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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (Fee Required)
For the fiscal year ended June 30, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from to
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Commission File No. 0-19420
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Credit Depot Corporation
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(Name of small business issuer in its charter)
Delaware 58-1909265
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
700 Wachovia Center, Gainesville, Georgia 30501
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(Address of principal executive offices) (Zip Code)
Issuer's Telephone Number, including Area Code (770) 531-9927
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Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
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N/A N/A
Securities registered under Section 12(g) of the Exchange Act:
Common Stock $.001 par value
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(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
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Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ X ]
Issuer's revenues for its most recent fiscal year: $5,918,460
As of September 30, 1997, 4,072,761 shares of Common Stock, $.001 par value,
were outstanding. The aggregate market value of the common stock held by
non-affiliates of the registrant as of such date was approximately $2,300,000*.
*Excludes 740,336 shares of common stock deemed to be held by officers and
directors, and stockholders whose ownership exceeds five percent of the shares
outstanding at August 31, 1997. Exclusion of shares held by any person should
not be construed to indicate that such person possesses the power, direct or
indirect, to direct or cause the direction of the management or policies of the
registrant, or that such person is controlled by or under common control with
the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement, to be filed within 120 days after
the end of the Registrant's fiscal year, are incorporated into Part III of this
Annual Report. See Part III hereof and the Exhibit Index hereto.
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PART I
ITEM 1. BUSINESS
GENERAL
Credit Depot Corporation (the "Company") is a mortgage finance company
engaged in originating, purchasing, servicing, and selling first and second
mortgage loans secured by single family (one to four family) residences made to
credit-impaired individuals who are generally unable to obtain financing from
conventional lending sources. The Company's customers borrow funds generally for
debt consolidation or to refinance first mortgages on the customer's primary
residence. The Company's mortgage loans are at higher interest rates than
conventional mortgage loans, which the Company's customers are willing to incur
because of their inability to obtain financing from conventional sources. While
the typical borrowers from the Company may not have attractive credit histories
due to a pattern of credit weakness, unverifiable income, insufficient credit
history or a previous bankruptcy or insolvency, it is the Company's experience
that these borrowers nevertheless have generally demonstrated an ability to make
payments due under their loans because the loans are secured by first mortgages
on their primary residences, and the Company generally requires that such
borrowers have significant equity in their residences. The Company believes its
underwriting procedures generally enable it to determine which borrowers with
substandard credit histories are likely to meet their mortgage obligations.
The Company believes that the lending practices of conventional financing
sources (such as commercial banks and savings and loan associations) have made
access to credit more difficult for the Company's target customer base. In
addition, the emergence of secondary mortgage markets has resulted in a reduced
willingness on the part of traditional financing sources to offer mortgages that
depart from the strict underwriting and documentation standards required by
government sponsored enterprises such as the Government National Mortgage
Association ("GNMA") and the Federal National Mortgage Association ("FNMA"). The
Company believes that the tightening of underwriting guidelines from traditional
financing sources has resulted in a large population of creditworthy borrowers
seeking alternative sources of financing.
Generally, mortgage lenders evaluate a borrower according to four primary
criteria: (i) the ratio of the borrower's debt to his gross income; (ii) the
loan-to-value ratio of the property securing the loan; (iii) the borrower's
credit history; and (iv) the responses to requests for third-party documentation
(such as employment and other verifications and credit references). Based on
these criteria, the Company will evaluate a loan application or loan (if
purchasing a loan from another source) and determine if the criteria fall within
the guidelines of the Company's current loan programs, also known as an
"underwriting matrix". The Company's target customer base traditionally consists
of homeowners with equity of at least 20% in their homes (typically with values
ranging from $35,000 to $200,000), a debt-to-gross-income ratio not exceeding
50% (as compared to approximately 36% for conventional lenders), and stable
employment.
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During the years ended June 30, 1995, 1996 and 1997 (referred to as
"Fiscal 1995", "Fiscal 1996", and "Fiscal 1997") the Company originated
$29,542,000, $37,035,000, and $79,323,000 of loans, respectively. The average
original principal balance of the loans originated by the Company during Fiscal
1995, 1996, and 1997 was $41,000, $49,000, and $50,000, respectively, with an
average annual interest rate to the Company of approximately 13.0%, 11.5%, and
12.1%, respectively. During Fiscal 1995, 1996, and 1997, approximately 96%, 91%,
and 90%, respectively, of the Company's loans originated for each period had an
original principal balance of between approximately $10,000 and $130,000. During
Fiscal 1995 1996, and 1997, the weighted average loan-to-value ratio at the time
of origination of the Company's loans originated during those periods was
approximately 70%, 74%, and 70%, respectively, and the weighted average
debt-to-gross-income ratio for the Company's borrowers was approximately 35%,
36%, and 35%, respectively.
Prior to October 1994, substantially all of the mortgage loans originated
by the Company were balloon loans, with periodic payments based generally on a
15-year amortization schedule and a single payment of the remaining balance of
the balloon loan due five years after origination. At June 30, 1997, the Company
was servicing approximately $2,753,000 of balloon loans, either in the Company's
own portfolio or for other entities. In October 1994, the Company changed its
mortgage product line from balloon to self-amortizing mortgages, and also began
to originate somewhat higher quality loans (although the target customers
remained credit-impaired borrowers who are unable to obtain loans from
conventional lenders), which resulted in slightly lower average annual interest
rates and slightly higher loan-to-value ratios. Currently, the loans originated
by the Company are generally for 15- 20- or 30-year terms.
Since 1993, the Company has expanded the geographic scope of its mortgage
activities from a single office in Gainesville, Georgia, and currently employs
personnel in nine additional states (Florida, Illinois, Indiana, Michigan,
Mississippi, North Carolina, Ohio, South Carolina, and Tennessee) from which
mortgage loans are originated. The Company is also licensed to originate loans
in several other states where it is not required to maintain a physical
presence. The Company originates and processes its loans utilizing a "spoke and
hub" system, wherein sales representatives forward loan applications to one of
four designated regional processing offices, which contain loan processors and
field underwriters. The underwriting department at the corporate headquarters in
Gainesville, Georgia issues final approval and funding of each loan.
The Company was incorporated in Delaware in 1990 and is the successor by
merger to a corporation organized in 1986. Unless the context otherwise
requires, reference to the "Company" includes the operations of the Company, its
predecessor and its wholly-owned subsidiaries. Also unless otherwise noted, all
dollar figures presented are rounded to the nearest $1,000 and are approximate.
The Company's executive offices are located at Wachovia Center, Suite 700,
Gainesville, Georgia 30501, telephone (770) 531-9927.
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RECENT DEVELOPMENTS
Subsequent to June 30, 1997, the Company was not in compliance with a
minimum net worth covenant under its warehouse lending arrangement with one of
its warehouse lenders primarily as a result of recurring operating losses. Since
the waiver of this covenant has not been obtained, the right to use this line to
finance originations and purchases of mortgage loans could be restricted or
terminated at the option of the lender.
The Company's net worth as of June 30, 1997 was $376,838. The Company has
received notification from Nasdaq stating that the Company has failed to
maintain a $1.00 minimum bid price on its common stock and also does not appear
to meet the $2,000,000 minimum in net tangible assets necessary for continued
listing on the Nasdaq SmallCap Market. The Company must respond by October 22,
1997 with a plan and schedule to bring the Company into compliance with these
requirements. In the event that Nasdaq does not accept the Company's plan for
achieving compliance, a formal notice of deficiency would be issued by Nasdaq
specifying a delisting date for the Company's common stock.
These and other matters raise substantial doubt about the ability of the
Company to continue as a going concern. See Item 6- "Management's Discussion and
Analysis of Financial Condition and Results of Operation", and Note 12 under
Item 7- "Financial Statements", for a more complete discussion of issues
concerning the viability of the Company and management's plans to address those
issues.
LOAN FINANCING
General. Although the Company's principal product is a non-conforming
residential first mortgage loan with a fixed interest rate and term to maturity,
it does offer a limited variable rate and second mortgage product and other
programs, all of which the Company believes keeps its product line competitive
in the marketplace without sacrificing underwriting guidelines. These loans are
distinct from residential mortgage revolving lines of credit, not offered by the
Company, which are generally secured by a second mortgage and typically carry a
floating interest rate. The proceeds of the loan will usually be used by the
borrower for debt consolidation or to refinance a first mortgage on his
property. The homes used for collateral to secure most of the loans are
single-family owner-occupied. As of June 30, 1997, approximately 11.2% of the
outstanding loans serviced by the Company represent loans where the properties
used as collateral to secure loans are non-owner occupied properties. Costs
incurred by the borrower for loan origination, including origination points and
appraisal, legal and title fees, are often included in the amount financed.
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The following table summarizes the Company's lending activities during each of
the periods indicated:
<TABLE>
<CAPTION>
Fiscal Year Ended
June 30,
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1997 1996 1995
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<S> <C> <C> <C>
Principal amount of loans originated $79,323,000 $37,035,000 $29,542,000
Number of loans originated 1,601 757 722
Servicing portfolio:
Serviced for the Company $ 5,205,000 $ 6,617,000 $ 3,610,000
Serviced for purchasers of loans 2,027,000 3,575,000 6,359,000
----------- ----------- -----------
Total Loans Serviced 7,232,000 10,192,000 9,969,000
Loan sale proceeds:
Loans sold servicing retained -- 1,616,000
Loans sold servicing released - whole 5,244,000 13,506,000 26,065,000
Loans sold servicing released - retained interest 77,020,000 19,321,000 --
----------- ----------- -----------
Total Sales 82,264,000 32,827,000 27,681,000
Gain on sales of loans (1) 5,181,000 1,697,000 1,327,000
Overall gain on sale percentage (1) 6.30% 5.17% 4.79%
Interest rate differential on loans sold with 2.70% 2.01% 1.89%
a retained interest (2)
Premium received on whole loan sales (3) 0.00% 2.27% 5.09%
</TABLE>
(1) This is a gross gain on sale from all types of loan sales, and excludes
any write-down of any asset with a retained interest (see "Sale of
Mortgage Loan Pools"), which is netted against the gain on sale in the
financial statements.
(2) This represents the average difference between the mortgage loan
interest rate and the interest rate passed on to the purchaser of loans
sold on a Servicing basis in Fiscal 1995, prior to giving effect to
normal servicing costs of .5%. For 1996 and 1997, it represents the
difference between the mortgage loan interest rate and the contractual
rate paid by the purchaser of loans sold on an Interest-Only basis.
Neither type of sale involves a cash premium or discount to the Company
at the time of sale.
(3) This represents the net cash premium received on loans sold Whole. This
percentage is calculated on the net proceeds (after premiums paid)
divided by the principal amount of the loan.
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Origination. Loan applications are brought to the Company's attention in
its branch offices by referral sources such as mortgage loan brokers,
prospective borrowers, or mortgage companies. Completed loan applications are
transferred to the Company's loan processors who verify certain information
contained in the applications such as employment information and credit history.
The loan processor also makes the arrangements necessary to have the applicant's
real property, offered as security for the loan, appraised by an independent
appraiser.
The Company's loan processor then reviews the application, the
applicant's credit history (including verifying any senior mortgages on the
applicant's property) and the appraisal, and uses this information to categorize
the application, a process which consists of determining the preliminary
loan-to-value ratio as well as ascertaining the applicant's other obligations.
The loan-to-value ratio is determined by dividing the requested loan amount by
the appraised value of the borrower's property. The Company requires that the
loan-to-value ratio of a property offered as collateral generally not exceed
85%, and, historically, such rate has averaged approximately 71%. The Company
requires that a loan applicant's total monthly debt payments to gross monthly
income generally not exceed 50%, and, historically, such rate has averaged
approximately 36%. If the loan processor concludes that the applicant may be a
suitable candidate for a loan, the loan processor prepares an "in-file" credit
report which provides a computer analysis of the applicant's credit history,
including outstanding indebtedness. Based upon the loan-to-value ratio,
debt-to-gross-income ratio, an analysis of the applicant's creditworthiness and
the appraisal of the applicant's property offered as security for the loan, a
loan committee, consisting of senior credit officers at the Corporate office,
determines whether or not to approve the application.
In all instances in which borrowers have advised the Company that all or
a portion of the loan will be used to repay outstanding debt, the Company's
closing agent will disburse such funds directly to the borrower's creditors.
Borrowers have a right under federal truth-in-lending laws to rescind their
loans for a period of three days after entering into the loan agreement and
prior to the disbursement of the funds. After the disbursement of loan proceeds,
the Company's closing attorney records the first mortgage security interest in
the county in which the property securing the loan is located, thus perfecting
the Company's interest. The closing attorney obtains, on behalf of the Company,
a title insurance policy insuring perfection of the Company's first lien
position.
Delinquency Information. Typically, promptly after failure to receive
timely payment, the Company commences collection efforts, and for loans which
become 60 days past due the borrower is verbally notified that the Company may
initiate the foreclosure process. The Company then notifies the borrower via an
attorney's letter of the serious nature of the delinquency but also affords the
borrower an opportunity (generally the minimum amount of time prescribed by
state statute) to bring the loan current. However, if the loan continues to
remain delinquent, the Company engages an attorney to complete the foreclosure
proceedings. The Company arranges for sale at public auction of all collateral
in order to satisfy the unpaid indebtedness to the Company. The proceeds of the
public sale of the foreclosed property are first distributed to the Company (on
behalf of the borrower) in an amount up to the unpaid balance of
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the loan plus accrued interest and expenses associated with the foreclosure.
Additional proceeds, if any, are generally disbursed by the foreclosing attorney
first to any junior lien holder which has filed a claim with the Company and has
been assigned such proceeds and then to the borrower.
Delinquency information herein gives effect to all mortgage loans
originated by the Company which are either retained in the Company's portfolio
or which have been sold to third parties servicing retained. At June 30, 1997,
the Company held real estate owned reflecting three foreclosed mortgage loans
totaling $89,000. As of June 30, 1997, 21 borrowers have filed for protection
under the federal bankruptcy laws, representing $627,000, or approximately 8.7%
of the principal amount of the Company's servicing portfolio. Of the 21
borrowers who have filed for bankruptcy, 15 are making their scheduled payments
on a timely basis.
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The following is a table setting forth certain information with respect
to the aggregate delinquency rates for loans in the Company's loan portfolio and
serviced loan portfolio:
<TABLE>
<CAPTION>
Fiscal Year Ended
June 30,
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1997 1996 1995
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<S> <C> <C> <C>
Number of loans 199 296 329
Amount of loans $ 7,232,000 $ 10,192,000 $ 9,969,000
Delinquency period (1) (3):
30-59 days 3.12% 3.50% 4.38%
60-89 days 2.79% 2.13% 2.30%
90-119 days 0.64% 0.83% 1.40%
120 days and over 7.45% 5.59% 5.00%
Foreclosed properties (2) 1.21% .04% .89%
Amount of loans owned by the Company $ 5,205,000 $ 6,617,000 $ 3,610,000
Amount of loans serviced for third parties 2,027,000 3,575,000 6,359,000
</TABLE>
(1) Represents the dollar amount of delinquent loans as a percentage of the
total "Amount of loans" as of the date indicated.
(2) Foreclosed property as a percentage of loans serviced and foreclosed
properties. These amounts reflect foreclosures during the applicable
period on mortgage loans originated since 1988.
(3) From time to time, the Company grants payment extensions or revises
repayment schedules. The above information does not list as delinquent
those payments for which extensions have been granted.
In Fiscal 1995, 1996, and 1997, the Company experienced defaults which
led to the foreclosure of the mortgaged property on 35, 11, and 19 loans,
respectively. As a result of such foreclosures, the Company experienced an
aggregate net loss on those related mortgage loans of $307,000, $130,000, and
$195,000 during Fiscal 1995, 1996, and 1997, respectively.
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In a continuing period of economic decline, the rates of delinquencies,
foreclosures and losses on the mortgage loans could be higher than those
heretofore experienced in the mortgage lending industry in general. In addition,
adverse economic conditions (which may or may not affect real estate property
values) may affect the timely payment by borrowers of scheduled payments of
principal and interest on the mortgage loans and, accordingly, the actual rates
of delinquencies, foreclosures and losses with respect to the Company's
portfolio of mortgage loans.
SALE OF MORTGAGE LOANS
As a fundamental part of its business and financing strategy, the Company
intends to sell all of the loans it originates in the secondary mortgage market
rather than holding such mortgage loans for its own account. Generally, the
Company has sold its loans using one of three sales methods. The first method
involves selling loans to third parties service-released (the Company no longer
services the loan after the sale) with no further obligations or interest in the
loan after the sale. The premium (or discount) on the loan is received (or
deducted) in cash at the time of the sale. This method of loan sale is referred
to as selling loans "Whole". In the second sales method, loans are sold
service-retained (the Company continues to service the loan after the sale),
with a residual interest and obligation. The interest the Company receives is a
percentage of the interest portion of a borrower's loan payment, and the
obligation owed in this case is a commitment by the Company to repurchase the
loan, at the option of the investor who purchased the loan, if it should become
over 90 days past due. The gain on sale recorded using the second sales method
is calculated as the present value of the difference between the interest rate
charged by the Company to a borrower and the interest rate paid to the investor
who purchased the loan less contractual servicing costs, referred to as a
"Service" sale. The third sales method involves selling loans service-released
with a residual interest and obligation. The interest due the Company is the
same as with a Service sale except that there is no deduction to the investor
for servicing costs, and the obligation by the Company in this case is twofold:
1) a commitment to repurchase a loan if the investor should discover an
exception in the loan file as defined in the loan purchase agreement during the
investor's quality control audit, and 2) a "first loss" provision, wherein if
the loan is ever foreclosed upon by the investor and the investor should incur a
loss upon the sale of the property, then the Company is obligated to reimburse
the investor for the amount of loss. This third type of sale is referred to as
an "Interest-Only" sale. An important distinction between the sales methods is
that in a Whole loan sale, the cash premium is received at the time of sale,
whereas in the other two methods the cash premium is received over the life of
the loan as it is collected. See "Certain Accounting Considerations" under Item
7 for a more complete discussion of how the Service and Interest-Only sales are
recorded.
Prior to Fiscal 1994, the Company sold most of its mortgage loans in groups
or "pools" of loans totaling anywhere from $500,000 to $2,000,000 a pool on a
Service basis to banks, life insurance companies, and other entities. At June
30, 1997, the aggregate balance of loans outstanding subject to the residual
repurchase obligation of the Service sale was $1,967,000, of which $23,000 was
past due by over 90 days and subject to repurchase at the option of the
investor.
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As loan volumes increased in subsequent years, the Company from time to
time had difficulty accumulating pools of loans with the financing facilities
and/or capital available to it, and would sell loans on a "Flow" basis (groups
of loans totaling less than $500,000) to provide the liquidity needed during the
periods of capital constraints. Loans sold on a Flow basis generally do not
provide as high a margin as loans sold from a larger pool of loans as purchasers
will generally pay a higher premium for a $2,000,000 pool of loans as compared
to a $500,000 pool of loans.
In March 1996, the Company commenced selling most of its mortgage loans
to a major financial institution on an Interest-Only basis, who in turn placed
the Company's loans (along with loans from other companies) into the
asset-backed securitization market. The agreement with the major financial
institution (referred to as the "Securitizer") allowed the Company to sell its
loans on a Flow basis, but receive higher margins than would typically be
expected for loans sold on a Flow basis. Pursuant to this agreement, the Company
enters into separate commitments in which it commits to sell to the Securitizer
a stated amount of mortgage loans during a stated period. The Securitizer is not
obligated to purchase any mortgage loans from the Company under the agreement.
Through June 30, 1997, the Company had sold approximately $96,292,000 of
mortgage loans to the Securitizer pursuant to this agreement. No requests have
been made by the Securitizer for reimbursement under the first loss provision of
the Interest-Only sale on the $96,292,000 sold. The Company maintains an
allowance for credit losses estimated to cover losses both from loans held by
the Company for its own portfolio and for loans sold with a residual obligation.
Subsequent to Fiscal 1997, the Company was able to obtain substantial
warehouse lines and therefore the capability to accumulate pools of mortgages.
With this capability, the Company decided in September 1997, primarily for
liquidity reasons, to switch to selling loans on a Whole basis. While the loans
sold under the agreement with the Securitizer generally result in a higher
margin than loans sold Whole, the net cash flow from a Whole loan sale is
generally more favorable than loans sold under the "Interest-Only" method, and
the Company believes at this time the improved cash flow is more critical to the
success of the Company than the higher margin. See "Liquidity and Capital
Resources" under Item 7 herein for a more complete discussion of liquidity
issues. In addition to improving cash flow, selling loans Whole to a variety of
third party purchasers has allowed the Company to expand its product line and
offer certain types of mortgages that were not part of the Securitizer's product
line. Since the Securitizer would not purchase these recently introduced
products, the Company, if it wished to originate such a loan, would have to hold
the loan in its own portfolio until a purchaser was found, requiring the Company
to use its own working capital to hold the loan until sale. However, the Company
does not have a sales contract with any of these third party purchasers, and
therefore the Company has no guarantee that its mortgage loans will be purchased
at a given rate as the premium received on each sale of a pool of loans is
negotiated at the time of sale. The Company does not currently hedge its sales
against changes in interest rates, and does not believe the costs associated
with hedging offset the risk taken by not hedging at this point in time.
However, there can be no assurance that changes in interest rates in the future
will not adversely affect the Company. The Company intends to continue to sell
loans Whole until its cash flow situation has improved to a point where selling
loans by other methods becomes more attractive.
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BRANCH OFFICES
In order to expand its loan production, the Company intends to continue
development of a network of branch offices located primarily in the eastern half
of the United States. Until September 1993, the Company originated and serviced
loans only to Georgia residents from a single office located in Gainesville,
Georgia. Since September 1993, the Company has opened and closed offices in
several states, but currently maintains personnel in Florida, Illinois, Indiana,
Michigan, Mississippi, North Carolina, Ohio, South Carolina, and Tennessee, and
is licensed to do business in several other states where it does not maintain a
salesperson. The Company currently maintains four processing centers, each with
a regional manager, account representative, and a staff of loan processors. In
some states, the Company may have one or more additional satellite offices which
normally house a single account representative in an executive suite to focus on
loan applications in a particular area within a state. All branch operations are
overseen by regional managers. From time to time, the Company has closed
unproductive processing or satellite offices, and has opened other offices in a
different location or with new staff to maintain production standards. The
purpose of a branch office is to originate loan production with final
underwriting being approved at the Company's corporate offices. The Company
expects that from the time a branch site is selected and such office opens, it
will take several months before the branch attains desired loan production
levels. The Company incurs expenses in connection with the opening of each
branch office, prior to realizing any revenues. Costs are expensed as incurred.
The Company embarked on a rapid expansion effort in Fiscal 1997 that did not
produce the desired increase in loan originations. Several of the offices opened
during that expansion effort have since been closed, and in some cases new
personnel have been hired to replace those terminated. The Company intends to
continue replacing personnel in offices it previously closed but will not add
"new" branch offices until additional capital is available.
MARKETING
The Company's marketing department provides training, research,
promotional materials, data base management, media and other support for the
account executives in the branch offices to enable them to target the mortgage
brokerage community at the local level. The officers and employees of the
Company also solicit referrals from personal contacts with banks, mortgage
lending institutions, credit unions, and real estate firms.
CUSTOMERS
The most likely market for loans financed by the Company has been and
will continue to be credit-impaired homeowners who are unable to obtain loans
from conventional sources. Typical borrowers approved by the Company for loans
are individuals who are generally unable or unwilling to obtain financing from
conventional lending sources due to an established pattern of credit weakness,
unverifiable income, insufficient credit history, or a previous bankruptcy or
insolvency. The inability of these borrowers to obtain conventional financing
makes them willing to pay the higher rates charged by the Company. While the
typical borrowers from the
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Company may not present attractive credit histories, the Company has found and
believes that these types of individuals nevertheless demonstrate an ability and
desire to preserve their loans in good standing because the loans are secured by
first mortgages on their primary residences. The Company obtained most of its
mortgage applications from mortgage brokers in Fiscal 1997 (as opposed to
soliciting the borrowers directly), and the Company anticipates that mortgage
brokers will remain its most significant source of loan applications in the year
ending June 30, 1998.
COMPETITION
The Company faces intense competition in connection with the origination,
purchase, and sale of mortgage loans from numerous providers of financial
services. Traditional competitors in the financial services business include
independent mortgage companies, credit unions, thrift institutions, credit card
issuers and finance companies. Many of these companies are substantially larger
and have more capital and other resources than the Company. Competition among
lenders can take many forms including convenience in obtaining a loan, customer
service, size of loans, interest rates and other types of finance or service
charges, duration of loans, the nature of the risks which the lender is willing
to assume and the type of security, if any, required by the lender. The Company
competes, among other ways, through efficient underwriting and the timely
response to applicants.
GOVERNMENT REGULATION
The Company's operations are subject to extensive regulation, supervision
and licensing by federal, state and local government authorities. Regulated
matters include, without limitation, loan origination, credit activities,
maximum interest rates and finance and other charges (including state usury
laws), disclosure to customers and requirements of the federal
"truth-in-lending" laws, the terms of secured transactions, the collection,
repossession and claims handling procedures utilized by the Company, multiple
qualification and licensing requirements for doing business in various
jurisdictions as mortgage lenders and brokers and other trade practices.
The Company's operations are subject to regulation by state statutes
governing loan interest rates and terms (i.e. usury statutes) and federal
"truth-in-lending" laws governing disclosure requirements applicable to lenders.
The Company believes it has complied in all material respects in the states in
which it operates with state laws regarding the licensing of mortgage lenders
and mortgage brokers.
There can be no assurance that restrictive laws, rules and regulations
will not be adopted in the future which could make compliance by the Company
more difficult and expensive and which could further limit or restrict the
amount of interest and charges assessed under loans originated by the Company or
otherwise adversely affect the business and prospects of the Company.
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The Company's loan financing activities are subject to the provisions of
Title 1 of the Federal Consumer Credit Protection Act, commonly known as the
Truth-In-Lending Act ("TILA") and Regulation Z promulgated pursuant thereto.
TILA contains disclosure requirements designed to provide consumers with simple
understandable information with respect to the terms and conditions of loans and
credit transactions in order to give them the ability to "shop" credit. TILA
also guarantees consumers a three-day right to cancel certain credit
transactions, including any refinanced mortgage or junior mortgage on a
consumer's primary residence. In September 1994, the Riegle Community
Development and Regulatory Improvement Act of 1994 (the "Riegle Act") was
enacted. Among other things, the Riegle Act makes certain amendments to TILA.
The TILA amendments, which became effective in October 1995, generally apply to
mortgage loans with (i) total points and fees upon origination in excess of
eight percent of the loan amount or (ii) an annual percentage rate of more than
ten percentage points higher than United States Treasury securities of
comparable maturity ("Covered Loans"). A substantial majority of the loans
originated or purchased by the Company are not Covered Loans.
The TILA amendments impose additional disclosure requirements on lenders
originating Covered Loans and prohibit lenders from originating Covered Loans
that are underwritten solely on the basis of the borrower's home equity without
regard to the borrower's ability to repay the loan. The Company believes that
only a small portion of loans it originated are of the type that, unless
modified, would be prohibited by the TILA amendments. The Company's underwriting
criteria have always taken into consideration the borrower's ability to repay.
The TILA amendments also prohibit lenders from including prepayment fee
clauses in Covered Loans to borrowers with a debt-to-income ratio in excess of
50% or Covered Loans used to refinance existing loans originated by the same
lender. The Company intends to continue to collect prepayment fees on loans
originated prior to the effectiveness of the TILA amendments and on non-Covered
Loans as well as on Covered Loans in permitted circumstances. Because the TILA
amendments did not become effective until October 1995, the level of prepayment
fee revenue was not affected in 1995, but the level of prepayment fee revenue
may decline in future years. The TILA amendments impose other restrictions on
Covered Loans, including restrictions on balloon payments and negative
amortization features, which the Company does not believe will have a material
impact on its operations.
The Company is also required to comply with the Equal Credit Opportunity
Act ("ECOA") which prohibits creditors from discriminating against applicants on
the basis of race, color, sex, age or marital status. Regulation B promulgated
under ECOA restricts creditors from obtaining certain types of information from
loan applicants. It also requires certain disclosures by the lender regarding
consumer rights and requires lenders to advise applicants who are turned down
for credit for the reasons therefore. The Fair Credit Reporting Act requires a
lender to provide an individual, whose application for credit was denied as a
result of information obtained from a consumer credit agency, with the name and
address of the reporting agency.
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In certain circumstances the Company may acquire properties securing
loans on foreclosure. There is a risk that hazardous wastes may be found on such
properties. In such event, it is possible that the Company could be held liable
for clean-up costs under the Comprehensive Environmental Response Compensation
and Liability Act ("CERCLA") or similar state statutes.
EMPLOYEES
As of June 30, 1997, the Company had 80 full-time employees in its Credit
Depot offices, and approximately 30 full and part-time employees in its Cash
Back Mortgage subsidiary. The Company considers its relations with its employees
to be satisfactory.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements contained in "Item 1. Business" and "Item 6.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" such as statements concerning the Company's future cash and
financing requirements, the Company's ability to originate and/or acquire
mortgage loans, the Company's ability to enter into securitization transactions
and/or otherwise sell mortgage loans to the third parties and the returns
therefrom and other statements contained herein regarding matters that are not
historical facts are forward looking statements; actual results may differ
materially from those projected in the forward looking statements, which
statements involve risks and uncertainties, including but not limited to, the
following: the Company's ability to obtain future financings; the uncertainties
relating to the Company's ability to participate in securitizations; and market
conditions and other factors relating to the mortgage lending business.
Investors are also directed to the other risks discussed herein and in other
documents filed by the Company with the Commission.
ITEM 2. DESCRIPTION OF PROPERTIES.
The Company's principal executive offices are located at 700 Wachovia
Center, Gainesville, Georgia 30501, where it leases approximately 12,650 square
feet of space at a monthly rental of $22,000. The lease for this office expires
in October 1999. The Company also leases office space in each state that it
maintains a branch office. The branch offices range from offices rented in an
executive office suite of approximately 120 square feet to 3,000 square feet
with monthly rents ranging from $350 to $4,000 per office. The Company
anticipates that most of the additional branch offices it plans to open in the
next 12 months will average less than 500 square feet. The Company believes that
its corporate facilities are adequate for the Company's present and anticipated
needs for at least the next 12 months.
ITEM 3. LEGAL PROCEEDINGS.
As of the date hereof, the Company is not a party to any material legal
proceedings. The Company from time to time commences foreclosure proceedings
against borrowers who have defaulted on their loans.
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<PAGE> 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock has traded in the Nasdaq SmallCap Market
under the symbol LEND since June 6, 1991. The following table sets forth the
high and low bid prices for the Common Stock as reported by the Nasdaq SmallCap
Market for the periods indicated. The prices set forth below represent quotes
between dealers and do not include commissions, mark-ups or mark-downs, and may
not necessarily represent actual transactions.
<TABLE>
<CAPTION>
Common Stock
------------
High Low
---- ---
<S> <C> <C>
Fiscal 1995
Quarter ended September 30, 1994 $8.25 $ 6.50
Quarter ended December 31, 1994 6.00 4.00
Quarter ended March 31, 1995 5.13 2.50
Quarter ended June 30, 1995 6.00 3.875
Fiscal 1996
Quarter ended September 30, 1995 6.50 4.25
Quarter ended December 31, 1995 7.00 3.00
Quarter ended March 31, 1996 4.125 2.375
Quarter ended June 30, 1996 3.875 2.125
Fiscal 1997
Quarter ended September 30, 1996 4.625 2.50
Quarter ended December 31, 1996 4.25 2.9375
Quarter ended March 31, 1997 4.0625 3.375
Quarter ended June 30, 1997 3.75 1.25
</TABLE>
As of June 30, 1997, the Company believes that there were in excess of
300 beneficial holders of its Common Stock.
The Company's Convertible Secured Notes restrict its ability to pay
dividends on its Common Stock.
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<PAGE> 17
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
This section presents management's discussion and analysis of the consolidated
financial condition and results of operations of the Company for the fiscal
years ended June 30, 1997, 1996, and 1995. The discussion should be read in
conjunction with the Company's consolidated financial statements and
accompanying notes to the consolidated financial statements (see "ITEM 7.
FINANCIAL STATEMENTS"). Also see "Safe Harbor Statement Under the Private
Securities Litigation Reform Act of 1995" under "ITEM 1."
CERTAIN ACCOUNTING CONSIDERATIONS
A portion of the Company's revenue consists of gain on loans sold by the
Company servicing retained (a Service sale) or with servicing released but
retaining an interest in the mortgage loan (an Interest-Only sale). The gross
gain on a Service sale principally represents the present value of the
difference between the interest rate paid by the borrower and the interest rate
received by the investor who purchased the loans, reduced by a contractual loan
servicing fee. The corresponding asset established to record this gain is the
Servicing Asset. A separate reserve for prepayments is calculated and also
concurrently recorded, which reduces the gross gain on sale. The corresponding
asset established in connection with the gain on an Interest-Only sale is known
as an Interest-Only Strip Receivable. In this type of sale, prepayment
assumptions are included in and effectively reduce the gross gain on sale, so no
separate reserve is recorded for prepayment. In both types of sales, the Company
recognizes the gain on sale of loans in the fiscal year in which such loans are
sold, although cash is received by the Company over the lives of the loans. Both
types of assets are computed in part based upon, and amortized over, the
estimated lives of the loans.
Because the gain recognized in the year of sale is equal to the present
value of the estimated future cash flows in both types of sales, the amount of
cash actually received over the lives of the loans may exceed the gain
previously recognized at the time the loans were sold. In subsequent years where
such cash exceeds the previously recorded gain, the Company recognizes
additional income and fees to the extent actual cash flows from such loans
exceed the amortization of either type of asset. If actual prepayments with
respect to sold loans occur faster than were projected at the time such loans
were sold, the carrying value of the Servicing Asset or Interest-Only Strip
Receivable would be reduced through a charge to earnings in the period of
adjustment. In Fiscal 1996 and 1997, actual prepayments did exceed those
previously anticipated at the time of the sale for loans sold on a Service
basis. Accordingly, during Fiscal 1997, the Company wrote off a portion of the
value of the Servicing Asset previously recorded to reflect the actual
prepayments incurred and the estimated net realizable value. This write-off was
$39,000 in Fiscal 1997 and $119,000 in Fiscal 1996.
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<PAGE> 18
In addition, provisions for credit losses are charged to income in
amounts sufficient to maintain the allowance for credit losses at a level
considered by the Company to be adequate to absorb possible losses of principal
and interest in the existing portfolio, based upon calculations of the
collectibility of loans receivable and prior credit loss experience. The Company
charges loans receivable against the allowance for credit losses when it
believes, based upon a loan-by-loan review, that the collectibility of principal
is unlikely. The Company's exposure to credit loss in the event of
nonperformance by the borrower is represented as the outstanding principal
balance of the respective loans less the value of the collateral obtained, which
value is based upon the Company's current review of the appraisal. While the
Company uses available information to recognize losses on loans, future
additions to the allowance for credit losses may be necessary based upon a
number of factors including changes in economic conditions.
RESULTS OF OPERATIONS
For Fiscal 1997, the Company realized a net loss of $3,363,000, of
which $3,210,000 was realized in the last six months. The loss in the second
half of Fiscal 1997 was the result of various factors. The Company had a
marginally profitable quarter ending December 31, 1996 and began a rapid
origination expansion program in January 1997, increasing its sales force from
13 persons in December 1996 to 24 persons in April 1997. Total employee
headcount went from 67 to 85 persons during the same period as support personnel
were added for the new salespeople. To help supplement loan originations when a
majority of the sales force were recently hired, the Company executed several
bulk purchases of loans. When these bulk purchase loans were eventually sold,
the profit margins received on them were significantly less than anticipated. A
contributing factor to the reduced margin on the sale of the bulk purchase loans
and other loans sold was the relatively sharp rise in interest rates which
occurred during the Company's third fiscal quarter ending April 30, 1997. The
Company was unable to increase its rates on mortgage loans originated or
purchased by it or increase its loan volumes to offset the reduced margins at
the time of sale. The Company also experienced working capital shortages during
Fiscal 1997. Because the Company had no warehouse lines of credit until the end
of June 1997 and was funding all of its loan production with working capital,
loan production was negatively impacted during these shortages. Many of the
factors resulting in the loss for the quarter ending March 31, 1997, carried
forward into the fourth fiscal quarter. The significant expense of the expansion
effort was not matched by a corresponding increase in revenues. Several of the
less productive offices opened during this expansion were recently closed,
although not in time to positively affect the financial results for the year
ended June 30, 1997. Also, in April 1997, the Company acquired Cash Back
Mortgage Corporation, a telemarketing mortgage broker located in Cleveland,
Ohio. This acquisition has not yet yielded the anticipated financial results and
contributed to the loss for the Company as a whole in Fiscal 1997. As a result
of continued operating losses, the Company requires additional capital to meet
its working capital requirements and to increase its mortgage loan originations.
18
<PAGE> 19
Subsequent to June 30, 1997, the Company was able to obtain warehouse
lines of credit of sufficient size to house most of the Company's current loan
production, thereby decreasing the need to rely on working capital to perform
this function. The change in sales method to a Whole loan basis has also
provided more cash from loan sales than under the sales agreement with the
Securitizer, allowing the Company, in conjunction with an expense reduction
program, to improve its cash flow. Nevertheless, the Company is still operating
with a negative cash flow and anticipates that it will continue to do so unless
it can restructure its interest and dividend payments. To that end, the Company
has extended an offer to its 10% Convertible Debt Holders and 9% Preferred Stock
holders to exchange their securities for common stock at an exchange rate of
$0.50 and $0.65 per share, respectively, for each dollar of security currently
held by them. This offer is scheduled to expire on October 22, 1997. A
prerequisite for this conversion offer to be accepted by the Company is the
approval by a majority of the common shareholders of a one-for-five reverse
stock split (to allow for, among other items, sufficient number of authorized
shares to be issued in conjunction with the conversion offer). A special
shareholders meeting has been scheduled for October 24, 1997 to vote upon this
issue. The Company intends, subsequent to and largely dependent upon, the
approval of the reverse stock split and conversion of a majority of the
convertible securities to raise additional capital in the private placement of
preferred stock. The Company has obtained a bridge loan to provide working
capital until October 31, 1997, at which time the Company intends to close on
the new financing. There can be no assurance that any of the proposals outlined
above will be approved, accepted, or obtained, or even if they are that the
Company can achieve positive cash flow or positive operating margins. Failure of
the Company to obtain additional financing or make other arrangements for
payment of the bridge loan by October 31, 1997 would probably result in
cessation of the operations of the Company.
FISCAL YEAR ENDED JUNE 30, 1997 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1996
The Company's net loss was $3,363,000 in Fiscal 1997 as compared to a net
loss of $4,115,000 in Fiscal 1996, representing an improvement in operating
results of 18%. This decrease in net loss was primarily the result of increased
gain on sale, as revenues increased 159% to $3,640,000 and expenses increased
45% to $2,888,000 in Fiscal 1997 from Fiscal 1996. This improvement was not
sufficient, however, to offset the costs of maintaining the Company's loan
production and support operations and the costs of raising capital.
Finance income and fees for Fiscal 1997 increased 15% to $757,000 in
Fiscal 1997 from Fiscal 1996 as both the amount of Company's average loan
portfolio and interest rate on that portfolio increased. The increase in the
average size of the Company's loan portfolio balance was a result of the
increased loan volume in Fiscal 1997. The average interest rate yield on
mortgage loans originated in Fiscal 1997 increased by 0.52% to 12.05%, compared
to an average of 11.53% in Fiscal 1996, a 4.5% increase. This increase was
primarily a result of the Company purchasing more loans in the "C" and "D"
credit grade as compared to loans originated in Fiscal 1996.
19
<PAGE> 20
Gains on sales of mortgage loans increased to $5,142,000 for Fiscal 1997
from $1,578,000 during Fiscal 1996 due to the increased volume of loan sales and
the higher margins received on those sales. The Company sold $82,264,000 of
loans in Fiscal 1997 as compared to $37,035,000 in Fiscal 1996. The gain on sale
margin on the loans sold also improved as the average gain on sale percentage
increased from 5.17% to 6.30%, or a 22% improvement in Fiscal 1997 from Fiscal
1996, reflecting the change in sales methods. For most of the first three
quarters of Fiscal 1996, loans were sold on a Whole basis, whereas for all of
Fiscal 1997 loans were sold with a retained interest.
Salaries and employee benefits increased 53% to $4,194,000 in Fiscal 1997
from $2,734,000 in Fiscal 1996, reflecting the Company's expansion effort. The
number of Company employees increased from 57 to 80 full-time employees, or 40%,
from June 30, 1996 to June 30, 1997, exclusive of the 30 full and part-time
personnel employed by Cash Back Mortgage Corporation acquired in April 1997.
Legal and professional fees increased 82% to $525,000 in Fiscal 1997 from
Fiscal 1996, with most of the increase in the form of consulting fees.
Consultants were paid primarily in connection with assisting the Company locate
additional financing or warehouse lines.
Other operating expenses increased by 50% to $2,893,000 in Fiscal 1997
from Fiscal 1996. A substantial portion of the expenses in this category
increased as a result of the 40% increase in number of employees between the
comparable periods. However, increases in certain expenses were incurred in
connection with the loan origination expansion effort undertaken in Fiscal 1997
and not directly attributable to just an increase in the number of employees.
The largest of these types of increases was in Advertising & Promotion expense,
which increased $109,000 from Fiscal 1996 to Fiscal 1997.
Interest expense and amortization of deferred financing costs increased
20% to $1,444,000 in Fiscal 1997 from Fiscal 1996 as the Company had most of the
$9,000,000 in convertible debt raised during the summer of 1996 outstanding for
Fiscal 1997. In addition, costs incurred with raising this debt also began
amortizing in Fiscal 1997 and increased the expense for this category.
FISCAL YEAR ENDED JUNE 30, 1996 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1995
The Company's net loss was $4,115,000 in Fiscal 1996 as compared to
$4,791,000 in Fiscal 1995, representing an improvement in operating results of
14%. This decrease in net loss reflected the Company's increase in loan
production coupled with maintaining operating costs relatively constant.
Originations were increased approximately 25% while personnel costs increased
only 0.8%. This improvement was not sufficient, however, to offset the costs of
maintaining the Company's loan production and support operations and the costs
of raising capital. During Fiscal 1996 the Company did not make any significant
reductions in its infrastructure, despite having limited capital, in order to
mitigate the negative impact that such a reduction would have had on the
Company's ability to originate loans once its capital situation.
20
<PAGE> 21
Mortgage interest rates on loans originated by the Company declined
during Fiscal 1996 in part as the Company's product mix was weighted more
towards higher credit (and thus lower interest rate) loans than in Fiscal 1995,
resulting in a reduced average coupon on loans originated during the period.
Finance income and fees for Fiscal 1996 increased by $73,000 to $640,000
from Fiscal 1995 primarily as a result of an increase in the Company's average
loan portfolio. The increase in the average size of the Company's loan portfolio
balance was a result of the increased loan volume in Fiscal 1996. The average
interest rate yield on mortgage loans originated in Fiscal 1996 declined by
1.45% to 11.53% compared to an average of 12.98% in Fiscal 1995, a 11.2%
decline. This decline was primarily a result of the Company originating higher
credit grade loans in Fiscal 1996 than in Fiscal 1995.
Gains on sales of mortgage loans increased to $1,578,000 for Fiscal 1996
from $984,000 during Fiscal 1995 due to the increased volume of loan sales and
the higher margins received on sales made after February 1996 to the
Securitizer. Gains in Fiscal 1995 represent sales of loans primarily sold on a
Whole basis. During Fiscal 1996, the Company sold no loans on a Service basis as
compared with $1,616,000 in Fiscal 1995, and sold $32,827,000 on a servicing
released basis in Fiscal 1996 as compared to $26,100,000 in Fiscal 1995. Many of
the loans sold on a servicing released basis in Fiscal 1996 were sold as part of
Interest-Only sales with a margin significantly higher than the margin on the
Whole loan sales in Fiscal 1995.
Salaries and employee benefits increased 0.8% to $2,734,000 in Fiscal
1996 from $2,712,000 in Fiscal 1995, reflecting the Company's plan to curtail
its expansion efforts and limit compensation increases until access to adequate
capital could be obtained.
Provision for credit losses was $185,000 in Fiscal 1996 as compared to a
$535,000 provision in Fiscal 1995. The reduction in provision was the result of
an analysis that demonstrated that nearly all of the credit losses experienced
in Fiscal 1996 and Fiscal 1995 related to loans originated prior to October 1994
at which point in time the Company began instituting a more stringent
underwriting guideline. As the number of loans in the pre-October 1994 category
has decreased due to sales and pay-offs, so has the corresponding provision for
this category of loans.
Other operating expenses increased by $132,000 to $1,980,000 in Fiscal
1996 from $1,828,000 in Fiscal 1995. Of the $158,000 increase, $128,000 is
attributed to an increase in office space rental. Escalations in the rent for
the Company headquarters in Georgia, combined with one-time payments for closing
office space in Tennessee and North Carolina, accounted for the increase. There
were no other significant increases in other operating expenses.
21
<PAGE> 22
LIQUIDITY AND CAPITAL RESOURCES
By its nature, the Company's business requires continual access to
short-term and long-term sources of debt and equity capital. The Company's
capital requirements arise principally from loan originations and loan
repurchases, payments of operating and interest expenses, capital expenditures,
and start-up expenses for expansion into new geographic markets. Additionally,
even if the Company is generating net income, a portion of its revenues will
consist of gain on sale of loans wherein cash is not received at the time of
sale, but over the life of the mortgage loans. The Company has never generated a
positive operating cash flow, and therefore has required and expects to continue
to require additional financing to fund expansion and to support its
infrastructure until such time as it can increase the volume of loan sales to a
point wherein the cash received from the premium on those sales is greater than
the total expenses of the Company, including debt service and payment of
preferred dividends. During Fiscal 1997, the Company had losses of $3,363,000,
which were funded primarily out of the proceeds of the convertible debt
placement completed in August 1996 and the preferred stock offering completed in
April 1997 and described below. Lack of substantial warehouse lines of credit,
combined with capital restraints have periodically restricted the Company's
ability to increase the volume of mortgage loans it originates, and have
negatively impacted its ability to accumulate such loans until a sale could be
arranged on more favorable terms. This has resulted in the Company selling loans
simply to preserve cash flow as opposed to seeking the best price for its loans.
With the recent addition of substantial warehouse lines of credit, the Company
is currently in an improved position to accumulate loans to obtain more
favorable pricing terms. However, to the extent that the Company is unable to
obtain periodic infusions of capital or maintain substantial warehouse lines,
the Company could be required to sell mortgage loans on less favorable terms
than it might otherwise be available or curtail lending activities. To date, in
addition to the Company's capital raising efforts, the sources of liquidity have
been (1) sales into secondary markets of the loans the Company originates and
purchases, (2) borrowings under a mortgage warehouse line of credit secured by
its loans, (3) finance income earned on Company owned loans and servicing fees
generated on the loan servicing portfolio, (4) borrowings under a repurchase
line of credit (5) other borrowings (discussed below), and (6) the conversion of
the Excess Servicing Asset and Interest-Only Strip into cash over the lives of
the loans in the servicing portfolio, including an advance against that
conversion described more fully below.
In July 1994, the Company completed the placement of $5,550,000 of 8%
Senior Subordinated Convertible Notes due 2004 (the "8% Notes"). In October
1995, the Company agreed to certain conditions as a prerequisite for obtaining a
waiver for technical covenant violations contained in the indenture relating to
the 8% Notes. When these conditions were not met at December 31, 1995, the
maturity date of 8% Notes was accelerated to March 30, 1996. The Company repaid
$3,250,000 of the 8% Notes in June 1996 ($2,250,000 of which was paid out of the
proceeds of the sale of the 8% Notes described below) and the remaining
$2,300,000 of 8% Notes was exchanged for loans under a secured warehouse lending
facility more fully described below.
22
<PAGE> 23
In 1995, the Company completed an offering of $3,000,000 of convertible
mortgage participations and warrants to purchase common stock to be used solely
for the purpose of originating and acquiring mortgage loans. The borrowings bore
an interest rate of 10% per annum, payable monthly, secured by underlying
mortgage loans. The proceeds from the sale of any assigned mortgage loans were
used to originate new mortgage loans in which the lenders will have
participations. In October 1995, $2,500,000 of the borrowings were converted by
the lenders of these participations into Preferred Stock and warrants as part of
a placement of $6,400,000 of 9% Convertible Preferred Stock (the 9% Preferred
Stock) and warrants to purchase common stock. Of the remaining $500,000 of
participations, $400,000 of the lenders converted their participations to common
stock and lenders representing $100,000 of participations were repaid during
Fiscal 1997. Of the original holders of the $6,400,000 of 9% Preferred Stock,
one holder converted $100,000 into common stock during Fiscal 1997. Dividends on
the 9% Preferred Stock are cumulative and payable in cash on a quarterly basis.
The dividends for the quarter ending June 30, 1997 were not paid as a result of
capital constraints.
In January 1996, the Company obtained a $1,050,000 term loan at a 10%
interest rate secured by certain mortgage loans of the Company. The loan was
scheduled to mature in February 1997, and had an outstanding $925,000 principal
balance at June 30, 1996. This loan was repaid in August 1996. In February 1996,
the Company sold $500,000 of convertible mortgage participations on similar
terms to the $3,000,000 of participations sold in June 1995 described above,
which mature in February 1998.
The Company completed the sale of $9,000,000 of 10% Convertible Secured
Notes (the "10% Notes") in August 1996, resulting in net proceeds to the Company
after expenses of approximately $8,000,000. $3,250,000 of the proceeds were used
to repay the 8% Notes described above. The 10% Notes are partially secured by
essentially all otherwise unpledged assets of the Company and are convertible
into Common Stock. During Fiscal 1997, holders representing $860,000 of the 10%
Notes converted their notes into common stock.
In November 1996, the Company entered into an agreement with the
Securitizer wherein the Company can receive advances on the Company's portion of
the interest-only strip collected from the borrower over the life of the loan.
This advance is repaid over 36 months and bears an interest rate set at the time
the loans underlying the interest-only strip receivable were sold to the
securitizer. The advance and the interest charge associated with it are deducted
from the monthly collections of interest due to the Company by the Securitizer.
At June 30, 1997, the Company had been advanced $2,101,000 net of repayments
under this agreement.
In March 1997, the Company obtained a total of $550,000 in warehouse
lines of credit bearing an interest rate of 12% and expiring in one year. These
lines have recently become unnecessary with the addition of the warehouse lines
described below and are in the process of being retired.
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<PAGE> 24
In April 1997, the Company placed $1,674,000 or 16,740 shares of a Series
B 11% Redeemable Convertible Preferred Stock (the "11% Preferred Stock),
convertible into common stock, resulting in net proceeds to the Company of
approximately $1,498,000. Purchasers of the 11% Preferred Stock received
warrants to purchase 669,000 shares of common stock at $2.50 per share. Both the
11% Preferred Stock and the warrants associated with them contain anti-dilution
provisions. Dividends are payable quarterly in cash or in preferred stock until
July 1998, when a penalty for paying dividends in stock becomes effective. The
Company paid the June 30, 1997 dividends in preferred stock.
In June 1997, the Company obtained a revolving warehouse line of credit
for $3,000,000. This line was subsequently increased, and a second line was
obtained in July 1997, bringing the total warehouse line capacity to $13,500,000
by August 1997 for these two lines. The Company is in technical default under
one of the lines and will need to obtain a waiver of default or correct the
default condition to maintain that line.
In July and August 1997, the Company received a total of $850,000 in a
private placement of convertible debt, intended to be a loan until the Company
can complete a new financing of preferred stock (the loan being referred to as a
"Bridge Loan"). The Bridge Loan is due October 31, 1997. The holders were issued
warrants to purchase 2,875,000 shares of Common Stock at an exercise price of
$.40 per share, subject to certain anti-dilution adjustments.
24
<PAGE> 25
The Company intends to raise additional capital in the form of preferred
stock to meet its working capital needs and to repay the Bridge Loan. The
Company believes that in order to attract additional investment at this time
that, among other changes, its interest and dividend payment burden must be
reduced. To accomplish this, an offering circular has been sent to the 9%
Preferred Stock holders and the 10% Note holders to convert their securities
into common stock at a limited time reduced conversion rate of $0.65 and $.50
per share, respectively. If a significant number of the holders accept the
offer, then the Company will not have enough authorized shares to fulfill the
offer. To insure enough available authorized shares, the Company has issued a
special proxy statement to its common shareholders requesting approval of a
one-for-five reverse stock split. The conversion offer expires on October 22,
1997, and the special shareholders meeting to vote upon the reverse stock split
is scheduled for October 24, 1997. The Company believes it has sufficient
capital to maintain normal operations through October 1997, but will require
additional financing to repay the Bridge Loan and provide working capital beyond
October 1997. It is the Company's goal, if the conversion offer receives
significant acceptance and the reverse stock split is approved and additional
financing is obtained, to minimize then reverse negative cash flow from the
combination of reduced cash expenditures (including interest and cash dividends
retired on the conversion offer as well as reducing overhead expenses) and
improved cash flow on sales of loans from the change in sales methods discussed
under "Sales of Mortgages". By generating a positive operating cash flow, the
Company would have the ability to make its remaining debt and preferred dividend
payments and avoid or delay the need for further financing in the fiscal year
ending June 30, 1998, excluding warehouse lines of credit needed to accommodate
increased loan volume. However, the potential achievement of positive cash flow
is based upon several significant assumptions, including, among others,
significant acceptance of the conversion offer, a reduction in cash
expenditures, and an increase in loan origination volume, as to which there can
be no assurance. The Company believes that obtaining additional financing would
be very difficult given the Company's financial condition, and the Company
believes that achieving a positive cash flow without acceptance of the
conversion offer would be extremely difficult. Even if the Company is successful
in obtaining additional financing, there can be no assurance that the Company
would be able to generate a positive cash flow. In the event that the Company is
unable to achieve positive cash flow, obtain additional financing, or make
arrangements to satisfy the Bridge Loan, the Company could be required to scale
back or cease its operations. See "Going Concern" at the end of this section.
FLUCTUATIONS IN INTEREST RATES AND OTHER FACTORS
Although the Company's customers are generally not interest rate
sensitive in determining to utilize the mortgage loan programs offered by the
Company, the primary assets and liabilities of the Company are interest rate
sensitive. Profitability is directly affected by the level of and fluctuations
in interest rates and is dependent upon the Company's ability to earn a spread
between the earnings on its assets and the costs of its liabilities.
Additionally, the value and potential maturity of the Company's assets and the
cost and duration of its liabilities are affected by changes in interest rates.
While the Company monitors the interest rate environment, there can be no
assurance that the profitability and/or liquidity of the Company would not be
adversely affected during any period of unexpected volatility in the interest
rate environment. A significant reduction in interest rates also could decrease
the size of the loan servicing portfolio by increasing the level of loan
prepayments.
25
<PAGE> 26
The collateral for the mortgage loans originated and owned by the Company
are secured by residential real estate. An overall decline in the residential
real estate market or the condition of particular properties, together with
other related factors, could adversely affect the values of the properties
securing the Company's mortgage loans. Therefore, in a continuing period of
economic decline, the rates of delinquencies, foreclosures and losses on
mortgage loans could be higher than those heretofore experienced by the Company
and in the mortgage lending industry in general. In addition, adverse economic
conditions (which may or may not affect real property values) may affect the
timely payment by borrowers of scheduled payments of principal and interest on
mortgage loans.
GOING CONCERN
The Company had an accumulated deficit of $16,063,375 at June 30, 1997, and has
incurred losses in every year since 1992. The Company has been unable to
generate a sufficient amount of gain on sale of its mortgage loans to offset its
operating and other expenses, and has been unable to achieve an appropriate
return. The Company also has experienced significant operating cash flow
deficiencies from time to time, including the Fiscal 1997 year.
The Company has approximately $1,260,000 in debt that will be due within the
next twelve months. Subsequent to June 30, 1997, the Company was not in
compliance with a minimum net worth covenant on one of its warehouse lines of
credit and had not obtained a waiver of this convenient. As such, the warehouse
lender could restrict or eliminate use of the line of credit. At June 30, 1997,
the Company's net worth was $376,838. The Company received notification from
Nasdaq that the Company has failed to maintain a $1.00 minimum bid price on its
common stock and appears to have not maintained a minimum net worth of
$2,000,000, both requirements for continued listing on the Nasdaq SmallCap
Market. Nasdaq has given the Company until October 22, 1997 to respond with a
plan to meet the requirements. If Nasdaq does not accept the Company's plan, a
formal notice of deficiency will be issued specifying a delisting date for the
Company's common stock. As such, there can be no assurance that the Company will
continue to be listed on the Nasdaq SmallCap Market. Also, there can be no
assurance that the Company will be able to obtain sufficient additional capital
or, even if such capital is obtained, that the Company could generate positive
operating gains or positive cash flow. Failure of the Company to improve its
operating cash flow and obtain additional financing as needed would result in
the curtailment or cessation of the Company's lending activities.
26
<PAGE> 27
Management's Plans
The Company is currently in the process of extending a conversion offer to the
holders of the 10% convertible secured notes and the Series "A" 9% convertible
preferred stock in order to reduce interest expense and cash dividends as part
of a plan to achieve positive operating cash flow and continue as a going
concern. The conversion will also make the Company's balance sheet more
attractive for the additional investment necessary for the Company to continue
as a going concern. Since the Company does not have sufficient authorized shares
to permit it to issue common stock pursuant to the conversion offer, the Company
has called a special meeting of the common shareholders to approve a
one-for-five reverse stock split. Besides creating enough authorized shares to
issue for the conversion offer by reducing the number of shares outstanding, the
Company believes the reverse split could cause the bid price of the Company's
common stock to exceed $1.00. The Company also believes substantial acceptance
of the conversion offer could give the Company a net worth in excess of
$2,000,000. If the common stock price should remain over $1.00 and the net
worth over $2,000,000, the Company believes it will meet the requirements for
continued listing on the Nasdaq SmallCap Market.
If the reverse stock split is approved and the conversion offer is accepted by a
significant number of the respective security holders, the Company plans to
offer a private placement of up to $4,000,000 of Series "B" 11% convertible
preferred stock. The Company intends to repay the Bridge Loan with the proceeds
of this offering. The offering, if successful, would provide the Company with
additional capital and improve the net worth of the Company. The Company
estimates that the combination of a successful offering, maintaining the current
level of warehouse lines of credit, and generating a positive cash flow from
operations would allow lending operations to continue throughout the year ending
June 30, 1998. However, there can be no assurance that any of the actions
mentioned above will occur, or even if they do that the condition of the Company
will substantially improve.
ITEM 7. FINANCIAL STATEMENTS.
The following consolidated financial statements of Credit Depot
Corporation are included in Item 8: (See page F-1)
Consolidated balance sheets - June 30, 1997 and 1996.
Consolidated statements of operations - Year ended June 30, 1997, 1996
and 1995.
Consolidated statements of stockholders' equity - Year ended
June 30, 1997, 1996 and 1995.
Consolidated statements of cash flows - Year ended June 30, 1997, 1996
and 1995.
Notes to consolidated financial statements - June 30, 1997.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
None.
27
<PAGE> 28
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company are as
follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Craig J. Brunet 49 Chairman of the Board
Gerald F. Sullivan 56 President, Chief Executive Officer and Director
Ralph. J. DeBee, Jr. 39 Vice President and Chief Operating Officer
Charles D. Farrahar 36 Vice President and Chief Financial Officer
John C. Thomas 44 Director and Treasurer
Samuel R. Dunlap, Jr. 48 Director
Joel C. Williams, Jr. 54 Director
Samuel S. Hemingway 45 Director
Carlos Munoz 60 Director
</TABLE>
CRAIG J.("C.J.") BRUNET was appointed Chairman of the Board in April
1996 and has been a director of the Company since January 1993. In addition, Mr.
Brunet is a member of the Board of Intelnet International, a privately held
management and integration company and President of the Lewisberg Group, a
financial and management consulting firm. Prior to becoming Chairman of Credit
Depot, Mr. Brunet served for three years as CEO and President of First Pacific
Networks; Senior Vice President of Entergy Corporation, a multi-state regional
electric utility holding company; Director of Strategic Planning for AT&T as
well as responsibilities in finance, marketing and personnel over his 15 year
career with AT&T; and Chairman of the Electric Power Research Institute
Strategic Planning Committee from 1989 to 1991. Mr. Brunet is a Vietnam Veteran,
flying 225 combat missions for the U.S. Army as an air observer and twice
receiving the Purple Heart. He holds a bachelor of science degree in marketing
from the University of Southwestern Louisiana and has received executive
education from the Harvard-Kennedy School of Government, Wharton, M.I.T.,
Stanford, and Aspen Institute.
28
<PAGE> 29
GERALD F. SULLIVAN has been the Chief Operating Officer of the Company
since May 1991 and a Director, President and Chief Executive Officer since July
1991. From October 1989 to June 1991 he served as President and a Director of
Bank Atlanta. From April 1988 through June 1989, he served as President and
Director of the Habersham Federal Savings Bank and the Habersham Group, Inc., a
bank and investment company located in Atlanta, Georgia. From January 1986 to
December 1986, he served as President and a Director of the Graphics Research
Corporation, a computer graphics software development company located in
Atlanta, Georgia. From June 1984 to January 1986, he served as President and a
Director of The System Works, Inc., a software firm in Atlanta, Georgia engaged
in the sale of maintenance planning and control software systems. From June 1980
to June 1984, Mr. Sullivan served as Chief Operating Officer and Executive Vice
President for Glasrock Products, Inc., a publicly-held company engaged in the
medical home care field.
RALPH J. DEBEE, JR. joined the Company in August 1996 as Chief Loan
Officer and was promoted to Chief Operating Officer in May 1997. From 1988 to
1996, Mr. DeBee was the Senior Vice-President of Equicredit Corporation, a large
sub-prime mortgage lender based in Jacksonville, Florida. Prior to joining
Equicredit, from 1984 to 1988, Mr. DeBee ran his own mortgage company,
originating and brokering loans to non-conventional lenders. From 1979 to 1984,
he managed the Jacksonville office of Great Western Financial Service.
CHARLES D. FARRAHAR, a certified public accountant, has been Chief
Financial Officer and Vice-President since April 1996, and was the Controller
since joining the Company in February 1994. Mr. Farrahar was the Chief
Accountant of Law Engineering, a national civil engineering firm, from April
1987 to February 1994. Prior to 1987, Mr. Farrahar held various managerial
accounting positions in both the public and private accounting sectors.
JOHN C. THOMAS, JR. has been Treasurer and a Vice President of the
Company since April 1996, and was the Chief Financial Officer and a Vice
President of the Company from February 1995 to April 1996 and from August 1990
to March 1993. Mr. Thomas was a Director to Tapistron International, Inc., a
publicly held manufacturer and textile technology company and was the Chief
Financial Officer of Tapistron from August 1991 until rejoining the Company in
February 1995. Mr. Thomas was a Director of Golf Training Systems, a publicly
held distributor of golf teaching aids, from August 1994 to January 1996. He has
also been the Chief Financial Officer of EntreMed, Inc., a publicly-held
pharmaceutical research and development company, since August 1991, and Pretty
Good Privacy, Inc., a privately held encryption software company, since June
1996. Prior to joining Credit Depot Corporation, Mr. Thomas has held the chief
financial officer's position for various start up companies, the following which
have become publicly-held entities, including CytRx Corporation, a
pharmaceutical research company; Biopool International, Inc. (formerly
CytRx-Biopool, Ltd.), a company engaged in the development and sale of
diagnostic test kits; and Medicis Pharmaceutical Company, a dermatologic
pharmaceutical company.
29
<PAGE> 30
SAMUEL R. DUNLAP, JR. has been a Director of the Company since December
1986 and served as a Vice President from October 1990 through June 1993 at which
time he became an Executive Advisor. Mr. Dunlap is (i) a Director to First
Pacific Networks, Inc., a publicly-held telecommunications company, (ii) an
Executive Advisor and a Director of EntreMed, Inc., a privately held
pharmaceutical research and development company, (iii) Chairman of Dunlap &
Partners Ltd., a financing consulting firm in Atlanta, Georgia, and (iv) is an
Executive Advisor and Director of MEDigital, a privately held medical technology
company. From June 1993 to November 1995, he served as an advisor to Golf
Training Systems, a publicly-held distributor of golf teaching aids, and was a
director of this company from August 1994 to December 1995. From August 1991
until February 1994, he served as Vice President and a Director of Tapistron
International, Inc., a publicly-held manufacturing and textile technology
company. From April 1986 until December 1988, he served as Executive Vice
President of CytRx Corporation, a publicly-held pharmaceutical company, and as a
Director of CytRx from August 1986 until November 1988. From January 1987 until
November 1988, Mr. Dunlap was Chairman of the Board of Directors of Biopool
International, Inc. (formerly CytRx Biopool Ltd.), a publicly-held company
engaged in the sale of diagnostic test kits. From January 1985 to October 1987,
Mr. Dunlap was President and a Director of Development Southeast, Inc., which is
a management consulting and real estate development firm. Mr. Dunlap has spent
more than 10 years in the commercial banking field and was Executive Vice
President of Elan Pharmaceutical Research Corp., a publicly-held company, from
August 1982 to December 1983 and President and a director of such entity from
January 1984 to January 1985.
JOEL C. WILLIAMS, JR. has been a Director of the Company since August
1990. Since 1978, Mr. Williams has been Vice President-Corporate Affairs of
Savannah Foods & Industries, Inc., a publicly-held conglomerate. He served as
Assistant to the President of such company from July 1971 until October 1978.
From January 1970 until March 1971, Mr. Williams served as Legal Counsel and
Legislative Aide to the late Senator Richard B. Russell of Georgia.
SAMUEL SCOTT HEMINGWAY has been a Director of the Company since October
1990. Mr. Hemingway is, and has been since January 1995, Managing Director of
Credit Card Network, an Internet based provider of financial services and
co-owner of Ocean PC, a manufacturer of personal computers for marine
applications. From April 1992 to December 1994, he served as the President and
Chief Executive Officer of Salem Mortgage Services, Inc., a Georgia corporation,
involved in the purchase and management of banking assets. From 1982 until April
1992, Mr. Hemingway was Vice President-Corporate Division at Barclays Bank PLC.
From 1978 until 1982, Mr. Hemingway was employed by Manufacturers Hanover Trust
Company, where he served as Assistant Secretary, Representative and Assistant
Vice President of the National Division, and Assistant to the Office of the
Chairman. Mr. Hemingway served as a director of CytRx from August 1986 through
1992 and serves as a trustee to Trinity-Pawling School in New York.
30
<PAGE> 31
CARLOS MUNOZ has been a Director of the Company since October 1996. Mr.
Munoz is, and has been, since April 1995 the Executive Vice President and Chief
Credit Officer of Dime Bancorp and Dime Savings Bank of New York, where he also
is chairman of the Bank's Risk Management Committee. From June 1982 to March
1995, Mr. Munoz served as Senior Vice President and a member of the Credit
Policy Committee of Citibank, N.A., responsible for credit oversight of part or
all of Citibank's worldwide consumer banking activities as well as the private
banking and global finance areas in Latin America. Prior to June 1982, Mr. Munoz
held various positions with Citibank since joining the bank in 1959. Mr. Munoz
is a graduate of Columbia College and is President of the Columbia College
Alumni Association and a member of the College Board of Visitors. He also holds
a Master's Degree in Economics from Columbia University. He is a member of the
Advisory Council of the Credit Research Center of Purdue University, a Trustee
of the Episcopal Diocese of New York and Vice President of the Episcopal Mission
Society
The information relating to compliance with Section 16(a) of the Exchange
Act will be set forth in the Company's proxy statement to be filed with the
Securities and Exchange Commission on or before October 28, 1997, and is
incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
The information required under this item will be set forth in the
Company's proxy statement to be filed with the Securities and Exchange
Commission on or before October 28, 1997 and is incorporated herein by
reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required under this item will be set forth in the
Company's proxy statement to be filed with the Securities and Exchange
Commission on or before October 28, 1997 and is incorporated herein by
reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required under this item will be set forth in the
Company's proxy statement to be filed with the Securities and Exchange
Commission on or before October 28, 1997 and is incorporated herein by
reference.
31
<PAGE> 32
PART IV
<TABLE>
<S> <C>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) 1. Financial Statements. An index to the Consolidated Financial
Statements appears on page F-1.
2. Schedules. All financial statement schedules are omitted
because they are not applicable, not required under the
instructions or all the information is set forth in the
financial statements or notes thereto.
3. Exhibits.
3.1 Certificate of Incorporation of the Registrant, as amended (1)
3.2 Certificate of Merger of Equithrift, Inc., a Georgia corporation, with and into
the Registrant (1)
3.3 By-Laws of the Registrant (1)
3.4 Certificate of Designation of 9% Cumulative Convertible Preferred Stock (10)
3.5 Certificate of Amendment of the Certificate of Incorporation (11)
3.6 Certificate of Designation for Series B Preferred Stock (12)
4.1 Indenture dated as of July 27, 1994 between the Company and SouthTrust
Bank of Alabama, N.A., as Trustee (2)
4.2 Form of Purchase Agreement between the Company and the Purchasers dated
as of July 27, 1994 (2)
4.3 First Supplement to Indenture dated February 1, 1995 (9)
4.4 Second Supplement to Indenture dated March 31, 1995 (9)
4.5 Registration Rights Agreement between the Company and The Robinson-
Humphrey Company, Inc., dated as of July 27, 1994 (2)
4.6 Redeemable Warrant to Purchase Common Stock issued to Robinson-
Humphrey dated January 25, 1995 (9)
4.7 Form of Convertible Mortgage Participation Purchase Agreement (9)
4.8 Form of Warrant issued to purchasers of Convertible Mortgage Participations
(9)
4.9 Specimen Common Stock certificate (1)
4.10 Form of Warrant issued to Placement Agent in connection with Preferred Stock
Offering (10)
4.11 Loan Agreement for 10% Convertible Secured Notes due 2001 (10)
4.12 Form of Warrant issued to Placement Agent in connection with 10%
Convertible Notes Offering (10)
4.13 Form of Warrant issued to purchasers of Series B Preferred Stock (12)
4.14 Form of Warrant issued to Placement Agent in connection with Series B
Preferred Stock Offering (12)
4.15 Purchase Agreement and accompanying exhibits for convertible loan due
October 31, 1997
4.16 Form of Warrant issued to purchasers of convertible loan due October 31, 1997
10.1 1990 Stock Option Plan (1)
</TABLE>
32
<PAGE> 33
<TABLE>
<CAPTION>
<S> <C>
10.4 Employment Agreement with Gerald F. Sullivan (3)
10.5 Specimen Loan Documents (1)
10.6 Agreement by Guarantors (1)
10.7 Loan and Credit Agreement dated June 16, 1993 between the Company and
TransAmerica Consumer Receivable Funding, Inc. (4)
10.8 Lease for Registrant's facility (4)
10.9 Lease of Registrant's additional facility space. (9)
10.10 1993 Stock Option Plan (5)
10.11 1993 Stock Option Plan, as amended (6)
10.12 1993 Stock Option Plan, as amended (7)
10.13 Sales Agreement with Greenwich Capital Financial Products dated October 4,
1994 (8)
10.14 Repurchase Agreement between Greenwich Capital Financial Products and
Registrant dated February 1, 1995. (9)
10.15 Consulting Agreement with Thieme Consulting (9)
10.16 Purchase and Sale Agreement with Access Financial Lending Corp. (10)
10.17 Repricing agreement with Heiko Thieme on certain securities (10)
10.18 Warehouse Lending Agreement with NewSouth Equities, et.al. (10)
10.19 Addendum to Warehouse Lending Agreement with NewSouth Equities, et.al.
(10)
10.20 Promissory Note to NewSouth Equities, et. al. (10)
10.21 Forward Commitment and Offset Agreement (11)
10.22 Acquisition Agreement for Cash Back Mortgage Corporation
21.1 List of Subsidiaries
23.1 Consent of Independent Auditors
27.0 Financial Data Schedule (for SEC use only).
</TABLE>
(b) Reports on Form 8-K.
The Company filed one report on Form 8-K during the three month period
ended June 30, 1997, on May 2, 1997. This report described 1) the
placement of $1,674,000 of Series B Preferred Stock and 2) the
acquisition of Cash Back Mortgage Corporation.
- ------------------
(1) These exhibits were filed as exhibits to the Company's Registration
Statement on Form S-1 (File No. 33-37416) and are incorporated herein.
(2) These exhibits were filed as exhibits to the Company's report on Form
8-K, filed with respect to a reported event dated July 27, 1994 and are
incorporated herein.
(3) This report was filed as an exhibit to the Company's report on Form
10-Q for the quarterly period ended March 31, 1992 and is incorporated
herein.
(4) These exhibits were filed as exhibits to the Company's report on Form
10-KSB for the fiscal year ended June 30, 1993 and are incorporated
herein.
(5) This exhibit was filed as an exhibit to the Company's proxy statement
dated February 22, 1993, filed on February 23, 1993, and is
incorporated herein by reference.
(6) This exhibit was filed as an exhibit to the Company's proxy statement
dated December 7,
33
<PAGE> 34
1993 filed and is incorporated herein by reference.
(7) This exhibit was filed as an exhibit to the Company's proxy statement
dated March 21, 1995 and is incorporated herein by reference.
(8) This exhibit was filed as an exhibit to the Company's report on Form
8-K, filed with respect to a reported event dated November 18, 1994 and
is incorporated herein.
(9) This agreement was filed as an exhibit to the Company's report on Form
10-KSB for the fiscal year ended June 30, 1995, and is incorporated
herein by reference.
(10) This exhibit was filed as an exhibit to the Company's report on Form
10-KSB for the fiscal year ended June 30, 1996, and is incorporated
herein by reference.
(11) This exhibit was filed as an exhibit to the Company's report on Form
10-Q for the quarterly period ended December 31, 1996 and is
incorporated herein by reference.
(12) This exhibit was filed as an exhibit to the Company's report on Form
10-Q for the quarterly period ended March 31, 1997 and is incorporated
herein by reference.
34
<PAGE> 35
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, this 10th day of October, 1997.
CREDIT DEPOT CORPORATION
By: /s/ Gerald F. Sullivan
-------------------------------
Gerald F. Sullivan, President
In accordance with the Exchange Act, this report has been signed below by
the following on behalf of the registrant and in capacities and on the dates
indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Gerald F. Sullivan President, Chief Executive October 10, 1997
- -------------------------- Officer and Director
Gerald F. Sullivan
/s/ Craig J. Brunet Chairman of the Board October 10, 1997
- --------------------------
Craig J. Brunet
/s/ Charles D. Farrahar Chief Financial Officer October 10, 1997
------------------------- and Vice President
Charles D. Farrahar
/s/ John C. Thomas, Jr. Director and Treasurer October 10, 1997
- --------------------------
John C.Thomas
/s/ Samuel R. Dunlap, Jr. Director October 10, 1997
- --------------------------
Samuel R. Dunlap, Jr.
/s/ Joel C. Williams, Jr. Director October 10, 1997
- --------------------------
Joel C. Williams, Jr.
/s/ Samuel S. Hemingway Director October 10, 1997
- --------------------------
Samuel S. Hemingway
/s/ Carlos Munoz Director October 10, 1997
- --------------------------
Carlos Munoz
</TABLE>
35
<PAGE> 36
CREDIT DEPOT CORPORATION
AUDITED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Stockholders' Equity............. F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 37
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Credit Depot Corporation
We have audited the accompanying consolidated balance sheets of Credit
Depot Corporation and subsidiaries (the "Company") as of June 30, 1997 and 1996
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended June 30, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Credit Depot
Corporation and subsidiaries at June 30, 1997 and 1996 and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended June 30, 1996, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 12,
the Company has incurred significant recurring operating losses and significant
operating cash flow deficiencies, has significant amounts of debt maturing
within the next fiscal year, and has a significant accumulated deficit. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are described in
Note 12. The consolidated financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result from the
outcome of this uncertainty.
August 29, 1997
/s/ Ernst & Young, LLP
F-2
<PAGE> 38
CREDIT DEPOT CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Loans receivable (Notes 2 and 4):
Consumer, collateralized by real estate................... $ 5,517,002 $ 6,958,903
Allowance for credit losses............................... (260,484) (250,260)
------------ ------------
Net loans receivable........................................ 5,256,518 6,708,640
Cash........................................................ 1,332,934 1,681,433
Cash subject to withdrawal restrictions (Note 7)............ 203,318 25,887
Property and equipment (Note 2)............................. 524,695 493,560
Real estate held for sale................................... 89,021 42,397
Other assets:
Receivable due from related parties (net of a reserve of
$200,000 and $-- for 1997 and 1996, respectively)...... 17,398 222,209
Prepaid expenses and other assets......................... 269,750 345,064
Servicing asset (Note 5).................................. 77,007 193,038
Interest-only strips receivable (Note 5).................. 7,268,930 1,317,075
Accrued interest receivable............................... 35,503 113,577
Deferred financing costs.................................. 1,338,822 957,158
Goodwill.................................................. 910,825 --
------------ ------------
Total assets...................................... $ 17,324,721 $ 12,100,041
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Convertible notes (Note 7).................................. $ 10,440,000 $ 8,500,000
Warehouse line of credit (Note 7)........................... 3,356,386 --
Advance on interest-only strips receivable (Note 7)......... 2,100,651 --
Other borrowings (Note 7)................................... 500,000 1,925,000
Accounts payable............................................ 291,235 54,393
Accrued liabilities......................................... 85,340 329,322
Dividends payable........................................... 174,271 144,000
------------ ------------
Total liabilities........................................... 16,947,883 10,952,715
Commitments (Note 9)
Stockholders' equity (Notes 3 and 11):
Series "A" Preferred stock, $.001 par value; 2,000,000
shares authorized, 315,000 and 320,000 shares issued at
June 30, 1997 and 1996................................. 315 320
Series "B" Preferred Stock, $.001 par value; 60,000 shares
authorized, 16,740 shares issued at June 30, 1997...... 17 --
Common stock, $.001 par value; 15,000,000 shares
authorized, 4,072,761 and 3,378,761 shares issued and
outstanding at June 30, 1997 and 1996.................. 4,073 3,379
Additional paid-in capital................................ 16,435,808 13,242,231
Accumulated deficit....................................... (16,063,375) (12,098,604)
------------ ------------
Total stockholders' equity........................ 376,838 1,147,326
------------ ------------
Total liabilities and stockholders' equity........ $ 17,324,721 $ 12,100,041
============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE> 39
CREDIT DEPOT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Finance income and fees earned.................... $ 756,847 $ 640,390 $ 566,648
Gain on sale of receivables....................... 5,141,695 1,578,088 898,546
Other............................................. 19,918 60,421 113,148
----------- ----------- -----------
5,918,460 2,278,899 1,578,342
Expenses:
Salaries and employee benefits.................... 4,194,149 2,733,814 2,711,812
Legal and professional fees....................... 525,333 288,012 347,041
Other operating expenses.......................... 2,893,121 1,980,443 1,828,387
Provision for credit losses (Note 4).............. 225,231 185,000 534,899
Interest expense and amortization of financing
costs.......................................... 1,443,625 1,206,450 947,141
----------- ----------- -----------
9,281,459 6,393,719 6,369,280
----------- ----------- -----------
Loss before provision for income taxes.............. (3,362,999) (4,114,820) (4,790,938)
Provision for income taxes (Note 8)................. -- -- --
Net loss............................................ $(3,362,999) $(4,114,820) $(4,790,938)
----------- ----------- -----------
Preferred dividends................................. 601,772 415,677 --
----------- ----------- -----------
Net loss attributable to common shareholders........ $(3,964,771) $(4,530,497) $(4,790,938)
=========== =========== ===========
Net loss per share of common stock (Note 2)......... $ (1.07) $ (1.34) $ (1.42)
=========== =========== ===========
Weighted average shares outstanding................. 3,701,574 3,378,761 3,380,386
=========== =========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 40
CREDIT DEPOT CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK
----------------------------------
SERIES "A" SERIES "B" COMMON STOCK ADDITIONAL TOTAL
---------------- --------------- ------------------ PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT EQUITY
------- ------ ------ ------ --------- ------ ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at July 1, 1994.... -- $ -- -- $-- 3,378,761 $3,379 $ 7,788,382 $(2,777,169) $ 5,014,592
Net loss................. -- -- -- -- -- -- -- (4,790,938) (4,790,938)
------- ---- ------ --- --------- ------ ----------- ------------ -----------
Balance at June 30, 1995... -- -- -- -- 3,378,761 3,379 7,788,382 (7,568,107) 223,654
Issuance of preferred
stock.................. 320,000 320 -- -- -- -- 5,453,849 -- 5,454,169
Dividends declared on
preferred stock........ -- -- -- -- -- -- -- (415,677) (415,677)
Net loss................. -- -- -- -- -- -- -- (4,114,820) (4,114,820)
------- ---- ------ --- --------- ------ ----------- ------------ -----------
Balance at June 30, 1996... 320,000 320 -- -- 3,378,761 3,379 13,242,231 (12,098,604) 1,147,326
Issuance of preferred
stock.................. -- -- 16,740 17 -- -- 1,412,266 -- 1,412,283
Dividends declared on
preferred stock........ -- -- -- -- -- -- -- (601,772) (601,772)
Conversion of preferred
stock.................. (5,000) (5) -- -- 40,000 40 (35) -- --
Conversion of convertible
loan participation..... -- -- -- -- 160,000 160 399,840 -- 400,000
Conversion of convertible
debt................... -- -- -- -- 344,000 344 838,656 -- 839,000
Issuance of common
stock.................. -- -- -- -- 150,000 150 542,850 -- 543,000
Net loss................. -- -- -- -- -- -- -- (3,362,999) (3,362,999)
------- ---- ------ --- --------- ------ ----------- ------------ -----------
Balance at June 30, 1997... 315,000 $315 16,740 $17 4,072,761 $4,073 $16,435,808 $(16,063,375) $ 376,838
======= ==== ====== === ========= ====== =========== ============ ===========
</TABLE>
See accompanying notes.
F-5
<PAGE> 41
CREDIT DEPOT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss......................................... $ (3,362,999) $ (4,114,820) $ (4,790,938)
Adjustments to reconcile net loss to cash used in
operating activities:
Provision for credit losses.................... 225,231 185,000 534,899
Depreciation and amortization.................. 393,983 672,673 401,184
Changes in operating assets and liabilities:
Cash subject to withdrawal restrictions..... (177,431) (25,887) --
Due from related parties.................... 204,811 (22,515) (171,846)
Prepaid expenses and other.................. 95,148 12,558 353,429
Deferred financing costs.................... (600,964) 191,004 (759,050)
Loans originated............................ (79,322,866) (37,035,070) (29,541,542)
Loans repurchased........................... (3,115,846) (1,061,976) (1,620,140)
Deferred fee income......................... -- (8,672) (9,716)
Servicing asset............................. 116,031 218,864 618,308
Interest-only strips receivable............. (5,951,855) (1,317,075) --
Proceeds from loans sold -- servicing
retained.................................. -- -- 1,616,359
Proceeds from loans sold -- servicing
released.................................. 82,263,716 32,827,220 26,064,652
Principal collections on loans not sold..... 1,401,890 1,801,102 2,483,118
Accounts payable and accrued liabilities.... (530,725) (25,571) 11,992
------------ ------------ ------------
Net cash used in operating activities............ (8,361,876) (7,703,165) (4,809,291)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment............... (177,538) (94,933) (220,294)
Disposal of property and equipment............... -- 37,599 --
Purchase of assets and liabilities, net of cash
received....................................... (25,905) -- --
------------ ------------ ------------
Net cash used in investing activities............ (203,443) (57,334) (220,294)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from preferred stock issuance....... 1,412,283 2,954,169 --
Dividends on preferred stock..................... (427,500) (415,677) --
Proceeds from warehouse line of credit........... 3,356,386 -- 25,511,084
Payments on warehouse line of credit............. -- -- (26,632,640)
Proceeds from issuance of convertible notes...... 2,800,000 7,570,000 5,550,000
Payment on issuance of convertible notes......... -- (5,550,000) --
Proceeds from other borrowings................... 2,100,651 3,250,000 1,300,000
Payment on other borrowings...................... (1,025,000) (125,000) --
------------ ------------ ------------
Net cash provided by financing activities........ 8,216,820 7,683,492 5,728,444
------------ ------------ ------------
Net (decrease) increase in cash.................. (348,499) (77,007) 698,859
Cash at beginning of period...................... 1,681,433 1,758,440 1,059,581
------------ ------------ ------------
Cash at end of period............................ $ 1,332,934 $ 1,681,433 $ 1,758,440
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for interest......... $ 1,194,232 $ 654,877 $ 680,556
============ ============ ============
Conversion of loans receivable to real estate
held for sale.................................. $ 645,202 $ 491,667 $ 969,489
============ ============ ============
</TABLE>
See accompanying notes.
F-6
<PAGE> 42
CREDIT DEPOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
Credit Depot Corporation ("CDC" or the "Company") was organized in August
1990 under the name of NBL Corporation. Concurrent with its formation, NBL was
merged with the business of Equithrift, Inc. (the "Predecessor Company") and its
name changed to Credit Depot Corporation. CDC expanded operations in the fiscal
year ended June 30, 1994 ("Fiscal 1994") into South Carolina, North Carolina,
Ohio, Florida and Tennessee through the creation of wholly owned subsidiaries.
Prior to Fiscal 1994, the Company operated solely in Georgia. During the year
ended June 30, 1996, CDC expanded operations into Missouri and Kentucky. During
the year ended June 30, 1997, the Company expanded operations into Illinois,
Michigan, Mississippi and Indiana and discontinued branch operations in Missouri
and Kentucky. Reference herein to the "Company" includes CDC and its wholly
owned subsidiaries.
CDC is a mortgage finance company which provides residential first mortgage
loans through its branch offices. The Company's borrowers are generally unable
or unwilling to obtain financing from conventional lending sources due to an
established pattern of credit weakness, unverifiable income, insufficient credit
history, or a previous bankruptcy or insolvency. The Company is subject to
competition from other financial institutions.
On April 1, 1997, the Company acquired Cash Back Mortgage Corporation
("Cash Back") through a newly-organized wholly owned subsidiary of the Company,
Cash Back Acquisition Corporation. Cash Back is a mortgage finance company which
provides residential first mortgage loans generally to individuals in Ohio. The
Company acquired substantially all of the assets and liabilities of Cash Back in
exchange for 150,000 shares of common stock in the Company at the date of
acquisition. An additional 600,000 shares of common stock in the Company are
currently held in escrow for future distribution in accordance with the purchase
agreement to the shareholders of Cash Back. Additional consideration is based
solely on the achievement of various performance targets by Cash Back. The
acquisition of Cash Back was accounted for as a purchase. The results of three
months of operations of Cash Back are included in the consolidated financial
statements. In conjunction with this transaction, goodwill of $910,825 was
recorded. This amount is being amortized on a straight-line basis over 15 years.
Goodwill is measured periodically for impairment and any impairment is
recognized as a charge to current period earnings.
During fiscal year 1997, the Company sold the majority of its loan
production to a major loan securitizer for inclusion in asset securitizations.
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles. All significant intercompany balances
and transactions have been eliminated in consolidation. In preparing the
consolidated financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the
date of the balance sheet and revenues and expenses for the period. Material
estimates that are particularly susceptible to significant change in the
near-term relate to the determination of the allowance for credit losses and
valuation of the interest-only strips receivable. In connection with the
determination of the allowance for credit losses, management considers
independent appraisals previously obtained for all properties while prepayment
experience, both Company and industry, is used as the basis for estimating
future prepayment rates in valuing the interest-only strips receivable.
Additionally, the ultimate collectibility of the Company's loans receivable are
susceptible to changes in market conditions.
F-7
<PAGE> 43
CREDIT DEPOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Interest income on loans receivable is recognized over the term of the
loans using methods which generally result in level rates of return on principal
amounts outstanding. Loans receivable are generally placed on nonaccrual status
when full payment of principal or interest is in doubt.
Gain on sale of receivables principally represents the present value of the
differential between the interest rates charged by the Company and the interest
rates passed on to the purchaser of the receivables, after considering the
effects of estimated prepayments and in the case of loans sold with servicing
retained, contractually specified servicing fees. Gains on the sale of loans
receivable are recorded on the settlement date generally using the specific
identification method. Gains on the sale of a portion of a loan are based on the
relative fair market value of the loan portion sold as compared to that portion
retained.
Finance income includes servicing fees and interest income on loans
retained by the Company. The servicing asset is carried at the lower of
amortized cost or fair value. Interest-only strips receivable are carried at
fair value.
The fair value of the interest-only strip receivable is analyzed quarterly
by the Company on a dissaggregated basis to determine whether prepayment and
default experience has an impact on this fair value. Expected cash flows of the
underlying loans sold are reviewed based upon current economic conditions and
are revised as necessary using the original discount rate used in calculating
the gain on sale. The interest-only strip receivable is classified as a trading
security. Accordingly, unrealized gains and losses are recorded in income.
LOAN RECEIVABLES
All loans receivable are considered to be held for sale and are carried at
the lower of aggregate cost or market values. Market value is determined by
outstanding commitments from investors or current investor yield requirements.
There was no allowance for market losses on loans receivable held for sale at
June 30, 1997 and 1996.
CREDIT LOSSES
Provisions for credit losses are charged to income in amounts sufficient to
maintain the allowance at a level considered adequate by management to absorb
possible losses of principal and interest in the existing portfolio, based on
calculations of the collectibility of loans receivable and prior credit loss
experience. Loans receivable are charged against the allowance for credit
losses, based on a loan-by-loan review, when management believes that the
collectibility of the principal is unlikely. The Company's exposure to credit
loss in the event of nonperformance by the borrower is represented by the
outstanding principal balance of the respective loans less the value of
collateral obtained. The amount of collateral obtained is based on management's
credit evaluation pursuant to the Company's lending and underwriting policies.
While management uses available information to recognize losses on loans,
future additions to the allowance may be necessary based on changes in economic
conditions.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Loans receivable are recorded on the balance sheet at an amount that
approximates fair market value. The servicing asset is periodically evaluated
for impairment and, as such, are recorded at values that approximate fair market
value. Interest-only strips receivable are recorded at fair value. The carrying
value of fixed rate debt is a reasonable estimate of fair value due to the
relatively stable rate environment during the fiscal year and the time period in
which the debt was originated.
F-8
<PAGE> 44
CREDIT DEPOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are provided on a straight-line
basis over the estimated useful lives of furniture and equipment (five years) or
the term of the related lease.
Property and equipment are as follows:
<TABLE>
<CAPTION>
JUNE 30,
---------------------
1997 1996
---------- --------
<S> <C> <C>
Furniture and equipment..................................... $1,138,407 $854,390
Leasehold improvements...................................... 64,679 63,495
---------- --------
1,203,086 917,885
Less accumulated depreciation and amortization.............. 678,391 424,325
---------- --------
$ 524,695 $493,560
========== ========
</TABLE>
INCOME TAXES
The Company accounts for income taxes using the liability method. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
LOSS PER SHARE
Loss per share amounts for all periods presented have been computed using
the weighted average number of common and, when dilutive, common equivalent
shares (stock options and warrants) outstanding.
RECLASSIFICATIONS
Certain reclassifications of prior years' amounts have been made to conform
to the current year presentation.
STOCK OPTIONS
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its employee stock options. Under APB 25,
because the exercise price of the Company's stock options equals the market
price of the underlying stock on the date of grant, no compensation expense is
recognized.
RECENT ACCOUNTING PRONOUNCEMENTS
During the year ended June 30, 1997, the Company adopted the requirements
of FASB Statement No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities." This new standard requires
application of a financial components approach that focuses on control and
recognition of financial assets and liabilities upon execution of a transfer of
such instruments. FASB Statement No. 125 is required to be applied to transfers
of assets occurring after January 1, 1997. The effect of adopting the new
standard was not material.
In February 1997, the Financial Accounting Standards Board issued FASB
Statement No. 128, "Earnings Per Share." This new standard establishes standards
for computing and presenting earnings per share (EPS) and applies to entities
with publicly held common stock. FASB Statement No. 128 simplifies the standards
for computing earnings per share previously found in APB Opinion No. 15 and
makes them
F-9
<PAGE> 45
CREDIT DEPOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
comparable to international EPS standards. It replaces the presentation of
primary EPS with a presentation of basic EPS. It also requires dual presentation
of basic and diluted EPS on the face of the statement of earnings for all
entities with complex capital structures and requires a reconciliation of the
numerator and denominator of the diluted EPS computation. FASB Statement 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 Financial Accounting Standards Board issued FASB
Statement No. 130, "Reporting Comprehensive Income," which is effective for
annual and interim periods ending after December 15, 1997. This statement
requires that all items that are required to be recognized under accounting
standards as comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements.
In June 1997, the Financial Accounting Standards Board issued FASB
Statement No. 131, "Disclosures about Segments of an Enterprise and Related
Information," which is effective for annual and interim periods ending after
December 15, 1997. This statement establishes standards for the method that
public entities use to report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographical areas and major customers.
3. COMMON STOCK TRANSACTIONS
In June 1993, the market price of the Company's Common Stock attained the
market price required to permit the Company to redeem the warrants issued as
part of the initial public offering units at $.01. The warrant holders had the
option of receiving $.01 per warrant or exercising the warrant to purchase
common stock at $5.50 per share. Warrant holders converted 259,225 warrants at
the $5.50 exercise price prior to June 30, 1993, net of expenses of
approximately $145,000. In the first quarter of 1994, 539,475 additional
warrants were exercised at the $5.50 option price, net of expenses of
approximately $119,000. The remaining 6,300 warrants were redeemed by the
Company.
As partial consideration for successfully obtaining a $6,000,000 warehouse
line of credit, the Company granted warrants to purchase 200,000 shares of
common stock exercisable through May 31, 2003 at $9.00 per share to certain
intermediaries. This warehouse line of credit matured on June 16, 1995 and was
not renewed.
As partial consideration related to obtaining a $3,000,000 financing
arrangement discussed in Note 7, the Company granted warrants to purchase
201,389 shares of common stock exercisable through August 12, 2000 at $2.50 per
share to an underwriter.
As partial consideration for successfully obtaining $5,550,000 in
convertible notes, as discussed in Note 7, the Company granted warrants to
purchase 92,500 shares of common stock exercisable through January 25, 2000 at
$7.25 per share to an investment banker.
As partial consideration for successfully obtaining a $2,300,000 warehouse
lending agreement, as discussed in Note 7, the Company granted warrants to
purchase 920,000 shares of common stock exercisable through June 30, 2001 at
$2.50 per share, subject to certain anit-dilution adjustments.
As partial consideration for successfully obtaining a financing agreement
with Greenwich Capital, as discussed in Note 7, the Company granted warrants to
purchase 300,000 shares of common stock at a price of $5.25 per share
exercisable at the option of the lender at any time on or prior to November 8,
2000.
As partial consideration for successfully obtaining $6,400,000 in Series
"A" Convertible Preferred Stock, as discussed in Note 7, the Company granted
warrants to an underwriter to purchase up to 146,250 shares of common stock at a
price of $2.50 per share, subject to certain anti-dilution adjustments,
exercisable at the option of the underwriter at anytime on or prior to October
10, 1999.
F-10
<PAGE> 46
CREDIT DEPOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As partial consideration for obtaining $9,000,000 in 10% convertible
secured notes, as discussed in Note 7, the Company granted warrants to purchase
540,000 shares of common stock exercisable through August 12, 2000 at $2.50 per
share, subject to certain anti-dilution adjustments, to the underwriter.
As partial consideration for obtaining $1,674,000 in 11% Series "B"
Convertible Redeemable Preferred stock, as discussed in Note 7, the Company
granted warrants to purchase 669,600 shares of common stock exercisable through
April 21, 2002 at $2.50 per share, subject to certain anti-dilution adjustments,
to the underwriter.
As partial consideration for obtaining two warehouse lines-of-credit
totaling $550,000, as discussed in Note 6, the Company granted warrants to
purchase 18,000 shares of common stock exercisable through March 25, 1999 at
$3.25 per share to an agent.
As partial consideration for services in connection with investor
relations, the Company granted warrants to purchase 150,000 shares of common
stock exercisable through November 1, 2001 at $2.50 per share.
As partial consideration for consulting services, the Company granted
warrants to purchase 40,000 and 35,000 shares of common stock exercisable
through December 19, 1997 and January 15, 2001 at $5.25 and $4.00 per share,
respectively.
4. LOANS RECEIVABLE
Prior to June 30, 1994, sales of loans were generally made with the
provision that the Company would repurchase at the request of the investor any
loan that becomes past due by over 90 days or in accordance with those
circumstances which may occur from time to time as outlined in the respective
sale agreements. Investors may not request or demand repurchase without cause as
defined in the respective sale agreement. The balance subject to repurchase
under these agreements included in the Company's servicing portfolio is
$1,967,000. Loans sold during 1996 and 1997 to a major loan securitizer are
subject to limited recourse provisions. At June 30, 1997, the aggregate balance
of loans originated by the Company subject to limited repurchase provisions was
approximately $82,483,000, of which none was past due over 90 days and subject
to repurchase at the option of the investor. These loans were sold servicing
released with an interest-only strip retained on the loans. At June 30, 1997 the
Company's servicing portfolio totaled approximately $7,232,000 including
approximately $5,205,000 of Company-owned loans receivable.
It is the Company's experience that a substantial portion of the Company's
loan portfolio generally is sold, repaid or foreclosed upon before contractual
maturity dates. Additionally, the Company may extend the maturity of a loan
receivable for past due payments.
At June 30, 1997, there were loans receivable with an aggregate principal
balance of approximately $379,000 for which the accrual of interest had been
suspended. Borrowers with loans totaling approximately $626,965 were paying
under a court-approved bankruptcy plan at June 30, 1997. Of this amount, 6
borrowers representing $203,418 aggregate principal balance were delinquent per
the terms of the bankruptcy plan.
F-11
<PAGE> 47
CREDIT DEPOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Changes in the allowance for credit losses were as follows:
<TABLE>
<S> <C>
Balance as of June 30, 1995................................. $ 184,794
Provision for credit losses............................... 185,000
Charge-offs............................................... (171,584)
Recoveries................................................ 52,050
---------
Balance as of June 30, 1996................................. 250,260
Provision for credit losses............................... 225,231
Charge-offs............................................... (235,657)
Recoveries................................................ 20,650
---------
Balance as of June 30, 1997................................. $ 260,484
=========
</TABLE>
The allowance for credit losses includes a provision for credit losses that
may be incurred as a result of the obligation to repurchase certain loans sold.
This reserve is included in the allowance for credit losses since it has been
the Company's practice to repurchase loans sold to investors under continuing
servicing agreements prior to foreclosure. The resulting gain or loss on the
foreclosed property is recognized on the books of the Company.
5. SERVICING ASSET AND INTEREST-ONLY STRIPS RECEIVABLE
The servicing asset represents the unamortized balance of previously
recognized servicing rights and excess servicing receivables This amount is
amortized over the estimated lives of the underlying receivables sold. The
carrying value of the servicing asset at June 30, 1997, 1996, and 1995
approximates fair value.
The activity in the servicing asset is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------
1997 1996 1995
-------- -------- ----------
<S> <C> <C> <C>
Balance, beginning of year........................ $193,038 $411,902 $1,030,210
Additions from sales of loans receivable.......... -- -- 257,321
Unscheduled amortization.......................... (81,421) (118,765) (605,118)
Scheduled amortization............................ (34,610) (100,099) (270,511)
-------- -------- ----------
Balance, end of year.............................. $ 77,007 $193,038 $ 411,902
======== ======== ==========
</TABLE>
The interest-only strips receivable represents the unamortized balance of
the present value of the interest rate differential between the rate charged to
the borrower and the contractual rate paid by the Company to the investor for
the pool of loans after taking into consideration the Company's estimate for any
early prepayments and bad debt expense resulting from the sale of loans
servicing released. This amount is amortized in relation to the related cash
flows over the estimated lives of the underlying receivables sold. Discount
rates of 12% and 9% were used to compute the interest-only strips receivable at
June 30, 1997 and 1996, respectively. The carrying value of the interest-only
strips receivable at year-end approximates fair value.
The activity in the interest-only strips receivable account is summarized
as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------
1997 1996
----------- ----------
<S> <C> <C>
Balance, beginning of year................................. $ 1,317,075 $ --
Additions from sales of loans receivable................... 7,162,973 1,384,843
Scheduled amortization..................................... (1,211,118) (67,768)
----------- ----------
Balance, end of year....................................... $ 7,268,930 $1,317,075
=========== ==========
</TABLE>
F-12
<PAGE> 48
CREDIT DEPOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In fiscal 1997 and 1996, the Company recognized approximately $40,000 and
$119,000, respectively, in expenses related to the write down of the servicing
asset resulting from unanticipated prepayments. These prepayments are primarily
a result of certain competitors targeting the higher interest rate loans
serviced by the Company (and primarily originated subject to underwriting
practices prior to fiscal 1994) and refinancing such loans at lower interest
rates.
6. MORTGAGE WAREHOUSE LINE-OF-CREDIT
On June 11, 1997, the Company obtained a $3,000,000 mortgage warehouse
line-of-credit from a mortgage warehouse lender. The Company utilizes this
line-of-credit for the purpose of financing the origination of single family
residential mortgage loans. This line bears interest at prime plus 2% payable
monthly and the Company generally has an available borrowing base equivalent to
the lesser of $3,000,000 or 95% of the original mortgage amount or the
commitment price on the related take-out commitment of eligible mortgage loans
as defined under the agreement. The maturity date of the line is the earlier of
(1) the 90th day after funding of each note or (2) the date on which funds are
received from the take-out investor for purchase of the eligible mortgage loan
securing such note. As of June 30, 1997, the outstanding balance was $2,806,386.
On March 25, 1997 and March 31, 1997, the Company obtained warehouse
lines-of-credit in the amounts of $450,000 and $100,000, respectively, from
individuals. The Company utilitizes the lines-of-credit for the purpose of
financing the origination of single family residential mortgage loans. The lines
bear an interest rate of 12% and mature one year from the date of origination.
In connection with this agreement, the Company issued warrants to purchase
15,000 shares of common stock at $3.25 exercisable at the option of the lenders
at any time on or prior to March 25, 1999.
7. CONVERTIBLE NOTES AND OTHER BORROWINGS
On July 27, 1994 the Company completed a private placement offering of 8%
notes due 2004, convertible into common shares of the Company at $5 per share.
Interest on the notes is payable each July 1 and January 1. The gross proceeds
of the offering totaled $5,550,000. Approximately $545,000 in expenses related
to the offering were deferred and are being amortized over the term of the
notes. The private placement resulted in net proceeds to the Company of
approximately $5,005,000. The notes are subordinate to any warehouse
lines-of-credit up to $50 million and the Company is required to comply with
various restrictive covenants. During fiscal year 1996, all outstanding
principal and interest due per the agreement was paid in full. One lender
accepted a warehouse lending agreement in lieu of cash in the amount of
$2,300,000. The borrowings, which accrue interest at the rate of 10% per annum
payable quarterly, are secured by the underlying mortgage loans. The Company
must provide loans to secure the promissory note in an amount equivalent to 110%
of the principal amount of the note. In the event of a shortfall in collateral,
the Company is required to pledge cash in a segregated account. At June 30, 1997
and 1996, the Company had pledged $203,318 and $25,887, respectively, in cash to
secure the note. Such agreement expires on April 30, 2001. In addition, as
discussed in Note 3, the Company has issued warrants to the lender for the
purchase of up to 920,000 shares of the Company's $.001 par value common stock
at a price of $2.50 per share exercisable at the option of the lender at any
time on or prior to June 30, 2001.
On June 16, 1995, the Company entered into an agreement for the placement
of up to $3,000,000 in available borrowings to be used expressly for the purpose
of originating and acquiring mortgage loans. In connection with this agreement,
warrants to purchase 27,779 shares of common stock at $2.50 per share were
issued to the lenders which are exercisable at the option of the lenders at any
time on or prior to June 16, 1999. This agreement expired on June 16, 1997.
During fiscal year 1996, $2,500,000 of the borrowings were converted into Series
"A" 9% Non-voting Convertible Preferred Stock. At June 30, 1997 and 1996, $-0-
and $500,000 was outstanding under this agreement. An additional $500,000 in
borrowings was obtained through a similar agreement. These borrowings are
convertible into 9% Convertible Preferred Stock at $2.50 per share.
F-13
<PAGE> 49
CREDIT DEPOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In connection with this agreement, warrants to purchase 100,000 shares of common
stock at $2.50 per share were issued to the lender which are exercisable at the
option of the lender at any time on or prior to February 22, 2000. The
borrowings, which accrue interest at the rate of 10% per annum payable monthly,
are secured by the underlying mortgage loans. The agreement contains a default
interest of 16% which accrues to the extent such borrowings are not repaid on or
prior to the maturity date. At June 30, 1997, $500,000 was outstanding under
this agreement. Such agreement matures on February 22, 1998. The Company has
pledged loans receivable as collateral related to these borrowings.
In conjunction with a separate agreement with Greenwich Capital, dated
February 1, 1995, the Company from time-to-time received advances from Greenwich
Capital equivalent to 95% during fiscal year 1996 and 90% during fiscal year
1995 of the principal amount of mortgage loans associated with such advances.
The Company pays interest to Greenwich at prime plus 1% and has the option to
repurchase such mortgages, or repay such advances, within one year of the date
of the advance. During 1996 and 1995, the Company was advanced approximately
$7,628,000 and $10,600,000 in connection with this agreement. The maximum amount
outstanding under such agreement during 1996 and 1995 was approximately
$7,628,000 and $5,600,000. No amounts were outstanding at June 30, 1995 and the
agreement had expired as of June 30, 1996. In connection with this agreement, as
discussed in Note 3, the Company has issued warrants to the lender for the
purchase of up to 300,000 shares of common stock at a price of $5.25 per share
exercisable at the option of the lender at any time on or prior to November 8,
2000.
On October 10, 1995, the Company issued 250 units at an offering price of
$20,000 per unit, each unit consisting of 1,000 shares of Series "A" 9%
Non-voting Convertible Preferred Stock and warrants to purchase 2,500 shares of
common stock at $2.50 per share, subject to certain adjustments, in exchange for
the conversion of $2,500,000 of other borrowings and $2,500,000 in cash. An
additional 70 units of the preferred stock were issued for cash in the amount of
$1,400,000. These warrants are exercisable at the option of the holder at any
time on or prior to October 10, 1999. Dividends on the 9% Convertible Preferred
Stock are cumulative from the date of issuance and payable on a quarterly basis
commencing on December 31, 1995. Shares of the preferred stock, totaling an
initial investment of $100,000 in preferred stock, were converted during the
year ended June 30, 1997 into 40,000 shares of common stock at $2.50 per share.
On January 18, 1996, the Company entered into an agreement to borrow
$1,050,000 from a third party lender. The loan is collateralized by mortgage
loans and bears interest at a rate of 12% per annum. The loan matured on
February 18, 1997. At June 30, 1997 and 1996, there was $-0- and $925,000
outstanding under this agreement, respectively.
On May 24, 1996, the Company commenced a $9,000,000 10% convertible secured
note offering. The notes are partially secured by essentially all otherwise
unpledged assets of the Company. The notes are convertible into 3,600,000 shares
of common stock at an exercise price of $2.50 per share and impose limitations
on the payments of dividends to common stockholders. In August 1996, the Company
became fully subscribed to the maximum offering amount of $9,000,000. The notes
mature on June 30, 2001. During 1997, $860,000 of the notes, net of were
converted by the debt holders into 344,000 shares of common stock of the Company
at $2.50 per share. This amount was netted against filing fees in the amount of
$21,000.
On November 12, 1996, the Company entered into an agreement with a major
loan securitizer by where the Company receives advances on the interest-only
strips receivable on the loans sold to be placed in securitizations, as
discussed in Note 5. The lender has the right to offset all sums owed to them by
the Company against the amounts owed by the Company under the loan sales
agreement. The interest rate on the advances is the 30-day LIBOR plus 400 basis
points. In the event of a default, the interest rate increases to the 30-day
LIBOR plus 700 basis points. The 30-day LIBOR rate at June 30, 1997 was 5.69%.
Each advance is repaid over a 36-month period from the day the loan sale
commitment that it pertains to is filled. As of June 30, 1997, $2,100,651 was
outstanding under this agreement.
F-14
<PAGE> 50
CREDIT DEPOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On March 24, 1997, the Company issued 16,740 shares of Series "B" 11%
Non-voting Convertible Redeemable Preferred Stock at an offering price of $100
per share and warrants to purchase 669,600 shares of common stock at $2.50 per
share, subject to certain adjustments exercisable at the option of the
stockholders at any time on or prior to April 12, 2000. Dividends on the 11%
Convertible Redeemable Preferred Stock are cumulative from the date of issuance
and payable on a quarterly basis commencing on July 1, 1997. Through July 1,
1998, dividends are payable, at the Company's option, either in cash or in
shares of preferred stock valued at the lessor of (1) the conversion price per
share or (2) the average closing bid price of the Company's common stock on the
Nasdaq SmallCap Market for the twenty consecutive trading day period ending five
days prior to the dividend record date. Thereafter, dividends are payable in
cash. The Company has the right at any time more than 913 days after the final
closing date to redeem for cash all or a portion of the outstanding shares of
this preferred stock at the original purchase price of $100 per share plus all
accrued and unpaid dividends.
The aggregate maturities for long-term debt are as follows:
<TABLE>
<S> <C>
1998........................................................ $ 1,257,646
1999........................................................ 757,646
2000........................................................ 585,359
2001........................................................ 10,440,000
2002 and thereafter......................................... --
-----------
$13,040,651
===========
</TABLE>
8. INCOME TAXES
Income tax expense (benefit) differs from the amount computed by applying
the graduated statutory federal income tax rates for the following reasons:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Income tax expense (benefit) at statutory
federal income tax rate applied to income
(loss) before income taxes.................... $(1,143,420) $(1,540,369) $(1,628,919)
State income tax, net of federal income tax
benefit....................................... (110,979) (149,506) (158,070)
Tax benefit not currently recognizable.......... 1,254,399 1,689,875 1,786,989
----------- ----------- -----------
$ -- $ -- $ --
=========== =========== ===========
</TABLE>
F-15
<PAGE> 51
CREDIT DEPOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes reflect the impact of temporary differences between
the amount of assets and liabilities recognized for financial reporting purposes
and such amounts recognized for income tax purposes. The primary sources of
these differences are the differing methods utilized for recognition of gains
associated with loan sales, accelerated tax depreciation, and the allowance for
credit losses. Significant components of the Company's deferred tax liabilities
and assets are as follows:
<TABLE>
<CAPTION>
JUNE 30,
-------------------------
1997 1996
----------- -----------
<S> <C> <C>
Deferred tax liabilities:
Interest-only strips receivable basis differences......... $(2,711,000) $ (491,000)
Other, net................................................ (39,000) (37,000)
----------- -----------
Total deferred tax liabilities.................... (2,750,000) (528,000)
Deferred tax assets:
Allowance for credit losses............................... 97,000 93,000
Other reserves............................................ 15,000 33,000
Other, net................................................ 71,000 62,000
Net operating loss carryforwards -- state................. 876,000 672,000
Net operating loss carryforwards -- Federal............... 5,475,000 4,200,000
----------- -----------
Total deferred tax assets......................... 6,534,000 5,060,000
Valuation allowance for deferred tax assets................. (3,784,000) (4,532,000)
----------- -----------
Net deferred tax assets..................................... 2,750,000 528,000
----------- -----------
Net deferred tax assets (liabilities)....................... $ -- $ --
=========== ===========
</TABLE>
At June 30, 1997, the Company had net operating loss carryforwards for
Federal and state income tax purposes available to offset future taxable income
of approximately $14,600,000 expiring from 2009 through 2012.
9. COMMITMENTS
The Company leases space for its corporate and branch offices in Georgia,
Indiana, Ohio, South Carolina, North Carolina, Kentucky, Missouri, Florida, and
Tennessee. Future lease payments under all such operating lease agreements are
as follows:
<TABLE>
<S> <C>
1998........................................................ $390,124
1999........................................................ 324,228
2000........................................................ 105,704
2001 and thereafter......................................... --
--------
$838,056
========
</TABLE>
Rental expense totaled $516,435, $480,779 and $353,185 for the years ended
June 30, 1997, 1996 and 1995, respectively.
10. OTHER RELATED PARTY TRANSACTIONS
During the year ended June 30, 1996, the Company advanced $100,000 to a
stockholder and director, due on September 15, 1996. On August 11, 1997, the
maturity date was extended to August 20, 1998. The note bears interest at 8% and
is payable at maturity. The borrower was not a director of the Company as of
June 30, 1997. A reserve has been recorded for the advance in the full amount of
the outstanding balance.
F-16
<PAGE> 52
CREDIT DEPOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During the year ended June 30, 1995, the board approved an advance in the
amount of $100,000 to a director. This loan bears interest at 11% and all
interest and principal is due and payable on May 20, 1996. During the year ended
June 30, 1996, the maturity date was extended to May 20, 1997. As of June 30,
1997, the advance remained outstanding. A reserve has been recorded for the
advance in the full amount of the outstanding balance.
11. STOCK OPTION PLAN
In October 1990, the Company adopted the 1990 Stock Option Plan (the "1990
Plan") under which 250,000 shares of the Company's common stock are reserved for
issuance, pursuant to which officers, directors and key employees are eligible
to receive incentive and/or non-qualified stock options. In March 1992, the
Company amended the 1990 Plan and increased the number of shares reserved from
250,000 to 400,000 shares.
In January 1993, subject to stockholder approval which was obtained in May
1993, the Company adopted the 1993 Stock Option Plan (the "1993 Plan") under
which 250,000 shares of the Company's common stock are reserved for issuance
similar to the 1990 Plan. Subsequently, the Company has amended the 1993 Plan
and increased the number of shares reserved to 1,200,000 shares. The 1990 Plan
and the 1993 Plan (collectively, the "Plans") are administered by a committee of
the Board of Directors. The option prices underlying all such agreements are
based upon the fair value of the stock on the date of grant.
On July 25, 1996, each option outstanding under the Plans, including
options held by directors and executive officers of the Company, with an
exercise price exceeding $4.00 was canceled and reissued with an exercise price
equal to $3.50 per share, compared to the then current market price of $2.75 per
share. Options to purchase 1,151,000 shares of common stock at exercise prices
ranging from $4.25 to $10.00 per share, with a weighted average exercise price
of $6.11 were repriced. All other terms and conditions of these options remained
the same.
In 1997, options for the purchase of 265,500 shares were granted to
employees and directors of the Company at a per share price ranging from $2.75
to $4.00. In 1996, options for the purchase of 265,500 shares were granted to
employees and directors of the Company at a per share price of $3.50 to $4.25.
At June 30, 1997, there were a total of 1,357,000 options outstanding with
exercise prices ranging from $2.75 to $8.00. No options were exercised during
1996 or 1997; however, 1,107,125 options outstanding are vested and exercisable
at June 30, 1997.
Pro forma information regarding net income and earnings per share is
required by FASB Statement No. 123, "Accounting for Stock-Based Compensation",
and has been determined as if the Company had accounted for its stock options
under the fair value method of that Statement. The fair value in these options
was estimated at the date of grant using the "minimum value" method allowed by
the Statement. Pro forma net loss and net loss per share were $(3,858,651) and
$(1.21) and $(4,582,052) and $(1.48) for the years ended June 30, 1997 and 1996,
respectively. The weighted average fair value of options granted during the
years ended June 30, 1997 and 1996 was $486,290 and $722,774.
At June 30, 1997, 1,107,125 shares under the Plans had vested but had not
been exercised.
F-17
<PAGE> 53
CREDIT DEPOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table reflects changes in the stock options issued under the
Plans:
<TABLE>
<CAPTION>
APPROXIMATE
PRICE RANGE
SHARES PER SHARE
--------- -----------
<S> <C> <C>
Options outstanding at July 1, 1994......................... 891,500 $4-10
Granted................................................... 402,500 5
Exercised................................................. -- --
Canceled.................................................. (84,500) 6-10
--------- -----
Options outstanding at June 30, 1995........................ 1,209,500 4-10
Granted................................................... 194,000 4-6
Exercised................................................. -- --
Canceled.................................................. (88,500) 5-7
--------- -----
Options outstanding at June 30, 1996........................ 1,315,000 4-8
Granted................................................... 265,500 2-4
Exercised................................................. -- --
Canceled.................................................. (223,500) 2-4
--------- -----
Options outstanding at June 30, 1997........................ 1,357,000 $2-8
========= =====
</TABLE>
12. GOING CONCERN
During the fiscal year ended June 30, 1997, the Company incurred losses of
$3,362,999 compared to losses of $4,114,820 for the year ended June 30, 1996. In
addition, as of June 30, 1997, the Company had an accumulated deficit of
$16,063,375. Although the Company had modest earnings for its 1992 fiscal year,
it has incurred losses during all of its other years since 1991. In view of its
geographic expansion and the increased size of its corporate infrastructure in
connection therewith, the Company has been unable to generate sufficient gain on
sales of its mortgage loans in either individual sales, bulk sales or through
securitization to provide sufficient revenues to achieve appropriate returns.
The Company has experienced significant operating cash flow deficiencies
over the past year. By its nature, the Company's business requires continual
access to short-term and long-term sources of debt and equity capital. The
Company's capital requirements arise principally from loan originations and loan
repurchases, payments of operating and interest expenses, capital expenditures,
and start-up expenses for new geographic markets. To date, in addition to the
Company's capital raising efforts, the sources of liquidity have been (1) sales
of the loans it originates and purchases into secondary markets, (2) borrowings
under its mortgage warehouse line of credit secured by its loans, in most cases
until such loans are sold and the lender can be repaid, (3) finance income and
fees generated by the loan servicing portfolio, and (4) the conversion of the
servicing asset and interest-only strips receivable into cash over the lives of
the loans sold.
The Company has approximately $1,260,000 in debt that will be due within
the next twelve months. In addition, subsequent to June 30, 1997, the Company
was not in compliance with a minimum net worth covenant under its warehouse
lending arrangement with one of its warehouse lenders primarily as a result of
recurring operating losses. Since waiver of this covenant has not been obtained,
the right to use this line to finance originations and purchases of mortgage
loans could be restricted or terminated at the option of the lender.
The Company's net worth as of June 30, 1997 was $376,838. The Company has
received notification from Nasdaq stating that the Company has failed to
maintain a $1.00 minimum bid price on its common stock and
F-18
<PAGE> 54
CREDIT DEPOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
also does not appear to meet the $2,000,000 minimum in net tangible assets
necessary for continued listing on the Nasdaq Small Cap Market. The Company must
respond by October 22, 1997 with a plan and schedule to bring the Company into
compliance with these requirements. In the event the Company is not in
compliance by October 22, 1997 or Nasdaq does not accept the Company's plan for
achieving compliance, a formal notice of deficiency would be issued by Nasdaq
specifying a delisting date for the Company's common stock.
There can be no assurance that the Company will be able to obtain necessary
financing or additional capital in the future or that the Company will continue
to be listed on the Nasdaq Small Cap Market. To the extent that the Company
experiences cash shortages in the future, it may be required to sell off
mortgage loans on less favorable terms than it might otherwise be able to
obtain. There can be no assurance that the Company will be able to obtain, on
acceptable terms, additional funds under lines of credit, or otherwise, when
needed, in which event the Company would be required to curtail its lending
activities and could be unable to comply with the terms of covenants contained
in the agreements relating to its outstanding indebtedness.
MANAGEMENT'S PLANS
The Company is currently in the process of extending a conversion offer to
the holders of the 10% convertible secured notes and the Series "A" 9%
Non-voting Convertible Preferred Stock in order to enable the Company to raise
additional capital to meet its operating expenses and to continue as a going
concern. The Company does not have sufficient authorized common stock to permit
it to issue the shares of common stock pursuant to the conversion offer. As a
means of increasing the number of shares of authorized common stock available
for issuance by the Company, the board of directors has approved, subject to
stockholder approval, a proposal to amend the certificate of incorporation to
effect a five-for-one reverse stock split. The board of directors believes that
the reverse stock split, by decreasing the number of shares outstanding, should
increase the bid price per common stock, and is necessary in order to permit the
company to meet the requirements for continued listing on the Nasdaq Small Cap
Market.
In addition, the Company plans to execute a private placement up to
$3,000,000 of Series "B" 11% Non-voting Convertible Redeemable Preferred Stock,
convertible into common stock at $.40 per share. This offering, if executed,
will serve to provide additional cash flow and improve the net worth of the
Company. In connection therewith, the conversion price of the 16,740 currently
outstanding shares of the Series "B" 11% Non-voting Convertible Redeemable
Preferred Stock will also be adjusted to $.40 per share.
There can be no assurances that the conversion offer or the private
placement will be successful or that the successful completion of those actions
will substantially improve the condition of the Company.
F-19
<PAGE> 1
EXHIBIT 4.15
CREDIT DEPOT CORPORATION
NOTE PURCHASE AGREEMENT (the "Purchase Agreement") made as of
this 26th day of August, 1997 between Credit Depot Corporation, a Delaware
corporation with its principal offices at 700 Wachovia Center, Gainesville,
Georgia 30501 (the "Company") and the undersigned subscriber (the
"Subscriber").
WHEREAS, the Company desires to issue up to $4,000,000 of
Secured Convertible Bridge Notes (the "Secured Notes") which are convertible
into the Company's Common Stock, $.001 par value (the "Common Stock") and
accompanying Warrants (the "Warrants") to purchase up to 10,000,000 shares of
the Company's Common Stock (the Secured Notes, the Warrants and the Common
Stock being referred to as the "Securities") and the Subscriber desires to
acquire that amount of Secured Notes set forth on the signature page hereof;
NOW, THEREFORE, for and in consideration of the premises and
the mutual covenants hereinafter set forth, the parties hereto do hereby agree
as follows:
I. SUBSCRIPTION FOR SECURITIES AND REPRESENTATIONS BY
SUBSCRIBER
1.1 Subject to the terms and conditions hereinafter
set forth, the Subscriber hereby subscribes for and agrees to purchase from the
Company such number of Secured Notes and accompanying Warrants as is set forth
upon the signature page hereof at a price equal to $1000 per $1000 face amount
of Secured Notes and 2,500 Warrants and the Company agrees to sell such Secured
Notes and Warrants to the Subscriber for said purchase price subject to the
Company's right to sell to the Subscriber such lesser amount of Secured Notes
and Warrants as it may, in its sole discretion, deem necessary or desirable.
The purchase price is payable by wire transfer or certified or bank check made
payable to Credit Depot Corporation, at or prior to the closing of this
Purchase Agreement. The Secured Notes and Warrants will be delivered by the
Company at the closing.
1.2 The Subscriber recognizes that the purchase of
the Securities involves a high degree of risk in that (i) no public market
exists for the Securities other than the underlying shares of Common Stock;
(ii) an investment in the Securities is highly speculative and only investors
who can afford the loss of their entire investment should consider investing in
the Company and the Securities; (iii) the Subscriber may not be able to
liquidate its investment; (iv) the Company requires substantial additional
capital to continue to meet its operating expenses and will be unable to do so
unless it obtains additional financing and as a result the investor's ability
to be repaid is dependent on the Company's obtaining additional financing, as
to which the Company has no commitment and (v) an investor could sustain the
loss of its entire investment.
<PAGE> 2
1.3 The Subscriber represents as follows:
(a) The Subscriber represents that it is an "accredited
investor" as such term in defined in Rule 501 of Regulation D promulgated under
the United States Securities Act of 1933, as amended (the "Act"), and that it
is able to bear the economic risk of an investment in the Securities.
(b) The Subscriber acknowledges that it has significant prior
investment experience, including investment in non-listed and non-registered
securities, or it has employed the services of an investment advisor, attorney
or accountant to read all of the documents furnished or made available by the
Company to it in the Securities and to evaluate the merits and risks of such an
investment on its behalf, and that it recognizes the highly speculative nature
of this investment. The Subscriber acknowledges that it has carefully read the
Secured Note, the Guaranty (the "Guaranty") and the Security Agreement (the
"Security Agreement") attached hereto as Exhibits A, B and C, respectively, and
fully understands the contents thereof.
(c) The Subscriber represents that the Securities are being
purchased for its own account, for investment and not for distribution or
resale to others. The Subscriber agrees that it will not sell or otherwise
transfer such Securities unless they are registered under the Act or unless an
exemption from such registration is available.
(d) The Subscriber understands that the Securities have not
been registered under Act by reason of a claimed exemption under the provisions
of the Act which depends, in part, upon its investment intention. In this
connection, the Subscriber understands that it is the position of the
Securities and Exchange Commission ("SEC") that the statutory basis for such
exemption would not be present if its representation merely meant that its
present intention was to hold such securities for a short period, such as the
capital gains period of tax statutes, for a deferred sale, for a market rise,
assuming that a market develops, or for any other fixed period. The Subscriber
realizes that, in the view of the SEC, a purchase now with an intent to resell
after a pre-determined amount of time would represent a purchase with an intent
inconsistent with its representation to the Company, and the SEC might regard
such a sale or disposition as a deferred sale to which such exemptions are not
available.
(e) The Subscriber understands that there is no public market
for the Securities, other than the Common Stock issuable upon conversion of the
Secured Notes and the Common Stock issuable upon exercise of the Warrants. The
Subscriber understands that Rule 144 (the "Rule") promulgated under the Act
requires, among other conditions, a one year holding period prior to the resale
(in limited amounts) of securities acquired in a non-public offering without
having to satisfy the registration requirements under the Act. The Subscriber
understands and hereby acknowledges that the Company is the only person that
can register the Securities under the Act and is under no obligation to
register the Securities under the Act, with the exception of
2
<PAGE> 3
certain registration rights set forth in Article III herein. The Subscriber
acknowledges that the Company may, if it desires, permit the transfer of the
Secured Notes, the Warrants or the Common Stock issuable upon conversion and/or
exercise thereof out of its name only when its request for transfer is
accompanied by an opinion of counsel reasonably satisfactory to the Company
that neither the sale nor the proposed transfer results in a violation of the
Act or any applicable state "blue sky" laws (collectively "Securities Laws")
and subject to the provisions of Section 1.3(f) hereof.
(f) The Subscriber consents to the placement of a legend on
any certificate or other document evidencing its Securities and the Common
Stock issuable upon conversion and/or exercise of such Securities stating that
they have not been registered under the Act and under applicable Securities
Laws and setting forth or referring to the restrictions on transferability and
sale thereof.
(g) The Subscriber understands that the Company will review
this Purchase Agreement and is hereby given authority by the undersigned to
call its bank or place of employment or otherwise review the financial standing
of the Subscriber; and it is further agreed that the Company reserves the
unrestricted right to reject or limit any subscription and to close the offer
at any time.
(h) The Subscriber hereby represents that the address of
Subscriber furnished by it at the end of this Purchase Agreement is the
undersigned's principal residence if it is an individual or its principal
business address if it is a corporation or other entity.
1.4 The Subscriber represents that:
(a) The Subscriber has had a reasonable opportunity to ask
questions of and receive answers from the Company concerning the Company, and
all such questions, if any, have been answered to the full satisfaction of the
Subscriber;
(b) The Subscriber has such knowledge and expertise in
financial and business matters that the Subscriber is capable of evaluating the
merits and risks involved in an investment in the Securities;
(c) The Subscriber understands that the Securities are being
offered and sold to it in reliance on specific exemptions from the registration
requirements of Federal and State the Securities Laws and that the Company is
relying upon the truth and accuracy of the representations, warranties,
agreements, acknowledgements and understandings of the Subscriber set forth
herein in order to determine the applicability of such exemptions and the
suitability of Subscriber to acquire the Securities;
(d) The Subscriber has full power and authority to execute
and deliver this Purchase Agreement and to perform the obligations of the
3
<PAGE> 4
undersigned hereunder; and this Purchase Agreement is a legally binding
obligation of the undersigned in accordance with its terms; and
(e) Except as set forth in this Purchase Agreement, no
representations or warranties have been made to the Subscriber by the Company
or any agent, employee or affiliate of the Company and in entering into this
transaction, the Subscriber is not relying on any information, other than the
results of independent investigation by the Subscriber.
II. REPRESENTATIONS AND COVENANTS BY THE COMPANY
The Company represents and warrants to the Subscriber:
(a) Each of the Company and the Subsidiary Guarantors (as
such term is defined in the Security Agreement) is a corporation duly
organized, existing and in good standing under the laws of the State of
Delaware and has the corporate power to conduct the business which it conducts
and proposes to conduct and is duly qualified or licensed and in good standing
as a foreign corporation in each jurisdiction in which its ownership or leasing
of any properties or the character of its operations requires such
qualification or licensing, except where the failure to do so would not have a
material adverse effect on the Company and its subsidiaries or their respective
properties taken as a whole.
(b) The execution, delivery and performance of this Purchase
Agreement, the Securities and the Security Agreement by the Company have been
duly approved by the Board of Directors of the Company and all other actions
required to authorize and effect the offer and sale of the Securities will have
been duly taken and approved.
(c) The execution, delivery and performance of the Subsidiary
Guarantee by each Subsidiary Guarantor have been duly approved by the Board of
Directors of each Subsidiary Guarantor and all other actions required to
authorize and effect the Subsidiary Guarantee by each Subsidiary Guarantor will
have been taken and approved.
(d) The Securities have been duly and validly authorized and
are enforceable in accordance with their respective terms. The Security
Agreement is duly and validly authorized and enforceable in accordance with its
terms and the Secured Notes, when issued and paid for in accordance with the
terms hereof, will be fully paid and non-assessable and valid and binding
obligations of the Company enforceable in accordance with their respective
terms. The Common Stock issuable upon conversion of the Secured Notes and
exercise of the Warrants will upon issuance thereof and payment therefor in
accordance with their terms be fully paid and non-assessable.
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(e) As to each Subsidiary Guarantor, the Subsidiary Guarantee
is duly and validly authorized and enforceable in accordance with its terms.
(f) The Company will at all times during the term of the
Securities have authorized and reserved a sufficient number of shares of Common
Stock to provide for conversion of the Secured Notes and exercise of the
Warrants.
(g) Each of the Company and the Subsidiary Guarantors has
obtained all licenses, permits, other governmental authorizations and required
consents necessary to the conduct of their respective businesses and the
execution, delivery and performance of this Purchase Agreement and the Notes,
Warrants, Security Agreement and Subsidiary Guaranty (as defined in the
Security Agreement); such licenses, permits, other governmental authorizations
and required consents obtained are in full force and effect; and the Company
and the Subsidiary Guarantors are in all material respects complying therewith.
Except for the consents, authorizations, orders and/or filings already obtained
and/or made, no consent, authorization or order of, and no filing with, any
court, government agency or other body is required of the Company or the
Subsidiary Guarantors for the issuance of (i) the Notes or the Warrants
pursuant to this Purchase Agreement or (ii) except with respect to applicable
Federal and state securities laws, Common Stock issuable on conversion of the
Notes or the exercise of the Warrants .
(h) The Company knows of no pending or threatened legal or
governmental proceedings to which the Company or any of the Subsidiary
Guarantors is a party which could materially adversely affect the business,
property, financial condition or operations of the Company.
(i) Each of the Company and the Subsidiary Guarantors is not
in violation of or default under, nor will the execution and delivery of this
Purchase Agreement, the Security Agreement and the Subsidiary Guarantee, the
issuance of the Securities and the incurrence of the obligations herein and
therein set forth and the consummation of the transactions herein or therein
contemplated, result in a violation of or constitute a default under: (i) the
certificate of incorporation or by-laws of the Company or any Subsidiary
Guarantor; (ii) any agreement, covenant or condition contained in any bond,
debenture, note or other evidence of indebtedness, material contract,
indenture, mortgage, loan agreement, lease, joint venture or other agreement or
instrument to which the Company or any of the Subsidiary Guarantors is a party
or by which it or any of its properties may be bound; (iii) any material order,
rule, regulation, writ, injunction, or decree of any government, governmental
instrumentality or court, domestic or foreign, applicable to the Company or any
Subsidiary Guarantor or any of their respective properties. All filings by the
Company pursuant to the Securities Exchange Act of 1934, as amended, have been
timely filed during the past 12 months and contain no material misstatements
required to be stated therein or omit to state material facts necessary in
order to make the statements made
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therein, in light of the circumstances under which they were made, not
misleading.
(j) The Company covenants that it shall provide
Subscriber with the opportunity to ask additional questions of and receive
answers (all of which information shall be limited to information in the public
realm) from the Company concerning the Company during the period which the
Subscriber owns any of the Securities;
III. REGISTRATION OF SECURITIES
3.1 Registration Rights. The Company agrees that the Company
shall use its best efforts to effect the registration under the Act and
registration or qualification under all applicable state securities laws of the
Common Stock issuable, or any other securities that may become issuable, upon
conversion of the Secured Notes and exercise of the Warrants (the "Registrable
Securities") on or before November 30, 1997.
3.2 Registration Procedures. When the Company is obligated to
effect the registration of Registrable Securities under the Act, the Company
will:
(a) prepare and file with the SEC a registration statement
with respect to such securities, and use its best efforts to cause such
registration statement to become and remain effective until the earlier of (i)
the date on which all Registrable Securities included in the registration
statement have been sold or (ii) two years after the effective date;
(b) prepare and file with the SEC such amendments to such
registration statement and supplements to the prospectus contained therein as
may be necessary to keep such registration statement effective and current
until the earlier of (i) the date on which all Registrable Securities have been
sold or (ii) two years after the effective date of such registration statement;
provided that such two year period shall be extended by any period after the
effective date of such registration statement when the registration statement
is not effective or current; during such period, if the registration statement
is not effective or current, the Company shall use its best efforts as may be
necessary to make such registration statement effective and current;
(c) furnish to the security holders participating in such
registration and to the underwriters of the securities being registered such
reasonable number of copies of the registration statement, preliminary
prospectus, final prospectus and such other documents as such underwriters may
reasonably request in order to facilitate the public offering of such
securities;
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(d) use its best efforts to register or qualify the
securities covered by such registration statement under such state securities
or blue sky laws of such jurisdictions as such participating holders may
reasonably request in writing within twenty (20) days following the mailing, by
first class mail, of a notice of the original filing of such registration
statement, such notice to be mailed within 5 business days of such filing,
except that the Company shall not for any purpose be required to execute a
general consent to service of process or to qualify to do business as a foreign
corporation in any jurisdiction wherein it is not so qualified;
(e) notify the security holders participating in such
registration, promptly after it shall receive notice thereof, of the time when
such registration statement has become effective or a supplement to any
prospectus forming a part of such registration statement has been filed;
(f) notify such holders promptly of any request by the SEC
for the amending or supplementing of such registration statement or prospectus
or for additional information;
(g) prepare and file with the SEC, promptly upon the request
of any such holders, any amendments or supplements to such registration
statement or prospectus which, in the opinion of counsel for such holders (and
concurred in by counsel for the Company), is required under the Act or the
rules and regulations thereunder in connection with the distribution of Common
Stock by such holder;
(h) promptly prepare and file with the SEC and promptly
notify such holders of the filing of such amendment or supplement to such
registration statement or prospectus as may be necessary to correct any
statements or omissions if, at the time when a prospectus relating to such
securities is required to be delivered under the Act, any event shall have
occurred as the result of which any such prospectus or any other prospectus as
then in effect would include an untrue statement of a material fact or omit to
state any material fact necessary to make the statements therein, in the light
of the circumstances in which they were made, not misleading; and
(i) advise such holders, promptly after it shall receive
notice or obtain knowledge thereof, of the issuance of any stop order by the
SEC suspending the effectiveness of such registration statement or the
initiation or threatening of any proceeding for that purpose and promptly use
its best efforts to prevent the issuance of any stop order or to obtain its
withdrawal if such stop order should be issued.
(j) upon the effectiveness of such registration statement,
the Registrable Securities included in the registration statement shall be
listed on the Nasdaq National Market or the Nasdaq SmallCap Market if the other
shares of outstanding Common Stock of the Company are so listed and on each
national securities exchange on which the other shares of outstanding Common
Stock of the Company are then listed.
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3.3 Agreements of the Holders of Registrable Securities. Each
holder of Registrable Securities hereby agrees to provide the Company, or its
agents or designees, with all information reasonably requested in connection
with the registration under the Act or any applicable state securities law of
any Registrable Securities.
3.4 Expenses.
(a) With respect to the registration pursuant to Section 3.1
hereof, all fees, costs and expenses of and incidental to such registration,
inclusion and public offering (as specified in paragraph (b) below) in
connection therewith shall be borne by the Company, provided, however, that any
security holders participating in such registration shall bear their pro rata
share of the underwriting discount and commissions and transfer taxes, if any.
(b) The fees, costs and expenses of registration to be borne
by the Company as provided in paragraph (a) above shall include, without
limitation, all registration, filing, and NASD fees, printing expenses, fees
and disbursements of counsel and accountants, if any, for the Company, and all
legal fees and disbursements and other expenses of complying with state
securities or blue sky laws of any jurisdictions in which the securities to be
offered are to be registered and qualified. Fees and disbursements of counsel
and accountants for the selling security holders and any other expenses
incurred by the selling security holders not expressly included above shall be
borne by the selling security holders.
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3.5 Indemnification.
(a) The Company will indemnify and hold harmless each holder
of Registrable Securities which are included in a registration statement
pursuant to the provisions of Sections 3.1, hereof, its directors and officers,
and any underwriter (as defined in the Act) for such holder and each person, if
any, who controls such holder or such underwriter within the meaning of the
Act, from and against, and will reimburse such holder and each such underwriter
and controlling person with respect to, any and all loss, damage, liability,
reasonable cost and expense to which such holder or any such underwriter or
controlling person may become subject under the Act or otherwise, insofar as
such losses, damages, liabilities, reasonable costs or expenses are caused by
any untrue statement or alleged untrue statement of any material fact contained
in such registration statement, any prospectus contained therein or any
amendment or supplement thereto, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading; provided, however, that
the Company will not be liable in any such case to the extent that any such
loss, damage, liability, reasonable cost or expenses arises out of or is based
upon an untrue statement or alleged untrue statement or omission or alleged
omission so made in conformity with written information furnished by such
holder, such underwriter or such controlling person in writing specifically for
use in the preparation thereof.
(b) Each holder of Registrable Securities included in a
registration pursuant to the provisions of Sections 3.1, hereof will indemnify
and hold harmless the Company, its directors and officers, any controlling
person and any underwriter from and against, and will reimburse the Company,
its directors and officers, any controlling person and any underwriter with
respect to, any and all loss, damage, liability, cost or expense to which the
Company or any controlling person and/or any underwriter may become subject
under the Act or otherwise, insofar as such losses, damages, liabilities,
reasonable costs or expenses are caused by any untrue statement or alleged
untrue statement of any material fact contained in such registration statement,
any prospectus contained therein or any amendment or supplement thereto, or
arise out of or are based upon the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances in which they were made, not
misleading, in each case to the extent, but only to the extent, that such
untrue statement or alleged untrue statement or omission or alleged omission
was so made in reliance upon and in strict conformity with written information
furnished by or on behalf of such holder specifically for use in the
preparation thereof.
(c) If the indemnification provided for in subsection (a) and
(b) of this Section 3.5 is unavailable or insufficient to hold harmless an
indemnified party, then each indemnifying party shall contribute to the amount
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<PAGE> 10
paid or payable by such indemnified party referred to in subsections (a) and
(b) of this Section 3.5 in such proportion as is appropriate to reflect the
relative fault of the indemnifying party on the one hand and the indemnified
party on the other hand in connection with statements or omissions which
results in losses, claims, damages or liabilities, as well as any other
relevant equitable considerations. The relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the indemnifying party or the
indemnified party and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such untrue statements or
omissions. The parties agree that it would not be just and equitable if
contributions pursuant to this clause were to be determined by pro rata
allocation or by any other method of allocation which does not take account of
the equitable considerations referred to in the first sentence of this
subsection (c). The amount paid by an indemnified party as a result of the
losses, claims, damages or liabilities referred to in the first sentence of
this subsection (c) shall be deemed to include any legal or other expense
reasonably incurred by such indemnified party in connection with investigating
or defending any loss, claim, damage, liability or proceeding which is the
subject of this clause. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be entitled
to contribution from any person who was not guilty of such fraudulent
misrepresentation. Notwithstanding anything herein to the contrary, no person
who sold Common Stock shall have to indemnify or otherwise contribute an amount
to any other party in excess of the total proceeds received by such person from
the sale of Registrable Securities.
(d) Promptly after receipt by an indemnified party pursuant
to the provisions of subsection (a) or (b) of this Section 3.5 of notice of the
commencement of any action involving the subject matter of the foregoing
indemnity provisions such indemnified party will, if a claim thereof is to be
made against the indemnifying party pursuant to the provisions of said
subsection (a) or (b), promptly notify the indemnifying party of the
commencement thereof; but the omission to so notify the indemnifying party will
not relieve it from any liability which it may have to any indemnified party
otherwise than hereunder. In case such action is brought against any
indemnified party and it notifies the indemnifying party of the commencement
thereof, the indemnifying party shall have the right to participate in, and, to
the extent that it may wish, jointly with any other indemnifying party
similarly notified, to assume the defense thereof, with counsel satisfactory to
such indemnified party, provided, however, if the defendants in any action
include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be legal
defenses available to it and/or other indemnified parties which are different
from or in addition to those available to the indemnified party, or if there is
a conflict of interest which would prevent counsel for the indemnifying party
from also representing the indemnified party, the indemnified party or parties
have the right to select separate counsel to participate in the defense
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of such action on behalf of such indemnified party or parties. After notice
from the indemnifying party to such indemnified party of its election to
assume the defense thereof, the indemnifying party will not be liable to such
indemnified party pursuant to the provisions of said subsection (a) or (b) for
any legal or other expense subsequently incurred by such indemnified party in
connection with the defense thereof other than reasonable costs of
investigation, unless (i) the indemnified party shall have employed counsel in
accordance with the provisions of the preceding sentence, (ii) the indemnifying
party shall not have employed counsel satisfactory to the indemnified party to
represent the indemnified party within a reasonable time after the notice of
the commencement of the action or (iii) the indemnifying party has authorized
the employment of counsel for the indemnified party at the expense of the
indemnifying party.
3.6 The Company acknowledges that there is no adequate remedy at
law for its failure to comply with the provisions of this Article III and that
such failure would not be adequately compensable in damages, and therefore
agrees that its agreements contained in this Article III may be specifically
enforced. In the event that the Company shall fail to file the Registration
Statement when required pursuant to Section 3.1 above or to keep the
Registration Statement effective as provided in this Article III or otherwise
fails to comply with its obligations and agreements in this Article III, then,
in addition to any other rights or remedies Subscribers may have at law or in
equity, including without limitation, the right of rescission, the Company
shall indemnify and hold harmless the Subscribers from and against any and all
manner or loss which they may incur as a result of such failure. In addition,
the Company shall also reimburse the Subscribers for any and all reasonable
legal fees and expenses incurred by them in enforcing their rights pursuant to
this Article III, regardless of whether any litigation was commenced.
IV. MISCELLANEOUS
4.1 All notices, consents and other communications under this
Purchase Agreement shall be in writing and shall be deemed to have been duly
given (a) when delivered by hand, (b) one business day after the business day
of transmission if sent by telex or telecopier (with receipt confirmed),
provided that a copy is mailed by registered mail, return receipt requested, or
(c) one business day after the business day of deposit with the carrier, if
sent for next business day delivery by Express Mail, Federal Express or other
recognized express delivery service (receipt requested), in each case addressed
to the Company at 700 Wachovia Center, Gainesville, Georgia 30501, Attention:
Gerald F. Sullivan, Sr., and to the Subscriber at its address indicated on the
last page of this Purchase Agreement (or to such other addresses, telex numbers
and the telecopier numbers as a party may designate as to itself by notice to
the other parties).
4.2 This Purchase Agreement shall not be changed, modified or
amended except by a writing signed by the parties to be charged, and this
Purchase
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Agreement may not be discharged except by performance in accordance with its
terms or by a writing signed by the party to be charged.
4.3 This Purchase Agreement shall be binding upon and inure to the
benefit of the parties hereto and to their respective heirs, legal
representatives, successors and assigns. This Purchase Agreement sets forth the
entire agreement and understanding between the parties as to the subject matter
thereof and merges and supersedes all prior discussions, agreements and
understandings of any and every nature among them.
4.4 Notwithstanding the place where this Purchase Agreement may be
executed by any of the parties hereto, the parties expressly agree that all the
terms and provisions hereof shall be construed in accordance with and governed
by the laws of the State of New York. The parties hereby agree that any dispute
which may arise between them arising out of or in connection with this Purchase
Agreement shall be adjudicated before a court located in New York and they
hereby submit to the exclusive jurisdiction of the courts of the State of New
York and of the federal courts in New York with respect to any action or legal
proceeding commenced by any party, and irrevocably waive any objection they now
or hereafter may have respecting the venue of any such action or proceeding
brought in such a court or respecting the fact that such court is an
inconvenient forum, relating to or arising out of this Purchase Agreement or
any acts or omissions relating to the sale of the securities hereunder, and
consent to the service of process in any such action or legal proceeding by
means of registered or certified mail, return receipt requested, in care of the
address set forth below or such other address as the undersigned shall furnish
in writing to the other.
4.5 This Purchase Agreement may be executed in counterparts. Upon the
execution and delivery of this Purchase Agreement by the Subscriber, this
Purchase Agreement shall become a binding obligation of the Subscriber with
respect to the purchase of Securities as herein provided; subject, however, to
the right hereby reserved to the Company to enter into the same agreements with
other subscribers and to add and/or to delete other persons as subscribers.
4.6 The holding of any provision of this Purchase Agreement to be
invalid or unenforceable by a court of competent jurisdiction shall not affect
any other provision of this Purchase Agreement, which shall remain in full
force and effect.
4.7 It is agreed that a waiver by either party of a breach of any
provision of this Purchase Agreement shall not operate, or be construed, as a
waiver of any subsequent breach by that same party.
4.8 The parties agree to execute and deliver all such further
documents, agreements and instruments and take such other and further action as
may be necessary or appropriate to carry out the purposes and intent of this
Purchase Agreement.
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4.9 The Company agrees to pay, at closing, the fees and expenses of
counsel to Thieme Fonds International, which fees and expenses are not to
exceed $9,000.
4.10 The Company recognizes that the rights of the holders of
the Secured Notes and Warrants under this Purchase Agreement are unique and,
accordingly, the holders of the Secured Notes and Warrants shall, in addition
to such other remedies as may be available to any of them at law or in equity,
have the right to enforce their rights hereunder by actions for injunctive
relief and specific performance to the extent permitted by law. The Company
agrees that monetary damages would not be adequate compensation for any loss
incurred by reason of a breach by it of the provisions of this Purchase
Agreement and hereby agrees to waive in any action for specific performance the
defense that a remedy at law would be adequate. This Purchase Agreement is not
intended to limit or abridge any rights of the holders of the Secured Notes and
Warrants which may exist apart from this Purchase Agreement.
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IN WITNESS WHEREOF, the parties have executed this Purchase
Agreement as of the day and year first written above. The execution of this
Purchase Agreement also constitutes agreement to the Security Agreement and the
undersigned shall be a party to such agreements to the same extent as if the
undersigned executed those agreements directly.
- ------------------------------ ------------------------------------
Signature of Subscriber(s)
- ------------------------------ ------------------------------------
Name of Subscriber(s)
[please print]
- ------------------------------ ------------------------------------
Address of Subscriber(s)
- ------------------------------ ------------------------------------
Social Security or Taxpayer
Identification Number of Subscriber(s)
- ------------------------------
Amount of Secured Notes
Subscribed For
Subscription Accepted:
CREDIT DEPOT CORPORATION
By:
--------------------------------
Date:
------------------------------
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EXHIBIT A
10% Convertible Secured Notes due October 31, 1997
No.1 $350,000
CREDIT DEPOT CORPORATION promises to pay to the order of _________ or its
registered assigns (the "Noteholder") the principal sum of Three Hundred and
Fifty Thousand ($350,000) United States Dollars on October 31, 1997, together
with interest therein as provided herein (the "Maturity Date").
This Note is payable pursuant to terms hereinafter set forth and set forth in
the Security Agreement dated as of July 30, 1997 among Credit Depot Corporation,
a Delaware corporation, Credit Depot Corporation of North Carolina, a Delaware
corporation, Credit Depot Corporation of Ohio, a Delaware corporation, Credit
Depot Corporation of South Carolina, a Delaware corporation, Credit Depot
Corporation of Tennessee, a Delaware corporation, Credit Depot Corporation of
Florida, a Delaware corporation, Credit Depot Corporation of Indiana, a Delaware
corporation, Credit Depot Corporation of Georgia, a Delaware corporation, Credit
Depot Corporation of Illinois, a Delaware corporation, Credit Depot Corporation
of Missouri, a Delaware corporation, Credit Depot Corporation of Michigan, a
Delaware corporation, Credit Depot Corporation of Virginia, a Delaware
corporation and Cash Back Mortgage Corp., a Delaware corporation, each a
guarantor of the Company's obligations hereunder.
Dated: July 30, 1997
CREDIT DEPOT CORPORATION
BY:
----------------------
(CORPORATE SEAL)
10% SECURED CONVERTIBLE NOTE DUE OCTOBER 31, 1997
<PAGE> 16
THIS NOTE (OR ITS PREDECESSOR) WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT
FROM REGISTRATION UNDER SECTIONS OF THE UNITED STATES SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), AND THE NOTE AND COMMON STOCK WHICH MAY BE
ISSUED UPON CONVERSION HEREOF (COLLECTIVELY THE "SECURITY") MAY NOT BE OFFERED,
SOLD, PLEDGED, HYPOTHECATED, OR OTHERWISE TRANSFERRED OR DISPOSED OF ABSENT SUCH
REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF THE
SECURITY EVIDENCED HEREBY IS HEREBY NOTIFIED THAT THE SELLER MAY BE RELYING ON
THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY
RULE 144A ("RULE 144A") THEREUNDER.
THE HOLDER OF THIS SECURITY AGREES FOR THE BENEFIT OF THE ISSUER THAT SUCH
SECURITY MAY BE OFFERED, RESOLD, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED
OR DISPOSED OF, ONLY (1) (A) TO A PERSON WHO THE HOLDER REASONABLY BELIEVED IS A
"QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A) IN A TRANSACTION
MEETING THE REQUIREMENTS OF RULE 144A, (B) PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT, (C) PURSUANT TO ANOTHER EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (AND BASED UPON AN OPINION OF
COUNSEL IF THE COMPANY SO REQUESTS) OR (D) TO THE COMPANY, AND (2) IN EACH CASE,
IN ACCORDANCE WITH APPLICABLE BLUE SKY LAWS AND THE SECURITIES LAWS OF ANY OTHER
APPLICABLE DOMESTIC OR FOREIGN JURISDICTION. THE HOLDER WILL, AND EACH
SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER FROM IT THAT THE SECURITY
EVIDENCED HEREBY IS SUBJECT TO THE FOREGOING RESALE RESTRICTIONS.
THIS SECURITY MAY NOT BE TRANSFERRED TO AN EMPLOYEE BENEFIT PLAN, TRUST OR
ACCOUNT THAT IS EITHER SUBJECT TO THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF
1974, AS AMENDED ("ERISA"), OR DESCRIBED IN SECTION 4975 (E)(1) OF THE INTERNAL
REVENUE CODE OF 1986, AS AMENDED ("CODE"), UNLESS SUCH TRANSFER SATISFIES THE
REQUIREMENTS OF CERTAIN PROHIBITED TRANSACTION EXEMPTIONS.
Capitalized terms used herein have the meanings assigned to them in the Security
Agreement (as defined below) unless otherwise indicated.
1. INTEREST. Credit Depot Corporation, a Delaware corporation (the
"Company"), promises to pay interest to the order of _____________ on the
principal amount of this Note at the rate and in the manner specified below. So
long as the Company is not in default hereunder, the
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Company as an entirety resulting in any distribution to the Company's
stockholders, on or before the Termination Date, the Holder shall have the right
to exercise this Warrant commencing at such time through the Termination Date
which shall entitle the Holder to receive, in lieu of Warrant Shares, the kind
and amount of securities and property (including cash) receivable by a holder of
the number of shares of Warrant Shares into which this Warrant might have been
exercisable immediately prior thereto. For purposes of this Warrant, the term
"Warrant Shares" shall include such securities and property. This Warrant may be
exercised by presentation and surrender hereof to the Company at its principal
office, or at the office of its stock transfer agent, if any, with the Purchase
Form annexed hereto duly executed and accompanied by payment of the Exercise
Price for the number of Warrant Shares specified in such form. Such payment may
be made, at the option of the Holder, by check or wire transfer As soon as
practicable after each such exercise of the Warrant, but not later than two
business days from the date of such exercise, the Company shall issue and
deliver to the Holder a certificate or certificates representing the Warrant
Shares issuable upon such exercise, registered in the name of the Holder or the
Holder's designee. If this Warrant should be exercised in part only, the Company
shall, upon surrender of this Warrant for cancellation, execute and deliver a
new Warrant evidencing the rights of the Holder thereof to purchase the balance
of the Warrant Shares purchasable thereunder. Upon receipt by the Company of
this Warrant at its office, or by the stock transfer agent of the Company at its
office, in proper form for exercise, the Holder shall be deemed to be the holder
of record of the Warrant Shares issuable upon such exercise, notwithstanding
that the stock transfer books of the Company shall then be closed or that
certificates representing such shares shall not then be physically delivered to
the Holder.
(b) Notwithstanding anything herein to the contrary, this Warrant may
not be transferred separately from the Note prior to the Commencement Date.
SECTION 2. RESERVATION OF SHARES.
The Company shall at all times reserve for issuance and/or delivery
upon exercise of this Warrant such number of Warrant Shares as shall be required
for issuance and delivery upon exercise of this Warrant.
SECTION 3. FRACTIONAL SHARES.
No fractional shares or scrip representing fractional shares shall be
issued upon the exercise of this Warrant. With respect to any fraction of a
share called for upon any exercise hereof, the Company shall pay to the Holder
an amount in cash equal to such fraction multiplied by the current market value
of a share, determined as follows:
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(a) If the Common Stock is listed on a national securities exchange or
admitted to unlisted trading privileges on such exchange or listed for trading
on NASDAQ, the current market value shall be the last reported sale price of the
Common Stock on such exchange or system on the last business day prior to the
date of exercise of this Warrant or if no such sale is made on such day, the
average of the closing high bid and low asked prices for such day on such
exchange or system; or
(b) If the Common Stock is not so listed or admitted to unlisted
trading privileges but bid and asked prices are reported by the National
Quotation Bureau, Inc., the current market value shall be the average of last
reported high bid and low asked prices reported by the National Quotation
Bureau, Inc. on the last business day prior to the date of the exercise of this
Warrant; or
(c) If the Common Stock is not so listed or admitted to unlisted
trading privileges and bid and asked prices are not so reported, the current
market value shall be an amount, the book value of a share thereof as at the end
of the fiscal quarter of the Company ending immediately prior to the date of the
exercise of the Warrant.
SECTION 4. EXCHANGE, TRANSFER, ASSIGNMENT OR LOSS OF WARRANT.
This Warrant is exchangeable, without expense, at the option of the
Holder, upon presentation and surrender hereof to the Company or at the office
of its stock transfer agent, if any, for other warrants of different
denominations entitling the holder thereof to purchase in the aggregate the same
number of shares of Common Stock purchasable hereunder. The term "Warrant" as
used herein includes any Warrants into which this Warrant may be divided or
exchanged. Upon receipt by the Company of evidence reasonably satisfactory to it
of the loss, theft, destruction or mutilation of this Warrant, and (in the case
of loss, theft or destruction) of reasonably satisfactory indemnification, and
upon surrender and cancellation of this Warrant, if mutilated, the Company will
execute and deliver a new Warrant of like tenor and date. Any such new Warrant
executed and delivered shall constitute an additional contractual obligation on
the part of the Company, whether or not this Warrant so lost, stolen, destroyed,
or mutilated shall be at any time enforceable by anyone.
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<PAGE> 19
SECTION 5. RIGHTS AND LIABILITIES OF THE HOLDER.
The Holder shall not, by virtue hereof, be entitled to any rights of a
shareholder in the Company, either at law or equity, and the rights of the
Holder are limited to those expressed in the Warrant and are not enforceable
against the Company except to the extent set forth herein. No provision of this
Warrant, in the absence of affirmative action by the Holder to purchase the
Warrant Shares, and no mere enumeration herein of the rights or privileges of
the Holder, shall give rise to any liability of the Holder for the Exercise
Price or as a shareholder of the Company, whether such liability is asserted by
the Company or by creditors of the Company.
SECTION 6. ADJUSTMENTS, NOTICE PROVISIONS AND RESTRICTIONS ON
ISSUANCE OF ADDITIONAL SECURITIES.
SECTION 6.1 Adjustment of Exercise Price. The Exercise Price in effect from time
to time shall be subject to adjustment, as follows:
(a) In case the Company shall (i) declare a dividend or make a
distribution on the outstanding shares of its capital stock that is payable in
shares of its Common Stock, (ii) subdivide, split or reclassify the outstanding
shares of its Common Stock into a greater number of shares, or (iii) combine or
reclassify the outstanding shares of its Common Stock into a smaller number of
shares, the Exercise Price in effect immediately after the record date for such
dividend or distribution or the effective date of such subdivision, combination
or reclassification shall be adjusted so that it shall equal the price
determined by multiplying the Exercise Price in effect immediately prior thereto
by a fraction, of which the numerator shall be the number of shares of Common
Stock outstanding immediately before such dividend, distribution, split,
subdivision, combination or reclassification, and of which the denominator shall
be the number of shares of Common Stock outstanding immediately after such
dividend, distribution, split, subdivision, combination or reclassification. Any
shares of Common Stock issuable in payment of a dividend shall be deemed to have
been issued immediately prior to the record date for such dividend for purposes
of calculating the number of outstanding shares of Common Stock of the Company
under this Section 6. Such adjustment shall be made successively upon the
occurrence of each event specified above.
(b) In case the Company fixes a record date for the issuance to holders
of its Common Stock of rights, options, warrants or convertible or exchangeable
securities generally entitling such holders to subscribe for or purchase shares
of Common Stock at a price per share less than the Current Market Price (as such
term is defined in Subsection 6.1(d) hereof) per share of Common Stock on such
record date, the Exercise Price shall be adjusted immediately thereafter so that
it shall equal the price determined by multiplying
5
<PAGE> 20
the Exercise Price in effect immediately prior thereto by a fraction, of which
the numerator shall be the number of shares of Common Stock outstanding on such
record date plus the number of shares of Common Stock which the aggregate
offering price of the total number of shares of Common Stock so offered would
purchase at the Current Market Price per share, and of which the denominator
shall be the number of shares of Common Stock outstanding on such Record Date
plus the number of additional shares of Common Stock offered for subscription or
purchase. Such adjustment shall be made successively on each date whenever a
record date is fixed.
(c) In case the Company fixes a record date for the making of a
distribution to all holders of shares of its Common Stock (i) of shares of any
class of capital stock other than its Common Stock or (ii) of evidences of its
indebtedness or (iii) of assets (other than dividends or distributions referred
to in Subsection 6.1(a) hereof) or (iv) of rights, options, warrant or
convertible or exchangeable securities (excluding those rights, options,
warrants or convertible or exchangeable securities referred to in Subsection
6.1(b) hereof), then in each such case the Exercise Price in effect immediately
thereafter shall be determined by multiplying the Exercise Price in effect
immediately prior thereto by a fraction, of which the numerator shall be the
total number of shares of Common Stock outstanding on such record date
multiplied by the Current Market Price (as such term is defined in Subsection
6.1(d) hereof) per share on such record date, less the aggregate fair value as
determined in good faith by the Board of Directors of the Company of said shares
or evidences of indebtedness or assets or rights, options, warrants or
convertible or exchangeable securities so distributed, and of which the
denominator shall be the total number of shares of Common Stock outstanding on
such record date multiplied by such Current market Price per share. Such
adjustment shall be made successively each time such a record date is fixed. In
the event that such distribution is not so made, the Exercise Price then in
effect shall be readjusted to the Exercise Price which would then be in effect
if such record date had not been fixed.
(d) For the purpose of any computation under Subsection 6.1(a), 6.1(b)
or 6.1(c) hereof, the "Current Market Price" per share at any date (the
"Computation Date") shall be deemed to be the average of the daily current
market value of the Common Stock as determined in accordance with the provisions
of Section 3 hereof over twenty consecutive trading days ending the trading day
before such date; provided, however, upon the occurrence, prior to the
Computation Date, of any event described in Subsections 6.1(a), 6.1(b) or 6.1(c)
which shall have become effective with respect to market transactions at any
time (the "Market-Effect Date") on or after the beginning of such 20-day period,
the current market value, as determined in accordance with the provisions of
Section 3 hereof for each trading day preceding the Market-Effect Date shall be
adjusted, for purposes of calculating such average, by multiplying such Closing
Price by a fraction the numerator of which is the Exercise Price as in effect
immediately after the Market-Effect Date and the
6
<PAGE> 21
denominator of which is the Exercise Price immediately prior to the
Market-Effect Date, it being understood that the purpose of this proviso is to
ensure that the effect of such event on the market price of the Common Stock
shall, as nearly as possible, be eliminated in order that the distortion in the
calculation of the Current Market Price may be minimized.
(e) Notwithstanding anything herein to the contrary, in addition to any
other adjustment required to be made pursuant to the provisions hereof, the
Exercise Price will also be reduced to a price equal to the sales price per
share of Common Stock issued by the Company or issuable on conversion or
exercise of convertible or exercisable securities issued by the Company on and
after the date hereof and through the Termination Date if such price is lower
than the Exercise Price. In no event will such price adjustment increase the
Exercise Price, as otherwise adjusted pursuant to the terms hereof. There shall
be no limitation on the number of adjustments made pursuant to this subsection
(e).
(f) All calculations under this Section 6.1 shall be made to the
nearest cent.
SECTION 6.2 Adjustment of Number of Shares. Upon each adjustment of the Exercise
Price pursuant to Subsection 6.1 hereof, this Warrant shall thereupon evidence
the right to purchase, in addition to any other securities to which the Holder
is entitled to purchase, that number of Warrant Shares (calculated to the
nearest one-hundred thousandth of a share) obtained by multiplying the number of
shares of Common Stock purchasable upon exercise of the Warrant immediately
prior to such adjustment by the Exercise Price in effect immediately prior to
such adjustment and dividing the product so obtained by the Exercise Price in
effect immediately after such adjustment.
SECTION 6.3 Verification of Computations. The Company shall select a firm of
independent public accountants, which may be the Company's independent auditors,
and which selection may be changed from time to time, to verify the computations
made in accordance with this Section 6. The certificate, report of other written
statement of any such firm shall be conclusive evidence of the correctness of
any computation made under this Section 6. Promptly upon its receipt of such
certificate, report or statement from such firm of independent public
accountants, the Company shall deliver a copy thereof to the Holder.
SECTION 6.4 Warrant Certificate Amendments. Irrespective of any adjustments
pursuant to this Section 6, Warrant Certificates theretofore or thereafter
issued need not be amended or replaced, but Warrant Certificates thereafter
issued shall bear an appropriate legend or other notice of any adjustments and
which legend and/or notice has been provided by the Company to the Holder,
provided the Company may, at its option, issue new Warrant Certificates
evidencing Warrants in the form attached hereto to reflect any adjustment in the
Exercise Price and the number of Warrant Shares evidenced
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<PAGE> 22
by such Warrant Certificates and deliver the same to the Holder in substitution
for existing Warrant Certificates.
SECTION 7. OFFICER'S CERTIFICATE.
Whenever the Exercise Price, the number of Warrant Shares underlying
this Warrant or either of them shall be adjusted as required by the provisions
of the foregoing Section, the Company shall forthwith file in the custody of its
Secretary or an Assistant Secretary at its principal office and with its stock
transfer agent, if any, an officer's certificate showing the adjusted Exercise
Price and number of Warrant shares determined as herein provided, setting forth
in reasonable detail the facts requiring such adjustment, including a statement
of the number of additional shares of Common Stock, if any, and such other facts
as shall be necessary to show the reason for and the manner of computing such
adjustment. Each such officer's certificate shall be made available at all
reasonable times for inspection by the Holder or any holder of a Warrant
executed and delivered pursuant to Section 1 hereof and the Company shall,
forthwith after each such adjustment, mail a copy by certified mail of such
certificate to the Holder or any such holder.
SECTION 8. NOTICES TO WARRANT HOLDERS.
So long as this Warrant shall be outstanding, (i) if the Company shall
pay any dividend or make any distribution upon the Common Stock, (ii) if the
Company shall offer to the holders of its Common Stock rights to subscribe for,
purchase, or exchange property for any shares of any class of stock, or any
other rights or options or (iii) if any capital reorganization of the Company,
reclassification of the capital stock of the Company, consolidation or merger of
the Company with or into another corporation, sale, lease or transfer of all or
substantially all of the property and assets of the Company to another
corporation, or voluntary or involuntary dissolution, liquidation or winding up
of the Company shall be effected, then in any such case, the Company shall cause
to be sent by overnight mail or courier service to the Holder, at least fifteen
days prior to the date specified in (x) or (y) below, as the case may be, a
notice containing a brief description of the proposed action and stating the
date on which (x) a record is to be taken for the purpose of such dividend,
distribution or subscription rights, or (y) such reclassification,
reorganization, consolidation, merger, conveyance, lease, dissolution,
liquidation or winding up is to take place and the date, if any is to be fixed,
as of which the holders of Common Stock or other securities shall receive cash
or other property deliverable upon such reclassification, reorganization,
consolidation, merger, conveyance, dissolution, liquidation or winding up.
8
<PAGE> 23
SECTION 9. RECLASSIFICATION, REORGANIZATION OR MERGER.
In case of any reclassification, capital reorganization or other change
of outstanding shares of Common Stock of the Company, or in case of any
consolidation or merger of the Company with or into another corporation (other
than a merger with a subsidiary in which merger the Company is the continuing
corporation and which does not result in any reclassification, capital
reorganization or other change of outstanding shares of Common Stock of the
class issuable upon exercise of this Warrant) or in case of any sale, lease or
conveyance to another corporation of the property of the Company as an entirety
(collectively such actions being hereinafter referred to as "Reorganizations"),
the Company shall, as a condition precedent to such Reorganization transaction,
cause effective provisions to be made so that the Holder shall have the right
thereafter by exercising this Warrant at any time prior to the expiration of the
Warrant, to receive in lieu of the amount of securities otherwise deliverable,
the kind and amount of shares of stock and other securities and property
receivable upon such Reorganization by a holder of the number of shares of
Common Stock which might have been purchased upon exercise of this Warrant and
the warrants included in the Shares immediately prior to such Reorganization.
Any such provision shall include provision for adjustments which shall be as
nearly equivalent as may be practicable to the adjustments provided for in this
Warrant. The foregoing provisions of this Section 9 shall similarly apply to
successive Reorganizations.
SECTION 10. ISSUE TAX.
The issuance of certificates representing the Warrant Shares upon the
exercise of this Warrant as well as securities underlying the Share Warrants
shall be made without charge to the Holder for any issuance tax in respect
thereof.
SECTION 11. EXCHANGE PROVISIONS
At any time during which this Warrant is exercisable in accordance with
its terms, the Holder may, at its option, exchange this Warrant, in whole or in
part (a "Warrant Exchange"), into the number of Warrant Shares determined in
accordance with this Section 11, by surrendering this Warrant at the principal
office of the Company or at the office of its stock transfer agent, accompanied
by a notice stating such Holder's intent to effect such exchange, the number of
Warrant Shares to be exchanged and the date on which the Holder requests that
such Warrant Exchange occur (the "Notice of Exchange"). The Warrant Exchange
shall take place on the date specified in the Notice of Exchange or, if later,
the date the Notice of Exchange is received by the Company (the "Exchange
Date"). Certificates for the shares issuable upon such Warrant Exchange and, if
9
<PAGE> 24
applicable, a new warrant of like tenor evidencing the balance of the shares
remaining subject to this Warrant, shall be issued as of the Exchange Date and
delivered to the Holder within seven (7) days following the Exchange Date. In
connection with any Warrant Exchange, this Warrant shall represent the right to
subscribe for and acquire the number of Warrant Shares (rounded to the next
highest integer) equal to (i) the number of Warrant Shares specified by the
Holder in its Notice of Exchange (the "Total Number") less (ii) the number of
Warrant Shares equal to the quotient obtained by dividing (A) the product of the
Total Number and the existing Exercise Price by (B) the Fair Market Value. "Fair
Market Value" "Fair Market Value" shall mean: (1) if the Common Stock is listed
on a National Securities Exchange or admitted to unlisted trading privileges on
such exchange or listed for trading on the NASDAQ system, Fair Market Value
shall be the average of the last reported sale prices of the Common Stock on
such exchange or system for the twenty (20) business days ending on the last
business day prior to the date for which the determination is being made; or (2)
if the Common Stock is not so listed or admitted to unlisted trading privileges,
Fair Market Value shall be the average of the means of the last reported bid and
asked prices reported by the National Quotation Bureau, Inc. for the twenty (20)
business days ending on the last business day prior to the date for which the
determination is being made; or (3) if the Common Stock is not so listed or
admitted to unlisted trading privileges and bid and asked prices are not so
reported, the Fair Market Value shall be the book value thereof as at the end of
the most recent fiscal year of the Company ending prior to the Exchange Date,
determined in accordance with generally accepted accounting principles.
10
<PAGE> 25
SECTION 12. GOVERNING LAW, JURISDICTION AND VENUE.
This Warrant shall be governed by and construed and enforced in
accordance with the laws of the State of New York. The Company hereby consents
to the exclusive jurisdiction and venue of the courts of the State of New York
located in New York County, New York with respect to any matter relating to this
Warrant and the performance of the Company's obligations hereunder and the
Company hereto hereby further consents to the personal jurisdiction of such
courts. Any action suit or proceeding brought by or on behalf of the Company
relating to such matters shall be commenced, pursued, defended and resolved only
in such courts and any appropriate appellate court having jurisdiction to hear
an appeal from any judgment entered in such courts.
CREDIT DEPOT CORPORATION
By:
-------------------
[SEAL]
Dated: , 1997
--------------
Attest:
- ----------------------------
Secretary
11
<PAGE> 26
PURCHASE FORM
Dated ________________, 19__
The undersigned hereby irrevocably elects to exercise the
within Warrant to the extent of purchasing ___________ Warrant Shares and
hereby makes payment of ____________ in payment of the actual exercise price
thereof.
INSTRUCTIONS FOR REGISTRATION OF STOCK
Name________________________________________________________
(Please typewrite or print in block letters)
Address_____________________________________________________
Signature___________________________________________________
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<PAGE> 27
EXHIBIT B
FORM OF NOTATION ON NOTE
RELATING TO SUBSIDIARY GUARANTEE
SUBSIDIARY GUARANTEE
For good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, each of Credit Depot Corporation of North
Carolina, Credit Depot Corporation of Ohio, Credit Corporation of South
Carolina, Credit Depot Corporation of Tennessee, Credit Depot Corporation of
Florida, Credit Depot Corporation of Indiana, Credit Depot Corporation of
Georgia, Credit Depot Corporation of Illinois, Credit Depot Corporation of
Missouri, Credit Depot Corporation of Michigan, Credit Depot Corporation of
Virginia and Cash Back Mortgage Corporation (hereinafter collectively referred
to as the "Guarantors," which term includes any successor or additional
Guarantors under the Security Agreement (the "Agreement") referred to in the
Note upon which this notation is endorsed), jointly and severally, (i) has
unconditionally guaranteed (a) the due and punctual payment of the principal of,
premium, if any, with respect to and interest on the Notes, whether at maturity
or an interest payment date, by acceleration, call for redemption or otherwise,
(b) the due and punctual payment of interest on the overdue principal of the
Notes, (c) the due and punctual performance of all other obligations of the
Company to the Securityholders, all in accordance with the terms set forth in
the Loan Documents (as defined in the Agreement), and (d) in case of any
extension of time of payment or renewal of any Notes or any of such other
obligations, the same will be promptly paid in full when due or performed in
accordance with the terms of the extension or renewal, whether at stated
maturity, by acceleration or otherwise and (ii) has agreed to pay any and all
costs and expenses (including reasonable attorneys' fees) incurred by the
Custodian or any Holder in enforcing any rights under this Subsidiary Guarantee;
provided, that the maximum liability of a Guarantor pursuant to this Subsidiary
Guarantee shall be limited by the following paragraph. Capitalized terms used
herein have the meanings assigned to them in the Loan Agreement unless otherwise
indicated.
Each Guarantor and by its acceptance hereof each Holder hereby confirms
that it is the intention of all such parties that the guarantee by such
Guarantor pursuant to its Subsidiary Guarantee not constitute a fraudulent
transfer or conveyance for purposes of the Bankruptcy Code, the Uniform
Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act or any similar
Federal or state law. To effectuate the foregoing intention, the Holders and
such Guarantor hereby irrevocably agree that the obligations of such Guarantor
under the Subsidiary Guarantee shall be limited to the maximum amount as will,
after giving effect to all other contingent and fixed liabilities of such
Guarantor and after giving effect to any collections from or payments made by or
on behalf of any other Guarantor in respect of the obligations of such other
Guarantor under its Subsidiary Guarantee, result in such Guarantor's obligations
under the Subsidiary Guarantee not constituting such fraudulent transfer or
conveyance.
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<PAGE> 28
No stockholder, officer, director or incorporator, as such, past,
present or future, of the Guarantors shall have any personal liability under
this Subsidiary Guarantee by reason of his or its status as such stockholder,
officer, director or incorporator, unless otherwise provided by any provision of
applicable law which cannot be waived.
This Subsidiary Guarantee shall be binding upon the Guarantors and
their successors and assigns and shall inure to the benefit the Securityholders
and, in the event of any transfer or assignment of rights by any Securityholder,
the rights and privileges herein conferred upon such party shall automatically
extend to and be vested in such transferee or assignee, all subject to the terms
and conditions hereof. The undersigned waive notice of acceptance, notice of
non-payment, notice of nonperformance, protest and notice of protest with
respect to the obligations contained herein and in the Note and Loan Documents
and agree to be bound by the terms of the Note.
CREDIT DEPOT CORPORATION OF NORTH CAROLINA
By: /s/ Gerald F. Sullivan
--------------------------------------
Name: Gerald F. Sullivan
--------------------------------------
Title: President
--------------------------------------
CREDIT DEPOT CORPORATION OF OHIO
By: /s/ Gerald F. Sullivan
--------------------------------------
Name: Gerald F. Sullivan
--------------------------------------
Title: President
--------------------------------------
CREDIT DEPOT CORPORATION OF SOUTH CAROLINA
By: /s/ Gerald F. Sullivan
--------------------------------------
Name: Gerald F. Sullivan
--------------------------------------
Title: President
--------------------------------------
CREDIT DEPOT CORPORATION OF TENNESSEE
By: /s/ Gerald F. Sullivan
--------------------------------------
Name: Gerald F. Sullivan
--------------------------------------
Title: President
--------------------------------------
2
<PAGE> 29
CREDIT DEPOT CORPORATION OF FLORIDA
By: /s/ Gerald F. Sullivan
--------------------------------------
Name: Gerald F. Sullivan
--------------------------------------
Title: President
--------------------------------------
CREDIT DEPOT CORPORATION OF INDIANA
By: /s/ Gerald F. Sullivan
--------------------------------------
Name: Gerald F. Sullivan
--------------------------------------
Title: President
--------------------------------------
CREDIT DEPOT CORPORATION OF GEORGIA
By: /s/ Gerald F. Sullivan
--------------------------------------
Name: Gerald F. Sullivan
--------------------------------------
Title: President
--------------------------------------
CREDIT DEPOT CORPORATION OF ILLINOIS
By: /s/ Gerald F. Sullivan
--------------------------------------
Name: Gerald F. Sullivan
--------------------------------------
Title: President
--------------------------------------
CREDIT DEPOT CORPORATION OF MISSOURI
By: /s/ Gerald F. Sullivan
--------------------------------------
Name: Gerald F. Sullivan
--------------------------------------
Title: President
--------------------------------------
CREDIT DEPOT CORPORATION OF MICHIGAN
By: /s/ Gerald F. Sullivan
--------------------------------------
Name: Gerald F. Sullivan
--------------------------------------
Title: President
--------------------------------------
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<PAGE> 30
CREDIT DEPOT CORPORATION OF VIRGINIA
By: /s/ Gerald F. Sullivan
--------------------------------------
Name: Gerald F. Sullivan
--------------------------------------
Title: President
--------------------------------------
CASH BACK MORTGAGE CORPORATION
By: /s/ Gerald F. Sullivan
--------------------------------------
Name: Gerald F. Sullivan
--------------------------------------
Title: President
--------------------------------------
4
<PAGE> 31
EXHIBIT C
SECURITY AGREEMENT
THIS SECURITY AGREEMENT ("Security Agreement"), made as of this 30th day
of July, 1997, by and among CREDIT DEPOT CORPORATION, a Delaware corporation
located at 700 Wachovia Center, Gainesville, Georgia 30501, (the "Debtor"), the
securityholder whose signature appears on the signature page attached hereto
(the "Noteholders" or "Holders") and Thieme Consulting, Inc., 1370 Avenue of
the Americas, New York, New York 10019, as agent (the "Holders' Agent") for
the ratable benefit of the Holders of the Notes (in such capacity the "Secured
Party").
W I T N E S S E T H:
WHEREAS, the Debtor has entered into that certain Note Purchase Agreement
of even date herewith (the "Purchase Agreement"), and
WHEREAS, pursuant to the Purchase Agreement, the Debtor may issue up to
$4,000,000 in principal amount of its 10% Convertible Secured Notes due October
31, 1997 (the "Notes") and accompanying Warrants (the "Warrants") to purchase
up to 10,000,000 shares of the Debtor's Common Stock;
WHEREAS, the Secured Party has agreed to act as collateral agent for the
Holders of the Notes for the purposes of attachment and perfection of the
security interest of such Holders in the Collateral (as hereinafter defined);
WHEREAS, to secure the performance of the obligations under the Purchase
Agreement, the Notes and this Security Agreement (collectively the "Loan
Documents"), the Debtor has granted to Secured Party an additional security for
all of the obligations and indebtedness of the Debtor under the Loan Documents,
and the Holders have required that the Debtor, and the Debtor has agreed, to
grant a first perfected security interest in and to certain assets of Debtor,
upon the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and covenants contained
herein, and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto do hereby agree
as follows:
0. DEFINITIONS
<PAGE> 32
"Affiliate" of any specified person means any other person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any person, shall
mean the possession, directly or indirectly, of the power to direct or cause
the direction of the management or policies of such person, whether through the
ownership of voting securities, by agreement or otherwise; provided, that
beneficial ownership of 10% or more of the voting securities of a person shall
be deemed to be control.
"Agent" means any Registrar, Paying Agent, Conversion Agent or
co-registrar.
"Annual Reports" is defined in Section 7(b).
"Bankruptcy Law" means Title 11, U.S. Code or any similar Federal or
State Law for the relief of Debtors.
"Board of Directors" means the Board of Directors of the Company, or any
authorized committee of the Board of Directors.
"Business Day" means any day other than a Legal Holiday.
"Capitalized Lease Obligation" means, with respect to any person for any
period, an obligation of such person in excess of $1.5 million to pay rent or
other amounts under a lease that is required to be capitalized for financial
reporting purposes in accordance with GAAP, and the amount of such obligation
shall be the capitalized amount thereof determined in accordance with such
principles.
"Capital Stock" of any person means any and all shares, interests, right
to purchase, warrants, options, participation's, or other equivalents of or
interests in (however designated) the common or preferred equity of such
person, including, without limitation, partnership interests.
"Collateral" means all property and interests in property and proceeds
thereof as defined in Section 2.
"Common Stock" means the Common Stock, $.001 par value per share, of the
Company as it exists on the date of this Agreement as originally signed or as
it may be constituted from time to time.
"Default" means any event that is or with the passing of time or the
giving of notice, or both, would be an Event of Default.
2
<PAGE> 33
"Distribution" means any dividend, payment or distribution on or with
respect to Capital Stock or other Equity Interest, whether in cash, Capital
Stock, other securities, assets or property of any kind or nature, provided
that all Distributions other than in cash shall be valued at the higher of the
(i) value thereof on the Company or its Subsidiary's books calculated in
accordance with GAAP, or (ii) the fair market value thereof based upon a good
faith determination of the Company's Board of Directors and certified in an
Officers' Certificate delivered to the Custodian.
"Equity Interest" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Equivalent Reports" is defined in Section 6(b)
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"GAAP" means, as of any date, generally accepted accounting principles
consistently applied in the United States which are in effect on the date of
this Security Agreement and not indulging any interpretations or regulations
that have been proposed but have not been enacted. Except as may otherwise be
specified, accounting terms used in this Security Agreement will have the
meanings specified under GAAP.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Hedging Obligations" means, with respect to any person, the obligations
of such person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements, and (ii) other agreements or
arrangements designed to protect such person against fluctuations in interest
rates.
"Holders' Agent" is defined in Section 9(e).
"Indebtedness" of any person as of any date means and includes, without
duplication, (i) all indebtedness, obligations and liabilities of such person
in respect of borrowed money including all interest, fees and expenses owed
with respect thereto (whether or not the recourse of the lender is to the whole
of the assets of such person or only to a portion thereof), or evidenced by
bonds, notes, debentures or similar instruments, or representing the deferred
and unpaid balance of the purchase price of any property or interest therein,
if and to the extent such indebtedness would appear as a liability upon a
balance sheet of such person prepared on a
3
<PAGE> 34
consolidated basis in accordance with GAAP, (ii) all Capitalized Lease
Obligations of such person, (iii) all obligations of such person in respect of
letters of credit, bankers' acceptances, letter of credit reimbursement or
similar agreement (whether or not such items would appear on the balance sheet
of such person), (iv) all net Obligations of such person in respect of interest
rate protection and foreign currency hedging arrangements, (v) all judgment
debts and (vi) all Guarantees by such person of items that would constitute
Indebtedness under this definition (whether or not such items would appear on
such balance sheet). The amount of Indebtedness of any person at any date
shall be, without duplication, the principal amount that would be shown on a
balance sheet of such person prepared as of such date in accordance with GAAP
and the maximum net liability of any contingent Obligations referred to in
clauses (i) through (v) above at such date. Interest rate swap, cap, collar or
other hedging agreements shall not be deemed to be Indebtedness for purposes of
this Security Agreement to the extent that they are entered into for the
purpose of reducing interest rate on currency exposure on any Indebtedness
permitted to be outstanding by the terms of this Security Agreement.
"Issuance Date" means the date of original issue of the Securities.
"Lien" means any lien, security interest, mortgage, deed of trust, charge
or encumbrance of any king (including any conditional sale or other title
retention agreement, any lease in the nature thereof, any option or other
agreement to give any security interest).
"Loan Documents" means the Purchase Agreement and this Security Agreement
and all documents and instruments executed and delivered in connection with the
foregoing.
"Obligations" means any principal, interest, penalties, fees,
indemnification's, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Officers" means the Chairman of the Board, the Chief Executive Officer,
the President, the Chief Financial Officer, the Treasurer, any Assistant
Treasurer, Controller, Secretary, and Assistant Secretary or any Vice President
of the Company, the Guarantors or any other Subsidiary, as the case may be.
"Officers' Certificate" means a certificate signed by two Officers, one of
whom must be the principal executive officer, principal financial officer or
principal accounting officer of the Company.
"Opinion of Counsel" means an opinion from legal counsel. Such counsel
may be a director, officer or employee of or counsel to the Company, any
Guarantor, or Subsidiary.
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"Permitted Liens" means the Liens described in Section 7(f) of this
Security Agreement.
"Person" means any individual, corporation, partnership, joint venture,
trust, estate, association, organization or any government or any agency or
political subdivision thereof.
"Preferred Stock" means any Equity Interest, whether or not designated as
"preferred stock" with preferential rights of payment of dividends or upon
redemption or retirement, or upon liquidation, winding-up or dissolution or
termination of the issuer thereof.
"Principal" means any director or executive officer of the Company or any
of its Subsidiaries, and their respective Affiliates and Related Persons.
"Quarterly Reports" is defined in Section 7(b).
"Related Person" with respect to any Principal means (i) any controlling
shareholder, 80% or more owned Subsidiary, or spouse or immediate family member
(in the case of an individual) of such Principal, or (ii) a trust, corporation,
partnership or other entity, the beneficiaries, shareholders, partner, owners
or person beneficially holding an 80% or more controlling interest of which
consists of such Principal or such other persons referred to in the foregoing
clause (i).
"SEC" means the Securities and Exchange Commission.
"S&P" means Standard & Poor's Corporation and its successors.
"Securities" means the Notes and Warrants.
"Securities Act" means the Securities Act of 1933, as amended.
"Securitization Subsidiary" of any person means a Subsidiary of such
person, the articles of incorporation or other governing instruments of which
restrict such Subsidiary to the business of purchasing mortgage loans from the
Company and its Affiliates and reselling such mortgage loans or selling
mortgage-backed securities.
"Securityholder" or "Holder" means a registered holder of one or more
Securities.
"Subordinated Notes" means the Company's Subordinated Convertible Notes
originally due June 30, 2004 in an original principal amount of $5,550,000.
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"Subsidiary" of any specified person means a corporation or such other
entity, a majority of whose Capital stock with voting power, under ordinary
circumstances, to elect the board of directors or other governing body is at
the time, directly or indirectly, owned by such person or by such person and a
Subsidiary or Subsidiaries of such person or by a Subsidiary or Subsidiaries of
such person.
"Subsidiary Guarantee" means, individually and collectively, the
Guarantees now or hereafter given by the Guarantors pursuant to the Purchase
Agreement, including with respect to the persons that are Guarantors as of the
date hereof a notation on the Securities substantially in the form attached as
Exhibit B to the Purchase Agreement.
"Subsidiary Guarantor" means (i) each of the Company's Subsidiaries in
existence on the Issuance Date, (ii) each of the Subsidiaries that becomes a
Guarantor of the Securities in compliance with the provisions hereof, and (iii)
each of the Subsidiaries executing a supplemental agreement in which such
Subsidiary agrees to be bound by the terms of this Agreement.
"Warehouse Lines of Credit" means any agreement, individually or
collectively, providing for up to $50 million of revolving credit borrowings,
and any other warehouse line of credit together with any other replacements or
other revolving credit or loan repurchase agreement and any related notes,
guarantees, collateral documents, instruments and agreements executed in
connection with any thereof or otherwise created for any Subsidiary or
Securitization Subsidiary of the Company, and in each case as amended,
increased, supplemented, extended, modified, renewed, refunded, replaced or
refinanced from time to time, and in addition any repurchase agreement entered
into by the Company or any of its Subsidiaries for the purpose of receiving
cash to fund mortgage lending operations pending the sale or securitization of
loans.
"Wholly Owned Subsidiary" of any person means a Subsidiary of such person
all of the outstanding Capital Stock or other ownership interest of which
(other than directors' qualifying shares required by statute) shall at the time
be owned by such person or by one or more Wholly Owned Subsidiaries of such
person or by such person and one or more Wholly Owned Subsidiaries of such
person.
1. COLLATERAL
The term "Collateral" for purposes of this Security Agreement shall
include all of Debtor's right, title and interest in and to all interest income
due to the Company generated from loans sold from March 1996 to November 1996
to Access Financial Lending Corp. under to the sales agreement dated March 26,
1996, pursuant to which the Debtor is entitled to payment of a portion of the
interest income from the loans sold during this period, specifically known as
commitment numbers 207, 214, and 252, copies of which are attached hereto.
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2. SECURITY INTERESTS
(a) To secure the payment and performance of the Obligations of the Debtor
under the Loan Documents (the "Obligations"), the Debtor hereby grants to
Secured Party for the ratable benefit of the Holders of the Notes, a continuing
security interest in the Collateral.
(b) Upon request by Secured Party, the Debtor shall execute and deliver to
the Secured Party at any time any document that Secured Party may reasonably
request, and the Debtor shall take any and all other steps reasonably requested
by Secured Party in order to perfect and maintain the security interest granted
herein by the Debtor to Secured Party.
(c) To the extent permitted by law, the Obligations shall not be affected
or impaired by any of the following: (i) any exchange, release, surrender,
sale, compromise, settlement, waiver, modification, with or without
consideration, of any Collateral or any part thereof, or any other obligation
of any other person or entity with respect to the Obligations or any part
thereof, any or all of which to the extent within the control of Secured Party,
may, to the extent permitted by law, be done or omitted by Secured Party in its
sole discretion without notice and irrespective of whether the Obligations of
the Debtor to the Secured Party shall be increased or decreased thereby (ii)
any permitted change in ownership of the Debtor or the insolvency, bankruptcy
or any other change in the legal status of the Debtor; (iii) any change in or
imposition of any law, decree, regulation or other governmental act which might
in any way affect the validity or enforceability of the payment or enforcement
of the Obligations; (iv) the failure of the Debtor to maintain in full force
and effect, or to obtain or renew when required, all governmental and other
approvals, licenses or covenants required in connection with the Obligations or
this Security Agreement; (v) the existence of any claim, defense, setoff or
other right which the Debtor may have at any time against Secured Party in
connection herewith or any unrelated transaction; or (vi) any other
circumstances which might otherwise constitute a defense available to, or
discharge of, the Debtor or others.
3. PRIORITY OF SECURITY INTERESTS
The Debtor warrants, represents and covenants that the security interest
granted to Secured Party hereunder, when properly perfected by filing duly
executed financing statements with the appropriate filing offices in all
applicable jurisdictions, as set forth on Schedule I hereto, shall constitute,
at all times, a first priority, valid and perfected security interest in the
Collateral, subject to no other liens or encumbrances (except Permitted Liens,
which at all times during the term of this Agreement will remain junior to the
Security Interest granted to the Secured Parties hereunder). The Debtor shall
not grant (without the prior written approval of Secured Party) a security
interest in, or permit a lien or encumbrance upon, any of the Collateral in
favor of anyone other than Secured Party, except for Permitted Liens.
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4. LOCATION OF THE COLLATERAL
The Debtor represents, warrants and covenants that its principal place of
business is located at 700 Wachovia Center, Gainesville, Hall County, Georgia
30501 and that all original books and records relating to the Collateral are
kept at such location. Secured Party shall, at all reasonable times, have full
access to and the right to examine and inspect the Debtor's books and records,
to confirm and verify the existence and location of the Collateral and to take
such other action as Secured Party reasonably deems necessary to protect its
interest. The Debtor will not move any of the Collateral to any location if
such change would cause the security interest of the Secured Party in the
Collateral to lapse or cease to be perfected.
5. REPRESENTATIONS AND WARRANTIES OF THE DEBTOR
In order to induce Secured Party to enter into this Security Agreement,
the Debtor hereby represents, warrants and covenants to the Secured Party as
follows:
(a) the Debtor is the sole owner of the Collateral, free and clear of all
liens, encumbrances and security interests, except for the security interest of
Secured Party and Permitted Liens, which Permitted Liens at all times during
the term of this Agreement, will remain junior to the Security Interest granted
to the Secured Parties hereunder except to the extent set forth in Section 7(f)
hereof.
(b) the execution, delivery and performance of this Security Agreement by
the Debtor: (i) does not and will not violate: (1) any provision of law, any
order of any court or other agency of government applicable to Debtor; or (2)
any indenture, agreement or other instrument to which the Debtor is a party or
by which the Debtor is bound, or be in conflict with, result in a breach of, or
constitute (with notice or lapse of time or both) a default under, any such
indenture, agreement or other instrument; and (ii) except as contemplated
herein, result in the creation or imposition of any lien, charge or encumbrance
of any nature whatsoever upon any of the properties or assets of the Debtor.
(c) there is no action, suit, proceeding or investigation at law or in
equity or by or before any governmental instrumentality or agency or
arbitration body now pending or, to the best knowledge of the Debtor,
threatened against or affecting Debtor or any of the properties or rights of
the Debtor.
(d) the Debtor is not in default with respect of any judgment, order,
decree, injunction, rule, award or regulation of any court or other
governmental instrumentality or agency or of any arbitrator or arbitration
panel.
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(e) this Agreement, when duly executed and delivered, will be the legal,
valid and binding obligation of the Debtor, enforceable against the Debtor in
accordance with its terms, except as such enforcement may be limited by
bankruptcy, insolvency or other laws affecting the enforcement of creditors'
rights generally and by general principles of equity.
(f) the book value of the Collateral, determined in accordance with GAAP,
as of June 30, 1997 is $2,272,727, and, as of the date hereof, is substantially
the same amount.
(g) the Company is not in violation of or default under, nor will the
execution and delivery of this Agreement or any of the Loan Documents or
consummation of the transactions contemplated herein or therein result in a
violation of or constitute a default in the performance or observance of any
obligation under the Purchase and Sale Agreement between Access Financing
Lending Corp. and the Company, dated March 26, 1996.
(h) the letter agreement dated April 16, 1996 (the "Letter Agreement"),
executed in connection with the sale by the Company of certain Convertible
Mortgage Participations in March 1996 (the "Participations") and certain 9%
Cumulative Convertible Preferred Stock in October 1995 (the "Preferred Stock"),
and the Loan Agreement dated as of June 16, 1996 (the "Loan Agreement")
governing certain 10% Secured Convertible Notes due 2001 (the "Notes") issued
in June 1996, have been duly amended to exclude the issuance the Notes and
Warrants offered hereby and the Common Stock issuable on conversion or exercise
thereof from anti-dilution adjustments set forth in Section 6 of the Letter
Agreement and in Section 10.07(e) of the Loan Agreement, and Section 4.07 of
the Loan Agreement has been duly amended to provide that the security interests
provided for in this Agreement constitute Permitted Liens under the Loan
Agreement and are senior to the security interests provided for under the Loan
Agreement (the documents evidencing such amendments collectively constituting
the "Amendments") and such Amendments have been duly authorized by the Company
and are enforceable in accordance with their terms.
6. COVENANTS
(a) Payment of Securities
The Company shall pay the principal of, premium, if any, and interest on
the Securities on the date and in the manner provided in the Securities.
Holders of Securities must surrender the Notes to Thieme Consulting, Inc., 1370
Avenue of the Americas, New York, New York 10019 (the "Paying Agent") upon
payment in full of all outstanding principal, interest and collection costs, if
any, in respect thereof.
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The Company shall pay interest (including post-petition interest in any
proceeding under any Bankruptcy Law) on overdue principal at the rate equal to
18% per annum, or the maximum amount permitted by law, whichever is less.
(b) Reports
The Company shall deliver to the Securityholders, copies of the annual
reports and of the information, documents, and other reports (or copies of such
portions of any of the foregoing as the SEC may by rules and designations
prescribe) that the Company is required to file with the SEC pursuant to
Section 13 or 15(d) of the Exchange Act. If the Company is not subject to the
requirements of such Section 13 or 15(d) of the Exchange Act, the Company shall
continue to deliver to the Securityholders, such reports, information and other
documents as it would be required to file if it were subject to the
requirements of Section 13 or 15(d) of the Exchange Act and shall furnish all
such reports, information and other documents to the Securityholders.
Whether or not required by the rules and regulations of the Commission, so
long as any Securities are outstanding, the Company will furnish to the Holders
of the Securities, upon request, all financial and other information that would
be required to be contained in filings with the Commission, including, without
limitation, those on Commission Forms 10-Q ("Quarterly Reports"), 10-K ("Annual
Reports") and 8-K as if the Company were required to file such forms, including
a "Management's Discussion and Analysis of Financial Condition and Results of
Operations" quarterly and annually within 15 days after the date on which
quarterly and annual reports are required to be filed with the Commission
(after giving effect to any permitted extensions). The financial statements as
of and for each fiscal year shall contain a report thereon by the Company's
independent auditors. In the event the Company is not at any time otherwise
required to file such reports with the Commission pursuant to the Exchange Act,
the Company shall furnish reports containing substantially the same information
as such reports (the "Equivalent Reports") to the Holders of the Securities at
such times as the Company would have been required to furnish same hereunder if
the Company were so required to file with the Commission.
(c) Stay, Extension and Usury Laws
The Company and the Guarantors covenant (to the extent that they may
lawfully do so) that they shall not at any time insist upon, plead or in any
manner whatsoever claim or take the benefit or advantage of, any stay,
extension or usury law whenever enacted, now or at any time hereafter in force,
that may affect the covenants or the performance of this Agreement.
(d) Limitation on Restricted Payments
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The Company will not, and will not permit any of its Subsidiaries to,
directly or indirectly: (i) declare or pay any common stock dividend or make
any Distribution on account of the Company's or any of its Subsidiaries' Equity
Interests (other than dividends payable from any Subsidiary to the Company or
to a Wholly Owned subsidiary of the Company or dividends or Distributions
payable to the Company or, in the case of a Subsidiary, from such Subsidiary to
any Wholly Owned Subsidiary of the Company that is a Guarantor and dividends
and Distributions payable in capital stock of the Company); or (ii) purchase,
redeem or otherwise acquire or retire for value any Equity Interests of the
Company or any Subsidiary or other Affiliate of the Company (other than any
such Equity Interests owned by the Company or any Wholly Owned Subsidiary of
the Company that is a Guarantor);
(e) Limitation on Dividend Restrictions Affecting Subsidiaries
The Company will not permit any of its Subsidiaries to, directly or
indirectly, create or otherwise cause or suffer to exist or become effective
any restriction on the ability of any such Subsidiary to (i) pay dividends or
make any other Distributions on its Equity Interests or with respect to any
other interest or participation in, or measured by, its sales, revenues or
profits, or pay any Indebtedness owed to the Company or a Subsidiary of the
Company, or (ii) make loans or advances to the Company or a Subsidiary of the
Company, except for such restrictions existing under or by reason of (A)
applicable law, (B) this Agreement, (C) any instrument governing indebtedness
existing on the Issuance date or any exchange, refinancing or refunding thereof
permitted under this Agreement; provided, that the terms of the new
Indebtedness to be incurred shall not impose any greater encumbrance or
restriction than those existing pursuant to the terms of the Indebtedness
proposed to be so exchanged, refinanced or refunded, (D) customary assignment
provisions of any agreement or obligation, including a lease governing a
leasehold interest, of the Company or a Subsidiary of the Company, (E) any
instruments governing or evidencing the Warehouse Lines of Credit or any other
Indebtedness permitted by this Agreement (including any liens or guarantees
created thereunder), (F) any instrument governing or evidencing Indebtedness of
a person acquired by the Company or any Subsidiary of the Company at the time
of such acquisition, which encumbrance or restriction is not applicable to any
person, or the properties or assets of any person, other than the person, or
the property or assets of the person, so acquired; provided, that such
Indebtedness is not incurred in connection with or in contemplation of such
acquisition, or (G) any instrument governing or evidencing Indebtedness of a
Securitization Subsidiary, provided, that such restrictions relate solely to
such Securitization Subsidiary.
(f) Limitation on Liens
Neither the Company, nor any of its Subsidiaries, may create, incur or
assume or suffer to exist any lien upon any of its property, assets, income or
profits, whether now
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owned or hereafter acquired, except for the following, which, at all times,
will be subordinate and junior to the liens created by this Security Agreement,
except to the extent that any senior liens that may arise in the future shall
not be granted by the Company or any Subsidiary and have priority, as a matter
of law, over liens perfected by filing under the UCC:
(i) Liens for taxes, assessments or other governmental charges not yet
due or which are being contested in good faith and by appropriate proceedings if
adequate reserves with respect thereto are maintained on the books of the
Company or such Subsidiary, as the case may be, in accordance with GAAP;
(ii) carriers', warehousemen's, mechanics', landlords', materialmen's ,
repairmen's or other like Liens arising by operation of law in the ordinary
course of business if (1) the underlying obligations are not overdue for a
period of more than 60 days or (2) such Liens are being contested in good faith
and by appropriate proceedings and adequate reserves with respect thereto are
maintained on the books of the Company or such Subsidiary, as the case may be,
in accordance with GAAP;
(iii) pledges or deposits in connection with workers' compensation,
unemployment insurance and other social security legislation;
(iv) deposits to secure the performance of bids, trade contracts (other
than for borrowed money), leases, statutory obligations, surety and appeal
bonds, performance bonds and other obligations of a like nature incurred in the
ordinary course of business;
(v) easements, rights-of-way, zoning and similar restrictions and other
similar encumbrances or title defects incurred in the ordinary course of
business which, in the aggregate, are not substantial in amount, and which do
not any case materially detract from the value of the property subject thereto
or interfere with the ordinary conduct of the business of the Company or its
Subsidiaries;
(vi) Liens on assets which are subject to leases which are capitalized on
the books of the Company and its Subsidiaries;
(vii) Liens arising by operation of law in connection with judgments;
(viii) Liens created by this Security Agreement;
(ix) Liens on mortgage loans originated or purchased by the Company using
the proceeds from Indebtedness incurred for the purpose of providing funds to
originate or purchase mortgage loans and any proceeds from the sale of any such
mortgage loans;
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(x) Liens on mortgage loans originated by the Company and the proceeds
therefrom securing up to $50,000,000 of Indebtedness under a warehouse facility
or facilities with banks or institutions regularly engaged in the business of
making commercial loans;
(xi) Liens securing up to $700,000 of outstanding mortgage
participations, which are characterized as "other indebtedness" on the
Company's balance sheet or which are issued in connection with the proposed
offering of mortgage participation;
(xii) Liens securing up to $2,530,000 of Indebtedness under a Secured
Warehouse Facility to be issued in exchanged for up to $2,530,000 of
Subordinated Notes;
(xiii) Liens to secure indebtedness or other obligations of the Company
provided that at the time of the creation of such Lien the book value of the
remaining Collateral not subject to such Lien shall be not less than 200% of
the aggregate outstanding principal balance of the Securities;
(xiv) Liens created pursuant to the Security Agreement dated June 12,
1996.
(g) Corporate Existence
Subject to Section 8 hereof, each of the Company and each of its
Subsidiaries shall do or cause to be done all things necessary to preserve and
keep in full force and effect its corporate existence, and the corporate,
partnership or other existence of each Subsidiary, in accordance with the
respective organizational documents (as the same may be amended from time to
time) of the Company and each Subsidiary and the rights (charter and
statutory), licenses and franchises of the Company or its Subsidiaries, as the
case may be; provided, that neither the Company nor its Subsidiaries shall be
required to preserve any such right, license or franchise, or the corporate,
partnership or other existence of any Subsidiary (other than the Company), if
the Board of Directors of the Company or its Subsidiaries, as the case may be,
shall determine that the preservation thereof is no longer desirable in the
conduct of the business of the Company or its Subsidiaries, as the case may be,
and that the loss thereof is not adverse in any material respect to the
Securityholders.
On the date of this Agreement, Credit Depot Corporation of North Carolina,
Credit Depot Corporation of Ohio, Credit Depot Corporation of South Carolina,
Credit Depot Corporation of Tennessee, Credit Depot Corporation of Florida,
Credit Depot Corporation of Indiana, Credit Depot Corporation of Georgia,
Credit Depot Corporation of Illinois, Credit Depot Corporation of Missouri,
Credit Depot Corporation of Michigan, Credit Depot Corporation of Maryland,
Credit Depot Corporation of Virginia and Cash Back Mortgage
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Corporation constitute all of the Subsidiaries of the Company. Credit Depot
Corporation of Maryland is inactive.
(h) Line of Business
For so long as any Securities are outstanding, the Company and its
Subsidiaries will engage primarily in the origination, servicing and sale of
residential first mortgage loans.
(i) Additional Subsidiary Investments and Guarantees
The Company will not, and will not permit any of its Subsidiaries,
including without limitation, any of the Guarantors, to make any Investment in
any Subsidiary that is not a Wholly Owned Subsidiary or a Securitization
Subsidiary, unless each such Subsidiary the majority of the capital stock of
which is owned by the Company or by another Subsidiary (a) guarantees payment
of the Securities by executing a Subsidiary Guarantee having the same terms and
conditions as those set forth, herein; (b) executes and delivers a Subsidiary
Security Agreement and also delivers to the Securityholders, upon request, an
Opinion of Counsel, in form that such Subsidiary Guarantee is a valid, binding
and enforceable obligation of such Subsidiary, subject to such customary
exceptions for bankruptcy and equitable principles; and (c) agrees in writing
to be bound by the terms of this Security Agreement.
(j) Transactions with Affiliates
The Company will not, and will not permit any of its Subsidiaries to
enter into any transaction (or series of transactions) between the Company or
any Subsidiary of the Company and an Affiliate or Related Person involving
payments by the Company or any Subsidiary of the Company, including, without
limitation, any sale, purchase, lease or loan or any other disposition of
assets, property or services (each of the foregoing, an "Affiliate
Transaction"), unless (i) such Affiliate Transaction is on terms that are no
less favorable to the Company or such Subsidiary, as the case may be, than
those that would be available in a comparable arms-length transaction with an
unrelated person and (ii) the Company first delivers to the Securityholders (1)
with respect to any Affiliate Transaction involving aggregate payments in
excess of $100,000, an Officers' Certificate certifying that such Affiliate
Transaction complies with clause (i) above and such Affiliate Transaction has
been approved by a majority of the disinterested members of the Board of
Directors of the Company and (2) with respect to any Affiliate Transaction
involving aggregate payments in excess of $1 million, a favorable opinion as to
the fairness to the Company or such Subsidiary from a financial point of view
issued by an investment banking, accounting or financial advisory firm of
national standing.
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(k) Asset Sales
The Company will not and will not permit any of its
Subsidiaries to sell, lease, convey or otherwise dispose of any assets (other
than (x) inventory in the ordinary course of business (including for purposes of
this Section, loans originated by the Company), (y) to a Wholly Owned Subsidiary
that is a Guarantor or (z) sales of accounts receivable, mortgage loans and
property acquired upon foreclosure of mortgage loans and all proceeds related
thereto, in each case under clauses (y) and (z) above, whether or not in the
ordinary course of business), whether in a single transaction or a series of
related transactions (a) that have a fair market value in excess of $1.0 million
or (b) for net proceeds in excess of $1.0 million (each of the foregoing, an
"Asset Sale"), unless, in each case, (1) the Company (or the Subsidiary, as the
case may be) receives consideration at the time of such Asset Sale at least
equal to the fair market value (as determined in good faith by, and evidenced by
a resolution of the Board of Directors set forth in an Officers' Certificate
delivered to the Holders of the Securities) of the assets sold or otherwise
disposed of.
(l) Default Certificate
The Company shall, so long as any of the Securities
are outstanding, deliver to the Securityholders, forthwith upon any Officer's
becoming aware of any Default or Event of Default, an Officers' Certificate
specifying such Default or Event of Default and what action the Company is
taking or proposes to take with respect thereto.
(m) Real Property Acquisitions
The Company and the Subsidiaries shall not, without
the prior written consent of the Holders of a majority in outstanding principal
amount of the Securities, acquire, on a consolidated basis during any calendar
year, any real property or interest therein in excess of $200,000, other than
real property acquired the Company or any Subsidiary upon foreclosure or by deed
in lieu of foreclosure.
(n) Rights of Inspection
The Debtor will permit the Secured Party or any of
its representative, at reasonable times and reasonable intervals upon one
business day's notice, to visit any of its offices and inspect the Collateral.
7. SUCCESSORS
(a) Merger, Consolidation or Sale of Assets
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The Company may not consolidate or merge with or into another person,
or sell, assign, transfer, lease, convey or otherwise dispose of (or permit any
of its Subsidiaries to sell, assign, transfer, lease, convey, or otherwise
dispose of) all or substantially all of its and its Subsidiaries' assets
(determined on a consolidated basis for the Company and its Subsidiaries taken
as a whole) to another person unless (i) the Company is the surviving entity or
the person formed by or surviving any such consolidation or merger (if other
than the Company) or to which such sale, assignment, transfer, lease,
conveyance or other disposition shall have been made is a corporation organized
or existing under the laws of the United States, one of the states thereof or
the District of Columbia, (ii) the resulting, surviving or transferee
corporation assumes by supplemental agreement in a form reasonably satisfactory
to a majority of the Securityholders all of the obligations under the
Securities and this Agreement, (iii) immediately before and after giving effect
to such transaction, no Default or Event of Default (and no event that with
notice or lapse of time, or both, would become an Event of Default) shall have
occurred or be continuing or would occur or result upon the effective date of
such transaction, and (iv) the Company shall have delivered to the
Securityholders, upon request, a Officers' Certificate and an Opinion of
Counsel that all conditions precedent relating to such transaction have been
satisfied. The Securityholders shall be entitled to conclusively rely upon
such Officers' Certificate and Opinion of Counsel.
(b) Successor Corporation Substituted
Upon any consolidation or merger, or any sale, lease, conveyance or
other disposition of all or substantially all of the assets of the Company in
accordance with Section 8(a) hereof, the successor corporation formed by such
consolidation or into or with which the Company is merged or to which such
sale, lease, conveyance or other disposition is made shall succeed to, and be
substituted for, and may exercise every right and power of the Company under
this Agreement with the same effect as if such successor person had been named
as the Company herein; provided, that the Company shall not be released or
discharged from the obligation to pay the principal of and interest on the
Securities.
8. DEFAULTS AND REMEDIES
(a) Events of Default
An "Event of Default" occurs if:
(i) the failure by the Company to pay interest on any of the
Securities when the same becomes due and payable.
(ii) the failure to pay principal on the Securities when the same
becomes due and payable, whether at maturity, acceleration, conversion or
otherwise;
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(iii) failure to perform, or breach of, any material covenant in any
Loan Document by the Company or the Subsidiaries which materially adversely
impacts the practical realization of the benefits to the Holders of the
Securities, and if such failure or breach is publicly disclosed by the Company,
continuance of such failure for 5 days after written notice is given to the
Company or the Subsidiaries by the holders of more than 50% in principal amount
of the Securities of the security interests granted to the Holders of the
Securities;
(iv) The Company or any Subsidiary shall
(1) become insolvent or generally fail or be unable to pay, or
admit in writing its inability to pay, debts as they become due;
(2) apply for, consent to, or acquiesce in, the appointment of
a trustee, receiver, sequestrator or other custodian for the Borrower or any
Subsidiary or any property of any thereof, or make a general assignment for the
benefit of creditors;
(3) in the absence of such application, consent or acquiescence
in, permit or suffer to exist the appointment of a trustee, receiver,
sequestrator or other custodian for the Company or any Subsidiary or for any
part of the property of any thereof, and such trustee, receiver, sequestrator
or other custodian shall not be discharged within 10 days;
(4) permit or suffer to exist the commencement of any bankruptcy,
reorganization, debt arrangement or other case or proceeding under any
bankruptcy or insolvency law, or any dissolution, winding up or liquidation
proceeding, in respect of the Borrower or any Subsidiary, and, if such case or
proceeding is not commenced by the Borrower or any Subsidiary or converted to a
voluntary case, such case or proceeding shall be consented to or acquiesced in
by the Borrower or such Subsidiary or shall result in the entry of an order for
relief or shall remain for 5 days undismissed; or
(5) take any corporate action authorizing, or in furtherance of,
any of the foregoing;
(v) Failure by the Company or any of its Subsidiaries to pay final
judgments entered by a court of competent jurisdiction against the Company
and/or its Subsidiaries (other than any judgment as to which an insurance
company of recognized standing has accepted full liability) aggregating $10,000
or more which remain undischarged or unstayed for a period of sixty (10) days;
(vi) Except as permitted by this Agreement, any Subsidiary Guarantee
is determined in any judicial proceeding to be unenforceable or invalid or
ceases for any reason to be in full force and effect or any Guarantor or any
person acting on behalf of any Guarantor denies or
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disaffirms its obligations under its Subsidiary Guarantee; provided that no
Event of Default shall exist under this clause (vi) by reason of any of the
foregoing events unless the occurrence of such event makes the remedies
provided for in the Subsidiary Guarantees (taken as a whole) inadequate for the
practical realization of the benefits intended to be afforded thereby; or
(vii) Any Indebtedness of the Company or any Subsidiary under a
warehouse facility or facilities with one or more banks or institutions
regularly engaged in the business of making commercial loans shall be duly
declared to be or shall become due and payable prior to the stated maturity
thereof.
If a Default or Event of Default occurs and is continuing, the Company
shall mail to each holder of the Securities a Notice of Default or Event of
Default ("Notice of Default") within 2 days after the occurrence of such
Default or Event of Default, as the case may be, unless such Default or Event
of Default has been cured.
(b) Acceleration
The holders of not less than 50% in aggregate principal amount of
Securities then-outstanding will be authorized, upon the happening of any Event
of any Default (other than an Event of Default specified in clause (iv) of
Section 9(a) hereof that relates to the Company), to declare (a "Declaration")
all the Securities due and payable immediately (the "Default Amount"). Upon
any such Declaration, the Default Amount shall become immediately due and
payable.
Notwithstanding the foregoing, if an Event of Default described in the
foregoing clause (iv) occurs with respect to the Company and is continuing,
then the principal of the Securities, together with accrued and unpaid interest
to the date the Securities become due and payable, shall automatically become
and be immediately due and payable without any declaration or other act on the
part of any Holder.
(c) Other Remedies
If an Event of Default occurs and is continuing, the Securityholders may
pursue any and all available remedies (under this Agreement or otherwise) to
collect the payment of principal, premium, if any, or interest on the
Securities or to enforce the performance of any provision of the Securities,
this Agreement or the other Loan Documents.
(d) Waiver of past Defaults
The Holders of not less than a majority in aggregate principal amount of
Securities outstanding are authorized to waive any Default and rescind any
Declaration if the Default or Event of Default is cured, except an uncured
Default in the payment of principal of or
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interest on any Security ("Payment Default"), or a Default with respect to a
covenant or provision that cannot be modified or amended without the consent of
the Holder of each outstanding Security affected; a Payment Default may not be
waived by the Holders' Agent (as defined below). Upon any such waiver, such
Default shall cease to exist, and any Event of Default arising therefrom shall
be deemed to have been cured for every purpose of this Agreement; but no such
waiver shall extend to any subsequent or other Default or impair any right
consequent thereon.
(e) Control by Majority
Subject to all provisions of this Agreement and applicable law, the
Holders of a majority in aggregate principal amount of the Securities then
outstanding shall have the right to appoint an agent to act on their behalf and
until the Company receives written notice delivered in accordance with Section
15(j) hereof and executed by the Holders of a majority in outstanding principal
amount of the Securities of the appointment of a successor agent, the Agent for
the Holders of the Securities shall be Thieme Consulting, Inc., 1370 Avenue of
the Americas, New York, New York 10019 (such agent and its successors, the
"Holders' Agent") and the Company shall be entitled to deal with the Holders'
Agent as the agent of the Holders of the Securities for all purposes of this
Agreement and the other Loan Documents.
(f) Rights of Securityholders to Receive Payment
Notwithstanding any other provision of this Agreement, the right of any
Securityholder to receive payment of principal and interest on the Security, on
or after the respective due dates expressed in the Security, or to bring suit
for the enforcement of any such payment on or after such respective dates,
shall not be impaired or affected without the consent of the Securityholder.
(g) Undertaking for Costs
In any suit for the enforcement of any right or remedy under this
Agreement, a court in its discretion may require the filing by any party
litigant in the suit of an undertaking to pay the costs of the suit, and the
court in its discretion may assess reasonable costs, including reasonable
attorneys' fees, against any party litigant in the suit, having due regard to
the merits and good faith of the claims or defenses made by the party litigant.
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(h) Confession of Judgment
Debtor shall deliver to the Holders' Agent at the closing, separate
affidavits of confession of judgment for the full amount of each Note (the
"Confessions of Judgment"). Upon the occurrence of (1) an Event of Default
under Section 9(a)(i), 9(a)(ii) or (iv) of this Agreement or (2) the
acceleration of the indebtedness evidenced by the Notes in accordance with the
terms of this Agreement, any or all of the Holders shall have the right, in
addition to other available remedies, to enter judgment on their respective
Confessions of Judgment for the full amount of each Holder's respective Note,
less credit to Debtor for sums actually received by the Paying Agent hereunder
with respect to such respective Note, and to execute on the judgment for the
full amount set forth in the Confessions of Judgment. Failure to exercise such
option or any other rights which the Holders may be entitled to upon the
occurrence of an Event of Default shall not constitute a waiver of the right to
exercise such option or any other rights in the event of any subsequent Event
of Default, whether of the same or different nature.
9. CONVERSION
(a) Conversion Rights of Holder
The Holder shall have conversion rights as follows:
(i) The Securities shall be convertible, in whole or in part, at any
time from the date of issuance until 11:59 p.m. on the earlier of any Event of
Default resulting in acceleration of the Securities, or October 31, 1997, into
shares of Common Stock at the conversion price per share (such price, as
adjusted pursuant to this section, the "Conversion Price") equal to $.40,
subject to adjustment as described below.
(ii) In the event the Holder elects to convert, conversion of the
Securities shall be effected by written notice advising the Company of the
desire to convert the securities and enclosing the Securities to be converted.
Such notice shall specify the principal amount to be converted, the address to
which the certificate representing the Common Stock issuable upon conversion,
and a new Security or Securities in the principal amount equal to the
unconverted portion of such Securities, if any, shall be delivered and shall
include reasonable instructions for delivery thereof. Not later than five (5)
days following such conversion, the Company shall deliver such certificate
representing the Common Stock in accordance with such instructions accompanied
by the new Security or Securities, if any. Interest accrued through the date
of conversion of a Security shall be paid to the Person in whose name such
Security is registered at the close of business on the date of conversion.
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(iii) A Holder may convert a portion of the outstanding principal
balance only in integral multiples of $1,000, unless the conversion is for the
full outstanding principal balance of the Note.
(b) Fractional Shares
The Company will not issue a fractional share of Common Stock upon
conversion of a Security. Instead the Company will deliver its check for the
current market value of the fractional share. The current market value of a
fraction of a share is determined by multiplying the current market price of a
full share of Common Stock by the fraction, rounded to the nearest cent.
The current market price of a share of Common Stock is the last sale
price of the Common Stock as reported on the National Association of Securities
Dealers Automated Quotations System ("NASDAQ") on the last trading day prior to
the conversion date. In the absence of such a quotation, the Company shall
determine the current market price of the basis of such quotations as it
considers appropriate.
(c) Taxes on Conversion
If a Holder of a Security converts it, the Company shall pay any
documentary, stamp or similar issue or transfer tax due on the issue of Common
Stock upon the conversion. However, the Holder shall pay any such tax which is
due because the shares are issued in a name other than the Holder's name.
(d) Reservation of Shares
The Company shall at all times reserve and keep available out of its
authorized Common Stock the full number of shares of Common Stock deliverable
in the event of conversion solely for the purpose of effecting the conversion
of the Securities.
(e) Adjustment for Certain Events
The number and kind of securities purchasable upon the conversion of
the Securities shall be subject to adjustment from time to time upon the
happening of certain events as follows:
(i) In case the Company shall (A) declare a dividend or make a
distribution on the outstanding shares of its Common Stock that is payable in
shares of its Common stock, (B) subdivide, split or reclassify the outstanding
shares of its Common Stock into a greater number of shares, or (C) combine or
reclassify the outstanding shares of its Common Stock into a
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smaller number of shares, the Conversion Price in effect immediately after the
record date for such dividend or distribution or the effective date of such
subdivision, combination or reclassification shall be adjusted so that it shall
equal the price determined by multiplying the Conversion Price in effect
immediately prior thereto by a fraction, of which the numerator shall be the
number of shares of Common Stock outstanding immediately before such dividend,
distribution, split, subdivision, combination or reclassification and of which
the denominator shall be the number of shares of Common Stock outstanding
immediately after such dividend, distribution, split, subdivision, combination
or reclassification. Any shares of Common Stock issuable in payment of a
dividend shall be deemed to have been issued immediately prior to the record
date for such dividends for purposes of calculating the number of outstanding
shares of common stock of the Company under this Section. Such adjustment
shall be made successively upon the occurrence of each event specified above.
(ii) In case the Company fixes a record date for the issuance to holders
of its Common Stock of rights, options, warrants or convertible or exchangeable
securities generally entitling such holders to subscribe for or purchase shares
of Common Stock at a price per share less than the then effective Conversion
Price per share of Common Stock on such record date, the Conversion Price shall
be adjusted immediately thereafter so that it shall equal the price determined
by multiplying the Conversion Price in effect immediately prior thereto by a
fraction, of which the numerator shall be the number of shares of Common Stock
outstanding on such record date plus the number of share of Common Stock which
the aggregate offering price of the total number of shares of Common Stock so
offered would purchase at the then effective Conversion Price per share, and of
which the denominator shall be the number of shares of common stock
outstanding on such record date plus the number of additional shares of Common
Stock offered for subscription or purchase. Such adjustment shall be made
successively on each date whenever a record date is fixed. To the extent that
any such rights, options, warrants or convertible or exchangeable securities
are not so issued or expire unexercised, the Conversion Price then in effect
shall be readjusted to the Conversion Price which would then be in effect if
such unissued or unexercised rights, options, warrants or convertible or
exchangeable securities had not been issuable.
(iii) In case the Company fixes a record date for the making of a
distribution to all holders of shares of its Common Stock (A) of shares of any
class of capital stock other than its common stock or (B) of evidences of its
indebtedness or (C) of assets (excluding cash dividends or distributions (other
than extraordinary cash dividends or distributions), and dividends or
distributions referred to in subsection 10(e)(ii) or (D) of rights, options,
warrant or convertible or exchangeable securities (excluding those rights,
options, warrants or convertible or exchangeable securities referred to in
subsection 10(e)(ii), then in each such case the Conversion Price in effect
immediately thereafter shall be determined by multiplying the Conversion Price
in effect immediately prior thereto by a fraction, of which the numerator
shall be the total number of shares of Common Stock outstanding on such record
date multiplied by the Current Market Price (as such term is defined in
subsection 10(g) below per share on such record date, less the aggregate fair
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<PAGE> 53
market value as determined in good faith by the Board of Directors of the
Company of said shares or evidences of indebtedness or assets or rights,
options, warrants or convertible or exchangeable securities so distributed, and
of which the denominator shall be the total number of shares of Common Stock
outstanding on such record date multiplied by such Current Market Price per
share. Such adjustment shall be made successively each time such a record
date is fixed. In the event that such distribution is not so made, the
Conversion Price then in effect shall be readjusted to the Conversion Price
which would then be in effect if such record date had not been fixed.
(f) Adjustment for Certain Issuances of Common Stock
(i) The conversion price of the Securities shall be adjusted to a
price equal to the price or prices of any shares of Common Stock issued by the
Company (the "Adjusted Conversion Price") on or after the date hereof; provided
that there shall be no adjustment for any Common Stock issued on or after the
earlier of October 31, 1997 or an Event of Default resulting in an acceleration
of the Notes. The provisions of this subsection shall not apply retroactively
to any Security which has been converted prior to the date of the adjustment.
(ii) In no event shall the provisions of this Agreement cause the
conversion price, or the Adjusted Conversion Price, of any of the Securities to
be increased.
(iii) In the event that on or after the date hereof the Company issues
any securities convertible into or exercisable for Common Stock (the "Additional
Securities"), the shares of Common Stock underlying the Additional Securities
shall be deemed to have been sold by the Company at the respective conversion
or exercise prices thereof; provided that if the conversion or exercise price
of the underlying Common Stock is not then determinable or is based on future
events, such shares of Common Stock shall not be deemed to be issued until the
price is determinable or such event has occurred and the conversion or exercise
price shall be subject to adjustment pursuant to subsection (a) above as a
result of any such issuance occurring prior to April 16, 1998 at the time of
such determination or the occurrence of such event even if the price is
determined or such event occurs after such date.
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(g) Current Market Price
For the purpose of any computation under subsection 10(e) above hereof,
the "Current Market Price" per share at any date (the "Computation Date") shall
be deemed to be the average of the reported daily closing bid prices of the
common stock on the principal market on which such securities are then traded
for twenty (20) consecutive trading days ending the trading day before such
date; provided, however, that in the event that during such twenty-day period
there shall occur one or more days on which there is no daily closing bid price
of the common stock reported on the principal market on which such securities
are then traded, then the "Current Market Price" per share at any such
Computation Date shall equal the book value per share of such common stock as
of the last day of the most recent fiscal quarter of the Company, computed in
accordance with GAAP; provided, further, however, upon the occurrence, prior to
the Computation Date, of any event described in subsection 10(e) above which
shall have become effective with respect to market transactions at any time
(the "Market-Effect Date") on or after the beginning of such 20-day period, the
Closing Price for each trading day preceding the Market-Effect Date shall be
adjusted, for purposes of calculating such average, by multiplying such Closing
Price by a fraction the numerator of which is the Conversion Price as in effect
immediately after the Market-Effect Date and the denominator of which is the
Conversion Price immediately prior to the Market-Effect Date, it being
understood that the purpose of this proviso is to ensure that the effect of
such event on the market price of the common stock shall, as nearly as
possible, be eliminated in order that the distortion in the calculation of the
Current Market Price may be minimized.
(h) Calculation
(i) All monetary calculations under this Section 10 shall be made to
the nearest cent.
(ii) Upon each adjustment of the Conversion Price pursuant to
subsections 10(e) and 10(f) above and each of the Securities shall thereupon
evidence the right to be converted into that number of shares of Common Stock
(calculated to the nearest one-hundred thousandth of a share) obtained by
multiplying the number of shares of Common Stock issuable upon conversion of
such Security immediately prior to such adjustment by the Conversion Price in
effect immediately prior to such adjustment and dividing the product so
obtained by the Conversion Price in effect immediately after such adjustment.
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(i) Independent Accountant's Review
The Company shall select a firm of independent public accountants,
which may be the Company's independent auditors, and which selection may be
changed from time to time, to verify the computations made in accordance with
this Section. The certificate, report or other written statement of any such
firm shall be conclusive evidence of the correctness of any computation made
under this Section. Promptly upon its receipt of such certificate, report or
statement from such firm of independent public accountants, the Company shall
deliver a copy thereof to the Holders of each of the Securities.
(j) Certificate as to Adjustment
Whenever the Conversion Price shall be adjusted as required by the
provisions of this subsection 10(j), the Company shall forthwith file in the
custody of its Secretary or an Assistant Secretary at its principal office and
with its stock transfer agent, if any, an officer's certificate showing the
adjusted Conversion Price determined as herein provided, setting forth in
reasonable detail the facts requiring such adjustment, including a statement of
the number of additional shares of Common Stock, if any, and such other fact as
shall be necessary to show the reason for and the manner of computing such
adjustment. Each such officer's certificate shall be made available at all
reasonable times for inspection by any such Holder or representative thereof
and the Company shall, forthwith after each such adjustment, mail a copy by
certified mail of such certificate to each such Holder.
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SUBSIDIARY GUARANTEES
(a) Subsidiary Guarantees
Each of the Guarantors hereby, jointly and severally, absolutely,
unconditionally and fully guarantees to each Holder of a Security all
Obligations of the Company under the Securities and under this Agreement and,
that: (a) the principal of and interest on the Securities will be promptly
paid in full when due, whether at maturity, by acceleration, redemption,
conversion or otherwise, and interest on the overdue principal of and interest
on the Securities, if any, and all other obligations of the Company to the
Securityholders under the Securities and under this Agreement will be promptly
paid in full or performed, all in accordance with the terms of the Securities
and this Agreement; and (b) in case of any extension of time of payment or
renewal of any Securities or any of such other obligations, that same will be
promptly paid in full when due or performed in accordance with the terms of the
extension or renewal, whether at stated maturity, by acceleration or otherwise.
Failing payment when due of any amount so guaranteed or any performance so
guaranteed for whatever reason, the Guarantors will be jointly and severally
obligated to pay the same immediately. The Guarantors hereby agree that their
obligations hereunder shall be absolute and unconditional, and joint and
several irrespective of the validity, regularity or enforceability of the
Securities or this Agreement, the absence of any action to enforce the same,
any waiver, consent, modification or indulgence granted by any Securityholder
with respect to any provisions hereof or thereof, the recovery of any judgment
against the Company, any action to enforce the same or any other circumstance
that might otherwise constitute a legal or equitable discharge or defense of a
Guarantor. Each Guarantor hereby waives diligence, presentment, demand of
payment, filing of claims with a court in the event of insolvency or bankruptcy
of the Company, any right to require a proceeding first against the Company,
protest, notice and all demands whatsoever and covenants that this Subsidiary
Guarantee will not be discharged except by complete performance of the
obligations contained in the Securities and this Agreement and the payment in
full of the principal thereof and all accrued interest thereon. If any
Securityholder is required by any court or otherwise to return to the Company
or the Guarantors, or any Custodian, liquidator or other similar official
acting in relation to either the Company or the Guarantors, any amount paid by
either to such Securityholder, this Subsidiary Guarantee, to the extent
therefore discharged, shall be reinstated in full force and effect. Each
Guarantor agrees that it shall not be entitled to any right of subrogation in
relation to the Securityholders in respect of any Obligations guaranteed hereby
until payment in full of obligations guaranteed hereby, including, without
limitation, the principal of and interest on all of the Securities. Each
Guarantor further agrees that, as between the Guarantors, on the one hand, and
the Securityholders on the other hand, (x) the maturity of the Obligations
guaranteed hereby may be accelerated as provided in Section 9 hereof for the
purposes of this Subsidiary Guarantee, notwithstanding any stay, injunction or
other prohibition preventing such acceleration in respect of the Obligations
guaranteed hereby, and (y) in the event of any declaration of acceleration of
such Obligations as provided in Section 9 hereof, such Obligations (whether or
not due and payable) shall forthwith become due and payable by the Guarantors
for the purpose of this Subsidiary Guarantee.
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(b) Execution and Delivery of Subsidiary Guarantee
To evidence its Subsidiary Guarantee set forth in subsection 11(a)
hereof, each Guarantor as of the date of this Agreement hereby agrees that a
notation of such Subsidiary Guarantee substantially in the form of Exhibit B to
this Agreement shall be endorsed by two Officers of such Guarantor on each
Security and that this Agreement shall be executed on behalf of such Guarantor
by its President or one of its Vice Presidents.
The delivery of any Security shall constitute due delivery of the
Subsidiary Guarantee set forth in this Agreement on behalf of each of the
Guarantors. Each Guarantor hereby agrees that its Subsidiary Guarantee set
forth in subsection 11(a) hereof shall remain in full force and effect
notwithstanding any failure to endorse on each Security a notation of such
Subsidiary Guarantee.
If an Officer whose signature is on this Agreement or on a Subsidiary
Guarantee no longer holds that office on which the Subsidiary Guarantee is
endorsed, the Subsidiary Guarantee shall be valid nevertheless.
(c) Guarantors May Consolidate, Etc., on Certain Terms
Except as set forth in Sections 7 and 8 hereof, nothing contained in
this Agreement or in any of the Securities shall prevent any consolidation or
merger of a Guarantor with or into the Company or another Guarantor or shall
prevent any sale or conveyance of the property of a Guarantor as an entirety or
substantially as an entirety, to the Company or another Guarantor.
Except as set forth in Sections 7 and 8 hereof, nothing contained in
this Agreement or in any of the Securities shall prevent any consolidation or
merger of a Guarantor with or into a corporation or corporations other than the
Company (whether or not affiliated with the Guarantor), or successive
consolidations or mergers in which a Guarantor or its successor or successors
shall be a party or parties, or shall prevent any sale or conveyance of the
property of a Guarantor as an entirety or substantially as an entirety, to a
corporation other than the Company (whether or not affiliated with the
Guarantor) authorized to acquire and operate the same; provided, that each
Guarantor hereby covenants and agrees that, upon any such consolidation,
merger, sale or conveyance, the Subsidiary Guarantee endorsed on the
Securities, and the due and punctual performance and observance of all of the
covenants and conditions of this Agreement to be performed by such Guarantor,
shall be expressly assumed (in the event that the Guarantor is not the
surviving corporation in the merger), by supplemental agreement together with
an Opinion of Counsel stating that the transaction and the supplemental
agreement comply with this Agreement, executed and delivered to the Holders of
the Securities by the corporation formed by such consolidation, or into which
the Guarantor shall have been merged, or by the corporation which shall have
acquired such property. In case of any such consolidation, merger, sale or
conveyance
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and upon such assumption by the successor corporation or the purchasing
corporation, as the case may be, by supplemental agreement, executed and
delivered to the Securityholder, of the Subsidiary Guarantee endorsed upon the
Securities and the due and punctual performance of all of the covenants and
conditions of this Agreement to be performed by the Guarantor, such successor
corporation shall succeed to and be substituted for the Guarantor with the same
effect as if it had been named herein as a Guarantor. Notwithstanding the
foregoing, a Subsidiary Guarantor may be released from its Subsidiary Guarantee
and its related obligations under this Agreement if 80% or more of the capital
stock of such Guarantor is sold to another Person or if such Guarantor
consolidates with, merges into or sells all or substantially all of its assets
to, another Person, in accordance and compliance with the requirements of this
Agreement.
(d) Limitation of Guarantor's Liability
Each Guarantor hereby confirms that it is its intention that its
Subsidiary Guarantee is not and shall not constitute a fraudulent transfer or
conveyance for purposes of any Bankruptcy Law, the Uniform Fraudulent
Conveyance Act, the Uniform Fraudulent Transfer Act or any similar Federal or
state law. To effectuate the foregoing intention, each of the Guarantors
hereby irrevocably agrees that the Obligations under the Subsidiary Guarantee
shall be limited to the maximum amount as will, after giving effect to such
maximum amount and all other (contingent or otherwise) liabilities of each of
the Guarantors that are relevant under such laws, and after giving effect to
any rights to contribution pursuant to any agreement providing for an equitable
contribution among each of the Guarantors and other Affiliates of the Company
of payments made by guarantees by such parties, result in the Obligations of
each of the Guarantors in respect of such maximum amount not constituting a
fraudulent transfer or conveyance.
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(e) Additional Subsidiary Guarantees
In the event any Subsidiary is required to become a Guarantor by the
provisions of Section of this Agreement or in the event such Subsidiary's
assets, liabilities, earnings or equity become more than "immaterial" or
"inconsequential" to the Company and its Subsidiaries on a consolidated basis
and the Company determines not to make such separate reporting of such
Subsidiary activities as required by Commission interpretations under the
Exchange Act and Regulation S-X, or if any Subsidiary is hereafter required to
guarantee any Senior Debt or debt that ranks pari passu with the obligations of
the Company and the Subsidiaries hereunder, then such Subsidiary shall
guarantee payment of the Securities and the Obligations of the Company
hereunder by executing a Subsidiary Guarantee having the same terms and
conditions as those set forth in this Section. Such new Subsidiary Guarantee
shall be evidenced by the Subsidiary executing and delivering to the
Securityholders a supplemental agreement and Subsidiary Guarantee which
subjects such Subsidiary to the provisions of this Agreement, joint and
severally, absolutely and unconditionally and fully as a Guarantor, and also
delivers an opinion of counsel that such Subsidiary Guarantee is valid, binding
and enforceable obligation of such Subsidiary, subject to such customary
exceptions for bankruptcy and applicable principles.
11. AMENDMENTS
(a) Supplement or Waiver with Consent of Securityholders
The terms of the Secured Notes may be amended or supplemented, and any
past default, excluding Payment Default, or compliance with any provisions may
be waived, with the consent of the holders of at least a majority in principal
amount of the Securities then outstanding.
(b) Without Consent of Securityholders
Without the consent of each holder of an outstanding Securities, no
amendment may (i) reduce the amount of Securities whose holders must consent to
an amendment, (ii) reduce to rate of or extend the time for payment of interest
on any Securities, (iii) reduce the principal of or extend the stated maturity
of any Securities, (iv) reduce to premium payable upon redemption of any
Securities or change the time at which any Securities may or shall be redeemed,
(v) make any Securities payable in money other than that stated in the
Securities, or (vi) impair the right of any holder to institute suit for the
enforcement of any payment on or with respect to any Securities, (vii) increase
the conversion price or (viii) amend the provisions of this Section 12.
12. TAXES AND INSURANCE
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(a) The Debtor shall pay promptly, when due, all sales, use, excise,
personal property, income, withholding, and other taxes, assessments and
governmental charges upon and in relation to the ownership or use of any of its
assets, income or gross receipts for which the Debtor is or may be liable,
except to the extent any such liabilities are being contested in good faith by
appropriate proceedings and adequate reserves therefor have been posted on the
books of Debtor in accordance with generally accepted accounting principles.
(b) In the event the Debtor shall fail to pay any tax, assessment, levy or
government charge or to discharge any lien (other than Permitted Liens) or
contest the same in good faith, then Secured Party, without waiving or
releasing any obligation or default of the Debtor hereunder, may at any time or
times thereafter make such payment, settlement, compromise or release or cause
to be released any such lien, or take any other action with respect thereto
which the Secured Party deems advisable. All sums paid by Secured Party in
satisfaction of, or on account of, any tax, levy assessment or governmental
charge, or to discharge or release any lien, and any expenses, including
attorneys' fees, court costs and other charges related thereto, shall become a
part of the Obligations secured by the Collateral, payable on demand. Nothing
herein shall be deemed to require or obligate Secured Party to make such
payment, settlement, compromise or release.
(c) The Debtor shall keep all insurable Collateral insured, at no expense
to Secured Party, against loss or damage by fire, theft, explosion and such
other risks, as are ordinarily insured against by other owners or users of
similar property in similar businesses, for the full insurable value thereof,
by policies of insurance in such form and with such companies as are reasonably
satisfactory to Secured Party. The Secured Party shall be named as a loss
payee on each such policy of insurance.
(d) Copies of all insurance policies covering the Collateral, or, at the
option of Secured Party, certificates evidencing insurance coverage, listing
the risks covered thereby shall be delivered to Secured Party, upon its written
request. The Debtor hereby grants to Secured Party a continuing security
interest in and to all said policies and the proceeds thereof to secure the
repayment of all Obligations, and the Debtor agrees that Secured Party shall
have the right, upon the occurrence of an Event of Default, as defined in this
Agreement, in the Debtor's name, or in the name of Secured Party, to file
claims under any insurance policies covering the Collateral, to receive any
payments that may be made thereunder, and to execute any and all documents that
may be necessary to effect the collection, compromise or settlement of any
claims under any such insurance policies.
(e) If the Debtor shall at any time or times hereafter fail to obtain and
maintain any of the policies of insurance required above, or fail to pay any
premium in whole or in part relating to any such policies, Secured Party may,
but shall not be obligated to, obtain or cause to be obtained any or all of
such policies and pay any part or all of the premiums due thereunder, without
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<PAGE> 61
thereby waiving any default by the Debtors, and any sum so disbursed by Secured
Party shall become a part of the Obligations secured by the Collateral, payable
on demand.
13. REMEDIES UPON AN EVENT OF DEFAULT WITH RESPECT TO COLLATERAL
(a) Upon the occurrence of an Event of Default, Secured Party shall have,
in addition to any other rights and remedies contained in this Agreement, all
the rights and remedies of a secured party under the Uniform Commercial Code of
New York, or any other applicable state, all of which shall be cumulative to
the extent permitted by law.
(b) In addition to all other rights and remedies, upon the occurrence of
an Event of Default, Secured Party may sell, lease or make any other
disposition of the Collateral, free from any right of redemption after such
sale, which right of redemption the Debtor hereby waives, for cash, credit or
any other accommodation thereof, and Secured Party may purchase all or any part
of the Collateral at a public or, to the extent permitted by law, private sale
after giving the Debtor ten (10) days' notice, which notice is hereby agreed to
be reasonable. The notice of such sale shall (i) in the case of a public sale,
state the time and place fixed for such sale and (ii) in the case of a private
sale, state the date after which such sale may be consummated. Any such public
sale shall be held at such time or times within ordinary business hours and at
such place or places as the Secured Party may fix in the notice of such sale.
Secured Party may, if it deems it reasonable, postpone or adjourn any sale of
the Collateral from time to time by an announcement at the time and place of
such postponed or adjourned sale, without being required to give a new notice
of sale and such sale may be made at any time or place to which the same may be
so adjourned. The proceeds of any sale or other disposition of any part of the
Collateral shall be applied by Secured Party to the then outstanding balance of
the Obligations (including any costs or sums advanced by Secured Party
hereunder or incurred by Secured Party hereunder) in such order of application
as Secured Party in its sole discretion may elect. The Debtor shall be liable
to Secured Party for any deficiency.
(c) Secured Party shall have the right to apply all proceeds from the sale
of Collateral to any of the Obligations in such order as Secured Party shall
determine.
(d) Should the Debtor fail to perform or observe any covenant or comply
with any condition contained in any agreement or instrument to which Debtor is
a party relating to the Collateral, then Secured Party, without obligation to
do so and without notice to or demand upon the Debtor, and without releasing
the Debtor from its obligations to Secured Party, may perform such covenant or
satisfy such condition. If Secured Party shall incur any costs or expenses of
litigation in connection with the enforcement of its rights hereunder, all such
costs, expenses, and payments shall become part of the Obligations secured
hereby, and shall be immediately due and payable upon demand.
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<PAGE> 62
(e) Upon the occurrence of an Event of Default and without written notice
thereof, Secured Party shall have the right to enter and remain upon the
property of Debtor, without cost or charge to Secured Party, and to effectuate
any or all of the remedies herein, for liquidating or collecting the
Collateral, or for conducting and preparing for the sale of the Collateral,
whether by foreclosure, auction or otherwise. In addition, Secured Party may
remove from such premises the Collateral and any records with respect thereto,
and take the same to the premises of Secured Party at such times as the Secured
Party may desire, in order to effectively collect or liquidate the Collateral.
In addition, upon an Event of Default, the Debtor, at its own cost, shall
assemble all the Collateral and make it available to Secured Party, in its sole
discretion, by written notice to the Debtor, which notice shall specify the
place of assembly and the time when the Collateral must be made available to
the Secured Party.
(f) Secured Party's failure, at any time or times hereafter, to require
strict performance by the Debtor of any of the provisions, warranties, terms
and conditions contained in this Security Agreement shall not waive, affect or
diminish any right of Secured Party at any time or times hereafter to demand
strict performance thereof and any waiver of any Event of Default shall not
waive or affect any other Event of Default, whether prior or subsequent thereto
and whether of the same or different type.
(g) The Debtor hereby constitutes Secured Party or its designee as the
Debtor's attorney-in-fact, effective upon the occurrence of an Event of
Default, to endorse the Debtor's name upon any notes, acceptances, checks,
drafts, money orders or other evidences of payment, and to do all other acts or
things necessary to carry out this Security Agreement. The Debtor hereby
waives notice of presentment, protest and dishonor of any instrument so
endorsed by Secured Party. All acts of said attorney-in-fact or designee are
hereby authorized or ratified and said attorney-in-fact or designee shall not
be liable for any acts of omission or commission, nor for any error of judgment
or mistake of fact or loss except to the extent caused by the gross negligence
or willful misconduct of the Secured Party or such designee. This power is
coupled with an interest and is irrevocable while the Obligations remain
unpaid. The granting of the power of attorney herein shall be in addition to
any other power of attorney granted to Secured Party and shall in no way limit
any other powers granted herein.
(h) Upon the occurrence of an Event of Default, Secured Party shall have
the right to exercise any and all of the foregoing remedies, without regard to
the adequacy of the security for the Obligations, and with or without the
commencement of any legal or equitable action or the appointment of any
receiver or trustee. The Secured Party shall exercise any and all rights and
remedies hereunder only upon the instructions of the holders of not less than
50% in principal amount of the Notes.
(i) After the earlier of (i) termination of this Agreement and the payment
in full of the Obligations and (ii) conversion of all of the Notes pursuant to
this Agreement, any proceeds
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<PAGE> 63
of the Collateral received or held by the Secured Party shall be turned over to
the Debtor and the Collateral shall be reassigned to the Debtor by the Secured
Party without recourse to the Secured Party and without any representations,
warranties or agreements of any kind.
14. MISCELLANEOUS
(a) Notwithstanding the place where this Agreement may be executed by any
of the parties hereto, the parties expressly agree that all the terms and
provisions hereof shall be construed in accordance with and governed by the
laws of the State of New York. The parties hereby agree that any dispute which
may arise between them arising out of or in connection with this Agreement
shall be adjudicated before a court located in New York County and they hereby
submit to the exclusive jurisdiction of the courts of the State of New York and
of the federal courts in New York with respect to any action or legal
proceeding commenced by any party, and irrevocably waive any objection they now
or hereafter may have respecting the venue of any such action or proceeding
brought in such a court or respecting the fact that such court is an
inconvenient forum, relating to or arising out of this Agreement or any acts or
omissions relating to the sale of the securities hereunder, and consent to the
service of process in any such action or legal proceeding by means of
registered or certified mail, return receipt requested, in care of the address
set forth below or such other address as the undersigned shall furnish in
writing to the other.
(b) Whenever reference is made to any of the parties in this Security
Agreement, such reference shall be deemed to include the successors and assigns
of such party, and all covenants, provisions and agreements by or on behalf of
the Debtor in this Agreement shall inure to the benefit of the successors and
assigns of the Secured Party.
(c) This Agreement may be executed in one or more counterparts each of
which shall be deemed an original, but all of which together shall constitute
one and the same Agreement.
(d) Any invalidity or limitation on the enforceability of any provision of
this Agreement shall not affect or impair the validity, legality or
enforceability of any other provision hereof and the remaining provisions of
this Agreement shall continue and remain in full force and effect.
(e) The captions of the various sections and paragraphs of this Agreement
have been included only for the purposes of convenience and are not a part of
this Agreement and shall not be deemed in any manner to modify, explain,
enlarge or restrict any of the provisions of this Agreement.
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<PAGE> 64
(f) No waiver of any breach of any covenant, agreement or undertaking
contained herein shall operate as a waiver of any subsequent breach of the same
covenant, agreement or undertaking or as a waiver of any breach of any other
covenant, agreement or undertaking. In the case of a breach by any party of
any covenant, agreement or undertaking, the nonbreaching party may nevertheless
accept from the other any payment or performance without waiving its right to
exercise any right or remedy provided herein or otherwise with respect to any
such breach which was in existence at the time such payment or performance was
accepted by it. No failure of any party to exercise any power given herein or
to insist upon strict compliance with any covenant, agreement or undertaking
contained herein, and no custom or practice which varies from the terms hereof,
shall constitute a waiver of such party's right to demand exact compliance with
the terms hereof. The waiver by any party of a breach of any covenant,
agreement or undertaking contained herein shall be made only by a written
waiver in each case, and no such waiver shall operate or be construed as a
waiver of any prior or subsequent breach.
(g) This Agreement and the Loan Documents embody the entire understanding
and agreement among the parties pertaining to the subject matter hereof, and
all prior agreements and understandings of the parties, whether written or
oral, are terminated and superseded by this Agreement and shall be deemed
merged herein.
(h) Except as otherwise expressly provided herein, all rights, powers and
privileges conferred hereunder upon any party shall be cumulative and not
restrictive of those given by law. No remedy herein conferred is exclusive of
any other available remedy, but each and every such remedy shall be cumulative
and shall be in addition to every other remedy given by agreement or now or
hereafter existing at law or in equity or by statute.
(i) If the Obligations shall be collected through an attorney at law, the
Debtor shall be responsible for the costs of collection, including, but not
limited to, court costs and reasonable attorneys' fees.
(j) Any notice, payment, demand, instruction or communication required or
permitted to be given by this Agreement shall be in writing and shall be given
by hand delivery, overnight messenger or certified mail, return receipt
requested, addressed to the appropriate party at the address stated below:
If to the Debtor:
Credit Depot Corporation
700 Wachovia Center
Gainesville, Georgia 30501
Attn:Gerald F. Sullivan, President and Chief Executive Officer
If to the Holders' Agent:
35
<PAGE> 65
Thieme Consulting, Inc.
1370 Avenue of the Americas
New York, New York 10019
(k) The parties hereto agree that time is of the essence in the execution
and performance of this Agreement.
Any notice sent by Federal Express or other nationally recognized overnight
courier service or hand delivery shall be deemed made on the date received and
any notice sent by certified mail shall be deemed made three (3) days after
mailing.
IN WITNESS WHEREOF, the parties hereto have signed and sealed this
Agreement the day and year first above written.
SECURED PARTY:
_________________________________
By:___________________________ (Seal)
Its: ___________________
DEBTOR:
CREDIT DEPOT CORPORATION
By: __________________________ (Seal)
GERALD F. SULLIVAN
Its: President and Chief Executive Officer
34
<PAGE> 66
Schedule I
FILING JURISDICTIONS
Clerk of the Superior Court, Hall County, Georgia
36
<PAGE> 1
EXHIBIT 4.16
THIS WARRANT AS WELL AS THE COMMON STOCK ISSUABLE UPON THE EXERCISE OF
THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED(THE "ACT"), AND MAY NOT BE OFFERED OR SOLD UNLESS REGISTERED UNDER THE
ACT OR AN EXEMPTION FROM REGISTRATION UNDER THE ACT IS AVAILABLE. THIS WARRANT
MAY NOT BE TRANSFERRED SEPARATELY FROM THE NOTE UNTIL THE COMMENCEMENT DATE, AS
THOSE TERMS ARE HEREINAFTER DEFINED.
Void after 5:00 P.M., New York City Time, on March 31, 1999 (the "Termination
Date")
WARRANT TO PURCHASE ______ SHARES OF THE COMMON STOCK OF
CREDIT DEPOT CORPORATION
This is to Certify That, FOR VALUE RECEIVED, ____________(the "Holder"), is
entitled to purchase, subject to the provisions of this Warrant, from Credit
Depot Corporation, a Delaware corporation (the "Company"), _______ shares of the
Common Stock of the Company, $.001 par value (the "Common Stock"), at a price of
$.40 per share at any time or from time to time during the period from the
Commencement Date, as that term is hereinafter defined, until 5:00 P.M., New
York City Time on the Termination Date. The number of shares to be received upon
the exercise of this Warrant and the price to be paid for each such share may be
adjusted from time to time as hereinafter set forth. The shares deliverable upon
such exercise, and as adjusted from time to time, are hereinafter sometimes
referred to as "Warrant Shares" and the exercise price of this Warrant as in
effect at any time as adjusted from time to time is hereinafter sometimes
referred to as the "Exercise Price."
SECTION 1. EXERCISE OF WARRANT.
(a) This Warrant may be exercised in whole or in part at any time or from time
to time on or after the earlier to occur of (i) the occurrence of a Default or
an Event of Default pursuant to a 10% Secured Convertible Note issued as of July
30, 1997 to the Holder by the Company (the "Note") or any agreements executed by
the Company or any subsidiary thereof in connection with the Note which results
in an acceleration of the due date of the Note or (ii) October 31, 1997 (the
"Commencement Date") until 5:00 P.M., New York City Time, on the Termination
Date (the "Exercise Period") provided, however, that if either such day is a day
on which banking institutions in the State of New York are authorized by law to
close, then on the next succeeding day which shall not be such a day, and (iv)
in the event of any merger, consolidation or sale of substantially all the
assets of the
<PAGE> 2
Company as an entirety resulting in any distribution to the Company's
stockholders, on or before the Termination Date, the Holder shall have the right
to exercise this Warrant commencing at such time through the Termination Date
which shall entitle the Holder to receive, in lieu of Warrant Shares, the kind
and amount of securities and property (including cash) receivable by a holder of
the number of shares of Warrant Shares into which this Warrant might have been
exercisable immediately prior thereto. For purposes of this Warrant, the term
"Warrant Shares" shall include such securities and property. This Warrant may be
exercised by presentation and surrender hereof to the Company at its principal
office, or at the office of its stock transfer agent, if any, with the Purchase
Form annexed hereto duly executed and accompanied by payment of the Exercise
Price for the number of Warrant Shares specified in such form. Such payment may
be made, at the option of the Holder, by check or wire transfer As soon as
practicable after each such exercise of the Warrant, but not later than two
business days from the date of such exercise, the Company shall issue and
deliver to the Holder a certificate or certificates representing the Warrant
Shares issuable upon such exercise, registered in the name of the Holder or the
Holder's designee. If this Warrant should be exercised in part only, the Company
shall, upon surrender of this Warrant for cancellation, execute and deliver a
new Warrant evidencing the rights of the Holder thereof to purchase the balance
of the Warrant Shares purchasable thereunder. Upon receipt by the Company of
this Warrant at its office, or by the stock transfer agent of the Company at its
office, in proper form for exercise, the Holder shall be deemed to be the holder
of record of the Warrant Shares issuable upon such exercise, notwithstanding
that the stock transfer books of the Company shall then be closed or that
certificates representing such shares shall not then be physically delivered to
the Holder.
(b) Notwithstanding anything herein to the contrary, this Warrant may
not be transferred separately from the Note prior to the Commencement Date.
SECTION 2. RESERVATION OF SHARES.
The Company shall at all times reserve for issuance and/or delivery
upon exercise of this Warrant such number of Warrant Shares as shall be required
for issuance and delivery upon exercise of this Warrant.
SECTION 3. FRACTIONAL SHARES.
No fractional shares or scrip representing fractional shares shall be
issued upon the exercise of this Warrant. With respect to any fraction of a
share called for upon any exercise hereof, the Company shall pay to the Holder
an amount in cash equal to such fraction multiplied by the current market value
of a share, determined as follows:
2
<PAGE> 3
(a) If the Common Stock is listed on a national securities exchange or
admitted to unlisted trading privileges on such exchange or listed for trading
on NASDAQ, the current market value shall be the last reported sale price of the
Common Stock on such exchange or system on the last business day prior to the
date of exercise of this Warrant or if no such sale is made on such day, the
average of the closing high bid and low asked prices for such day on such
exchange or system; or
(b) If the Common Stock is not so listed or admitted to unlisted
trading privileges but bid and asked prices are reported by the National
Quotation Bureau, Inc., the current market value shall be the average of last
reported high bid and low asked prices reported by the National Quotation
Bureau, Inc. on the last business day prior to the date of the exercise of this
Warrant; or
(c) If the Common Stock is not so listed or admitted to unlisted
trading privileges and bid and asked prices are not so reported, the current
market value shall be an amount, the book value of a share thereof as at the end
of the fiscal quarter of the Company ending immediately prior to the date of the
exercise of the Warrant.
SECTION 4. EXCHANGE, TRANSFER, ASSIGNMENT OR LOSS OF WARRANT.
This Warrant is exchangeable, without expense, at the option of the
Holder, upon presentation and surrender hereof to the Company or at the office
of its stock transfer agent, if any, for other warrants of different
denominations entitling the holder thereof to purchase in the aggregate the same
number of shares of Common Stock purchasable hereunder. The term "Warrant" as
used herein includes any Warrants into which this Warrant may be divided or
exchanged. Upon receipt by the Company of evidence reasonably satisfactory to it
of the loss, theft, destruction or mutilation of this Warrant, and (in the case
of loss, theft or destruction) of reasonably satisfactory indemnification, and
upon surrender and cancellation of this Warrant, if mutilated, the Company will
execute and deliver a new Warrant of like tenor and date. Any such new Warrant
executed and delivered shall constitute an additional contractual obligation on
the part of the Company, whether or not this Warrant so lost, stolen, destroyed,
or mutilated shall be at any time enforceable by anyone.
3
<PAGE> 4
SECTION 5. RIGHTS AND LIABILITIES OF THE HOLDER.
The Holder shall not, by virtue hereof, be entitled to any rights of a
shareholder in the Company, either at law or equity, and the rights of the
Holder are limited to those expressed in the Warrant and are not enforceable
against the Company except to the extent set forth herein. No provision of this
Warrant, in the absence of affirmative action by the Holder to purchase the
Warrant Shares, and no mere enumeration herein of the rights or privileges of
the Holder, shall give rise to any liability of the Holder for the Exercise
Price or as a shareholder of the Company, whether such liability is asserted by
the Company or by creditors of the Company.
SECTION 6. ADJUSTMENTS, NOTICE PROVISIONS AND RESTRICTIONS ON
ISSUANCE OF ADDITIONAL SECURITIES.
SECTION 6.1 Adjustment of Exercise Price. The Exercise Price in effect from time
to time shall be subject to adjustment, as follows:
(a) In case the Company shall (i) declare a dividend or make a
distribution on the outstanding shares of its capital stock that is payable in
shares of its Common Stock, (ii) subdivide, split or reclassify the outstanding
shares of its Common Stock into a greater number of shares, or (iii) combine or
reclassify the outstanding shares of its Common Stock into a smaller number of
shares, the Exercise Price in effect immediately after the record date for such
dividend or distribution or the effective date of such subdivision, combination
or reclassification shall be adjusted so that it shall equal the price
determined by multiplying the Exercise Price in effect immediately prior thereto
by a fraction, of which the numerator shall be the number of shares of Common
Stock outstanding immediately before such dividend, distribution, split,
subdivision, combination or reclassification, and of which the denominator shall
be the number of shares of Common Stock outstanding immediately after such
dividend, distribution, split, subdivision, combination or reclassification. Any
shares of Common Stock issuable in payment of a dividend shall be deemed to have
been issued immediately prior to the record date for such dividend for purposes
of calculating the number of outstanding shares of Common Stock of the Company
under this Section 6. Such adjustment shall be made successively upon the
occurrence of each event specified above.
(b) In case the Company fixes a record date for the issuance to holders
of its Common Stock of rights, options, warrants or convertible or exchangeable
securities generally entitling such holders to subscribe for or purchase shares
of Common Stock at a price per share less than the Current Market Price (as such
term is defined in Subsection 6.1(d) hereof) per share of Common Stock on such
record date, the Exercise Price shall be adjusted immediately thereafter so that
it shall equal the price determined by multiplying
4
<PAGE> 5
the Exercise Price in effect immediately prior thereto by a fraction, of which
the numerator shall be the number of shares of Common Stock outstanding on such
record date plus the number of shares of Common Stock which the aggregate
offering price of the total number of shares of Common Stock so offered would
purchase at the Current Market Price per share, and of which the denominator
shall be the number of shares of Common Stock outstanding on such Record Date
plus the number of additional shares of Common Stock offered for subscription or
purchase. Such adjustment shall be made successively on each date whenever a
record date is fixed.
(c) In case the Company fixes a record date for the making of a
distribution to all holders of shares of its Common Stock (i) of shares of any
class of capital stock other than its Common Stock or (ii) of evidences of its
indebtedness or (iii) of assets (other than dividends or distributions referred
to in Subsection 6.1(a) hereof) or (iv) of rights, options, warrant or
convertible or exchangeable securities (excluding those rights, options,
warrants or convertible or exchangeable securities referred to in Subsection
6.1(b) hereof), then in each such case the Exercise Price in effect immediately
thereafter shall be determined by multiplying the Exercise Price in effect
immediately prior thereto by a fraction, of which the numerator shall be the
total number of shares of Common Stock outstanding on such record date
multiplied by the Current Market Price (as such term is defined in Subsection
6.1(d) hereof) per share on such record date, less the aggregate fair value as
determined in good faith by the Board of Directors of the Company of said shares
or evidences of indebtedness or assets or rights, options, warrants or
convertible or exchangeable securities so distributed, and of which the
denominator shall be the total number of shares of Common Stock outstanding on
such record date multiplied by such Current market Price per share. Such
adjustment shall be made successively each time such a record date is fixed. In
the event that such distribution is not so made, the Exercise Price then in
effect shall be readjusted to the Exercise Price which would then be in effect
if such record date had not been fixed.
(d) For the purpose of any computation under Subsection 6.1(a), 6.1(b)
or 6.1(c) hereof, the "Current Market Price" per share at any date (the
"Computation Date") shall be deemed to be the average of the daily current
market value of the Common Stock as determined in accordance with the provisions
of Section 3 hereof over twenty consecutive trading days ending the trading day
before such date; provided, however, upon the occurrence, prior to the
Computation Date, of any event described in Subsections 6.1(a), 6.1(b) or 6.1(c)
which shall have become effective with respect to market transactions at any
time (the "Market-Effect Date") on or after the beginning of such 20-day period,
the current market value, as determined in accordance with the provisions of
Section 3 hereof for each trading day preceding the Market-Effect Date shall be
adjusted, for purposes of calculating such average, by multiplying such Closing
Price by a fraction the numerator of which is the Exercise Price as in effect
immediately after the Market-Effect Date and the
5
<PAGE> 6
denominator of which is the Exercise Price immediately prior to the
Market-Effect Date, it being understood that the purpose of this proviso is to
ensure that the effect of such event on the market price of the Common Stock
shall, as nearly as possible, be eliminated in order that the distortion in the
calculation of the Current Market Price may be minimized.
(e) Notwithstanding anything herein to the contrary, in addition to any
other adjustment required to be made pursuant to the provisions hereof, the
Exercise Price will also be reduced to a price equal to the sales price per
share of Common Stock issued by the Company or issuable on conversion or
exercise of convertible or exercisable securities issued by the Company on and
after the date hereof and through the Termination Date if such price is lower
than the Exercise Price. In no event will such price adjustment increase the
Exercise Price, as otherwise adjusted pursuant to the terms hereof. There shall
be no limitation on the number of adjustments made pursuant to this subsection
(e).
(f) All calculations under this Section 6.1 shall be made to the
nearest cent.
SECTION 6.2 Adjustment of Number of Shares. Upon each adjustment of the Exercise
Price pursuant to Subsection 6.1 hereof, this Warrant shall thereupon evidence
the right to purchase, in addition to any other securities to which the Holder
is entitled to purchase, that number of Warrant Shares (calculated to the
nearest one-hundred thousandth of a share) obtained by multiplying the number of
shares of Common Stock purchasable upon exercise of the Warrant immediately
prior to such adjustment by the Exercise Price in effect immediately prior to
such adjustment and dividing the product so obtained by the Exercise Price in
effect immediately after such adjustment.
SECTION 6.3 Verification of Computations. The Company shall select a firm of
independent public accountants, which may be the Company's independent auditors,
and which selection may be changed from time to time, to verify the computations
made in accordance with this Section 6. The certificate, report of other written
statement of any such firm shall be conclusive evidence of the correctness of
any computation made under this Section 6. Promptly upon its receipt of such
certificate, report or statement from such firm of independent public
accountants, the Company shall deliver a copy thereof to the Holder.
SECTION 6.4 Warrant Certificate Amendments. Irrespective of any adjustments
pursuant to this Section 6, Warrant Certificates theretofore or thereafter
issued need not be amended or replaced, but Warrant Certificates thereafter
issued shall bear an appropriate legend or other notice of any adjustments and
which legend and/or notice has been provided by the Company to the Holder,
provided the Company may, at its option, issue new Warrant Certificates
evidencing Warrants in the form attached hereto to reflect any adjustment in the
Exercise Price and the number of Warrant Shares evidenced
6
<PAGE> 7
by such Warrant Certificates and deliver the same to the Holder in substitution
for existing Warrant Certificates.
SECTION 7. OFFICER'S CERTIFICATE.
Whenever the Exercise Price, the number of Warrant Shares underlying
this Warrant or either of them shall be adjusted as required by the provisions
of the foregoing Section, the Company shall forthwith file in the custody of its
Secretary or an Assistant Secretary at its principal office and with its stock
transfer agent, if any, an officer's certificate showing the adjusted Exercise
Price and number of Warrant shares determined as herein provided, setting forth
in reasonable detail the facts requiring such adjustment, including a statement
of the number of additional shares of Common Stock, if any, and such other facts
as shall be necessary to show the reason for and the manner of computing such
adjustment. Each such officer's certificate shall be made available at all
reasonable times for inspection by the Holder or any holder of a Warrant
executed and delivered pursuant to Section 1 hereof and the Company shall,
forthwith after each such adjustment, mail a copy by certified mail of such
certificate to the Holder or any such holder.
SECTION 8. NOTICES TO WARRANT HOLDERS.
So long as this Warrant shall be outstanding, (i) if the Company shall
pay any dividend or make any distribution upon the Common Stock, (ii) if the
Company shall offer to the holders of its Common Stock rights to subscribe for,
purchase, or exchange property for any shares of any class of stock, or any
other rights or options or (iii) if any capital reorganization of the Company,
reclassification of the capital stock of the Company, consolidation or merger of
the Company with or into another corporation, sale, lease or transfer of all or
substantially all of the property and assets of the Company to another
corporation, or voluntary or involuntary dissolution, liquidation or winding up
of the Company shall be effected, then in any such case, the Company shall cause
to be sent by overnight mail or courier service to the Holder, at least fifteen
days prior to the date specified in (x) or (y) below, as the case may be, a
notice containing a brief description of the proposed action and stating the
date on which (x) a record is to be taken for the purpose of such dividend,
distribution or subscription rights, or (y) such reclassification,
reorganization, consolidation, merger, conveyance, lease, dissolution,
liquidation or winding up is to take place and the date, if any is to be fixed,
as of which the holders of Common Stock or other securities shall receive cash
or other property deliverable upon such reclassification, reorganization,
consolidation, merger, conveyance, dissolution, liquidation or winding up.
7
<PAGE> 8
SECTION 9. RECLASSIFICATION, REORGANIZATION OR MERGER.
In case of any reclassification, capital reorganization or other change
of outstanding shares of Common Stock of the Company, or in case of any
consolidation or merger of the Company with or into another corporation (other
than a merger with a subsidiary in which merger the Company is the continuing
corporation and which does not result in any reclassification, capital
reorganization or other change of outstanding shares of Common Stock of the
class issuable upon exercise of this Warrant) or in case of any sale, lease or
conveyance to another corporation of the property of the Company as an entirety
(collectively such actions being hereinafter referred to as "Reorganizations"),
the Company shall, as a condition precedent to such Reorganization transaction,
cause effective provisions to be made so that the Holder shall have the right
thereafter by exercising this Warrant at any time prior to the expiration of the
Warrant, to receive in lieu of the amount of securities otherwise deliverable,
the kind and amount of shares of stock and other securities and property
receivable upon such Reorganization by a holder of the number of shares of
Common Stock which might have been purchased upon exercise of this Warrant and
the warrants included in the Shares immediately prior to such Reorganization.
Any such provision shall include provision for adjustments which shall be as
nearly equivalent as may be practicable to the adjustments provided for in this
Warrant. The foregoing provisions of this Section 9 shall similarly apply to
successive Reorganizations.
SECTION 10. ISSUE TAX.
The issuance of certificates representing the Warrant Shares upon the
exercise of this Warrant as well as securities underlying the Share Warrants
shall be made without charge to the Holder for any issuance tax in respect
thereof.
SECTION 11. EXCHANGE PROVISIONS
At any time during which this Warrant is exercisable in accordance with
its terms, the Holder may, at its option, exchange this Warrant, in whole or in
part (a "Warrant Exchange"), into the number of Warrant Shares determined in
accordance with this Section 11, by surrendering this Warrant at the principal
office of the Company or at the office of its stock transfer agent, accompanied
by a notice stating such Holder's intent to effect such exchange, the number of
Warrant Shares to be exchanged and the date on which the Holder requests that
such Warrant Exchange occur (the "Notice of Exchange"). The Warrant Exchange
shall take place on the date specified in the Notice of Exchange or, if later,
the date the Notice of Exchange is received by the Company (the "Exchange
Date"). Certificates for the shares issuable upon such Warrant Exchange and, if
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<PAGE> 9
applicable, a new warrant of like tenor evidencing the balance of the shares
remaining subject to this Warrant, shall be issued as of the Exchange Date and
delivered to the Holder within seven (7) days following the Exchange Date. In
connection with any Warrant Exchange, this Warrant shall represent the right to
subscribe for and acquire the number of Warrant Shares (rounded to the next
highest integer) equal to (i) the number of Warrant Shares specified by the
Holder in its Notice of Exchange (the "Total Number") less (ii) the number of
Warrant Shares equal to the quotient obtained by dividing (A) the product of the
Total Number and the existing Exercise Price by (B) the Fair Market Value. "Fair
Market Value" "Fair Market Value" shall mean: (1) if the Common Stock is listed
on a National Securities Exchange or admitted to unlisted trading privileges on
such exchange or listed for trading on the NASDAQ system, Fair Market Value
shall be the average of the last reported sale prices of the Common Stock on
such exchange or system for the twenty (20) business days ending on the last
business day prior to the date for which the determination is being made; or (2)
if the Common Stock is not so listed or admitted to unlisted trading privileges,
Fair Market Value shall be the average of the means of the last reported bid and
asked prices reported by the National Quotation Bureau, Inc. for the twenty (20)
business days ending on the last business day prior to the date for which the
determination is being made; or (3) if the Common Stock is not so listed or
admitted to unlisted trading privileges and bid and asked prices are not so
reported, the Fair Market Value shall be the book value thereof as at the end of
the most recent fiscal year of the Company ending prior to the Exchange Date,
determined in accordance with generally accepted accounting principles.
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<PAGE> 10
SECTION 12. GOVERNING LAW, JURISDICTION AND VENUE.
This Warrant shall be governed by and construed and enforced in
accordance with the laws of the State of New York. The Company hereby consents
to the exclusive jurisdiction and venue of the courts of the State of New York
located in New York County, New York with respect to any matter relating to this
Warrant and the performance of the Company's obligations hereunder and the
Company hereto hereby further consents to the personal jurisdiction of such
courts. Any action suit or proceeding brought by or on behalf of the Company
relating to such matters shall be commenced, pursued, defended and resolved only
in such courts and any appropriate appellate court having jurisdiction to hear
an appeal from any judgment entered in such courts.
CREDIT DEPOT CORPORATION
By:
-------------------
[SEAL]
Dated: , 1997
--------------
Attest:
- ----------------------------
Secretary
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PURCHASE FORM
Dated ________________, 19__
The undersigned hereby irrevocably elects to exercise the
within Warrant to the extent of purchasing _________ Warrant Shares and hereby
makes payment _________ of in payment of the actual exercise price thereof.
INSTRUCTIONS FOR REGISTRATION OF STOCK
Name
--------------------------------------------------------
(Please typewrite or print in block letters)
Address
-----------------------------------------------------
Signature
---------------------------------------------------
11
<PAGE> 1
EXHIBIT 10.22
ACQUISITION AGREEMENT
Agreement dated as of April 1, 1997 among Cash Back Acquisition Corp.,
a Delaware corporation ("Buyer"), and Cash Back Mortgage Corp., an Ohio
corporation ("Seller") and Alan Schiff and Alan Solomon (the "Stockholders").
WHEREAS, Seller is engaged in the business of originating
mortgage loans; and
WHEREAS, Buyer, a newly-organized wholly-owned subsidiary of Credit
Depot Corporation, desires to purchase and Seller desires to sell, all of the
assets, properties and business, except as otherwise set forth herein, of
Seller, on the terms and conditions hereinafter set forth; and
WHEREAS, the Stockholders own all of the issued and outstanding shares
of Seller and, in order to induce Buyer to enter this Agreement, have agreed to
enter into certain agreements with the Buyer;
WHEREAS, the parties intend that the transaction be treated as a
tax-free reorganization for Federal income tax purposes.
NOW, THEREFORE in consideration of the premises and the mutual
representations, warranties, covenants and agreements herein contained, the
parties, intending to be legally bound hereby, hereby agree as follows:
1. Definitions.
As used in this Agreement, the following terms have the meanings
specified or referred to in this Section 1.
"Assets" -- See Section 2.1.
"Assumption Agreement" -- See Section 2.5.
"Balance Sheets" -- See Section 5.7.
"Business and Condition" -- The business, operations, properties,
assets, material contracts, cash flow, revenues, net income, prospects or
condition (financial or otherwise) of the Seller.
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"Business Day" -- Any day that is not a Saturday or Sunday or a day on
which banks located in the City of Atlanta are authorized or required to be
closed.
"Buyer" -- See the first paragraph of this Agreement.
"Closing" -- See Section 4.1.
"Closing Date" -- The date and time of the Closing.
"Closing Price" -- The Closing Price shall be determined as
follows:
(a) If the Common Stock is listed on a national securities exchange or
admitted to unlisted trading privileges on such exchange or listed for trading
on the Nasdaq Stock Market system, the current market value shall be the last
reported sale price of the Common Stock on such exchange or system or if no such
sale is made, the average closing bid and asked prices; or
(b) If the Common Stock is not so listed or admitted to unlisted
trading privileges but bid and asked prices are reported by the National
Quotation Bureau, Inc., the current market value shall be the mean of the last
reported bid and asked prices reported by the National Quotation Bureau, Inc.;
or
(c) If the Common Stock is not so listed or admitted to unlisted
trading privileges and bid and asked prices are not so reported, the current
market value shall be an amount, not less than book value thereof as at the end
of the most recent fiscal year of Credit Depot, determined in such reasonable
manner as may be prescribed by the Board of Directors of Credit Depot. The
parties agree that if there is a dispute as to the determination of fair market
value under this subparagraph (c), such dispute shall be submitted to
arbitration by an arbitrator mutually agreeable to Seller and Buyer or if one
cannot be agreed upon, by an arbitrator appointed by the American Arbitration
Association.
"Code" -- The Internal Revenue Code of 1986, as amended.
"Contemplated Transactions" -- The sale of the Assets by Seller to
Buyer, the purchase of the Assets by Buyer from Seller, the operation of the
business conducted by Seller prior to the Closing by Buyer after the Closing,
and performance of and compliance with all agreements contained in this
Agreement.
"Damages" -- See Section 11.3.
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"Employment Agreements" -- The employment agreements
referred to in Section 9.10.
"Encumbrance" -- Any security interest, mortgage, lien, charge, adverse
claim or restriction of any kind, including, but not limited to, any restriction
on the use, voting, transfer, receipt of income or other exercise of any
attributes of ownership.
"Excluded Assets" -- See Section 2.2.
"GAAP" -- Generally accepted accounting principles of the
United States.
"Guaranty" -- The Guaranty of Guarantor attached to this
Agreement.
"Guarantor" -- Credit Depot Corporation.
"Interim Balance Sheet" -- See Section 5.7.
"Non-Competition Agreements" -- See Section 9.11.
"Person" -- Any individual, corporation, partnership, joint venture,
trust, association, unincorporated organization, other entity, or governmental
body.
"Plans" -- See Section 5.21(a).
"Proprietary Rights" -- All trademarks, tradenames, service marks,
brand marks, brand names, copyrights, know-how, names and likeness and other
proprietary rights.
"Related Party" -- (a) Seller, (b) Stockholders, (c) any individual who
is a director or officer of the Seller, (d) any member of the family (as defined
in section 267(c)(4) of the Code) of, or any individual who has the same home
as, any individual (or the spouse of any such individual) described in clause
(a), (b) or (c) of this section, or (e) any trust, estate or partnership of
which an individual described in clause (a), (b), (c) or (d) of this section is
a grantor, fiduciary, beneficiary or partner.
"Securities Act" -- the Securities Act of 1933, as amended.
"SEC" -- the Securities and Exchange Commission.
"Seller" -- See the first paragraph of this Agreement.
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"Stockholders" -- See the first paragraph of this Agreement.
"Taxes" -- All taxes, duties, charges, fees, levies, interest,
penalties, additions to tax or other assessments, including, but not limited to,
income, excise, employment, property, sales, withholding, use, value added and
franchise taxes and customs duties, imposed by any governmental body and any
payments with respect thereto required under any tax-sharing agreement.
"Tax Returns" -- Any return, report, information return or other
document (including any related or supporting information) filed or required to
be filed with any governmental body in connection with the determination,
assessment or collection of any Taxes or the administration of any laws,
regulations or administrative requirements relating to any Taxes.
2. The Acquisition.
2.1 Purchase and Sale of Assets. Subject to the terms and conditions of
this Agreement and the performance by the parties hereto of their respective
obligations hereunder, at the Closing (as defined in Section 4.1 hereof), Seller
shall sell, grant, transfer, convey, assign and deliver to Buyer, and Buyer
shall purchase, acquire and accept from the Seller, all of the Seller's right,
title and interest in and to all of the assets, properties and rights of Seller
of every kind and description, real, personal and mixed, tangible and
intangible, wherever situated, other than the Excluded Assets, including without
limitation, cash and cash equivalents, the business and operations of Seller as
a going concern, good will, causes of action, all other claims and rights of
every kind, insurance policies, Proprietary Rights, all licenses of the Seller
and all rights relating to or arising out of the business conducted by Seller,
all books and records, computers and computer software (including documentation
and related object and source codes), correspondence, employment records and
files of or relating to the business or assets of Seller and all of Seller's
right, title and interest in and to each lease, contract, agreement or
commitment to which Seller is a party or in which Seller has rights and the name
"Cash Back Mortgage Corp.", and all derivatives thereof and all goodwill
associated therewith (which business, assets, properties and rights, excepting
only those assets expressly excluded by Section 2.2 below, are herein referred
to as the "Assets").
2.2 Excluded Assets. It is hereby expressly acknowledged
and agreed that Seller is not selling, transferring or assigning
to Buyer, and that Buyer is not acquiring, the assets and
properties listed on Schedule 2.2 hereof.
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2.3 Transfer of Assets. The transfer of the Assets as herein provided
shall be effected by bills of sale, endorsements, assignments, drafts, checks
and other instruments of transfer and conveyance delivered by Seller to Buyer on
the Closing Date (as defined in Section 4.1 hereof) in form sufficient to
transfer good and marketable title to the Assets free and clear of all
Encumbrances and as shall be reasonably requested by Buyer. Seller and
Stockholders hereby covenant and agree that (i) they will, at any time and from
time to time after the Closing Date, do all such further acts and things as may
be reasonably requested by Buyer for the effective transferring and delivering
to Buyer, or for aiding and assisting Buyer in collecting and reducing to
possession, any and all of the Assets; (ii) Buyer, after the Closing Date, shall
have the right and authority to collect, for the account of Buyer, all checks,
notes and other evidences of indebtedness or obligations to make payment of
money and other items relating to the Assets as provided herein and to endorse
with the name of Seller, any such checks, notes or other instruments received
after the Closing Date; and (iii) Seller will transfer and deliver to Buyer any
cash or other property that Seller may receive after the Closing Date in respect
of or arising out of the Assets.
2.4 Third Party Consents. At the election of Buyer, the execution and
delivery of this Agreement by Seller shall not constitute an agreement to assign
any contract, license, lease, commitment, sales order, purchase order or other
agreement, or any claim, right or benefit thereunder, if the assignment thereof
requires the consent of any third party and such consent is not obtained. If any
such consent or approval is required to be obtained for Buyer to effectively
acquire all of the Assets and such consent is not obtained or to enable Buyer to
conduct the business conducted by Seller prior to the Closing, the Seller and
Stockholders, if requested by Buyer, shall cooperate with Buyer in any legal and
reasonable arrangement to provide for Buyer the benefits under any such
contract, license, lease, commitment, sales order, purchase order or other
agreement. The Seller and Stockholders covenant and agree that after the Closing
Date, if requested by Buyer, the Seller and Stockholders will use their best
efforts to obtain the consent and approvals of any parties to, and any
governmental agencies or other persons or entities concerned with, any material
contracts, licenses, leases, commitments, sales orders, purchase orders or other
agreements or rights being assigned by Seller to Buyer hereunder.
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2.5 Assumption of Liabilities.
(a) Liabilities Assumed by Buyer. Upon the Closing, Buyer
shall assume and become liable for the following obligations and liabilities,
provided however that in no event shall Buyer be deemed to assume any of the
obligations set forth in Section 2.5(b):
(i) All liabilities and obligations of Seller
which have been incurred with respect to the business of Seller and which are
reflected in the Recent Balance Sheet (as defined in Section 5.7) and which
continue to exist on the Closing Date;
(ii) Accounts payable which have been incurred in
connection with the business of Seller arising since the date of the Recent
Balance Sheet incurred in the ordinary course of business and consistent in type
and scope to those reflected in the Recent Balance Sheet, which may include
legal fees and disbursements and accounting fees and disbursements incurred in
connection with the Contemplated Transactions and which shall not include any
other fees and expenses relating to the Contemplated Transactions;
(iii) All liabilities and obligations under the
contracts and commitments listed in Schedule 2.5, but only to the extent that
the liabilities and obligations under such contracts and commitments arise out
of actions or events occurring after the Closing Date.
(b) Excluded Liabilities. Notwithstanding the provisions of
Section 2.5(a), Buyer does not assume or agree to pay, perform or discharge any
liability or obligations relating to (i) Taxes; (ii) any liabilities under
Section 2.5(a)(i) and (ii) in excess of $375,000 (and any such excess
liabilities shall be retained by Seller), provided that if the amount of such
liabilities is less than $375,000, the liabilities of Seller to be assumed by
Buyer shall include other liabilities of Buyer relating to, and arising in the
ordinary course of, the business of Seller, which should have been included on
the Recent Balance Sheet but were omitted therefrom, but only to the extent that
the total liabilities assumed under Sections 2.5(a)(i) and 2.5(a)(ii) and such
other liabilities do not exceed $375,000; (iii) any obligations of any kind
whatsoever incurred by Seller after the Closing Date (other than actions taken
in accordance with Section 2.6 of the Agreement); (iv) any and all liabilities
arising or resulting from Seller's defaults or breaches prior to the Closing
Date under any lease, sublease, contract or other agreements; (v) any
liabilities to any present or former stockholders of Seller, except that amounts
included in Section 2.5(a)(i) and
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(ii) which are due from the Company to stockholders to reimburse them for
amounts charged on their personal credit cards or loaned to the Company (in the
amount set forth in Schedule 2.5(b)), will be included as Assumed Liabilities,
provided that payment of any such amounts shall be subject to the limitations
set forth in Section 2.5(b); and (vi) any claims, liabilities, or other
obligations for violations of applicable law or regulation resulting from acts
or omissions prior to the Closing Date of Seller.
(c) Assumption Agreement; Effect. The assumption by Buyer of
the liabilities and obligations set forth in Section 2.5 hereof shall be
effected by such instrument or instruments of assumption delivered by Buyer to
Seller on the Closing Date as shall be reasonably requested by Seller
("Assumption Agreement"). Assumption by Buyer of the liabilities set forth in
Section 2.5 (hereinafter referred to as the "Assumed Liabilities") shall in no
way expand the rights or remedies of third parties against Buyer as compared to
the rights or remedies which such parties would have against Seller had this
Agreement not been consummated. Except as specifically set forth in Section 2.5,
Buyer does not and shall not assume or agree to pay, perform or discharge any
other obligations or liabilities of the Seller, whether or not related to the
Assets.
2.6 Transition Services. Seller agrees that until such time as Buyer is
licensed as a mortgage lender in each jurisdiction in which Seller is licensed,
Seller will continue to originate and hold mortgage loans in any jurisdiction in
which Seller is currently licensed and in which Buyer would be required to be
licensed to originate and/or hold mortgage loans. Buyer shall be entitled to the
profits and shall bear all of the expenses of Seller's operations relating to
the origination and holding of mortgage loans to the same extent as if Buyer had
originated such mortgage loans directly and Seller shall act, to the extent
permitted by law, subject to the direction and control of Buyer.
3. Purchase Price.
3.1 Purchase Price. Subject to the terms and conditions of
this Agreement, in reliance on the representations, warranties and agreements of
the Seller contained herein, and in full and complete consideration of the sale,
assignment, transfer and delivery of the Assets referred to in Section 2.1
hereof, the aggregate purchase price for the Assets shall be:
(a) 150,000 shares of Common Stock of Guarantor which
shall be issuable to Seller at the closing; and
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(b) 600,000 shares of Common Stock of Guarantor which shall be
held in escrow by Seller's counsel pursuant to the Escrow Agreement attached
hereto as Exhibit 3.1(b) and shall only be released to Buyer on the terms set
forth in Section 3.4.
(c) an additional purchase price equal to the number of
additional shares of Common Stock of Guarantor determined as set forth in
Section 3.2 to the extent, if any, that the shares of Common Stock of Guarantor
issuable pursuant to Section 3.2(b) exceed 600,000 shares, and which shall be
issuable at the time set forth in Section 3.4.
3.2 Determination of Shares to be Released From Escrow and Additional
Purchase Price. The number of shares of the Common Stock of Guarantor to be
released from escrow and the number of shares of Common Stock to be issued as
additional purchase price payable pursuant to Section 3.1(b) shall be determined
as follows:
(a) The number of shares of Common Stock
to be released from escrow and/or issued as additional purchase price shall
equal (X) (i) the sum of the "Annual Accrual" (as defined below), if any, for
each of the first three "Contract Years" (as defined below), minus (ii) the
Annual Deficit, if any, for each such Contract Year minus (Y) 150,000
(representing the shares issued at the Closing Date) multiplied by the "Value"
(as defined in Section 3.2(c)) at the Closing Date of the Common Stock issued
pursuant to Section 3.1(a) divided by the average Closing Price of the Common
Stock of Guarantor for the 15 trading days preceding the last day of the final
Contract Year for which the Annual Accrual (or Annual Deficit) is determined. If
the Value of the Common Stock (determined in accordance with Section 3.2(c))
after the third Contract Year is less than $4 million, then the determination of
the number of shares of Common Stock of Guarantor to be released from escrow
and/or issuable as additional purchase price shall be made based on the Annual
Accrual (or Annual Deficit) for the four Contract Years after the Closing, and,
if the Value of Common Stock of Guarantor issued to Seller (as so determined) is
less than $4 million after the fourth Contract Year, based on the Annual Accrual
(or Annual Deficit) for the five Contract Years after the Closing.
Notwithstanding anything else to the contrary contained herein, if the Value of
the shares of Common Stock of Guarantor issuable to Seller based on the accrual
through the third Contract Year is less than $4 million at the end of the third
Contract Year after the Closing, the aggregate Value of the shares of Common
Stock issued to Seller shall not exceed $4 million and Buyer shall not be
entitled to receive any shares from escrow or as additional purchase price based
on any Annual Accrual in the fourth or fifth
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Contract Year which would result in the value of the Shares exceeding $4
million.
(b) Notwithstanding anything to the contrary contained herein,
the aggregate number of shares of the Common Stock of Guarantor issuable to
Seller pursuant to Section 3.1(a) plus the number of shares of Common Stock of
Guarantor to be released from escrow and issuable as additional purchase price
determined pursuant to Section 3.2(a) shall not exceed 1,500,000 shares.
(c) The shares of Common Stock issued pursuant to Section 3.1
shall be valued for purposes hereof (the "Value") as follows: the shares issued
at the Closing shall be valued at the average of the Closing Price of the Common
Stock of Guarantor for the 15 trading days preceding the Closing Date, and the
shares of Common Stock accrued for any Contract Year shall be valued for
purposes hereof at the average of the Closing Price of the Common Stock for the
15 trading days preceding the first day of the Contract Year.
(d) "Contract Year" shall mean a year commencing on the first
day of the first calendar month commencing after the Closing Date or any
anniversary date thereof and ending on the day preceding the next anniversary
thereof.
(e) The "Annual Accrual" shall equal (x) four times the amount
by which the Net Income for a Contract Year exceeds the Prior Year Net Income
(y) divided by the average of the Closing Price of the Common Stock for the 15
trading days preceding the commencement of the Contract Year; provided that if
Buyer has incurred a Net Loss in any prior Contract Year and thereafter Buyer
has Net Income for a Contract Year which at least equals the Prior Year Net
Income, then there shall be added to the Net Income for purposes of determining
the Annual Accrual for such Contract Year an amount equal to the Net Loss in
such prior Contract Year.
(f) The "Annual Deficit" shall equal four times the amount of
the Net Loss for a Contract Year divided by the average of the Closing Price of
the Common Stock for the 15 trading days preceding the Commencement of the
Contract Year.
(g) "Net Income" or "Net Loss" for the Contract Year shall
equal the net income (or net loss), after taxes, of Buyer determined in
accordance with GAAP on the same basis as used in determining net income in
Guarantor and its subsidiaries' regularly prepared audited financial statements;
provided that only one-fourth of interest paid or accrued on loans made by
Guarantor or its subsidiaries to Buyer shall be deducted and
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there shall be no allocation of parent or related company overhead in
determining Net Income.
(h) The "Prior Year Net Income" shall equal zero for the first
Contract Year, and for each subsequent Contract Year shall equal the highest Net
Income for any preceding Contract Year; provided that in no event shall the
Prior Year Net Income for any year be less than zero.
3.3 Procedures for Determining Number of Shares to be
Released from Escrow and Additional Purchase Price.
(a) Within 120 days after the end of each Contract Year, Buyer
shall furnish to Seller a statement setting forth in reasonable detail the
calculation of Net Income for the Contract Year. Seller shall be deemed to have
agreed to and accepted such calculation unless no later than 30 days after the
delivery of the calculation by Buyer to Seller, the Seller shall give notice to
Buyer objecting to the calculation and setting forth in reasonable detail the
basis for such objection. Seller shall be given a reasonable opportunity to
review the Buyer's books and records relating to the calculation of Net Income
to determine the accuracy of such calculation. In the event of any adjustments
in any of the revenues or expenses of Buyer in connection with the annual audit
of the consolidated financial statements of Guarantor and its subsidiaries, the
Net Income of Buyer for purposes of this Section 3 shall be recalculated to
reflect such adjustments.
(b) If Seller furnishes a notice of objection, Seller and
Buyer agree to use their best efforts, in good faith, during the 30 day period
following the furnishing of such notice of objection to resolve the
disagreement. If the parties are unable to agree on Net Income for the Fiscal
Years during such 30 day period, the amount of the Revenues shall be determined
by an accounting firm (the "Accountants") agreed to by Buyer and Seller. The
losing party shall bear the fees of the Accountants, in connection with such
determination; provided that the fees of such Accountants shall be borne 50% by
Seller and 50% by Buyer if the arbitration results in a decrease in Net Income
that is less than 5% and neither party shall be deemed to be a losing party, and
Seller shall be deemed to be the losing party unless such arbitration does not
result in a decrease in Net Income; and Buyer shall be deemed to be the losing
party if such arbitration results in a decrease in Net Income of more than 5%.
In no event shall the costs incurred by Buyer in connection with any such
arbitration proceeding be treated as an expense in determining Net Income under
this Section 3.
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3.4 Release of Shares of Common Stock from Escrow and
Issuance of Additional Shares of Common Stock.
(a) Within 10 days following a final determination (whether as
a result of Seller not furnishing written notice of any disagreement with
Buyer's determination, a resolution by Buyer and Seller of any disagreement, or
a determination by the Accountants selected to resolve any disagreement between
the parties) of the number of shares of Common Stock of Guarantor to be released
from escrow or issuable to Seller after the third, fourth or fifth Contract
Year, whichever is the final Contract Year in which the number of shares
issuable to Seller is to be determined pursuant to Section 3.2, there shall be
released from escrow or Buyer shall issue to Seller, as the case may be, the
number of shares of Common Stock of Guarantor determined pursuant to Section
3.2, provided that, in the event of a dispute as to Buyer's determination of Net
Income, there shall be released from escrow, or the Buyer shall deliver to the
Seller, as the case may be, the undisputed amount of the shares of Common Stock
of Guarantor within ten days of Seller's furnishing a written notice of
disagreement and the balance following the final determination, as set forth
above.
(b) The shares of Common Stock of Guarantor held in escrow
pursuant to Section 3.1(b) (together with any dividends paid thereon or cash or
other securities received in connection therewith or in exchange therefor, and
any interest or other income earned with respect thereto) shall be released to
Seller if, and only to the extent that, Seller is entitled to be issued shares
of Common Stock pursuant to Section 3.2 in accordance with the procedures set
forth in Section 3.4(a). Any shares of Common Stock of Guarantor (together with
any dividends paid thereon or cash or other securities received in connection
therewith or in exchange therefor, and any interest or other income earned with
respect thereto) held in escrow in excess of the number of shares of Common
Stock to be released to Seller pursuant to the preceding sentence shall be
distributed to Buyer and shall be cancelled. Each of Seller and Buyer agrees to
give to the Escrow Agent all notices required under the Escrow Agreement in
connection with the release of the shares of Common Stock from escrow in
accordance with this Section 3.4(b).
3.5 Adjustment of Common Stock.
(a) If, as a result of any recapitalization, reclassification,
stock dividend, stock split, reverse stock split or other similar transaction,
(i) the outstanding shares of Common Stock are increased, decreased or exchanged
for a different number or kind of shares or other securities of
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Guarantor, or (ii) additional shares or new or different shares or other
non-cash assets are distributed with respect to such shares of Common Stock or
other securities, an appropriate and proportionate adjustment shall be made in
the kind of shares issuable to Seller pursuant to this Section 3.
(b) If there shall be any reorganization, merger or
consolidation of Guarantor with one or more other corporations or Guarantor
shall be acquired in a transaction in which the stockholders of Guarantor are
issued cash, property or securities of another company, Seller shall be entitled
to receive in lieu of Common Stock of Guarantor the securities, property or cash
to which a holder of Common Stock of Guarantor received pursuant to such
reorganization, merger, consolidation or acquisition.
4. The Closing.
4.1 Closing. The Closing will take place at the offices of Bachner,
Tally, Polevoy & Misher, 380 Madison Avenue, New York, New York 10017 at 10:00
A.M. (New York City time), on April 1, 1997 (or, if later, the second Business
Day following the satisfaction or waiver of the conditions set forth in Sections
9 and 10) or at such other place, date and time as the parties may agree in
writing. The date of the Closing is herein referred to as the "Closing Date."
4.2 Items to be delivered at Closing by Seller and Stockholders. At the
Closing, Seller and Stockholders shall deliver to Buyer the following:
(a) The bills of sale with covenants of warranty, assignments,
endorsements, and other good and sufficient instruments and documents of
conveyance and transfer, in form attached hereto as Exhibit 4.2, as shall be
necessary and effective to transfer and assign to, and vest in, Buyer all of
Seller's right, title and interest in and to the Assets;
(b) The documents contemplated by Sections 3, 4, and 9; and
(c) All other documents, instruments and writings required by this
Agreement to be delivered by the Seller and Stockholders at the Closing.
4.3 Items to be Delivered at Closing by Buyer. At the Closing, Buyer
shall deliver to Seller and Stockholders the following:
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(a) the shares of Common Stock issuable to Seller at
the Closing, which shall bear the legend referred to in
Section 5.26;
(b) the Assumption Agreement;
(c) The documents contemplated by Sections 3, 4, and
10; and
(d) All other documents, instruments and writings
required by this Agreement to be delivered by Buyer at the
Closing.
4.4 Allocation of Purchase Price. The Purchase Price shall be allocated
among the Assets acquired hereunder in accordance with Schedule 4.4, it being
agreed that no portion of the consideration shall be allocated to Seller and
Shareholders' covenant not to compete. Seller, Stockholders and Buyer each
hereby covenant and agree not to take a position on any income tax return,
before any governmental agency charged with the collection of any income tax, or
in any judicial proceeding that is in any way inconsistent with the provisions
of this Section 4.4.
5. Representations and Warranties of Seller and Stockholders.
Seller and Stockholders, jointly and severally, represent and warrant
(both as of the date of this Agreement and as of the Closing Date) to, and agree
with, Buyer as follows:
5.1 Authorization.
(a) Stockholders are of full age and have full right, power,
legal capacity and authority to execute and deliver this Agreement and to
perform their obligations hereunder. The execution, delivery and performance of
this Agreement and the performance of Stockholders' obligations hereunder
constitute valid and binding obligations of Stockholders, enforceable against
them in accordance with its terms.
(b) The Seller has the corporate power and authority to execute
and deliver this Agreement and to perform its obligations hereunder. The
execution, delivery and performance of this Agreement and the performance of the
Seller's obligations hereunder have been duly authorized by all necessary
corporate action of the Seller (including, but not limited to, approval by
Seller's Board of Directors and Shareholders) and this Agreement
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constitutes a valid and binding obligation of Seller, enforceable against it in
accordance with its terms.
5.2 Capitalization of Seller.
(a) Stockholders own all of the outstanding shares of common
stock of the Seller, of record and beneficially, free and clear of all
Encumbrances.
(b) There are no outstanding options, rights, conversion
rights, agreements or commitments of any kind relating to the issuance, sale,
purchase, redemption, voting or transfer of any equity securities or other
securities of the Seller. None of the outstanding equity securities was issued
in violation of the Securities Act of 1933, as amended or any state securities
laws. Seller has delivered to Buyer true and complete copies of their respective
Certificates of Incorporation and By-Laws (or other governing instrument), as
currently in effect, and of any agreements referred to in this Section 5.2(b).
5.3 Organization of Seller. The Seller is a corporation duly organized,
validly existing and in good standing under the laws of its jurisdiction of
incorporation, with full corporate power and authority to own its properties and
to engage in its business as presently conducted or contemplated, is duly
qualified and in good standing as a foreign corporation under the laws of each
jurisdiction in which the ownership of its property or the conduct of its
business requires such qualification. Schedule 5.3 sets forth the jurisdictions
in which the Seller is qualified to do business. Except as set forth in Schedule
5.3, Seller has no subsidiaries, nor does it own any equity interest in, or
control directly or indirectly, any other entity. The Seller is not a party to
any joint venture or partnership agreement.
5.4 No Conflict as to Seller and Stockholders. Neither the execution
and delivery of this Agreement nor the consummation of any or all of the
Contemplated Transactions will (a) violate any provision of the Certificate of
Incorporation or By-Laws of the Seller or (b) violate, or be in conflict with,
or constitute a default (or an event which, with notice or lapse of time or
both, would constitute a default) under, or result in the termination of, or
accelerate the performance required by, or excuse performance by any Person of
any of its obligations under, or cause the acceleration of the maturity of any
debt or obligation pursuant to, or result in the creation or imposition of any
Encumbrance upon any property or assets of the Seller or the Stockholders under,
any agreement or commitment to which the Seller or either of the Stockholders is
a party or by which any
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of their respective property or assets is bound, or to which any of the property
or assets of Seller or either of the Stockholders is subject, or (c) to the best
of Seller's and Stockholders' knowledge, violate any statute or law or any
judgment, decree, order, regulation or rule of any court or other governmental
body applicable to the Seller or the Stockholders.
5.5 Consents and Approvals of Governmental Authorities. Except as set
forth in Schedule 5.5, to the best of Seller's and Stockholders' knowledge, no
notice to, consent, approval or authorization of, declaration, filing or
registration with, or license from, any governmental body is required (a) in
connection with the execution, delivery and performance of this Agreement or the
consummation of the Contemplated Transactions, or (b) to enable the Buyer
subsequent to the Closing to conduct its business in the manner conducted by
Seller prior to the Closing.
5.6 Other Consents. Except as set forth in Schedule 5.6, no consent of,
or notice to, any Person is necessary in connection with the execution, delivery
and performance of this Agreement or the consummation of the Contemplated
Transactions, including, but not limited to, parties to leases or other
agreements or commitments.
5.7 Financial Statements. Seller has delivered to Buyer: (a) unaudited
consolidated balance sheets of the Seller as at December 31 for each of the
years 1994 through 1996 (the "Balance Sheets"), and the related unaudited
statements of income and retained earnings and cash flows for each of the fiscal
years then ended, and (b) an unaudited consolidated balance sheet of the Seller
as at February 28, 1997 (the "Interim Balance Sheet") and the related unaudited
statements of income and retained earnings and cash flow for the two months then
ended, including in each case the notes thereto. The balance sheet of the Seller
at December 31, 1996 is individually referred to herein as the "Recent Balance
Sheet". Such financial statements and notes are true, complete and correct and
fairly present the financial condition and results of operations of the Seller
as at the respective dates thereof and for the periods therein referred to
(subject, in the case of the interim statements, to normal year-end
adjustments).
5.8 No Undisclosed Liabilities. Except as set forth in Schedule 5.8,
the Seller has no liabilities or obligations of any nature (absolute, accrued,
contingent or otherwise that were not fully reflected or reserved against in the
Balance Sheets and the Interim Balance Sheet, except for liabilities and
obligations incurred in the ordinary course of business and consistent with past
practice (in nature and scope) since the respective dates
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thereof, and Seller has no obligations or liabilities (whether absolute,
accrued, contingent or otherwise) to repurchase and/or indemnify for losses or
breaches of representations and warranties in connection with mortgage loans
originated, purchased or arranged by Seller.
5.9 Absence of Certain Changes. Except as set forth in Schedule 5.9,
since the date of the Recent Balance Sheet, there has not been, occurred or
arisen, with respect to the Seller:
(a) any change or amendment in the Seller's Certificate of
Incorporation or By-Laws;
(b) any declaration, setting aside, or payment of any dividend
or other distribution in respect of equity securities of the Seller or any
direct or indirect redemption, purchase or acquisition by any person of any such
securities or of any interest in or right to acquire any such securities.
(c) any damage, destruction or loss of any of the Assets
(whether or not covered by insurance);
(d) any incurrence or assumption of any indebtedness for money
borrowed or the guaranty of any indebtedness or other obligation by the Seller;
(e) any of the Assets being subjected to any Encumbrance by
reason of any action by Seller or Stockholders or, to the best of Seller's and
Stockholders' knowledge, any other Encumbrances;
(f) the cancellation of any debts or waiver of any claims or
rights of value of the Seller;
(g) transfer or other disposition or lease of any of the
Seller's assets, except in the ordinary course of business;
(h) any loan or advance by the Seller, other than mortgage
loans made in the ordinary course of business;
(i) any increase by the Seller in the compensation of their
officers or employees (including any such increase pursuant to any of the Plans)
of the Seller;
(j) the purchase of any properties or assets, other than in
the ordinary course of business and consistent with past practice;
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(k) any capital expenditures or additions to property, plant
or equipment or the acquisition of any other property or assets, at a cost in
excess of $2,500 in the aggregate, by the Seller, other than purchases of
supplies in the ordinary course of business;
(l) any payment, loan or advance made by the Seller of any
amount to, or the lease by the Seller of any of the properties or assets to or
from, or the entering into any other agreement or arrangement with, any Related
Party;
(m) any sale, transfer, assignment or conveyance of any
property or asset to, or the purchase or acquisition of any property or assets
from, or any other transaction or commitment with, any Related Party;
(n) any write-off or write-down of any of the Assets or any
determination to write-off or write-down any of the Assets;
(o) any agreement or commitment, whether in writing or
otherwise, to do any of the foregoing.
5.10 No Material Adverse Change. Since the date of the Recent Balance
Sheet, there has not been any material adverse change in the Business and
Condition or any event, condition or contingency that might result in such a
material adverse change, provided that the continuation of the losses being
incurred by Seller in the ordinary course of business shall not be deemed to be
such a material adverse change.
5.11 Title to Properties; Encumbrances; Condition.
(a) The Seller does not own any real property. Schedule 5.11
describes all real property leased by the Seller and all personal property or
interests therein owned or leased by the Seller and included in the Assets
(specifying whether such property is owned or leased). The Seller has good,
valid and marketable title to all of the assets (personal and mixed, tangible
and intangible) that it purports to own. The equipment of the Seller is in good
operating condition and repair, ordinary wear and tear excepted.
(b) The Assets include all rights, properties and other assets
used in and necessary to permit the Buyer to conduct the Seller's business in
all material respects in the same manner as such business was conducted prior to
the date of this Agreement and the Seller owns, or has the right to use under
contracts, agreements or understandings which are included in the
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Assets, all rights, properties and other assets presently used in the conduct of
such business.
5.12 Litigation. Except as set forth in Schedule 5.12, there is no
action, suit, inquiry, proceeding or investigation by or before any court or
governmental body pending or, to the best knowledge of Seller and Stockholders,
filed but not yet served or threatened against or involving the Seller or the
Assets and neither the Seller nor Stockholders have received any notice of any
event or occurrence which could result in any such action, suit, inquiry,
proceeding or investigation nor to Seller's or Shareholders' knowledge is there
any valid basis for any such action, suit, inquiry, proceeding or investigation.
Except as set forth in Schedule 5.12, the Seller is not subject to any judgment,
order or decree.
5.13 Taxes.
Schedule 5.13 is a true, correct and complete list of all of
the taxing authorities with which the Seller is required to file any Tax
Returns in connection with the conduct of its business. The Seller has timely
filed all Tax Returns required to be filed by it as of the date hereof and has
paid in full all Taxes due as of the date hereof. Neither the Seller nor the
Stockholders know of any audit, assessment, notice of deficiency, claim or
demand for Taxes or proposed deficiency against its for any Taxes. The Seller
has not consented to a waiver or extension of the statute of limitations for
assessments of any tax liability for any year with any taxing authority. The
federal income tax returns of the Seller have never been examined by the
Internal Revenue Service.
5.14 Trademarks, Trade Names, Etc. The Seller owns, or is licensed or
to the best knowledge of Seller and Shareholder, otherwise has the full rights
to use, all Proprietary Rights used in or necessary for the conduct of the
business of the Seller as heretofore conducted, and as presently contemplated to
be conducted. Schedule 5.14 contains an accurate and complete list of all
Proprietary Rights owned, used or proposed to be used by the Seller, all
licenses or other agreements with respect thereto, and all applications
therefor. Except as set forth in Schedule 5.14, to the best of Seller's and
Stockholders' knowledge: the Seller has the sole and exclusive right to use the
Proprietary Rights referred to therein, all of such Proprietary Rights are
included in the Assets and the consummation of the Contemplated Transactions
will not alter or impair any such rights; no claims have been asserted by any
Person to the use of any such Proprietary Rights or challenging or questioning
the validity or effectiveness of any such Proprietary Rights,
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licenses or agreements, and there is no valid basis for any such claim; and the
use of such Proprietary Rights by the Seller does not violate or infringe the
rights of any Person. Neither the Seller nor, to the best knowledge of Seller
and Stockholders, any other Person is in default under any license or other
agreement relating to such Proprietary Rights, and all such licenses and
agreements are valid, enforceable and in full force and effect.
5.15 Banking Relationships. Schedule 5.15 sets forth the names and
locations of all banks, trust companies, savings and loan associations and other
financial institutions at which the Seller maintain safe deposit boxes or
accounts of any nature and the names of all persons authorized to have access
thereto, draw thereon or make withdrawals therefrom.
5.16 Contracts and Commitments. (a) Schedule 5.16 contains a true and
complete and accurate list of the following contracts, agreements,
understandings or other obligations (whether written or oral) to which the
Seller is a party or by which any of the Assets are bound, true, complete and
correct copies of which have previously been delivered by Seller to Buyer:
(i) contracts, agreements, commitments or other
obligations with officers, employees, agents, consultants, advisors, or salesmen
or under which Seller may have any obligation to pay commissions or similar
payments;
(ii) leases, subleases or rental or use agreements,
contracts, covenants or obligations;
(iii) contracts, agreements, commitments or other
obligations under which Seller has any obligation to repurchase mortgage loans
or indemnify any person in connection with any losses or breaches of
representations and warranties relating to mortgage loans.
(iv) contracts, agreements, commitments or other
obligations with any Person containing any provision or covenant limiting the
ability of the Seller to engage in any line of business or to compete with any
Person.
(v) contracts, agreements or commitments relating
to the origination, purchase or sale of mortgage loans; and
(vi) all other contracts, agreements, commitments,
or other obligations (written or oral) whether or not made in the ordinary
course of business which either (i) may involve the expenditure by the Seller of
funds in excess of $5,000 per commitment (or under a group of similar
commitments), (ii) do not
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terminate or expire or are not terminable within 30 days from the date hereof
without penalty, premium or other liability or obligation, or (iii) are
otherwise material to the Seller.
(b) There are no existing material defaults (or events which,
with notice or lapse of time or both, would constitute a default) by the Seller,
or to the best knowledge of the Seller and the Stockholders, any other party,
under any of the material agreements or commitments required to be included in
Schedule 5.16.
5.17 Mortgage Loans.
(a) The origination of Mortgage Loans by Seller complied in
all material respects with applicable laws or regulation of any governmental
body, including, without limitation, usury, equal credit opportunity, real
estate settlement procedures, truth-in-lending and disclosure laws relating to
the origination of mortgage loans. The mortgage loans originated by Seller did
not include prepayment premiums or penalties or any other provisions which
violate applicable laws or regulations of any governmental body or would
adversely affect the enforceability thereof.
(b) Except as set forth in Schedule 5.17(b), no complaints
have been asserted in writing, no action has been commenced or threatened
against, and no counterclaim has been made against, the Seller, by any Person
who is the borrower under a mortgage loan originated by or through Seller or by
any Person to which the Seller has sold mortgage loans.
(c) Set forth in Schedule 5.17(c) is a true and complete
schedule of mortgage loans originated by Seller during each month during the 12
months ended December 31, 1996.
5.18 Insurance. Schedule 5.18 contains an accurate and complete
description of all policies of insurance of any kind or nature, including but
not limited to, fire, liability, workmen's compensation, liability and other
forms of insurance owned or held by or covering the Seller, its operations or
all or any portion of the Assets. All such policies are in full force and
effect, and the Company is not in default with respect to its obligations under
any insurance policy maintained by it.
5.19 Labor Relations. Schedule 5.19 lists the employees of the Seller,
including their current positions and compensation (and any increases in wage
rate or compensation of which such employees have been notified). Except as set
forth in Schedule 5.19, the Seller is not obligated under any employment
contract,
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and none of its current or former employees are covered by, and the Seller has
no obligation with respect to, any bonus, deferred compensation, pension,
profit-sharing, retirement, insurance, stock purchase, stock option, or other
fringe benefit plan, arrangement or practice, or any other employee benefit plan
(as defined in section 3(3) of ERISA), whether formal or informal (collectively,
"Plans"). The Seller is not liable for any severance pay or other payments on
account of termination of any former employee. Except as set forth in Schedule
5.19, (a) the Seller is in compliance with all applicable laws respecting
employment and employment practices, terms and conditions of employment and
wages and hours, and the Seller is not nor has been engaged in any unfair labor
practice, (b) there is no unfair labor practice complaint against the Seller
pending before the National Labor Relations Board, (c) there is no labor strike,
dispute, slowdown or stoppage actually pending or threatened against or
affecting the Seller, (d) no labor union representation question exists
respecting the employees of the Seller, (e) the Seller's relations with its
employees are satisfactory, and (f) the Seller is not a party to, or subject to,
a collective bargaining agreement, and no collective bargaining agreement
relating to employees of the Seller is currently being negotiated.
(b) To the best knowledge of Seller and Stockholders, the
Seller has performed and complied with all of its obligations under or with
respect to such Plans and such Plans have operated in accordance with their
terms. The Seller does not have any commitment, whether formal or informal and
whether legally binding or not, to create any additional Plan. The Plans have
operated in accordance with the applicable requirements of ERISA and the Code,
to the extent applicable. The Seller does not have any current or projected
liability in respect of post-employment or post-retirement benefits for retired
or former employees of the Seller.
5.20 Compliance with Law. Schedule 5.20 is a true and complete list,
together with a brief description of each license, permit, order or approval of
governmental bodies held or obtained by the Seller and its employees, including,
but not limited to, all licenses relating to the conduct of the Seller's
business relating to mortgage lending and mortgage brokerage. The Seller and its
employees have all license, permits, orders or approvals from governmental
bodies required for the conduct of its business. The operations of the Seller
have been conducted in accordance with all applicable laws, regulations and
other requirements of all governmental bodies having jurisdiction over the
Seller and all licenses, permits, orders or approvals held by Seller applicable
to the Seller's mortgage lending operations and
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to the best knowledge of Seller and Stockholders, all other laws, regulations
and other requirements, including, without limitation, all such laws,
regulations and requirements relating to truth-in lending, lending practices,
consumer protection, equal opportunity, health and occupational safety matters.
Neither the Seller nor the Stockholders has received any notification of any
asserted present or past failure to comply with any such laws, rules,
regulations or licenses or of any threatened suspension or cancellation thereof.
5.21 Related Party Transactions and Interests.
Except as set forth in Schedule 5.21, (i) no Related Party has
any material interest in any property, real or personal, tangible or intangible,
used in or pertaining to the business of the Seller, (ii) no Related Party is
indebted to the Seller, (iii) the Seller is not indebted to any Related Party;
and (iv) no Related Party is a party to any lease, agreement or commitment with
the Seller or owns any direct or indirect interest of any kind in, a competitor,
supplier, customer, landlord, tenant, creditor or debtor of the Seller.
5.22 No Brokers or Finders. Neither the Seller nor the Stockholders, or
any of their respective officers, directors or employees, has employed any
broker or finder or incurred any liability for any brokerage or finder's fees or
commissions or similar payments in connection with any of the Contemplated
Transactions.
5.23 Books and Records. The books of account, minute books, stock
record books and other records of the Seller, all of which have been made
available to Buyer, are complete and correct in all material respects and have
been maintained in all material respects in accordance with sound business
practices and accurately reflect in all material respects the Business and
Condition of the Seller.
5.24 Investment Representations. Seller understands that the Common
Stock of Credit Depot has not been registered under the Securities Act of 1933,
as amended (the "Securities Act"), by reason of its issuance in a transaction
exempt from the registration requirements of the Securities Act pursuant to the
exemption provided in Section 4(2) thereof, that the Common Stock has not been
registered under applicable state securities laws by reason of its issuance in a
transaction exempt from such registration requirements, and that the Common
Stock may not be sold or otherwise disposed of unless registered under the
Securities Act and applicable state securities laws (the Seller being under no
obligation so to register such Common Stock
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except as set forth in Section 13) or exempted from registration, and that the
certificates representing the Common Stock will bear a legend to this effect.
5.25 Seller's Acknowledgment as to Information. Seller acknowledges
that it has had the opportunity to receive from Credit Depot such information
with respect to Credit Depot as Seller has deemed necessary and relevant in
connection with the transactions contemplated by this Agreement, and Seller has
had the opportunity, directly or through representatives, to ask questions of
and receive answers from persons acting on behalf of Credit Depot necessary to
verify the information so obtained.
5.26 Disclosure. No representations or warranties by Seller in this
Agreement and no statement contained in any document (including, without
limitation, financial statements, certificates, or other writing furnished or to
be furnished to Buyer or any of its representatives pursuant to the provisions
hereof or in connection with the Contemplated Transactions), contains or will
contain any untrue statement of material fact or omits or will omit to state any
material fact necessary, in light of the circumstances under which it was made,
in order to make the statements herein or therein not misleading. Documents
delivered or to be delivered to Buyer pursuant to this Agreement are or will be
true and complete copies of what they purport to be. To the best knowledge of
Seller and Stockholders, Seller and Stockholders have disclosed to Buyer all
facts known to Seller or the Stockholders that may affect or does affect in a
materially adverse manner the Seller's Business and Condition.
6. Representations and Warranties of Buyer. Buyer represents and
warrants (both as of the date of this Agreement and as of the Closing Date) to,
and agrees with, Seller and Stockholders, as follows:
6.1 Organization of Buyer; Authorization. Buyer and Guarantor are
corporations duly organized, validly existing and in good standing under the
laws of the State of Delaware, with full corporate power and authority to
execute and deliver this Agreement and to perform their obligations hereunder.
The execution, delivery and performance of this Agreement have been duly
authorized by all necessary corporate action (including, but not limited to,
approval by the Board of Directors) of Buyer and Guarantor and this Agreement
constitutes a valid and binding obligation of Buyer and Guarantor, enforceable
against it in accordance with its terms.
6.2 No Conflict as to Buyer. Neither the execution and delivery of
this Agreement or the Guaranty nor the performance of
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Buyer's obligations hereunder will (a) violate any provision of the certificate
of incorporation or by-laws (or other governing instrument) of Buyer or
Guarantor, (b) violate, be in conflict with, or constitute a default (or an
event which, with notice or lapse of time or both, would constitute a default)
under any agreement or commitment to which Buyer or Guarantor is party or (c)
violate any statute or law or any judgment, decree, order, regulation and rule
of any court or other governmental body applicable to Buyer or Guarantor.
6.3 Capitalization . The authorized capital stock of Guarantor consists
of 37,000,000 shares, consisting of (a) 2,000,000 shares of a class designated
as preferred stock, par value $ per share ("Preferred Stock"), and (b)
35,000,000 shares of Common Stock. As of the date hereof, (i) 310,000 shares of
Preferred Stock are issued and outstanding,(ii) 3,741,861 shares of Common Stock
were issued and outstanding, and (iii) 12,285,118 shares of Common Stock were
reserved for issuance on conversion or exercise of outstanding convertible
securities, warrants and options.
6.4 SEC Reports. The Buyer has heretofore delivered to the Seller, in
the form filed with the SEC true and complete copies (including any amendments
thereto) of Guarantor's Annual Report on Form 10-KSB for the Year Ended June 30,
1996, Quarterly Report on Form 10-QSB for the Quarters Ended September 30, 1996
and December 31, 1996 and Proxy Statement dated December 17, 1996.
6.5 No Brokers or Finders. Neither Buyer nor Guarantor, nor any of
their officers, directors or employees, has employed any broker or finder or
incurred any liability for any brokerage or finder's fees or commissions or
similar payments in connection with any of the Contemplated Transactions.
6.6 Disclosure. No representations or warranties by Buyer in this
Agreement and no statement contained in any document (including, without
limitation, certificates or other writing furnished or to be furnished by Buyer
or any of its representatives pursuant to the provisions hereof or in connection
with the Contemplated Transactions), contains or will contain any untrue
statement of material fact or omits or will omit to state any material fact
necessary, in light of the circumstances under which it was made, in order to
make the statements herein or therein not misleading. Documents delivered or to
be delivered to Seller or Stockholders pursuant to this Agreement are or will be
true and complete copies of what they purport to be.
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7. Covenants of Seller and Buyer.
7.1 Regulatory Matters. Seller, Stockholders and Buyer shall (a) file
with applicable regulatory authorities the applications and related documents
required to be filed by them (and prosecute diligently any related proceedings)
in order to consummate the Contemplated Transactions, and (b) use their best
efforts to obtain any necessary consents of regulatory authorities and cooperate
with the others as they may reasonably request in connection with the foregoing.
7.2 Publicity. Except as required by law or to comply with applicable
securities law requirements, prior to the Closing, neither the Buyer, the Seller
nor the Stockholders will make any public disclosure of the execution of this
Agreement or of the terms hereof without the prior written consent of the other
party of such disclosure and the form thereof. Nothing herein shall prevent any
disclosure of the execution or terms of this Agreement in connection with
financings or potential financings for Credit Depot.
7.3 Access Following Closing. Following the Closing Date, (a) Seller
shall give Buyer, and its authorized representatives, (i) access to its books
and records (and permit Buyer to make copies thereof) to the extent relating to
the Seller, as Buyer may reasonably request and (ii) assistance with the audit
of the financial statements of the Seller, any proceedings relating to Tax
Returns or any investigations by governmental bodies, to the extent relating to
periods prior to the Closing Date, as Buyer may reasonably request.
(b) Following the Closing, Buyer shall give Seller, and their
authorized representatives, access to its books and records (and permit Seller
to make copies thereof) to the extent relating to periods prior to the Closing
Date as Seller may reasonably request for purposes of preparing Tax Returns and
conducting proceedings relating to Taxes or investigations by governmental
bodies.
7.4 Confidentiality. Prior to the Closing Date (or at any time if the
Closing does not occur), Buyer shall keep confidential and not disclose to any
Person (other than its employees, attorneys, accountants and advisers) or use
(except in connection with the Contemplated Transactions) all non-public
information obtained by Buyer in connection with the Contemplated Transactions.
Prior to and following the Closing, Seller and Stockholders shall, keep
confidential and not disclose to any Person (other than its employees,
attorneys, accountants and advisers) or use (except in connection with preparing
Tax
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Returns, conducting proceedings relating to Taxes and, prior to the Closing
Date, as required in the conduct of the business of the Seller in the ordinary
course and consistent with past practice) any non-public information relating to
the Seller's business or the Assets. This Section 7.4 shall not be violated by
disclosure pursuant to court order or as otherwise required by law, on condition
that notice of the requirement for such disclosure is given to the other parties
prior to making any disclosure and the party subject to such requirement
cooperates as the others may reasonably request in resisting it. Seller and
Buyer shall cause their respective representatives, employees, attorneys,
accountants and advisers to whom information is disclosed in connection with the
Contemplated Transactions to comply with the provisions of this Section 7.4.
7.5 Tax Matters.
Between the date of this Agreement and the Closing Date, Seller
shall file on a timely basis all Tax Returns required to be filed by them.
Seller shall deliver or cause to be delivered to Buyer at least 30 days prior
to the filing thereof a copy of each Tax Return to be filed on or before the
Closing Date by the Seller with respect to any period ended on or before the
Closing Date. Any such Tax Return shall be prepared in a manner that, to the
extent consistent with applicable laws and regulations, is consistent with the
positions taken and accounting methods employed by the Seller in the preparation
of similar Tax Returns for prior periods. Seller shall be responsible for filing
all Tax Returns, and payment of all Tax liabilities of the Seller whether
relating to periods prior to or subsequent to the Closing.
7.6 Change of Corporate Name. From and after the Closing, Seller and
the Stockholders will discontinue using in the conduct of their business or
otherwise, the words constituting the present name of Seller or any words or
expression bearing any resemblance to or likely to be confused with its present
name or names and will promptly change the corporate names of Seller. Seller and
Stockholders will execute or obtain such consents and documents as Buyer shall
request in order to enable Buyer to use as it may desire the aforesaid name as
its corporate name and for all other purposes to the extent it shall deem
desirable.
7.7 Right of First Refusal on Mortgage Loans. Buyer and Seller agree
that after the execution of this Agreement and until the expiration of the third
Contract Year (or the fourth or fifth Contract Years, to the extent that Seller
is entitled to be paid additional purchase price pursuant to Section 3.2 based
on the Net Income in such Contract Year), Buyer shall be permitted
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to sell mortgage loans to third parties other than Guarantor and its
subsidiaries, provided that Buyer offers Guarantor a right of first refusal with
respect to such mortgage loans in accordance with the provisions of this Section
7.7. If Buyer receives a bona fide offer from a third party to purchase any
mortgage loan held by Buyer or any mortgage loans to be originated by Buyer
(provided that, with respect to mortgage loans to be originated, the maximum
amount of such mortgage loans subject to any single commitment or related
commitments (provided that any commitment entered into more than 25 days after a
prior commitment shall not be deemed to be related to such prior commitment)
shall not exceed one month's loan production and the aggregate commitment of
Buyer pursuant to any such offer shall not exceed Buyer's average loan
production for the three calendar months preceding such offer), Buyer will offer
such mortgage loan or mortgage loans to Guarantor on the same terms and
conditions as such third party has offered. Buyer will provide Guarantor with
such information and documentation as Guarantor shall reasonably request to
determine whether to exercise its right of first refusal hereunder. The right of
first refusal granted to Guarantor hereunder with respect to a particular
mortgage loan is conditioned on (i) Buyer having an on-site underwriter (who
shall be an employee of Guarantor (and will be paid by Guarantor) and not of
Buyer) at its premises during its normal hours (provided that no on-site
underwriter need be present during periods when the on-site underwriter is not
present for normal business reasons, such as vacation, sick or personal time and
periods reasonably necessary to replace an on-site underwriter after termination
or resignation) and (ii) Guarantor providing conditional pre-approval of such
mortgage loan within four working hours from the request for pre-approval,
provided documents reasonably required by Guarantor in connection with such
pre-approval are submitted by Buyer prior to 12:00 noon on a business day.
7.8 Acquisition of Guarantor. If any person or group of related persons
not affiliated with Credit Depot shall acquire all or substantially all of the
assets of Credit Depot or more than 50% of the voting stock of Credit Depot or
if Credit Depot shall merge with or into another company in a transaction in
which the stockholders of Credit Depot immediately before the merger do not own
at least 50% of the voting securities of the surviving corporation after the
merger, then any shares of Common Stock of Credit Depot which have been accrued
pursuant to Section 3.2 with respect to a prior Contract Year and based on an
interim calculation of the Annual Accrual (or Annual Deficit) for the Contract
Year in which the transaction occurs, but which have not yet been issued, shall
immediately vest and be issuable on the closing of such transaction. The
consummation of such transaction
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shall not otherwise affect the terms on which the additional purchase price
pursuant to Section 3.2 shall accrue and be paid, except for the adjustments
provided in Section 3.5(b) and the acquiring or surviving entity shall continue
to be bound by the same obligations with respect to the operations of the
business of Buyer, including obligations under Section 3, as were required prior
to the consummation of the transaction.
7.9 Bankruptcy of Guarantor. If Guarantor commences (as the debtor)
any case in bankruptcy or consents to or admits the material allegations
against it in any such case or proceeding against it or a case in bankruptcy is
commenced against Guarantor, as the debtor, and a court having jurisdiction
enters an order for relief against Credit Depot in such case or proceeding and
such case remains undismissed for 180 days, then Seller shall have an option to
purchase the Buyer by returning all of the Common Stock of Guarantor previously
received by Seller, less an amount of Common Stock (determined based on the
Value of the Common Stock at the date of the exercise of the option) equal to
the Buyer's Net Income prior to the exercise of said option, provided that in
no event, however, shall the value of the consideration paid by Sellers be
less than $10,000.00.
7.10 Loan to Buyer. After the Closing, Credit Depot shall loan to Buyer
up to $500,000, as, and to the extent, reasonably requested by Buyer to meet the
requirements of its business. Nothing herein shall restrict Credit Depot from
making other loans to Buyer which Credit Depot determines to be necessary or
useful in connection with Buyer's business. Such loans shall bear interest at
the rate of 10% per annum and shall be on commercially reasonable terms.
7.11 Operations of Buyer. (a) Buyer agrees that, during the term of
their employment pursuant to their Employment Agreements, Stockholders shall be
entitled to day-to-day operational control of the Buyer, subject to oversight by
the Buyer's Board of Directors of Buyer and compliance with reasonable policies
established by the Buyer's Board of Directors; provided that Stockholders comply
in material respects with the agreements contained in this Section 7.11, and
provided further that nothing herein shall give Stockholders the authority to
take any action outside of the ordinary course of Buyer's business.
(b) Stockholders agree to: (i) conduct the business of Buyer
in a commercially reasonable manner and consistent with good industry practice;
(ii) comply, in all material respects, with all laws, statutes, ordinances,
rules, regulations, orders, writs, injunctions, decrees, awards or other
requirements of any court or other governmental body applicable to Buyer or the
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conduct of Buyer's business; (iii) cause Buyer to perform all of its material
obligations under all material contracts, agreements, licenses, permits,
instruments, or undertakings; (iv) not cause the Buyer to engage in any business
other than the business of originating mortgage loans, and, specifically,
Stockholders shall not cause the Buyer to purchase any mortgage loans (which
shall not preclude repurchases of mortgage loans under warehouse loan agreements
entered into with the approval of Buyer's Board of Directors); (v) not enter
into on behalf of Buyer, without the approval of Buyer's Board of Directors, any
agreement or commitment for the purchase or sale of mortgage loans, except for
sales of mortgage loans held by the Buyer on the date of such agreement or
commitment or commitments to sell mortgage loans which do not exceed Buyer's
mortgage loan production for one month (provided that with respect to mortgage
loans to be originated, the maximum amount of such mortgage loans subject to any
single commitment or related commitments (provided that any commitment entered
into more than 25 days after a prior commitment shall not be deemed to be
related to such prior commitment) shall not exceed Buyer's average loan
production for the three calendar months preceding such commitment); (vi) not
enter into loan or warehouse agreements without the approval of Buyer's Board of
Directors, which approval shall not be unreasonably withheld; (vii) not cause
Buyer to enter into any transaction with the Stockholders or members of their
families without the approval of Buyer's Board of Directors; (viii) not to cause
Buyer to enter into any agreement which is not cancelable without penalty or
premium on 30 days notice or which provides for aggregate payments by Buyer
(individually or together with any related matters) of more than $50,000,
without the approval of Buyer's Board of Directors, which approval shall not be
reasonably withheld if the expenditures pursuant to such agreement do not exceed
the amounts contained in the Buyer's budget as described in subparagraph (ix)
below; and (ix) operate the Buyer's business in accordance with the budget
attached hereto as Schedule 7.11(b) through March 31, 2000 and thereafter in
accordance with a budget reasonably agreed to by Stockholders and the Buyer's
Board of Directors which shall provide for aggregate expenditures not in excess
of 10% of the budget for the prior year.
(c) Seller agrees that its Board of Directors will make any
determination required by this Section 7.11(c) promptly.
7.12
8. Covenants of Seller. Buyer shall reimburse Seller for amounts paid
under the settlement agreement with Results Technology to the extent that such
payments and other Assumed
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Liabilities and payments subject to the $375,000 limit referred to in Section
2.5(b)(ii) do not exceed $375,000.
8.1 Access. Between the date of this Agreement and the Closing Date,
Seller shall (a) give Buyer and its authorized representatives full access to
all plants, offices, warehouses and other facilities and properties of the
Seller and to the books and records of the Seller (and permit Buyer to make
copies thereof), (b) permit Buyer to make inspections thereof, and (c) cause its
officers and its advisers (including, without limitation, its auditors,
attorneys, financial advisors and other consultants, agents and advisors) to
furnish Buyer with such financial and operating data and other information with
respect to the Assets, and to discuss with Buyer and its authorized
representatives the affairs of the Seller, all as Buyer may from time to time
reasonably request.
8.2 Updating of Representations and Warranties. Between the date of
this Agreement and the Closing Date, Seller and Stockholders shall give notice
to Buyer promptly upon Seller or the Stockholders becoming aware of (a) any
inaccuracy of a representation or warranty set forth in Section 5 or in the
Schedules hereto or (b) any event or state of facts that, if it had occurred or
existed on or prior to the date of this Agreement, would have caused any such
representation and warranty to be inaccurate, any such notice to describe such
inaccuracy, event or state of facts shall be in reasonable detail.
8.3 No Solicitation. Following the execution of this Agreement, neither
Seller nor the Stockholders, nor any of Seller's affiliates nor any of such
Persons' directors, officers, employees, agents or representatives will directly
or indirectly, (a) solicit or encourage any inquiries, discussions or proposals
for, (b) continue, propose or enter into negotiations or discussions with
respect to, or (c) enter into any agreement or understanding providing for, any
acquisition of the capital stock, assets or business of the Seller; nor shall
any such persons or entities provide any information to any person (other than
the Buyer and its representatives) for the purpose of evaluating or determining
whether to make or pursue any inquiries or proposal with respect to any such
transaction. Seller will immediately advise the Buyer of, and communicate to the
Buyer the terms of, any such inquiry or proposal that any of Seller or such
persons may receive or of which any of them may become aware, including the
identity of the person making such inquiry or proposal.
8.4 Operation in Ordinary Course. Between the date of this
Agreement and the Closing Date, Seller shall (a) conduct its
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business only in the ordinary course and consistent with past practice, (b)
maintain the Assets in good working order and condition, ordinary wear and tear
excepted, (c) maintain in full force and effect all fire, liability and other
insurance policies and (d) continue all current marketing and selling activities
relating to the business, operations or affairs of the Seller.
8.5 Business Organization. Between the date of this Agreement and the
Closing Date, Seller shall (a) preserve substantially intact the business
organization of the Seller and keep available the services of the present
officers and employees of the Seller, (b) preserve in all material respects the
present business relationships of Seller, (c) maintain in full force and effect
all licenses from governmental bodies applicable to the Seller and its employees
and comply, in all material respects, with all laws, statutes, ordinances,
rules, regulations, orders, writs, injunctions, decrees, awards or other
requirements of any court or other governmental body applicable to it or the
conduct of its business, and (d) perform all of its material obligations under
all material contracts, agreements, licenses, permits, instruments, or
undertakings.
8.6 Other Restrictions. Between the date of this Agreement
and the Closing Date, Seller shall not:
(a) take any action which would render any of its
representations or warranties contained in Section 5.9 untrue or
inaccurate in any material respect;
(b) enter into any agreement or commitment or engage in any
activity or transaction other than agreements, commitments, and transactions in
the ordinary course of business and consistent with past practice;
(c) enter into any agreement or commitment for the purchase or
sale of mortgage loans, except for sales of mortgage loans held by the Seller on
the date of such agreement or commitment, without the prior written consent of
Buyer.
(d) agree or otherwise commit, whether in writing or
otherwise, to do any of the foregoing.
8.7 Other Actions by the Seller. (a) Between the date of this Agreement
and the Closing Date, Seller and Buyer shall not, take or omit to take any
action, the result of which would be the failure to satisfy any condition
specified in Section 8 or 9, as applicable.
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(b) Subject to the terms and conditions of this Agreement,
Seller and Stockholders shall use their best efforts to take, or cause to be
taken, all action, and to do, or cause to be done, all things necessary, proper
or advisable under applicable laws and regulations to cause the conditions
specified in Section 9 to be satisfied, the transactions under Section 2 to be
effected simultaneously with the Closing, and otherwise to consummate and make
effective the transactions contemplated by this Agreement.
(c) Between the date of this Agreement and the Closing, Seller
may settle liabilities of Seller with the prior written consent of Buyer, which
consent shall not be unreasonably withheld.
8.8 Legal Fees. The Seller agrees that the legal fees and
disbursements incurred by Seller in connection with the
Contemplated Transactions will not exceed $25,000.
8.9 Resolution of Dispute. Prior to the Closing, Seller shall cause any
claims which Results Technologies, Inc. may have against Seller to be released
without further liability. Any payments made by Seller in connection therewith
shall be included in Seller's liabilities under Section 2.5(a)(ii) and shall be
subject to the limitation in Section 2.5(b).
9. Conditions to Buyer's Obligations. The obligations of Buyer to
effect the Closing shall be subject to the satisfaction at or prior to the
Closing of the following conditions, any one or more of which may be waived by
Buyer:
9.1 No Injunction. There shall not be in effect any injunction, order
or decree of a court of competent jurisdiction that prohibits or materially
delays consummation of any or all of the Contemplated Transactions, and Buyer
shall have received a certificate to that effect signed by the President of the
Seller.
9.2 Representations, Warranties and Agreements. (a) The
representations and warranties of Seller and Stockholders set forth in this
Agreement shall be true and correct in all material respects as of the date of
this Agreement and as of the Closing Date with the same force and effect as
though made at such time (such representations and warranties not being
affected by any updating information furnished pursuant to Section 8.2 or any
other provision of this Agreement), (b) Seller shall have performed and
complied in all material respects with the agreements contained in this
Agreement required to be performed and complied with by it at or prior to the
Closing and (c) Buyer
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shall have received a certificate to that effect signed by the President of the
Seller and the Stockholders.
9.3 Legal Opinion. Buyer shall have received an opinion from counsel to
Seller, dated the Closing Date and in substantially the form of Exhibit 9.3.
9.4 Litigation. No action or proceeding shall be pending or threatened
by or before any Person, court or other governmental body to restrain or
prohibit or to recover damages in respect of any or all of the Contemplated
Transactions or to revoke or suspend any license, permit, order or approval by
reason of any or all of the Contemplated Transactions; nor shall there be any
other action or proceeding pending or threatened which action, or other
proceeding may, in the reasonable opinion of Buyer, result in a decision,
ruling, or finding that individually or in the aggregate has or may reasonably
be expected to have a material adverse effect on the validity or enforceability
of this Agreement, or on the ability of the Seller or Stockholders to perform
their obligations under this Agreement.
9.5 Regulatory Approvals. All licenses, authorizations, consents,
orders and regulatory approvals of governmental bodies necessary for the
consummation of the Contemplated Transactions shall have been obtained on terms
satisfactory to Buyer and shall be in full force and effect.
9.6 Other Consents. Consents or waivers from parties other than
governmental bodies that are required in connection with the consummation of the
Contemplated Transactions shall have been obtained on terms satisfactory to
Buyer and shall be in full force and effect and signed copies thereof shall have
been delivered to Buyer.
9.7 Secretary of State Certificates. Buyer shall have received a
Certificate of the Secretary of State of the State of Ohio, with respect to the
Seller, and of each state in which the Seller is qualified to do business as a
foreign corporation as of a recent date showing Seller to be validly existing or
qualified as a foreign corporation in its state of existence and qualification,
as the case may be, and in good standing and that all franchise taxes required
to be paid and all reports required to be filed have been duly paid and filed,
and with respect to the Certificates of the Secretary of State of the State of
[ ], listing all documents filed and attaching certified copies thereof.
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9.8 Secretary's Certificate of the Seller. Buyer shall have received a
Certificate of the Secretary of the Seller stating that (i) no document has been
filed relating to or affecting the Certificates of Incorporation of the Seller,
after the date of the Certificate of the Secretary of State of the state of its
incorporation furnished pursuant to Section 9.7, and (ii) attached to the
Certificate is a true and complete copy of By-Laws of the Seller, as in full
force and effect at the date of the Closing.
9.9 Resolutions. Buyer shall have received certified copies of
resolutions duly adopted by the Seller's Board of Directors and Stockholders
authorizing the execution of this Agreement and the performance by Seller of the
transactions contemplated hereby.
9.10 Employment Arrangements. Each of the Stockholders shall have
entered into employment agreements effective as of the Closing Date with Buyer,
in substantially the form of Exhibits 9.10A and 9.10B, respectively.
9.11 Non-Competition Agreement. Each of the Stockholders shall have
entered into non-competition agreements (the "Non- Competition Agreements")
effective as of the Closing Date, substantially in the form of Exhibit 9.11.
9.12 Stock Option Letter. Buyer shall have received an executed copy of
a Stock Option Letter executed by the Seller and each of the Stockholders.
9.13 Proxy. Seller shall deliver to Buyer, in form reasonably
satisfactory to Buyer, an irrevocable proxy to vote the shares of Common Stock
held in escrow and not yet released pursuant to Section 3.4 in the discretion of
the Company's Board of Directors.
9.14 Compliance Evidence. Buyer shall have received such certificates,
opinions, documents and information as it may reasonably request in order to
establish satisfaction of the conditions set forth in this section 9.
9.15 Proceedings Satisfactory. All certificates, opinions and other
documents to be delivered by Seller and all other matters to be accomplished
prior to or at the Closing shall be satisfactory in the reasonable judgment of
Buyer and its counsel.
10. Conditions to Seller's Obligations.
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The obligations of Seller to effect the Closing shall be subject to the
satisfaction at or prior to the Closing of the following conditions, any one or
more of which may be waived by Seller:
10.1 No Injunction. There shall not be in effect any injunction, order
or decree of a court of competent jurisdiction that prohibits or delays the
consummation of any or all of the Contemplated Transactions and Seller shall
have received a certificate to that effect signed by the chief executive officer
of Buyer.
10.2 Representations, Warranties and Agreements. (a) The
representations and warranties of Buyer set forth in this Agreement shall be
true and correct in all material respects as of the date of this Agreement and
as of the Closing Date as though made at such time, (b) Buyer shall have
performed and complied in all material respects with the agreements contained in
this Agreement required to be performed and complied with by it prior to the
Closing and (c) Seller shall have received a certificate to that effect signed
by the chief executive officer of Buyer.
10.3 Legal opinion. Seller shall have received an opinion from Bachner,
Tally, Polevoy & Misher, counsel to Buyer, dated the Closing Date and in
substantially the form of Exhibit 10.3.
10.4 Secretary of State Certificate. Seller shall have received a
Certificate of the Secretary of State of the State of Delaware with respect to
the Buyer and of each state in which the Buyer is qualified to do business as a
foreign corporation as of a recent date showing the Buyer to be validly existing
or qualified as a foreign corporation in its states of existence and
qualification, as the case may be, and in good standing and that all franchise
taxes required to be paid and all reports required to be filed have been duly
paid and filed, and with respect to the Certificate of the Secretary of State of
Delaware, listing all documents filed and attaching certified copies thereof.
10.5 Secretary's Certificate of Buyer. Seller shall have received a
Certificate of the Secretary of Buyer, stating that (i) no document has been
filed relating to or affecting the Certificate of Incorporation of Buyer, after
the date of the Certificates of the Secretary of State of Delaware furnished
pursuant to Section 10.4, and (ii) attached to the Certificate is a true and
complete copy of the Certificate of Incorporation and By-Laws of the Buyer as in
full force and effect at the date of the Closing.
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10.6 Resolutions. Seller shall have received certified copies of
resolutions duly adopted by the Buyer's Board of Directors authorizing the
purchase of the Assets by the Buyer and the performance of the transactions
contemplated hereby.
10.7 Employment Arrangements. Buyer shall have entered into employment
agreements effective as of the Closing Date with each of the Stockholders in
substantially the form of Exhibits 9.10A and 9.10B, respectively.
11. Survival of Representations and Warranties; Indemnification.
11.1 Survival. All representations, warranties and agreements contained
in this Agreement or in any certificate delivered pursuant to this Agreement
shall survive the Closing for the time period set forth in Section 11.2 below
notwithstanding any investigation conducted with respect thereto.
11.2 Time Limitations. If the Closing occurs, Seller shall have no
liability (for indemnification or otherwise) with respect to any representation
or warranty, or agreement to be performed and complied with prior to the Closing
Date, other than those set forth in Sections 5.11(a), 5.15 (as to which Seller
and Stockholders shall only be liable for out-of-pocket expenses, liabilities
and damages incurred as a result of the breach thereof), 5.20, and 5.22, unless
on or before 18 months from of the Closing Date, Seller is given notice
asserting a claim with respect thereto. A claim with respect to Sections 5.11(a)
5.13, 5.20, and 5.22 may be made at any time. If the Closing occurs, Buyer shall
have no liability (for indemnification or otherwise) with respect to any
representation or warranty, or agreement to be performed and complied with prior
to the Closing Date, unless on or before the third anniversary of the Closing
Date, Buyer is given notice of a claim with respect thereto. However, the
provisions of this Section 11.2 shall not apply to any liability resulting from
any intentional misrepresentation or breach of warranty or any intentional
failure to perform or comply with any agreement.
11.3 Indemnification by Seller and Stockholders. Seller and
Stockholders shall jointly and severally indemnify and hold harmless Buyer, and
shall reimburse Buyer for, any loss, liability, claim, damage, expense
(including, but not limited to, costs of investigation and defense and
reasonable attorneys' fees, provided that the reimbursement of costs of
investigation, defense and reasonable attorneys' fees shall be subject to
Section 11.7) or diminution of value (collectively, "Damages") arising from or
in connection with (a) any inaccuracy in any of
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the representations and warranties of Seller or Stockholders in this Agreement
or in any certificate delivered by Seller or Stockholders pursuant to this
Agreement, or any actions, omissions or statements of facts inconsistent with
any such representation or warranty, (b) any failure by Seller or Stockholders
to perform or comply with any agreement in this Agreement, (c) any and all
liabilities and obligations of Seller that are not expressly assumed by Buyer
under the terms of this Agreement, (d) any claim by any person based on any act
or omission occurring prior to the Closing Date, except for claims base on
Buyer's failure to pay or perform the Assumed Liabilities, (e) any claims by
creditors of Seller (including any taxing authority) under any applicable bulk
sales laws (it being understood that neither Seller nor Buyer shall require
compliance with any such bulk transfer laws), (f) any claim by any Person for
brokerage or finder's fees or commissions or similar payments based upon any
agreement or understanding alleged to have been made by any such Person with the
Seller or the Stockholders (or any Person acting on their behalf) in connection
with any of the Contemplated Transactions, (g) claims by any taxing authorities
with respect to Taxes with respect to the period prior to the Closing, (h) any
claims made against the Seller alleging violation of ERISA or otherwise premised
on an ERISA claim or (i) any claims relating to the dispute listed on Schedule
5.8, provided that any damages or amount payable in settlement in such claim
shall be paid by Buyer to the extent that such amount does not result in the
liabilities set forth in Section 2.5(a)(i) and (ii) plus additional liabilities
referred to in Section 2.5(b) (ii) and (v) exceeding $375,000.
11.4 Indemnification by Buyer. Buyer shall indemnify and hold harmless
Seller and Stockholders, and shall reimburse Seller and Stockholders for, any
Damages arising from or in connection with (a) any inaccuracy in any of the
representations and warranties of Buyer in this Agreement or in any certificate
delivered by Buyer pursuant to this Agreement, or any actions, omissions or
statements of facts inconsistent with any such representation or warranty, (b)
any failure by Buyer to perform or comply with any agreement in this Agreement,
(c) any and all liabilities expressly assumed by Buyer pursuant to Section 2.5
hereof; (d) any claim by any Person for brokerage or finder's fees or
commissions or similar payments based upon any agreement or understanding
alleged to have been made by such Person with Buyer (or any Person acting on its
behalf) in connection with any of the Contemplated Transactions and (e) any
claim arising out of the performance of Seller of the service pursuant to
Section 2.6, unless such liability results from the bad faith or willful
misconduct of Seller.
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11.5 Limitations as to Amount -- Seller. Seller shall have no liability
(for indemnification or otherwise) with respect to the matters described in
clause (a) of Section 11.3 as to any matter or series of related matters as to
which the total Damages is less than $1,000 and until the total of all Damages
with
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respect to matters described in Section 11.3(a) exceeds $35,000 and then only
for the amount by which such Damages exceed $35,000.
11.6 Limitations as to Amount -- Buyer. Buyer shall have no liability
(for indemnification or otherwise) with respect to the matters described in
clause (a) of Section 11.4 as to any matter or series of related matters as to
which the total Damages is less than $1,000 and until the total of all Damages
with respect to matters described in Section 11.4(a) exceeds $35,000 and then
only for the amount by which such Damages exceed $35,000.
11.7 Procedure for Indemnification. Promptly after receipt by an
indemnified party under Sections 11.3 or 11.4 of notice of the commencement of
any action for which indemnification is available under Sections 11.3, 11.4,
11.5 and 11.6, such indemnified party shall, if a claim in respect thereof is to
be made against an indemnifying party under such section, give notice to the
indemnifying party of the commencement thereof, but the failure so to notify the
indemnifying party shall not relieve it of any liability that it may have to any
indemnified party except to the extent the indemnifying party demonstrates that
the defense of such action is prejudiced thereby. In case any such action shall
be brought against an indemnified party and it shall give notice to the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it shall wish, to assume
the defense thereof with counsel satisfactory to such indemnified party and,
after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party shall not be
liable to such indemnified party under such section for any fees of other
counsel or any other expenses, in each case subsequently incurred by such
indemnified party in connection with the defense thereof, if the indemnified
party and the indemnifying party are both parties to the action and the
indemnified party has been advised by counsel that there may be one or more
defenses available to it and not available to the indemnifying party. If an
indemnifying party assumes the defense of such an action, (a) no compromise or
settlement thereof may be effected by the indemnifying party without the
indemnified party's consent (which shall not be unreasonably withheld) unless
(i) there is no finding or admission of any violation of law or any violation of
the rights of any Person and no effect on any other claims that may be made
against the indemnified party and (ii) the sole relief provided is monetary
damages that are paid in full by the indemnifying party and (b) the indemnifying
party shall have no liability with respect to any compromise or
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<PAGE> 40
settlement thereof effected without its consent (which shall not be unreasonably
withheld). If notice is given to an indemnifying party of the commencement of
any action and it does not, within ten days after the indemnified party's notice
is given, give notice to the indemnified party of its election to assume the
defense thereof, the indemnifying party shall be bound by any determination made
in such action or any compromise or settlement thereof effected by the
indemnified party.
12. Termination.
12.1 Termination. This Agreement may be terminated before
the Closing occurs only as follows:
(a) By written agreement of Seller and Buyer at any time.
(b) By Seller, by notice to Buyer at any time, if one or
more of the conditions specified in Section 10 is not satisfied at the time at
which the Closing would otherwise occur or if satisfaction of such a condition
is or becomes impossible.
(c) By Buyer, by notice to Seller at any time, if one or
more of the conditions specified in Section 9 is not satisfied at the time at
which the Closing would otherwise occur or if satisfaction of such a condition
is or becomes impossible.
(d) By Buyer or Seller, by notice to the other at any time
after June 30, 1997.
12.2 Effect of Termination. In the event that this Agreement is
terminated pursuant to Section 12.1, this Agreement shall terminate without any
liability or further obligation of any party to another, except for Sections 7.2
and 7.4, which shall survive termination. However, a termination under Section
12.1 shall not relieve any party of liability for any failure to perform or
comply with any agreement prior to the date of termination or any
misrepresentation or breach of warranty or constitute a waiver of any claim with
respect thereto.
13. Registration Rights.
Credit Depot covenants and agrees as follows:
13.1 Registration. Credit Depot will use its best efforts to file a
registration statement covering the shares of Common Stock of Credit Depot with
the SEC (i) no later than 75 days after the Closing Date, with respect to the
shares of Common Stock of Credit Depot issued to Seller at the Closing and (ii)
no
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<PAGE> 41
later than 75 days after the date on which the remaining Common Stock of Credit
Depot is issued to Seller pursuant to Section 3.4, with respect to such
remaining shares.
13.2 Obligations of Credit Depot. Whenever required under Section 13.1
to effect the registration of any Common Stock of Credit Depot, Credit Depot
shall:
(a) Prepare and file with the SEC a registration
statement with respect to such Credit Depot Common Stock and use its best
efforts to cause such registration statement to become effective and keep such
registration statement effective for up to 180 days or until Seller has
completed the distribution described in the registration statement, whichever
occurs first.
(b) Prepare and file with the SEC such
amendments and supplements to such registration statement and the prospectus
used in connection with such registration statement as may be necessary to
comply with the provisions of the Securities Act with respect to the
disposition of all securities covered by such registration statement.
(c) Furnish to Seller such number of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Securities Act, all other documents filed with or
correspondence with the SEC relating to the registration of the Credit Depot
Common Stock, and such other documents as they may reasonably request in order
to facilitate the disposition of Credit Depot Common Stock owned by them.
(d) Use its best efforts to register and qualify
the securities covered by such registration statement under such other
securities or Blue Sky laws of such states as shall be reasonably requested by
Seller; provided, that Credit Depot shall not be required to qualify to do
business or to file a general consent to service of process in any such states
or jurisdictions.
(e) Notify Seller at any time when a prospectus
relating thereto is required to be delivered under the Securities Act of the
happening of any event as a result of which the prospectus included in such
registration statement, as then in effect, includes an 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 not misleading in the light of the
circumstances then existing.
(f) Credit Depot shall bear all fees and
expenses in connection with the registration of the Credit Depot Common
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<PAGE> 42
Stock pursuant to this Agreement (excluding commissions, discounts, expenses of
the broker or placement agent and transfer taxes.
13.3 Furnish Information. It shall be a condition precedent to the
obligations of Credit Depot to take any action pursuant to this Section 13 that
the Seller shall furnish to Credit Depot such information regarding Seller, the
Credit Depot Common Stock held by it, and the intended method of disposition of
such securities as shall be required to effect the registration of the Credit
Depot Common Stock.
13.4 Blackout Periods. Credit Depot shall have the right to postpone
the filing of a Registration Statement or the distribution pursuant thereto for
a reasonable period or periods if the Board of Directors of Credit Depot has
determined, in its good faith judgment, that it would materially interfere with
any financing, acquisition, corporate reorganization or other material
transaction involving Credit Depot, or would require premature disclosure of any
material non-public information.
14. Miscellaneous.
14.1 Notices. All notices, consents and other communications under this
Agreement shall be in writing and shall be deemed to have been duly given when
(a) delivered by hand, (b) sent by telex or telecopier (with receipt confirmed),
provided that a copy is mailed by registered mail, return receipt requested, or
(c) when received by the addressee, if sent by Express Mail, Federal Express or
other express delivery service (receipt requested), in each case to the
appropriate addresses, telex numbers and telecopier numbers set forth below (or
to such other addresses, telex numbers and telecopier numbers as a party may
designate as to itself by notice to the other parties):
(a) If to Buyer:
c/o Credit Depot Corporation
700 Wachovia Center
Gainesville, GA 30501
Telecopier No.: 770-531-0228
Attention: Jerry Sullivan, Sr.
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<PAGE> 43
with a copy to:
Bachner, Tally, Polevoy & Misher
380 Madison Avenue
New York, New York 10022
Telecopier No.: (212) 682-5729
Attention: Steven A. Fishman, Esq.
(b) If to Seller:
Cash Back Mortgage Corp.
3645 Warrensville Center Road
Shaker Heights, Ohio 44122
Telecopier No.: (216) 491-0119
Attention: Alan Schiff
with a copy to:
Gary B. Garson
The Illuminating Building
55 Public Square
Suite 1200
Cleveland, Ohio 44113
Telecopier No.: (216) 589-0764
(c) If to Stockholders:
Alan Solomon
8251 Pinecreek Court
Chargin Falls, Ohio 44124
Alan Schiff
14 Laurel Hill Lane
Pepper Pike, Ohio 44124
with a copy to:
Gary B. Garson
The Illuminating Building
55 Public Square
Suite 1200
Cleveland, Ohio 44113
Telecopier No.: (216) 589-0764
14.2 Expenses. Each party shall bear its own expenses incident to the
preparation, negotiation, execution and delivery of this Agreement and the
performance of its obligations hereunder.
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<PAGE> 44
14.3 Payment. A wire transfer or delivery of a check shall not operate
to discharge any obligation of payment under this Agreement and is accepted
subject to collection.
14.4 Specific Performance. The parties acknowledge that the subject
matter of this Agreement (i.e., the Assets of the Seller) is unique and that no
adequate remedy of law would be available for breach of this Agreement.
Accordingly, each party agrees that the other parties will be entitled to an
appropriate decree of specific performance or other equitable remedies to
enforce this Agreement (without any bond or other security being required) and
each party waives the defense in any action or proceeding brought to enforce
this Agreement that there exists an adequate remedy at law.
14.5 Captions. The captions in this Agreement are for convenience of
reference only and shall not be given any effect in the interpretation of this
Agreement.
14.6 No Waiver. The failure of a party to insist upon strict adherence
to any term of this Agreement on any occasion shall not be considered a waiver
or deprive that party of the right thereafter to insist upon strict adherence to
that term or any other term of this Agreement. Any waiver must be in writing.
14.7 Exclusive Agreement; Amendment. This Agreement supersedes all
prior agreements among the parties with respect to its subject matter
(including, but not limited to, the letter of intent among Credit Depot, Seller
and Stockholders dated _______, 1997), is intended (with the documents referred
to herein) as a complete and exclusive statement of the terms of the agreement
among the parties with respect thereto and cannot be changed or terminated
except by a written instrument executed by the party or parties against whom
enforcement thereof is sought.
14.8 Payment of Sales Taxes, etc. All filing fees and sales, use,
transfer, document, recording (real estate or otherwise), gross receipts and
similar taxes of any nature whatsoever, applicable to, or resulting from, the
sale and purchase of the Assets shall be borne 50% by Seller and 50% by Buyer.
Seller shall be responsible for filing all returns required in connection
therewith.
14.9 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be considered an original, but all of which
together shall constitute the same instrument.
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<PAGE> 45
14.10 Governing Law. This Agreement and (unless otherwise provided) all
amendments hereof and waivers and consents hereunder shall be governed by the
internal law of the State of Delaware, without regard to the conflicts of law
principles thereof.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first written above.
CASH BACK MORTGAGE CORP.
By: /S/
---------------------------------
CASH BACK ACQUISITION CORP.
By: /S/
---------------------------------
/s/ Alan Schiff
------------------------------------
Alan Schiff
/s/ Alan Solomon
------------------------------------
Alan Solomon
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<PAGE> 46
Guaranty
Credit Depot Corporation ("Credit Depot") hereby agrees to be bound by
Section 13 of the Asset Purchase Agreement (the "Acquisition Agreement") dated
as of April 1, 1997, between Cash Back Acquisition Corp. ("Buyer"), Cash Back
Mortgage Corp. ("Seller") and Alan Schiff and Alan Solomon ("Stockholders"), and
unconditionally guarantees to Seller full and punctual payment when due of the
amounts due from Buyer pursuant to Section 3 of the Acquisition Agreement and
payment of any liabilities of Buyer as a result of inaccuracies or breaches of
representations, warranties or covenants in the Acquisition Agreement (the
"Buyer Obligations"). This is a guaranty of payment and not of collection and
the Seller shall not be obligated to proceed first against the Buyer before
proceeding against Credit Depot.
Credit Depot shall be entitled to assert any defense which would be
available to the Buyer, except for any defense based on Buyer's insolvency,
bankruptcy, reorganization or other similar proceeding. Credit Depot shall have
the right to offset against any amounts payable by the Buyer to Seller any
amounts owed by Seller or Stockholders to Buyer, to the same extent as if such
amount was payable directly by Credit Depot to Sellers.
Credit Depot waives any and all notice of the creation, renewal,
extension or accrual of any of the Buyer Obligations, present or future, and
further waives notice of or proof of reliance by Seller or Stockholders upon
this guaranty or acceptance of this guaranty. Credit Depot waives acceptance
hereof, diligence, presentment, demand, protest and any notice not provided for
herein, and any defense that may arise by reason of lack of authority of any
person signing on behalf of Credit Depot or the lack of authority, death or
disability of any other person or entity.
IN WITNESS WHEREOF, the undersigned has executed this Guaranty as of
this 1st day of April, 1997.
CREDIT DEPOT CORPORATION
By: /s/
----------------------
<PAGE> 1
CREDIT DEPOT CORPORATION
LIST OF SUBSIDIARIES
EXHIBIT 21.1
<TABLE>
<S> <C>
Credit Depot Corporation of Georgia Delaware
Credit Depot Corporation of North Carolina Delaware
Credit Depot Corporation of Ohio Delaware
Credit Depot Corporation of South Carolina Delaware
Credit Depot Corporation of Tennessee Delaware
Credit Depot Corporation of Florida Delaware
Credit Depot Corporation of Illinois Delaware
Credit Depot Corporation of Missouri Delaware
Credit Depot Corporation of Michigan Michigan
Credit Depot Corporation of Virginia Delaware
Credit Depot Corporation of Indiana Delaware
Cash Back Mortgage Corporation Delaware
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement on
Form S-8 pertaining to the Credit Depot Corporation 1993 Stock Option Plan and
in the Registration Statement (Form S-3 No. 33-310125) and related Prospectus
of Credit Depot Corporation of our report dated August 29, 1997, with respect
to the consolidated financial statements of Credit Depot Corporation included
in the Annual Report (Form 10-KSB) for the year ended June 30, 1997.
ERNST & YOUNG LLP
Atlanta, Georgia
October 14, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 1,332,934
<SECURITIES> 0
<RECEIVABLES> 5,517,002
<ALLOWANCES> 260,484
<INVENTORY> 0
<CURRENT-ASSETS> 7,204,442
<PP&E> 524,695
<DEPRECIATION> 0
<TOTAL-ASSETS> 17,324,721
<CURRENT-LIABILITIES> 13,907,232
<BONDS> 10,940,000
0
332
<COMMON> 4,073
<OTHER-SE> 372,433
<TOTAL-LIABILITY-AND-EQUITY> 17,324,721
<SALES> 0
<TOTAL-REVENUES> 5,918,460
<CGS> 0
<TOTAL-COSTS> 7,612,603
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 225,231
<INTEREST-EXPENSE> 1,443,625
<INCOME-PRETAX> (3,362,999)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,362,999)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,362,999)
<EPS-PRIMARY> (1.07)
<EPS-DILUTED> (1.07)
</TABLE>
