally exercised at a
conversion price of $2 7/16 per share, the closing price of the Class A Common
Stock on June 27, 1996. Subject to shareholder approval, the initial
conversion price of the Additional 12% Notes will be fixed at $3.00 per share
and the conditional exercise of the Note Purchase Agreement will be withdrawn.
See "Description of Securities." The Company will receive the proceeds with
respect to and to the extent of the exercise of the Note Purchase Option.
The Class A Common Stock is traded on the Nasdaq National Market under
the symbol "MONFA." On August 7, 1996, the last sale price for
the Class A Common Stock as reported by Nasdaq was $3-3/8 per
share. It is unlikely the Placement Warrants or Notes will be exercised or
converted until the market price of the Class A Common Stock is significantly
greater than the applicable exercise or conversion prices.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESEN-TATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is August 8, 1996
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securi-ties Exchange Act of 1934, as amended (the "Exchange Act") and in
accordance therewith, files reports and other information with the Securities
and Exchange Commis-sion (the "Commission"). Proxy statements, reports and
other information concerning the Company can be inspected and copied at Room
1024 of the Commis-sion's office at 450 Fifth Street, N.W., Washington, D.C.
20549, and the Com-mission's Regional Offices in New York (Room 1228, 75 Park
Place, New York, New York 10007), and Chicago (Suite 1400, Northwestern Atrium
Center, 500 West Madison Street, Chicago, Illinois 60621-2511), and copies of
such material can be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. This Prospectus does not contain all information set forth in the
Registration Statement of which this Prospectus forms a part and exhibits
thereto which the Company has filed with the Commission under the Securities
Act of 1933, as amended (the "Securities Act") and to which refer-ence is
hereby made.
DOCUMENTS INCORPORATED BY REFERENCE
The Company has provided, without charge, to each record holder of the 7%
Notes, 12% Notes and the Placement Warrants a copy of the Company's Annual
Report on Form 10-KSB for the fiscal year ended December 31, 1995. The Company
will also provide, without charge, to each person to whom a copy of this
Prospectus is delivered, upon the written or oral request of such person, a
copy of any or all of the other documents incorporated by reference herein
(other than exhibits to such documents, un-less such exhib-its are
specifically incorporated by reference into the infor-ma-tion that the
Prospectus incorporates). Requests should be directed to:
Monaco Finance, Inc.
370 17th Street, Suite 5060
Denver, Colorado 80202
Telephone number: (303) 592-9411
Attention: Irwin L. Sandler, Executive Vice President
The following documents filed with the Commission by the Company (File
Number 0-18819) are hereby incorporated by reference into this Prospectus:
1. The Company's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1995, as amended by Form 10-KSB/A dated April 26, 1996, and
July 17, 1996;
2. The Company's Current Reports on Form 8-K dated January 9,
1996, March 5, 1996, and June 28, 1996; and
3. The Company's Quarterly Report on Form 10-QSB for the quarter
ended March 31, 1996, as amended by Form 10-QSB/A dated July 17, 1996.
All documents filed with the Commission by the Company pur-suant to
Sec-tions 13(a), 13(c), 14, or 15(d) of the Exchange Act subse-quent to the
date of this Prospectus and prior to the ter-mination of the offering
registered hereby shall be deemed to be incorpo-rated by reference into this
Prospectus and to be a part hereof from the date of the filing of such
documents. Any state-ment contained in a document incorporated or deemed to
be incor-porated by reference herein shall be deemed to be modified or
superseded for purposes of this Pro-spectus to the extent that a statement
contained herein or in any subsequently filed document which also is or is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Such statement so modi-fied or supersed-ed shall not be deemed,
except as so modified or superseded, to con-stitute a part of this Prospectus.
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THE COMPANY
The Company is engaged in the business of providing alternative financing
programs primarily to purchasers of new and used motor vehicles who do not
qualify for traditional sources of financing due to low income level and/or
adverse credit history. The Company commenced operations in June 1988. The
Company acquires retail automobile and light truck installment sales contracts
(the "Contracts") from selected automobile dealers (the "Dealers" or the
"Dealer Network"). The Company also originates and acquires Contracts through
the sale of automobiles at three Company-owned retail used vehicle sales
locations in the State of Colorado. The Company terminated the retail used
vehicle sales operation effective May 31, 1996. Through March 31, 1996, the
Company's loan portfolio consisted of approximately $60 million in principal
amount of Contracts, a substantial portion of which has been pledged as
collateral pursuant to various financing arrangements to which the Company is
a party.
The Company has developed a variety of financing programs and continues
to expand its automobile Dealer Network. The Company is currently engaged in
automobile financing activities in Arizona, California, Colorado, Florida,
Georgia, Idaho, Iowa, Maryland, Mississippi, Missouri, Nevada, New Mexico,
North Carolina, Oregon, South Carolina, Tennessee, Texas, Utah, Virginia,
Washington and Wyoming.
The address of the Company is 370 17th Street, Suite 5060, Denver,
Colorado 80202, telephone (303)592-9411.
RISK FACTORS
These securities involve a high degree of risk. Prospective purchasers
should consider carefully, among other factors set forth in this Prospectus,
the following:
DEPENDENCE UPON ADDITIONAL CAPITAL TO EXPAND OPERATIONS. The Company's
business has been and will continue to be cash intensive. Capital is required
primarily to purchase Contracts from the Dealer Network. The net proceeds from
any exercise of the Placement Warrants and the Note Purchase Option will be
used for working capital and general corporate purposes, including repayment
of debt, origination and purchase of additional Contracts and, if required,
the hiring of additional personnel to support expanded operations. Further
expansion of the Company's business and the Company's longer-term liquidity
requirements may require additional borrowings or other funding. There can be
no assurance that such additional financing will be available to the Company,
or if available, on terms satisfactory to the Company.
RELIANCE ON DEBT FINANCING. Since inception, in addition to
shareholders' equity, the Company has financed its capital requirements using
debt from a variety of sources including commercial banks and other
institutional investors. The Company's principal source of such capital as of
June 30, 1996, consists of a warehouse line of credit, allowing issuance,
under certain circumstances, of automobile receivable-backed notes of up to
$150 million, of which approximately $53.2 million has been drawn. The
warehouse line of credit is secured by Contracts in face amount equal to
approximately 80% of the amount drawn. Other than the pledged Contracts, the
line is non-recourse to the Company. Senior subordinated debt, convertible
subordinated debt and cash flow from operations also provide capital. The
ability of the Company to receive additional advances on the warehouse credit
facility and to secure new financing sources is dependent upon compliance with
loan covenants and other factors. Based on current operations, management
believes the Company is in full compliance with the requirements of the
warehouse line of credit and will be able to draw additional amounts
thereunder. However, failure to meet the requirements for additional draws
and/or to obtain new sources of financing would have a material adverse effect
on the ability of the Company to expand its operations.
SUBSTANTIAL LOSSES AND EFFECT OF DISCONTINUANCE OF CAR MART OPERATIONS.
During the fiscal year ended December 31, 1995, and the three months ended
March 31, 1996, the Company sustained losses of $1,341,095 and $487,695,
respectively. Of this amount, approximately $1,878,498 and $93,900,
respectively, was in connection with discontinued operations relating to the
Car Mart retail used car lots. For the same periods, income (loss) from
continuing operations was $537,403 and $(393,795), respectively. During the
second quarter of fiscal 1996, the Company expects to report approximately
$250,000 of pre-tax losses in connection with discontinued operations.
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The Car Mart retail used vehicle operations were closed effective May 31,
1996. In 1995, the Car Mart operations generated approximately 23% of the
Contracts financed by the Company. However, competition in the retail used car
market resulted in reduced sale prices and, accordingly, lower margins on used
car sales. In addition, the default rate with respect to certain Car Mart
Contracts was higher than the default rate with respect to Contracts purchased
from the Dealer Network. Management determined that the Company's best
interests would be served by concentrating on its core business of acquiring
and servicing sub-prime Contracts purchased from its Dealer Network. Operating
expenses were approximately 56% of revenue for fiscal 1995 and increased to
approximately 65% of revenue for the first quarter of fiscal 1996. During
1995, the Company expanded its staff and other services so as to be able to
support increased Contract acquisitions and to service its growing Contract
portfolio. However, factors, including, but not limited to, termination of
the Car Mart operations have reduced the volume of Contracts acquired by the
Company. Since management anticipates that the volume of Contracts purchased
from the Dealer Network will increase, the Company has continued to increase
its operating costs. If the number of Contracts purchased by the Company does
not increase significantly, losses will continue unless the Company reduces
such costs.
COST OF CAPITAL AND INTEREST RATE RISKS. A substantial part of the
Company's operating revenues are derived from the spread between the interest
income it collects on its contracts and the interest expense it pays on
borrowings incurred to purchase and retain such contracts. As of December 31,
1995, and March 31, 1996, the Company's interest expense as a percentage of
revenues was 26.3% and 32.6%, respectively. Net interest margin percentage,
representing the difference between interest income and interest expense
divided by average finance receivables, decreased from 17.1% in 1994 to 16.2%
in 1995. The Company's capacity to generate earnings on its portfolio of
contracts is dependent upon its ability to maintain a sufficient margin
between its fixed portfolio yield and its floating or fixed cost of funds. In
addition, losses from Contract defaults reduce the Company's margins and
profits. In the event interest rates increase due to economic conditions or
other reasons, resulting in an increase in the cost of borrowed capital, it is
likely that the Company's spread will be reduced since the rates charged on
the majority of its Contracts are already at the legal limits. If defaults on
outstanding Contracts increase resulting in larger credit losses, the
availability of outside financing (i) may diminish and (ii) may become more
costly due to higher interest rates or fees. Either of these events could
have an adverse effect on the Company.
RISK OF LENDING TO HIGHER-RISK BORROWERS. The market targeted by the
Company for financing of the purchase of vehicles consists of individuals
with low income levels and/or adverse credit histories but who fit within the
underwriting parameters established by the Company indicating a probability
that the borrower is a reasonable credit risk. The benefit to the Company is
that higher-risk borrowers are not able to obtain credit from traditional
financing sources and hence are willing to pay a relatively high annual
percentage rate of interest. The risk to the Company is that the default rate
for such borrowers is relatively high. Historically, management believes that
the default rate experienced by the Company has been within satisfactory
parameters. However, no assurance can be given that the default rate will not
increase in the future. At December 31, 1995 and 1994, the blended default
rate on Contracts held by the Company was 16% and 30% for Contracts originated
in 1995 and 1994, respectively. However, the expected yield to the Company is
more significant than the default rate. Contracts which, according to the
Company's model, pose a higher risk of default will be acquired only if they
have a relatively high contract rate of interest and/or purchase prices at a
relatively high discount from face value in order to compensate for the
increased risk.
ADVERSE ECONOMIC CHANGES MAY INCREASE DELINQUENCIES. The majority of
the individuals who purchase automobiles financed by the Company and other
sub-prime finance companies are hourly wage earners with little or no cash
reserves. In most cases, the ability of such individuals to meet their
required semi-weekly or monthly payment on their installment contract is
completely dependent upon continued employment. Job losses generally will
result in defaults on their consumer debt, including their contracts with the
Company. An economic downturn or prolonged economic recession resulting in
local, regional or national unemployment could cause a large increase in
delinquencies, defaults and charge-offs. If this would occur, the Company's
cash reserves and allowance for losses may not be sufficient to support
current levels of operations if the downturn or recession were for a sustained
period of time.
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RISK OF DELAYED REPOSSESSIONS. The relatively high default rate on
Contracts requires that the Company repossess and resell a substantial number
of vehicles. After a default occurs, the condition of the vehicle securing
the Contract in default generally deteriorates due to lack of maintenance or
otherwise. The Company carefully monitors delinquencies and moves quickly to
repossess, recondition and resell vehicles secured by Contracts in default so
as to minimize its losses. Management believes that the historic recovery
rate has been satisfactory. However, any delays in repossessions could
decrease loan loss recoveries.
POTENTIAL INADEQUACY OF LOAN LOSS RESERVES. The Company maintains a
reserve to absorb anticipated losses from Contract defaults net of
repossession recoveries. The allowance for credit losses, which anticipates
losses based on the Company's risk analysis of historical trends and expected
future results, is continually reviewed and adjusted to maintain the allowance
at a level which, in the opinion of management and the Board of Directors,
provides adequately for existing and, possibly, future losses that may develop
in the present portfolio. However, since the risk model uses past history to
predict the future, changes in national and regional economic conditions,
borrower mix, competition for higher quality Contracts and other factors could
result in actual losses exceeding predicted losses.
EFFECT OF SUPERVISION AND REGULATION UPON COMPANY OPERATIONS. The
Company's present and proposed operations are subject to extensive regulation,
supervision and licensing under various federal, state and local statutes,
ordinances and regulations and, in most of the states in which the Company
conducts business, limit the interest rates the Company is allowed to charge.
While management believes that it maintains all requisite licenses and permits
and is in substantial compliance with all applicable federal, state and local
regulations, there can be no assurance that the Company will be able to
maintain all requisite licenses and permits, and the failure to satisfy those
and other regulatory requirements could have a material adverse effect on the
operations of the Company, including severe monetary and other penalties.
Further, the adoption of additional laws, rules and regulations could have a
material adverse effect on the Company's business.
POSSIBILITY OF UNINSURED LOSSES. The Company requires that all vehicles
financed by it be covered by collision insurance. To reduce the risk that
such collision insurance will lapse because of nonpayment of premiums, the
Company monitors premium payments. When notification is received that a
policy has lapsed, the Company immediately contacts the borrower by telephone
and sends a letter indicating that failure to maintain insurance constitutes
default under the borrower's Contract. If the borrower fails to secure
insurance, the Company may repossess the vehicle. In addition, the Company
has the ability to force place collision insurance should the debtor fail to
pay insurance premiums resulting in cancellation of the debtor's insurance
coverage. However, gaps in coverage on the vehicles could result in uninsured
losses to the Company. For example, collision insurance, in the event of a
total vehicle loss, generally will cover only for the fair value of the
vehicle which often can be substantially less than the outstanding contract
receivable. In addition, the Company may incur losses in situations where the
borrower fails to make payments and the Company is unable to locate the car
for repossession. Although the Company's losses to date in such cases have
been minimal, there can be no assurance that this will continue to be the
case.
SUBSTANTIAL COMPETITION. In connection with its business of financing
vehicle purchases, the Company competes with many well-established financial
institutions, including banks, thrifts, independent finance companies, credit
unions, captive finance companies owned by automobile manufacturers and others
who finance used vehicle purchases (some of which are larger, have
significantly greater financial resources and have relationships with
established captive dealer networks). Any increased competition could have a
material adverse effect on the Company, including its ability to acquire loans
meeting its underwriting requirements.
DEPENDENCE ON KEY PERSONNEL. The Company's success depends largely on
the efforts and abilities of senior management. The loss of the services of
any of these individuals could have a material adverse effect on the Company's
business. The Company maintains insurance policies in the amount of
$2,000,000 each on the lives of Messrs. Ginsburg and Sandler for the purpose
of funding the Company's obligation to purchase shares of its common stock
beneficially owned by either of them upon death. The purchase obligation is
limited to the insurance proceeds. The purchase price is the greater of book
value or 80% of the average closing price of the Class A Common Stock for the
30 consecutive trading days commencing 45 trading days before the death of the
insured. At
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March 31, 1996, the book value of the stock was approximately $3.19 per share,
while the closing price of the stock on July 8, 1996, was $2 7/32 per share.
As of that date, the Company's purchase obligation would have been less than
$2,000,000 with respect to each of Messrs. Ginsburg and Sandler. Any excess
insurance proceeds will be used for general corporate purposes, including
replacement of the decedent. The Company also maintains a traveler's
accidental death policy on the lives of Messrs. Ginsburg and Caukin in the
amount of $1,000,000 each. The Company otherwise does not maintain key-man
insurance upon the lives of its executive officers.
EFFECT OF BOARD ACTION BY CONSENT. Under Colorado law, the board of
directors of the Company may delegate certain of its powers to one or more
committees. The Company's executive committee, which has broad powers to act
on behalf of the Company, consists of Messrs. Ginsburg and Sandler. The
members of the executive committee discuss Company matters on virtually a
daily basis. Under Colorado law, the board of directors may act either at a
duly convened meeting by the affirmative vote of a majority of the directors
present at the meeting or by unanimous written consent signed by all
directors. During the fiscal year ended December 31, 1995, the board of
directors held no meetings and took action by unanimous written consent on
nine occasions. Matters approved by unanimous consent in 1995 include
appointment of officers; setting of the record and meeting dates for the 1995
annual meeting of shareholders; approval of financing matters; and
authorization of the reduction of the exercise price of the Company's
publicly-traded stock purchase warrants. Significant matters were informally
discussed among the directors before the consents were signed. Since a consent
to action does not afford the same degree of interaction as does a formal
meeting of the board of directors, management expects that the Company in the
future will take most significant board actions at duly convened meetings
rather than by unanimous written consent.
INSURANCE RISKS. The Company maintains comprehensive insurance of the
type and in the amounts management believes are customarily obtained for
businesses similarly situated, including liability insurance for used
vehicles, sold, repaired or maintained by the Company. However, certain types
of losses generally of a catastrophic nature are either uninsurable or not
economically insurable. Any uninsured or partially insured loss could have an
adverse economic effect upon the Company.
VOTING POWER OF CLASS B COMMON STOCK. As of June 30, 1996, 1,311,000
shares of Class B Common Stock were issued and outstanding. These shares are
held by Messrs. Ginsburg and Sandler and by another individual. They are
identical in all respects to the Class A Common Stock except that the Class B
Common Stock has three votes per share while the Class A Common Stock has one
vote per share. The Class B Common Stock automatically converts into Class A
Common Stock on a share-for-share basis upon transfer (excluding certain
transfers for estate planning purposes) or upon death of the holder. As of
June 30, 1996, holders of the Class A Common Stock owned approximately 76.6%
of the aggregate issued and outstanding shares of Class A and Class B Common
Stock, but had the power to cast approximately 58.9% of the combined votes of
both classes. As of the same date, Messrs. Ginsburg and Sandler had the power
to vote an aggregate of 820,500 shares and 490,500 shares of Class B Common
Stock, respectively, and collectively had the power to cast approximately
41.1% of the combined votes of both classes. This effectively may constitute
voting control of the Company.
POTENTIAL NASDAQ DELISTING. In January 1996, the Company issued
$5,000,000 in principal amount of 12% Notes convertible into a maximum of
1,081,081 shares of Class A Common Stock, subject to adjustment as provided
therein. In addition, the Company concurrently agreed to sell up to
$5,000,000 in principal amount of Additional 12% Notes upon terms and
conditions agreed to between the Company and the purchaser, but with a
conversion price equal to the market price of the Class A Common Stock at or
about the date of issuance of the Additional 12% Notes. See "Description of
Securities." The Nasdaq Stock Market has taken the position that these
transactions required shareholder approval. While management disagrees with
this position, the Nasdaq Stock Market has agreed not to take any action so
long as the transactions are submitted to and approved by the Company's
shareholders at its 1996 Annual Meeting of Shareholders. Due to the fact that
management controls approximately 41.1% of the combined voting power of the
two classes of common stock, it is unlikely that the proposal will not be
approved. However, if for any reason the proposal is not approved, then it is
possible that Nasdaq could seek to delist the Class A Common Stock from the
National Market System. The Company would vigorously oppose any delisting
based on the grounds, among others, that the Nasdaq Stock Market exceeded its
authority and that its regulations are vague and unenforceable. In any event,
management believes that the Class A Common Stock would be eligible for
trading on the Nasdaq Small Cap market.
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EFFECT OF ISSUANCE OF PREFERRED STOCK. The Company is
authorized to issue up to 5,000,000 shares of preferred stock, no par value.
The preferred stock may be issued in one or more series, the terms of which
will be determined at the time of issuance by the board of directors without
any requirement for shareholder approval. Such rights may include voting
rights, preferences as to dividends and upon liquidation, conversion and
redemption rights and mandatory redemption provisions pursuant to sinking
funds or otherwise. No preferred stock is currently outstanding and the
Company has no present plans for issuance thereof. However, any issuance of
preferred stock could affect the rights of the holders of Class A Common Stock
and therefore reduce its value. Rights could be granted to holders of
preferred stock hereafter issued which could reduce the attractiveness of the
Company as a potential takeover target or make the removal of management of
the Company more difficult or adversely impact the rights of holders of Class
A Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE. As of June 30, 1996, the Company had
1,311,000 shares of Class B Common Stock outstanding which are convertible, on
a share-for-share basis, into shares of Class A Common Stock. The shares of
Class A Common Stock underlying the shares of Class B Common Stock will be,
when issued, "restricted securities," as that term is defined under Rule 144
promulgated under the Securities Act of 1933, as amended (the "Securities
Act"). In general, under Rule 144, a person who has satisfied a two-year
holding period may, under certain circumstances, sell within any three-month
period a number of shares of Common Stock which does not exceed the greater of
1% of the then outstanding shares of Common Stock or the average weekly
trading volume in such shares during the four calendar weeks prior to such
sale. Rule 144 also permits, under certain circumstances, the sale of shares
without any quantity or other limitation by a person who is not an affiliate
of the Company and who has satisfied a three-year holding period. The shares
of Class A Common Stock issued upon conversion of the Class B Common Stock
will be eligible for immediate sale under Rule 144. Sales of such stock in
the public market could adversely affect the market price of the Class A
Common Stock.
EFFECT OF CONVERSION OF NOTES. As of June 30, 1996, 5,640,379 shares of
Class A Common Stock, 1,311,000 shares of Class B Common Stock and 7% Notes
convertible into an aggregate of 404,971 shares of Class A Common Stock were
issued and outstanding. If the transactions with respect to the 12% Notes are
approved by shareholders, if the option to purchase the Additional 12% Notes
is exercised in full and if the entire $11,385,000 in principal amount of
convertible notes which would then be outstanding is converted into Class A
Common Stock, then the Company will be obligated to issue 3,321,637 shares of
Class A Common Stock at an average exercise price of $3.43. Such shares, if
they had been issued as of June 30, 1996, would have represented approximately
32.3% of the total number of shares of common stock outstanding and
approximately 25.8% of the voting power of the common stock. If the
transactions are not approved by shareholders, if the option to purchase the
Additional 12% Notes is timely exercised, if the entire $11,385,000 in
principal amount of convertible notes which would then be outstanding is
converted into Class A Common Stock and if the exercise price of the 12% Notes
is reduced to $4.00 per share, then the Company will be obligated to issue
3,706,253 shares of Class A Common Stock at an average exercise price of
$3.07. Such shares, if they had been issued as of June 30, 1996, would have
represented approximately 34.8% of the total number of shares of common stock
outstanding and approximately 27.9% of the voting power of the common stock.
Issuance of the shares upon conversion of the notes could result in dilution
to earnings and book value per share of common stock and will substantially
reduce the voting power of the common stock beneficially owned by Messrs.
Ginsburg and Sandler.
EFFECT OF OUTSTANDING OPTIONS AND WARRANTS. For the respective terms of
the Placement Warrants and the options granted by the Company pursuant to the
Company's stock option plans, the holders thereof are given an opportunity to
profit from a rise in the market price of the Company's Class A Common Stock,
with a resulting dilution in the interests of the other shareholders.
Further, the terms on which the Company may obtain additional financing during
those periods may be adversely affected by the existence of such securities.
The holders of such securities may be expected to exercise them at a time when
the Company might be able to obtain additional capital through a new offering
of securities on more favorable terms.
NO CASH DIVIDENDS. The holders of Class A and Class B Common Stock are
entitled to receive dividends when, as and if declared by the Board of
Directors of the Company out of funds legally available therefor. To date,
the Company has not paid any cash dividends. The Board of Directors of the
Company does not intend to declare
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any cash dividends in the foreseeable future, but instead intends to retain
all earnings, if any, for use in the Company's business operations. The
Company's credit facilities restrict or prohibit the Company from paying
dividends. Accordingly, it is unlikely any dividend will be paid on the Class
A Common Stock in the foreseeable future.
USE OF PROCEEDS
The 482,418 shares and 1,081,081 shares of Class A Common Stock issued
and issuable upon conversion of the 7% Notes and 12% Notes, respectively, are
being offered for the account of the Noteholders. The Company will not
receive any proceeds from the conversion of the Notes into Class A Common
Stock. However, conversion of the Notes will benefit the Company in that its
indebtedness and corresponding interest expense will be reduced to the extent
of any such conversions.
The proceeds to the Company from the exercise of the Placement Warrants
and the Note Purchase Option will be approximately $411,250 and $5,000,000,
respectively, if all such warrants are exercised and the Note Purchase Option
is exercised in full (of which there can be no assurance). The Company
estimates that it will incur expenses of approximately $17,000 in connection
with this offering. The Company intends to use any net proceeds from the
exercise of the Placement Warrants and Note Purchase Option for working
capital and general corporate purposes, including payment against existing
credit lines, acquisition of Contracts and, if required, hiring of additional
personnel to support expanded operations.
DIVIDEND POLICY
The Company has never paid any cash dividends. The payment of such
dividends, if any, in the future is within the discretion of the Board of
Directors and will depend upon the Company's earnings, its capital
requirements and financial condition, and other relevant factors. The Board
of Directors does not presently intend to declare any cash dividends in the
foreseeable future, but instead intends to retain all earnings, if any, for
use in the Company's business operations. The Company's credit facilities
restrict or prohibit the Company from paying dividends. Accordingly, it is
unlikely any dividend will be paid on the Class A Common Stock in the
foreseeable future.
- -8-
<PAGE>
SELLING SECURITY HOLDERS
The shares of Class A Common Stock underlying the Underwriter's Options,
the Notes, the Note Purchase Option and the Placement Warrants are being
offered by the Selling Security Holders identified in the following table.
<TABLE>
<CAPTION>
Number of Shares to be
Number of Shares Beneficially Owned on
Beneficially Owned Completion of the Offering
------------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C>
Number of
Name of Selling Shares Being % of
Security Holder Record Indirect Offered Record Indirect Class
- --------------------------------- ------- --------- ---------------- ------- -------- ------
William Harris & Co.,
Employee Profit Sharing Trust
(5) 33,478 175,439 208,917 (1) -- -- --
Harris Foundation (5) 16,947 -- 16,947 (1) -- -- --
H.F.F. Partners (5) -- 112,573 112,573 (1) -- -- --
Roxanne H. Frank Trust dtd.
3/16/94 (5) 18,566 38,012 56,578 (1) -- -- --
Couderay Partners (5) 853 38,012 38,865 (1) -- -- --
Virginia H. Polsky Trust dtd.
8/5/94 (5) -- 29,240 29,240 (1) -- -- --
Jerome Kahn, Jr. Rev. Tr. dtd
10/16/87 (5) 7,603 11,695 19,298 (1) -- -- --
Howard Phillips -- 46,250(4) 46,250 (2) -- -- --
D.H. Blair Investment Banking
Corp. 135,300 46,250 46,250 (2) 135,300 -- 2.4%
Alfred Palagonia -- 25,000 25,000 (2) -- -- --
Black Diamond Advisors, Inc. -- 1,709,910 1,709,910 (3, 6) -- -- --
Stephen H. Deckoff -- 54,054 54,054 (3) -- -- --
James E. Walker III -- 54,054 54,054 (3) -- -- --
BDC Partners I, L.P. -- 183,784 183,784 (3, 7) -- -- --
Lisa W. Zenni -- 43,243 43,243 (3) -- -- --
Heller Financial, Inc. -- 341,201 341,201 (3, 8) -- -- --
Guarantee Title & Trust Co. -- 54,054 54,054 (3) -- -- --
TOTAL 3,040,218
<FN>
* Less than 1%.
(1) Includes shares issued or issuable pursuant to presently convertible 7% Notes.
(2) Includes shares covered by presently exercisable Placement Warrants.
(3) Includes shares issued or issuable pursuant to presently convertible 12% Notes.
(4) Excludes 25,000 shares and 50,000 shares underlying presently exercisable stock options
and/or warrants issued in the names of Mr. Phillips' spouse and a trust or estate of which Mr.
Phillips is the trustee or beneficiary, respectively, the beneficial ownership of which is
disclaimed by Mr. Phillips.
(5) Pursuant to a Schedule 13D filed on or about August 31, 1995, each of these persons may be
deemed to be a member of a group pursuant to Rule 13d-3 under the Securities Exchange Act of 1934,
as amended. Each member of the group may be deemed to beneficially own shares of Class A Common
Stock
- -9-
<PAGE>
beneficially owned by each other member of the group. The number of shares of Class A Common
Stock beneficially owned by all members of the group aggregates 482,418.
(6) The information contained in the table and in this footnote and footnote (7) is derived
from a Schedule 13D dated April 4, 1996, filed by Black Diamond Advisors, Inc. ("BDA") and others
with the Securities and Exchange Commission with respect to the issuance by the Company of
$5,000,000 in principal amount of 12% Notes convertible at any time prior to maturity on January
9, 2001, into approximately 1,081,081 shares of the Company's Class A Common Stock at a conversion
price of $4.625 per share. The conversion price is required to be reduced to the average closing
price of the Class A Common Stock for the five trading days after public announcement by the
Company of second quarter earnings for fiscal 1996, but not to less than $4.00 per share.
Concurrently, the Company agreed to issue up to an additional $5 million in principal amount of
12% Notes (the "Additional 12% Notes") upon terms and conditions agreed to by BDA and the Company
at any time on or before January 9, 1998. The Indenture relating to the notes provides that the
conversion price of the Additional 12% Notes shall be the closing price on the trading day (as
defined in the Indenture) prior to the day the Company receives notice of exercise of the right to
purchase the Additional 12% Notes. In the Schedule 13D, BDA claims that it is the beneficial owner
of the shares of Class A Common Stock issuable upon conversion of the Additional 12% Notes (the
"Additional Shares"). The Company expresses no opinion with respect to this position.
Includes 1,666,667 Additional Shares assuming all of the Additional 12% Notes are issued and the
conversion price of the Additional 12% Notes is $3.00 per share. Stephen H. Deckoff and James E.
Walker III each is an officer, director and 50% shareholder of BDA.
The Company and BDA have entered into a letter agreement which, subject to shareholder approval,
establishes the conversion price of the 12% Notes at $4.00 per share, and the initial conversion
price of the Additional 12% Notes at $3.00 per share. If the transactions are not approved by
shareholders, then the option to purchase the Additional 12% Notes shall be deemed to have been
exercised on June 28, 1996, at a conversion price of $2-7/16 per share. See "Description of
Securities."
(7) Messrs. Deckoff and Walker and James J. Zenni are the only members of Black Diamond
Capital Management L.L.C., the sole general partner of BDC Partners I, L.P.
(8) Heller Financial, Inc. is the owner of 12% Notes presently convertible into 648,649 shares
of Class A Common Stock, or approximately 8.5% of the Company's outstanding common stock.
However, pursuant to the terms of the Indenture, if a holder of 12% Notes is subject to federal
banking regulations with respect to the ownership of common stock, then the 12% Notes held by such
holder are only convertible to such extent as would permit such holder to own at any one time no
more common stock of the Company than would constitute 4.9% of the outstanding capital stock of
the Company. Such restrictions do not apply to any transferee of the holder if such transferee is
not subject to such federal banking regulations and such transfer would not otherwise cause such
holder to be otherwise in violation of federal banking regulations. Heller Financial, Inc. has
advised the Company that it is subject to such federal banking regulations and, accordingly,
presently may exercise the 12% Notes only to the extent shown in the table.
</TABLE>
- -10-
<PAGE>
To the knowledge of the Company, none of the Selling Security Holders
have held any office, position or other mat-er-ial relationship with the
Company, its prede-cessors or affil-iates during the past three years, except
that Howard K. Phillips was a director of the Company from 1990 to April 1996.
In addition, the purchase agreement relating to the 12% Notes provides that,
so long as certain persons own at least 50% of the 12% Notes, two designated
individuals shall have the right to attend meetings of the Board of Directors
of the Company as observers and, if requested by one of the 12% Noteholders,
the Board of Directors shall appoint, to the extent permitted by law, one of
such individuals to the Board of Directors and, in any subsequent election,
shall nominate such appointee for a seat on the Board of Directors. If either
individual is unable or unwilling to serve, then the specified 12% Note holder
may appoint a successor reasonably acceptable to the Company.
Each Selling Security Holder has represented that the Notes, Placement
Warrants, Note Purchase Option and underlying shares of Class A Common Stock
were acquired for investment and with no present intention of distribut-ing or
reselling such securities. However, in recognition of the fact that hold-ers
of restricted securities may wish to be legally permitted to sell such
securities when they deem appropriate, the Company has filed with the
Commission under the Securities Act a Form S-3 registration statement of which
this Pro-spectus forms a part with respect to the resale of the shares
issuable upon conversion of the Notes or upon exercise of the Placement
Warrants from time to time in the over-the-counter market or in privately
negotiated transactions and has agreed to prepare and file such amendments and
supplements to the registration statement as may be necessary to keep the
registration statement effective until all such shares have been sold pursuant
thereto or until such shares are no longer, by reason of Rule 144 under the
Securi-ties Act or any other rule of similar effect, required to be registered
for the sale thereof by the Selling Security Holders.
Certain of the Selling Security Holders, their associates and affiliates
may from time to time be customers of, engage in transactions with, and/or
perform services for the Company or its subsidiaries in the ordinary course of
busi-ness.
PLAN OF DISTRIBUTION
The shares of Class A Common Stock issuable upon conversion of the Notes
and exercise of the Placement Warrants will be referred to herein as the
"Securities." The sale of the Securities by the Selling Security Holders may
be effected from time to time (i) in transactions in the over-the--counter
market, in negotiated transactions, through the writing of options on the
Securities, or through a com-bination of such meth-ods of sale, and (ii) at
fixed prices which may be changed, at market prices prevailing at the time of
sale, at prices related to such prevailing market prices or at negotiated
prices. The Selling Security -Holders may effect such transactions by selling
the Securities to or through broker-dealers, and such broker-dealers may
receive compensation in the form of dis-counts, concessions, or commis-sions
from the Selling Security Holders and/or the purchasers of the Securities for
which such broker-dealers may act as agent or to whom they may sell, as
principal, or both (which compensation as to a particu-lar broker-dealer may
be in excess of customary compensa-tion). Selling Security Holders may also
sell such shares pursuant to Rule 144 or Rule 144A under the Securities Act if
the requirements for the availability of such Rules have been satisfied.
The Selling Security Holders and any broker-dealers who act in connection
with the sale of the Securities hereunder may be deemed to be "underwriters"
with-in the meaning of 2(11) of the Securities Act, and any commissions
received by them and profit on any re-sale of the Securities as principal
might be deemed to be underwrit-ing discounts and commissions under the
Securities Act. The Com-pany has agreed to indemnify the Selling Security
Holders and any securities broker-dealers who may be deemed to be underwriters
against certain liabili-ties, including liabilities under the Securities Act
as underwriters or other-wise.
The Company has advised the Selling Security Holders that they and any
secu-rities broker-dealers or others who may be deemed to be statutory
underwriters will be subject to the Prospectus delivery requirements under the
Securities Act of 1933. The Company has also advised each Selling Security
Holder that in the event of a "distribution" of its Securities, such Selling
Security Holder, any "affiliated purchasers," and any broker-dealer or other
person who partic-ipates in such distribution may be subject to Rule 10b-6
under the Securities Exchange Act of 1934 ("1934 Act") until its participation
in that distribution is completed. A "distribu-tion" is defined in Rule
- -11-
<PAGE>
10b-6(c)(5) as an offering of securities "that is distinguished from ordinary
trading trans-ac-tions by the magnitude of the offering and the presence of
special selling efforts and selling methods." The Company has also advised
the Selling Secur-ity Holders that Rule 10b-7 under the 1934 Act prohibits any
"stabilizing bid" or "stabilizing purchase" for the purpose of pegging, fixing
or stabilizing the price of the Securities in connection with this offering.
Rule 10b-6 makes it unlawful for any person who is participat-ing in a
distribution to bid for or purchase stock of the same class as is the subject
of the distribution. If Rule 10b-6 applies to the offer and sale of any of
the Securities, then participating broker-dealers will be obligated to cease
market making activities nine business days prior to their participation in
the offer and sale of the Securities and may not recommence market making
activities until their participation in the distribution has been completed.
If Rule 10b-6 applies to one or more of the principal market makers in the
Company's Common Stock, the market price of such stock could be adversely
affected.
DESCRIPTION OF SECURITIES
COMMON STOCK
The Company is authorized to issue 17,750,000 shares of Class A Common
Stock, $.01 par value, and 2,250,000 shares of Class B Common Stock, $.01 par
value. As of June 30, 1996, 5,640,379 shares of Class A Common Stock and
1,311,000 shares of Class B Common Stock were issued and outstanding.
Holders of Class A Common Stock and Class B Common Stock have equal
rights to receive dividends when, as and if declared by the Board of
Directors, out of funds legally available therefor.
Holders of Class A Common Stock have one vote for each share held of
record and holders of the Class B Common Stock have three votes for each share
held of record on all matters to be voted on by the shareholders. The Class A
Common Stock and Class B Common Stock do not have cumulative voting rights and
vote as one class on all matters requiring shareholder approval. Therefore,
the holders of the Class B Common Stock representing a majority of voting
rights may elect all of the directors of the Company and authorize certain
corporate transactions without the concurrence of the public shareholders.
Holders of Class A Common Stock and Class B Common Stock are entitled
upon liquidation of the Company to share ratably in the net assets available
for distribution. Shares of Class A Common Stock and Class B Common Stock are
not redeemable and have no preemptive or similar rights. All outstanding
shares of Class A Common Stock and Class B Common Stock are fully paid and
nonassessable. The Class B Common Stock may be converted into Class A Common
Stock on a share for share basis at the option of the holder thereof, and
shall automatically be converted in the event of its sale or transfer or upon
death of the holder. Excluded, however, from the automatic conversion are
transfers of the Class B Common Stock for estate planning purposes to or for
the benefit of the original holder or members of his immediate family;
provided, that the original holder retains both voting and investment power
over the stock so transferred. However, upon death of the original holder
after such type of transfer, the Class B Common Stock so transferred shall
automatically be converted into Class A Common Stock.
7% NOTES AND PLACEMENT WARRANTS
In March 1993, the Company sold in a non-public offering $3,000,000 in
principal amount of 7% Convertible Subordinated Notes (the "7% Notes") due
March 1, 1998. The 7% Notes are convertible by the holders thereof any time
prior to maturity into the Class A Common Stock at a conversion price of $3.42
per share. At the date of this Prospectus, $1,385,000 in principal amount of
7% Notes remains outstanding, which are convertible into 404,971 shares of
Class A Common Stock. An additional 77,447 shares issued upon conversion of
the 7% Notes are included in the registration statement of which this
Prospectus is a part.
In connection with this private placement, the Company issued warrants
for the purchase of 117,500 shares of its Class A Common Stock to D.H. Blair &
Co., Inc. (the "Placement Warrants"). The Placement Warrants are
- -12-
<PAGE>
exercisable at any time on or before March 15, 1998, at an exercise price of
$3.50 per share. The Placement Warrants contain anti-dilution and other
provisions similar to those of the Warrants described above.
12% NOTES
Original Terms
On January 9, 1996, the Company sold in a non-public offering $5,000,000
in principal amount of 12% Convertible Senior Subordinated Notes due January
9, 2001 (the "12% Notes") pursuant to a purchase agreement of the same date.
Interest is payable monthly and the 12% Notes are convertible, in whole or in
part and at any time and from time to time prior to maturity, into shares of
the Company's Class A Common Stock, par value $.01 per share, at a conversion
price of $4.625 per share, subject to the terms of an indenture, also dated
January 9, 1996, between the Company and Norwest Bank Minnesota, N.A., as
trustee (the "Indenture"). On or about June 28, 1996, certain of the parties
to the transaction entered into a letter agreement modifying the terms of the
purchase agreement and Indenture. The modified terms will not become
effective unless shareholders approve the transactions.
The business of the Company is capital intensive. It requires
additional funds not only to purchase Contracts from the Dealer Network, but
also to establish and maintain the additional administrative services required
to support expanding operations. Pursuant to the purchase agreement and
Indenture, the Company received $5,000,000 in convertible debt financing in
January 1996 with the possibility of an additional $5,000,000 in convertible
debt financing at a later date. In June 1996, the Company agreed to amend the
purchase agreement and Indenture for the primary purpose of fixing the
conversion rates of the 12% Notes and any Additional 12% Notes which may be
issued. As discussed herein, the amendment, if approved by shareholders, will
have the effect of reducing the maximum number of shares of Class A Common
Stock issuable upon conversion of all of these 12 % Notes from 3,301,282 to
2,916,667 shares. See "The June 28, 1996 Amendment."
Pursuant to the Indenture, the conversion price is adjusted under various
circumstances, including share splits and combinations and stock dividends.
In addition, the conversion price is required to be reduced if the Company
issues rights or warrants to substantially all holders of its common stock
entitling them to subscribe for or purchase shares of such common stock (or
securities convertible into or exchangeable for common stock) at a price per
share (or having a conversion or exchange price per share) less than the
greater of (i) the then conversion price or (ii) the current market price. In
such event, the conversion price is required to be adjusted by multiplying the
then conversion price times a fraction. The numerator of the fraction is the
number of shares of common stock outstanding at the close of business on the
record date, plus the number of shares of common stock issuable if the price
per share issued or issuable in the transaction had been at the then
conversion price. The denominator of the fraction is the number of shares of
common stock outstanding on the record date plus the number of additional
shares of common stock issued or issuable in accordance with the terms of the
transaction. No readjustment of the conversion price is required to be made
if the securities issued in the transaction are never exercised or converted.
At present, the Company has no intention of issuing rights or warrants to
substantially all stockholders. Accordingly, it is unlikely this conversion
price adjustment provision will become operative in the foreseeable future.
In addition, the conversion price is required to be adjusted at the close
of business on the fifth trading day after the Company publicly announces its
second quarter earnings for fiscal 1996 to the lesser of the conversion price
then in effect or the average closing price of the common stock for the five
trading days after such public announcement, but not less than $4.00 per
share. As of August 7, 1996, the closing price of the Company's
Class A Common Stock was $3-3/8 per share. It is anticipated that earnings
for the second quarter of fiscal 1996 will be publicly announced on or before
August 14, 1996. To summarize, the floor conversion price of the 12 %
Notes is $4.00 per share. The only circumstances which could result in a lower
conversion price are (i) a stock split or transaction with similar effect or
(ii) in the event the Company should make a rights offering at a price below
the greater of the then current market price of the Class A Common Stock or
the then conversion price of the 12 % Notes. As stated above, the Company has
no present intention of making a rights offering. The only circumstance
- -13-
<PAGE>
in which the conversion price of the Notes (whether the initial conversion
price or the conversion price as thereafter adjusted) is required to be
increased is in the event of a share combination (i.e., a reverse stock
split).
The parties to the Note purchase agreement are Black Diamond Advisors,
Inc. ("Black Diamond"), BDC Partners I, L.P., Heller Financial, Inc.,
Guarantee Title & Trust Co., and Lisa W. Zenni (collectively the "Initial
Purchasers"). See "Selling Security Holders" for additional information
regarding beneficial ownership of the Notes and the underlying shares of Class
A Common Stock. There is no relationship between the Company and any of the
Noteholders other than as described herein. In addition, the purchase
agreement provides that, so long as the Initial Purchasers, excluding Ms.
Zenni, and affiliates and principals of Black Diamond own at least 50% of the
Notes, two designated individuals (Jim Walker and Steve Deckoff, neither of
whom have any other relationship with the Company) shall have the right to
attend meetings of the Board of Directors of the Company as observers and, if
requested by Black Diamond, the Board of Directors shall appoint, to the
extent permitted by law, one of such individuals to the Board of Directors
and, in any subsequent election, shall nominate such appointee for a seat on
the Board of Directors. If either individual is unable or unwilling to serve,
then Black Diamond may appoint a successor reasonably acceptable to the
Company.
On January 9, 1996, 5,667,279 shares of Class A Common Stock and
1,311,000 shares of Class B Common Stock were issued and outstanding, or an
aggregate of 6,978,279 shares of common stock. On that date, the closing
price of the Class A Common Stock was $4.625 per share. The 12% Notes are
convertible at $4.625 per share into 1,081,081 shares of Class A Common Stock,
or approximately 15.5% of the outstanding common stock on January 9, 1996. If
the conversion price is reduced to $4.00 per share, the 12% Notes will be
convertible into 1,250,000 shares of Class A Common Stock, or approximately
17.9% of the outstanding common stock as of that date. As discussed herein,
agreement has been reached, subject to shareholder approval, to fix the
conversion price of the 12% Notes at $4.00 per share.
In addition, the purchase agreement provides that at any time on or
before January 9, 1998, at the written request of Black Diamond, the Company
will sell up to an additional $5,000,000 in principal amount of 12% Notes (the
"Additional 12% Notes") upon terms and conditions agreed to by the Company and
the such purchaser. If agreement is reached, holders of the Additional 12%
Notes shall be entitled to all of the rights and benefits granted to the
holders of the 12% Notes under the purchase agreement and Indenture. In the
event the Company should grant a concession or consideration to any holder of
an Additional Note, it is obligated to grant the same concession or condition
to the holders of all 12% Notes and Additional 12% Notes.
The Indenture provides that the conversion price of any Additional 12%
Notes shall be equal to the closing price of the Class A Common Stock on the
trading day prior to the day the Company receives notice of exercise of the
right to purchase the Additional 12% Notes. As discussed herein, agreement
has been reached, subject to shareholder approval, to fix the conversion price
of the Additional 12% Notes at $3.00 per share.
- -14-
<PAGE>
THE JUNE 28, 1996, AMENDMENT
On or about June 28, 1996, the Company and Black Diamond entered into a
letter agreement conditionally amending their rights and obligations with
respect to the Purchase Agreement and Indenture dated January 9, 1996.
Subject to shareholder approval, Black Diamond and the Company agreed as
follows:
1. The conversion price of the $5,000,000 in principal amount of 12%
Notes issued on or about January 9, 1996, shall be fixed at $4.00 per share.
2. The initial conversion price for up to $5,000,000 in principal
amount of any Additional 12% Notes which hereafter may be issued shall be
$3.00 per share.
3. The period of time during which Black Diamond may exercise the
option shall be extended to the later of the date which is 24 months after the
Company receives the requisite shareholder approval of the transactions or 24
months after the Company's registration statement relating to its shares of
Class A Common Stock issuable upon conversion of the notes becomes effective.
Presently, the expiration date of the option is January 9, 1998.
If the shareholders do not ratify, confirm and approve the transactions,
then (i) the option to purchase $5,000,000 in principal amount of Additional
12% Notes by Black Diamond or its designees shall be deemed to have been
exercised on June 28, 1996, and the conversion price shall be $2 7/16 per
share, the closing price of the Class A Common Stock on the preceding trading
day, and (ii) the conversion price of the 12% Notes shall be determined as
described herein. However, if Black Diamond fails to actually exercise the
option to purchase the Additional 12% Notes within 15 days of the receipt of
written notice of the disapproval by the shareholders, then the exercise of
the option as of June 28, 1996, is deemed to have been revoked and the
conversion price of any Additional 12% Notes which may be issued shall be
determined as provided in the Indenture. The Company and Black Diamond agreed
to diligently and in good faith seek shareholder approval of the transactions
and to amend the notes, Purchase Agreement and Indenture to accomplish the
intent of the letter agreement.
As of June 30, 1996, 5,640,379 shares of Class A Common Stock and
1,311,000 shares of Class B Common Stock were issued and outstanding. If the
transactions are approved by shareholders, if the option to purchase the
Additional 12% Notes is exercised in full and if the entire $10,000,000 in
principal amount of the notes is converted into Class A Common Stock, then the
Company will be obligated to issue 2,916,667 shares of Class A Common Stock at
an average exercise price of $3.43. Such shares, if they had been issued as
of June 30, 1996, would have represented approximately 29.6% of the total
number of shares of common stock outstanding and approximately 23.4% of the
voting power of the common stock.
If the transactions are not approved by shareholders, if Black Diamond or
its designees timely exercise the option to purchase the Additional 12% Notes
as of June 28, 1996, if the exercise price of the 12% Notes is reduced to
$4.00 per share, and if the entire $10,000,000 in principal amount of notes is
converted into Class A Common Stock, then the Company will be obligated to
issue 3,301,282 shares of Class A Common Stock at an average exercise price of
$3.03. Such shares, if they had been issued as of June 30, 1996, would have
represented approximately 32.2% of the total number of shares of common stock
outstanding and approximately 25.6% of the voting power of the common stock.
The Company funds a substantial amount of the its capital requirements
with debt financing. The advantage of debt financing is that it creates
leverage which can result in increased profitability without dilution to
shareholders. On the other hand, leverage also increases the risk of loss. The
conversion feature of the 12 % Notes and any Additional 12 % Notes which may
be issued was included to make these instruments marketable and to allow for
reduction of the Company's leverage by conversion of the debt to equity. The
closing price of the Class A Common Stock as of August 7, 1996, was $3-3/8. If
the proposal is approved by shareholders, the conversion price of the 12 %
Notes will be fixed at $4.00 per share and the conversion price of the
Additional 12 % Notes, if any , will be fixed at $3.00 per share. If the
proposal is not approved by shareholders, then, in all probability, the
conversion price of the 12 % Notes will be reduced to $4.00 per share and the
conversion price of the Additional
- -15-
<PAGE>
12% Notes will be $2-7/16 per share. Also, if the proposal is not approved by
shareholders, then the option to purchase the Additional 12 % Notes shall be
deemed to have been exercised, which will result in an additional $5,000,000
in debt financing for the Company. As of the date hereof, the Company does not
require additional funds. Accordingly, the Board of Directors has determined
that the terms of the transaction, initially and as proposed to be amended,
are in the best interests of and fair to current unaffiliated shareholders.
In the opinion of management, the foregoing describes the material terms
and conditions relating to the Notes and the Additional 12% Notes, including
the Indenture, purchase agreement and Registration Rights Agreement. These
documents are exhibits to the Company's Forms 8-K as of January 9, 1996, and
June 28, 1996, filed with the Securities and Exchange Commission. Full
conversion of all 12% Notes and Additional 12% Notes would result in the
Company saving $1,200,000 per year in interest expense ($10,000,000 in
principal amount of Notes at the rate of 12% per annum). The effect of any
such conversion upon per share earnings or loss is not determinable.
The Nasdaq Stock Market has advised the Company that the issuance of the
Notes and the Note Purchase Option is a single transaction which requires
shareholder approval and that, if shareholder approval is not obtained, the
Company's Class A Common Stock could be delisted from the Nasdaq National
Market. While the Company does not agree with this position, management has
determined that the Company should use all reasonable efforts to obtain
shareholder approval. In the unlikely event shareholder approval is not
obtained, then management will contest the position taken by the Nasdaq Stock
Market, attempt to renegotiate the terms relating to the Notes and/or the
Additional 12% Notes so as to remove the transaction from the purview of the
Nasdaq Stock Market regulatory requirements, or take other action to avoid
delisting of its Class A Common Stock. In the event of such delisting, it is
expected that the Class A Common Stock thereafter would trade on the Nasdaq
Small Cap Market.
PREFERRED STOCK
The Company is authorized to issue 5,000,000 shares of Preferred Stock,
no par value. The Board of Directors has the power to issue preferred stock
with rates of dividends, voting rights, redemption prices, liquidation
premiums, conversion rights and requirements as to any sinking or purchase
fund it may from time to time establish without a vote of the shareholders.
There are no shares of Preferred Stock presently issued and outstanding and
the Company currently has no intentions to issue Preferred Stock. If shares
of Preferred Stock were issued with voting rights and/or other rights or
preferences, such issuance could have the effect of deterring a change in
control of the Company.
TRANSFER AGENT AND WARRANT AGENT
American Stock Transfer & Trust Company serves as Transfer Agent for the
Class A Common Stock of the Company. The address and telephone number of the
Transfer Agent is 40 Wall Street, New York, New York 10005-1303, (212)
936-5100.
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<PAGE>
INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Company has the power under the Colorado Corporation Code to
indemnify any person who was or is a party or is threatened to be made a party
to any action, whether civil, criminal, administrative or investiga-tive, by
reason of the fact that such person is or was a director, officer, employee,
fiduciary or agent of the Company or was serving at its request in a similar
capacity for another entity, against expenses (including attor-neys' fees),
judgments, fines and amounts paid in settlement actually and reasonably
in-curred by him in connection therewith if he acted in good faith and in a
manner he reasonably believed to be in the best interest of the corporation
and, with respect to any criminal action or proceeding, had no reasonable
cause to believe his conduct was unlawful. In case of an action brought by or
in the right of the Company such persons are similarly entitled to
indemnification if they acted in good faith and in a manner reasonably
believed to be in the best interests of the Company but no indemnification
shall be made if such person was adjudged to be liable for negligence or
misconduct in the perfor-mance of his duty to the Company unless and to the
extent the court in which such action or suit was brought determines upon
application that despite the adjudication of liability, in view of all
cir-cumstances of the case, such person is fairly and reasonably entitled to
indemnifica-tion. Such indemnifi-cation is not deemed exclusive of any other
rights to which those indemnified may be entitled under the Articles of
Incorporation, Bylaws, agreement, vote of shareholders or disinterested
directors, or otherwise.
The Articles of Incorporation and Bylaws of the Company generally require
indemnification of officers and directors to the fullest extent allowed by
law.
EXPERTS
The financial statements of the Company as of December 31, 1995 and 1994
and for the years then ended, included in the Annual Report on Form 10-KSB for
the year ended December 31, 1995, as amended by Form 10-KSB/A dated April 26,
1996, and July 17, 1996 (the "Annual Report"), incorporated herein by
reference, have been audited by Ehrhardt Keefe Steiner & Hottman P.C.,
independent public accountants, as set forth in their report thereon appearing
in the Annual Report incorporated herein by reference. The financial
statements incorporated by reference into this Prospectus have been so
incorporated herein in reliance upon such report, given on the authority of
said firm as experts in auditing and accounting.
NO DEALER, SALESMAN, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER-ING HEREIN CONTAINED AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR THE SELLING SECURITY HOLDERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY, THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUN-DER SHALL, UNDER ANY CIRCUM-STANCES,
CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY SINCE THE DATE HEREOF OR THAT ANY INFORMATION CONTAINED HEREIN IS
CORRECT AS TO ANY OF THE TIME SUBSEQUENT TO ITS DATE.
ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURI-TIES, WHETHER
OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
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<PAGE>
TABLE OF CONTENTS
Page
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AVAILABLE INFORMATION 2
DOCUMENTS INCORPORATED BY REFERENCE 2
THE COMPANY 3
RISK FACTORS 3
USE OF PROCEEDS 8
DIVIDEND POLICY 8
SELLING SECURITY HOLDERS 9
PLAN OF DISTRIBUTION 11
DESCRIPTION OF SECURITIES 12
Common Stock 12
7% Notes and Placement Warrants 12
12% Notes 13
Preferred Stock 16
Transfer Agent and Warrant Agent 16
INDEMNIFICATION OF OFFICERS AND DIRECTORS 17
EXPERTS 17
