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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 13E-4
ISSUER TENDER OFFER STATEMENT
(PURSUANT TO SECTION 13(E)(1) OF THE SECURITIES EXCHANGE ACT OF 1934)
CREDIT DEPOT CORPORATION
(Name of the Issuer)
Credit Depot Corporation
(Name of Person Filing Statement)
9% Convertible Preferred Stock
10% Convertible Secured Notes
(Title of Classes of Securities)
Not Applicable
(CUSIP Number of Classes of Securities)
Gerald F. Sullivan
700 Wachovia Center
Gainseville, Georgia 30501
(770) 531-9927
(Name, Address and Telephone Number of Person Authorized to Receive Notices
and Communications on Behalf of Person Filing Statement)
Copy to:
Sheldon E. Misher, Esq.
Bachner, Tally, Polevoy & Misher LLP
380 Madison Avenue
New York, New York 10017
(212) 687-7000
September 23, 1997
(Date Tender Offer First Published, Sent or Given to Security Holders)
CALCULATION OF FILING FEE
Transaction Valuation * Amount of Filing Fee
Not Applicable Not Applicable
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[ ] Check box if any part of the fee is offset as provided by Rule 0-11(a)
(2) and identify the filing with which the offsetting fee was
previously paid. Identify the previous filing by registration statement
number, or the form or Schedule and the date of its filing.
Amount Previously Paid: Not Applicable
Form or Registration No.: Not Applicable
Filing Party: Not Applicable
Date Filed: Not Applicable
Preliminary Note: References in this Schedule to the "Offering Circular" and the
"Letter of Transmittal" are to the Offering Circular dated September 23, 1997
(the "Offering Circular") and the Letter of Transmittal dated September 23, 1997
(the "Letter of Transmittal"), filed herewith as Exhibits (a)(1) and (a)(2),
respectively.
Item 1. Security and Issuer.
(a) The issuer of the securities to which this statement relates is Credit
Depot Corporation, a Delaware corporation (the "Company"). The Company's
principal executive offices are located at 700 Wachovia Center, Gainseville,
Georgia 30501.
(b) The information required by this sub-item may be found on the Outside
Front Cover Page of the Offering Circular and under the following headings in
the Offering Circular: "The Conversion Offer" and "The Conversion Offer --
Conditions of the Conversion Offer." Such information is incorporated herein by
reference.
(c) See "Comparative Market Prices" in the Offering Circular and the
Issuer's Annual Report on Form 10-KSB for the year ended June 30, 1996, included
as Appendix A to the Offering Circular, incorporated herein by reference.
(d) Not applicable.
Item 2. Source and Amount of Funds or Other Consideration.
(a) See "The Conversion Offer" in the Offering Circular, incorporated
herein by reference.
(b) (1) Not applicable.
(b) (2) Not applicable.
Item 3. Purpose of the Tender Offer and Plans or Proposals of the Issuer or
Affiliate.
See "Background of the Conversion Offer -- Reasons for the Conversion
Offer" in the Offering Circular, incorporated herein by reference. The shares of
Preferred Stock surrendered to the Issuer on the conversion thereof into shares
of Common Stock shall upon appropriate filing
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and recording to the extent required by law, have the status of authorized and
unissued shares of Preferred Stock.
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(d) Not applicable.
(e) See "Background of the Conversion Offer" and "Selected
Historical and Pro Forma Financial Data" in the Offering Circular, incorporated
herein by reference.
(f) Not applicable.
(g) Not applicable.
(h) See "Considerations Applicable to Holders of Preferred Stock
and Notes Who Do Not Convert in Connection with this Conversion Offer --
Possible Delisting of Securities from the Nasdaq Stock Market" in the Offering
Circular, incorporated herein by reference.
(i) Not applicable.
(j) Not applicable.
Item 4. Interest in Securities of the Issuer.
Neither the Issuer nor to the best of its knowledge, any of the other
persons covered by Item 4 of this Schedule has effected any transaction in the
Preferred Stock or Notes during the 40 business days preceding the date of the
Offering Circular.
Item 5. Contracts, Arrangements, Understandings or Relationships with Respect
to the Issuer's Securities.
See "Payment of Expenses," of the Offering Circular which is
incorporated by reference herein.
Item 6. Persons Retained, Employed or to be Compensated.
The Conversion Offer is being made by the Issuer in reliance on the
exemption from the Securities Act registration requirements afforded by Section
3(a)(9) thereof. Therefore, the Issuer has not employed or retained and will not
compensate any persons to make solicitations or recommendations in connection
with the Conversion Offer. See "The Conversion Offer,"
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"Conversion Offer Procedures" and "Payment of Expenses" in the Offering
Circular, incorporated herein by reference.
Item 7. Financial Information.
(a)(1) See the Issuer's Annual Report on form 10-KSB for the year ended June
30, 1996, included as Appendix A to the Offering Circular and incorporated
herein by reference and the Issuers Report on Form 8-K which includes the
Company's financial statements for the fiscal year ended June 30, 1997, included
as Appendix C to the Offering circular and incorporated herein by reference.
(a)(2) See the Issuer's Quarterly Report on Form 10-QSB for the quarter ended
March 31, 1997, included as Appendix B to the Offering Circular and incorporated
herein by reference.
(a)(3) See "Selected Historical and Pro Forma Financial Data" in the Offering
Circular, incorporated herein by reference.
(a)(4) See "Selected Historical and Pro Forma Financial Data" in the Offering
Circular, incorporated herein by reference.
(b) See "Selected Historical and Pro Forma Financial Data" in the Offering
Circular, incorporated herein by reference.
Item 8. Additional Information.
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(d) Not applicable.
(e) The Offering Circular, including the Appendices thereto, and the Letter
of Transmittal should be read in their entirety and are incorporated herein by
reference.
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Item 9. Material to Be Filed as Exhibits.
Description
(a)(1) - Offering Circular dated September 23, 1997.
(a)(2) - Form of Conversion Notice and Letter of Transmittal dated September
23, 1997.
(a)(3) - Form of Notice of Guaranteed Delivery.
(a)(4) - Consent of Holders of 9% Cumulative Convertible Preferred Stock
(a)(5) - Consent of Holders of 10% Convertible Secured Notes
(b) - Not applicable.
(c) - Not applicable.
(d) - Not applicable.
(e) - Not applicable.
SIGNATURE
After due inquiry and to the best of my knowledge and belief, I certify that the
information set forth in this statement is true, complete and correct.
Date: September 23, 1997 CREDIT DEPOT CORPORATION
By /s/ Gerald F. Sullivan
-----------------------------
Gerald F. Sullivan, President
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EXHIBIT INDEX
Exhibit Number Description
(a)(1) - Offering Circular dated September 23, 1997.
(a)(2) - Form of Conversion Notice and Letter of Transmittal dated September
23, 1997.
(a)(3) - Form of Notice of Guaranteed Delivery.
(a)(4) - Consent of Holders of 9% Cumulative Convertible Preferred Stock
(a)(5) - Consent of Holders of 10% Convertible Secured Notes
(b) - Not applicable.
(c) - Not applicable.
(d) - Not applicable.
(e) - Not applicable.
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EXHIBIT (a)(1)
CREDIT DEPOT CORPORATION
CONVERSION OFFER
------------------------------------
CONVERSION OF 9% CONVERTIBLE
PREFERRED STOCK INTO APPROXIMATELY
30 SHARES OF COMMON STOCK
------------------------------------
CONVERSION OF 10% CONVERTIBLE
SECURED NOTES TO COMMON STOCK
AT A CONVERSION PRICE OF $.50 PER SHARE
------------------------------------
Credit Depot Corporation (the "Company") is offering to adjust the
conversion price of the outstanding shares of its 9% Convertible Preferred Stock
(the "Preferred Stock") and the outstanding 10% Convertible Secured Notes (the
"Notes," together with the Preferred Stock, the "Securities," the holders
thereof being "Holders"). The offer (the "Conversion Offer") is as follows:
9% Convertible Preferred Stock -- A total of approximately 30 shares of
Common Stock will be issued to the Holder of each share of Preferred
Stock (having a liquidation preference of $20 per share) converted in
connection with this Conversion Offer (plus such number of additional
shares of Common Stock as are issuable on the conversion of Preferred
Stock dividends accrued and in arrears as of the Expiration Date, at a
rate of one share of Common Stock for each $.65 of such dividends):
each share of Preferred Stock is convertible into eight (8) shares of
Common Stock in accordance with the stated terms of the Preferred
Stock, and an additional approximately 22 additional shares of Common
Stock (plus shares of Common Stock issued on the conversion of
dividends) will be issued as to each share of Preferred Stock converted
pursuant to the Conversion Offer. See "The Conversion Offer" for a
further description.
10% Convertible Secured Notes -- Prior to the Conversion Offer, each
$1,000 principal amount of Notes was convertible into 400 shares of
Common Stock at a Conversion Price of $2.50 per share of Common Stock.
The adjustment of the Conversion Price from $2.50 to $.50 per share
will result in the issuance of 1,600 additional shares of Common Stock,
or an aggregate of 2,000 shares of Common Stock (plus such number of
additional shares as are issuable on the conversion of interest accrued
through the Expiration Date at a rate of one share of Common Stock for
every $.50 of accrued interest), on the conversion of each $1,000
principal amount of Notes, pursuant to the conversion rights contained
in the Loan and Security Agreement (the "Loan Agreement") governing the
Notes. See "The Conversion Offer" for a further description.
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Holders of the Preferred Stock are entitled to receive quarterly
cumulative cash dividends at an annual rate of $1.80 per share, and Holders of
the Notes are entitled to receive semi-annual cumulative cash interest payments
at an annual rate of 10% per annum. The quarterly dividend payment on the
Preferred Stock which was to be made on June 30, 1997, was not made. As a result
of the Company's need for additional cash to meet its working capital
requirements, if this Conversion Offer is not consummated and if the Company
does not obtain additional financing, the Company does not expect to pay this
dividend, the September 30, 1997 dividend or future dividends, on the Preferred
Stock. In addition, in such event, the Company would be unable to make interest
payments on the Notes when due, which would result in a default under the Notes.
The Company cannot predict when it would be in a position to resume the payment
of such dividends or make its scheduled interest payments if the Conversion
Offer is not consummated and the Company does not obtain the requisite
financing. On the scheduled Expiration Date (as defined below) of this
Conversion Offer, it is anticipated that each of the shares of Preferred Stock
will have a dividend arrearage of $.90 per share and that $241,937 in interest
will be payable on the Notes. The Company currently proposes to commence
additional financing in the form of a private placement of a maximum $3,000,000
of 11% Convertible Preferred Stock, convertible into Common Stock at $.40 per
share (the "Proposed Financing"). There can be no assurance that the Company
will be able to successfully consummate such Proposed Financing or, if not,
other necessary financing, and even if such financing is completed, there can be
no assurance that the Company will resume payment of Preferred Stock dividends.
In connection with the conversion of the Preferred Stock or Notes
pursuant to this Conversion Offer, each converting Holder will be required, as a
condition to such conversion to execute a consent (the "Consent") with respect
to such Holder's Preferred Stock and/or Notes, approving amendments to the
Company's Certificate of Designation relating to the Preferred Stock, the Letter
Agreement dated April 16, 1996 (relating to certain anti-dilution adjustments
relating to the Preferred Stock and certain other securities) or the Loan
Agreement, as the case may be, which will among other things, eliminate the
anti-dilution adjustments for issuances of Common Stock, or securities
convertible into, or exercisable for, Common Stock at prices below the
Conversion Price and certain covenants of the Company. See "Description of
Securities."
The Common Stock is traded on the NASDAQ SmallCap Market ("NASDAQ")
under the symbol "LEND." There is no established market for the Preferred Stock
or the Notes. On September 11, 1997, the last trading day before the Company
publicly announced this Conversion Offer, the closing price of the Common Stock
on NASDAQ was $.75 per share. The closing price of the Common Stock on NASDAQ on
September 22, 1997, the last trading day before the date of this Offering
Circular, was $.75 per share.
THIS CONVERSION OFFER WILL EXPIRE AT 5:00 P.M.
ATLANTA, GEORGIA TIME ON OCTOBER 22, 1997 UNLESS EXTENDED
BY THE COMPANY (THE "EXPIRATION DATE").
THE DATE OF THIS OFFERING CIRCULAR IS SEPTEMBER 23, 1997.
The Preferred Stock was issued in a private offering by the Company in
April 1995. The Notes were issued in private offering by the Company in May and
June 1996. See "Background of the Conversion Offer." Each Holder of Preferred
Stock who elects to convert such Holder's
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shares will be required to deliver the Preferred Stock certificate(s), to the
Conversion Agent (as defined herein) and will be issued certificates for the
number of shares of Common Stock into which the Preferred Stock tendered may be
converted. Each Holder of Notes who elects to convert such Holder's Notes will
be required to deliver the Notes, to the Conversion Agent and will be issued
certificates for the number of shares of Common Stock into which the Notes
tendered may be converted. See "Conversion Offer Procedures."
This Conversion Offer is made upon the terms, and is subject to the
conditions, set forth in this Offering Circular and in the accompanying
Conversion Notice and Letter of Transmittal (the "Letter of Transmittal").
The Preferred Stock and the Notes delivered for conversion in
connection with this Conversion Offer may be withdrawn at any time prior to 5:00
p.m., Atlanta, Georgia time, on the Expiration Date. See "Conversion Offer
Procedures -- Withdrawal of Deliveries."
No assurance can be given as to future market price fluctuations and
changes in the value of the Company's Common Stock. Holders should obtain
current market price quotations before making a final decision regarding this
Conversion Offer. The Conversion Price being offered will NOT be adjusted by the
Company for fluctuations in the market prices of the Common Stock.
THE COMPANY WILL NOT SEEK OR OBTAIN AN INDEPENDENT "FAIRNESS OPINION"
OR INDEPENDENT VALUATION REGARDING THIS CONVERSION OFFER AND IS NOT MAKING ANY
RECOMMENDATION TO HOLDERS OF THE PREFERRED STOCK OR THE NOTES WHETHER TO ACCEPT
OR REJECT THIS CONVERSION OFFER. EACH HOLDER OF PREFERRED STOCK OR NOTES SHOULD
CAREFULLY REVIEW THIS CONVERSION OFFER AND THE APPLICABLE TAX CONSEQUENCES
BEFORE DECIDING WHETHER TO CONVERT SUCH SECURITIES IN CONNECTION WITH THIS
CONVERSION OFFER. SEE "BACKGROUND OF THE CONVERSION OFFER" AND "CERTAIN
CONSIDERATIONS APPLICABLE TO CONVERTING IN CONNECTION WITH THIS CONVERSION
OFFER" FOR AN EXPLANATION OF FACTORS THAT LED THE COMPANY AND ITS BOARD OF
DIRECTORS TO MAKE THIS CONVERSION OFFER AND FOR A DESCRIPTION OF CERTAIN
CONSIDERATIONS WHICH THE COMPANY BELIEVES HOLDERS MAY WANT TO EVALUATE IN MAKING
A DECISION TO CONVERT IN CONNECTION WITH THIS CONVERSION OFFER.
Appendix A to this Offering Circular is a copy, without exhibits, of
the Company's Annual Report on Form 10-KSB for the year ended June 30, 1996 (the
"Annual Report"), describing the Company and its various businesses, and
including the Company's audited consolidated financial statements (and notes
thereto). Appendix B to this Offering Circular is a copy, without exhibits, of
the Company's Quarterly Report on Form 10-QSB for the quarter ended March 31,
1997, which includes the Company's unaudited financial statements (and notes
thereto) for the nine month period then ended (the "Quarterly Report"). Appendix
C to this Offering Circular is a copy of the Company's Form 8-K containing the
Company's financial statements for the fiscal year ended June 30, 1997. The
information contained in these materials
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should be reviewed carefully by each Holder of the Preferred Stock or Notes in
considering this Conversion Offer.
SEE "CONSIDERATIONS APPLICABLE TO CONVERTING IN CONNECTION WITH THIS
CONVERSION OFFER," "BACKGROUND OF CONVERSION OFFER," "RISKS APPLICABLE TO
HOLDERS OF PREFERRED STOCK OR NOTES WHO DO CONVERT IN CONNECTION WITH THIS
CONVERSION OFFER," "CONSIDERATIONS APPLICABLE TO HOLDERS OF PREFERRED STOCK AND
NOTES WHO DO NOT CONVERT IN CONNECTION WITH THIS CONVERSION OFFER" AND "CERTAIN
FEDERAL INCOME TAX CONSEQUENCES" FOR A DISCUSSION OF VARIOUS FACTORS THAT ALSO
SHOULD BE CONSIDERED BY HOLDERS OF THE PREFERRED STOCK OR NOTES IN EVALUATING
THIS CONVERSION OFFER.
No person has been authorized to give any information pertaining to
this Conversion Offer or the Company, except as contained in this Offering
Circular and its Appendices. Any information not so contained must not be relied
upon as having been authorized by the Company. Neither the delivery of this
Offering Circular nor the consummation of this Conversion Offer will be deemed
to create any implication that there has been no change in the information set
forth herein or in the Annual Report and the Quarterly Report since their
respective dates.
All questions and requests for assistance or for additional copies of
this Offering Circular and the Letter of Transmittal may be directed to
Continental Stock Transfer & Trust Company (the "Conversion Agent") at Two
Broadway, 19th Floor, New York, New York 10004; telephone: (212) 509-4000.
NEITHER THIS CONVERSION OFFER NOR THE ADDITIONAL COMMON STOCK ISSUABLE
AS A RESULT OF THE REDUCTION IN THE CONVERSION PRICES HAS BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR REGISTERED OR
QUALIFIED UNDER THE SECURITIES OR BLUE SKY LAWS OF ANY STATE OR OTHER
JURISDICTION. THIS CONVERSION OFFER IS BEING MADE BY THE COMPANY IN RELIANCE ON
THE EXEMPTION FROM THE SECURITIES ACT REGISTRATION REQUIREMENTS AFFORDED BY
SECTION 3(A)(9) THEREOF. IN ACCORDANCE WITH THE REQUIREMENTS FOR SUCH EXEMPTION,
THE COMPANY WILL NOT PAY ANY COMMISSION OR OTHER REMUNERATION TO ANY BROKER,
DEALER, SALESMAN OR OTHER PERSON FOR SOLICITING DELIVERIES OF THE PREFERRED
STOCK OR NOTES FOR CONVERSION. REGULAR EMPLOYEES OF THE COMPANY, WHO WILL NOT
RECEIVE ADDITIONAL COMPENSATION THEREFOR, MAY PROVIDE INFORMATION TO HOLDERS OF
THE PREFERRED STOCK OR NOTES CONCERNING THIS CONVERSION OFFER.
This Conversion Offer is not being made to, nor will the Company accept
deliveries for conversion from, Holders of the Preferred Stock or Notes in any
jurisdiction in which the acceptance thereof or this Conversion Offer would not
be in compliance with the securities or Blue Sky laws of such jurisdiction.
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The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files periodic reports, proxy statements and other
information with the Securities and Exchange Commission (the "SEC"). Such
reports, proxy statements and other information may be inspected and copied (at
prescribed rates) at the public reference facilities maintained by the SEC at
450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and at the SEC's
regional offices located at Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661 and Seven World Trade Center, Suite 1300, New
York, New York 10048. The SEC maintains a website, located at
http://www.sec.gov., that contains reports, proxy and other information
regarding registrants, including the Company, that file electronically with the
SEC. In addition, such reports, proxy and other information concerning the
Company may be inspected at the office of NASDAQ at 1735 K Street, N.W.,
Washington, D.C. 20006. For certain further information with respect to the
Company and the Conversion Offer, reference is made to the Issuer Tender Offer
Statement on Schedule 13E-4 (the "Schedule 13E-4"), including the exhibits filed
as part thereof or incorporated by reference therein. Copies of the Schedule
13E-4 and its exhibits may be inspected and copied (at prescribed rates) at the
offices of the SEC at the locations set forth above.
"Safe Harbor" statement under the Private Securities Litigation Reform
Act of 1995: Certain of the statements in this Offering Circular under
"Background of the Conversion Offer" and "Certain Considerations" and elsewhere
herein (including certain statements in the Annual Report reproduced as Appendix
A and in the Quarterly Report reproduced as Appendix B which contain
Management's Discussion and Analysis of Financial Conditions and Results of
Operations ("Management's Discussion and Analysis")) and other Company materials
referred to herein, 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 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 sell mortgage loans; 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.
CONTINENTAL STOCK TRANSFER AND TRUST COMPANY IS SERVING AS THE
CONVERSION AGENT ("CONVERSION AGENT") FOR THIS CONVERSION OFFER. ITS TELEPHONE
NUMBER AND ADDRESS IS SET FORTH ON THE BACK COVER OF THIS OFFERING CIRCULAR. ALL
DOCUMENTS TO BE SUBMITTED IN CONNECTION WITH THIS CONVERSION OFFER SHOULD BE
DELIVERED TO THE CONVERSION AGENT AT ITS ADDRESS SET FORTH ON THE BACK COVER OF
THIS OFFERING CIRCULAR.
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TABLE OF CONTENTS
PAGE
----
OFFERING CIRCULAR SUMMARY......................................................1
BACKGROUND OF THE COMPANY'S CONVERSION OFFER...................................6
CONSIDERATIONS APPLICABLE TO CONVERTING
IN CONNECTION WITH THIS CONVERSION OFFER.......................................9
THE CONVERSION OFFER..........................................................11
RISKS APPLICABLE TO HOLDERS OF PREFERRED STOCK
OR NOTES WHO DO CONVERT IN CONNECTION WITH THIS
CONVERSION OFFER..............................................................16
CONSIDERATIONS APPLICABLE TO HOLDERS OF PREFERRED
STOCK AND NOTES WHO DO NOT CONVERT IN CONNECTION
WITH THIS CONVERSION
OFFER.........................................................................30
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES..................................................................33
TAX CONSEQUENCES TO HOLDERS OF PREFERRED STOCK................................33
TAX CONSEQUENCES TO HOLDERS OF
NOTES.........................................................................34
TAX CONSEQUENCES TO THE COMPANY...............................................34
DESCRIPTION OF SECURITIES.....................................................35
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA..............................47
CAPITALIZATION ...............................................................50
PRINCIPAL STOCKHOLDERS........................................................51
CONVERSION OFFER PROCEDURES...................................................54
PAYMENT OF EXPENSES...........................................................58
APPENDIX A - FORM 10-KSB FOR THE YEAR ENDED JUNE 30, 1996.
APPENDIX B - FORM 10-QSB FOR THE QUARTER ENDED MARCH 31, 1997.
APPENDIX C - REPORT ON FORM 8-K CONTAINING FINANCIAL STATEMENTS FOR
THE FISCAL YEAR ENDING JUNE 30, 1997.
i
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NO PERSON HAS BEEN AUTHORIZED TO MAKE ANY RECOMMENDATION ON BEHALF OF THE
COMPANY AS TO WHETHER HOLDERS SHOULD TENDER OR REFRAIN FROM TENDERING SECURITIES
PURSUANT TO THE OFFER. NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR
TO MAKE ANY REPRESENTATION IN CONNECTION WITH THE OFFER OTHER THAN THOSE
CONTAINED HEREIN OR IN THE LETTER OF TRANSMITTAL. IF GIVEN OR MADE, SUCH
RECOMMENDATION AND SUCH INFORMATION AND REPRESENTATION MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE COMPANY.
NEITHER THIS TRANSACTION NOR THE SECURITIES OFFERED HEREBY HAS BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS OFFERING
CIRCULAR. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
ii
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OFFERING CIRCULAR SUMMARY
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Offering Circular, the Company's Annual
Report reproduced as Appendix A to this Offering Circular and the Company's
Quarterly Report reproduced as Appendix B to this Offering Circular.
The Company
Credit Depot Corporation (the "Company") is a mortgage finance company
engaged in originating, purchasing, servicing, and selling first 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. Instead of holding mortgage loans originated or purchased by
it, the Company's strategy is generally to resell such mortgage loans to
financial service companies for inclusion in mortgage loan securitizations
shortly after their origination or acquisition.
The Company's executive offices are located at 700 Wachovia Center,
Gainesville, Georgia 30501, telephone (770) 531-9927.
The Conversion Offer
The Conversion Offer... The Company is offering to adjust the Conversion Price
of its 9% Convertible Preferred Stock and its 10%
Convertible Secured Notes, as follows:
The Preferred Stock.... A total of approximately 30 shares of Common Stock will
be issued to the Holder of each share of Preferred Stock
(having a liquidation preference of $20 per share)
converted in connection with this Conversion Offer (plus
such number of additional shares of Common Stock as are
issuable on the conversion of Preferred Stock dividends
accrued and in arrears as of the Expiration Date, at a
rate of one share of Common Stock for each $.65 of such
dividends): each share of Preferred Stock is convertible
into eight (8) shares of Common Stock in accordance with
the stated terms of the Preferred Stock, and an
additional approximately 22 additional shares (the
"Additional Shares") of Common Stock (plus shares of
Common Stock issued on the conversion of dividends) will
be issued as to each share of Preferred Stock converted
pursuant to the Conversion Offer. See "The Conversion
Offer" for a further description.
The Notes.............. Prior to the Conversion Offer, each $1,000 principal
amount of Notes was convertible into 400 shares of
Common Stock at a conversion price of $2.50 per share of
Common Stock (the
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"Conversion Price"). The adjustment of the Conversion
Price from $2.50 to $.50 per share will result in the
issuance of 1,600 additional shares of Common Stock, or
an aggregate of 2,000 shares of Common Stock (plus such
number of additional shares as are issuable on the
conversion of interest accrued through the Expiration
Date at a rate of one share of Common Stock for every
$.50 of interest payable), on the conversion of each
$1,000 principal amount of Notes, pursuant to the
conversion rights contained in the Loan Agreement
governing the Notes.
Common Stock........... The Common Stock is described in this Offering Circular
under "Common Stock."
Dividend Arrearage; Holders of Preferred Stock are entitled to cumulative
Future Dividend and cash dividends at an annual rate of $1.80 per share,
Interest Payments...... payable quarterly when, as and if declared by the Board
of Directors, and Holders of the Notes are entitled to
interest at an annual rate of 10%, payable
semi-annually. The quarterly dividend payment on the
Preferred Stock which was to be made on June 30, 1997,
was not made and the dividend payment of September 30,
1997 is not expected to be made. As a result of the
Company's need for additional cash to meet its working
capital requirements, if this Conversion Offer is not
consummated and additional financing is obtained
pursuant to the Proposed Financing or another financing,
the Company does not expect to pay future dividends on
the Preferred Stock. In addition, in such event, the
Company would be unable to make interest payments on the
Notes when due, which would result in a default under
the Notes. Even if the Conversion Offer is consummated
and additional financing is obtained pursuant to the
Proposed Financing or another financing, there can be no
assurance that the Company will make dividend payments
on the Preferred Stock. The Company cannot predict when
it would be in a position to resume the payment of such
dividends or make scheduled interest payments if the
Conversion Offer is not consummated and additional
financing is not obtained pursuant to the Proposed
Financing or another financing. On the scheduled
Expiration Date (as defined below) of this Conversion
Offer, it is anticipated that each of the shares of
Preferred Stock will have a dividend arrearage of $.90
per share. On the Expiration Date, the 315,000 shares of
outstanding Preferred Stock will have an aggregate
dividend arrearage of $307,125. BY TENDERING SECURITIES
PURSUANT TO THE OFFER AND NOT WITHDRAWING THE SAME, EACH
TENDERING HOLDER WILL BE DEEMED TO HAVE WAIVED SUCH
HOLDER'S RIGHT TO RECEIVE ANY DIVIDEND OR INTEREST WHICH
MAY BECOME
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PAYABLE IN RESPECT OF THE TENDERED SECURITIES SUBSEQUENT
TO THE DATE THAT SUCH SECURITIES ARE TENDERED, EVEN IF
SUCH DIVIDEND OR INTEREST BECOMES PAYABLE PRIOR TO
ACCEPTANCE OF SUCH SECURITIES BY THE COMPANY. See "9%
Convertible Preferred Stock;" 10% Convertible Secured
Notes."
No Adjustment for The number of Additional Shares and Conversion Price
Market Price .......... being offered to convert will NOT be adjusted by the
Fluctuations Company for fluctuations in the market prices of the
Common Stock.
No Anti-dilution As a condition to conversion of the Preferred Stock and
Adjustment of the Notes, each Holder will be required to execute the
Conversion Price of Consent, pursuant to which the Holder will agree to
Non-Tendered certain amendments tthe Loan Agreement, the Letter
Securities; Agreement dated April 16, 1996 (pursuant to which the
Cancellation of Holders of the Preferred Stock were granted certain
Certain Covenants anti-dilution protections), and to the Certificate of
of the Company........ Designation. As a result, after the Expiration Date of
this Conversion Offer, no Additional Shares will be
offered to Holders of Preferred Stock and the Conversion
Price for the Notes will not be adjusted on account of
the additional shares of Common Stock issued in
connection with this Conversion Offer and the
anti-dilution provisions applicable to the issuance of
shares of Common Stock, or securities convertible into
or exercisable for Common Stock at a price below the
conversion price of the Preferred Stock and Notes
contained therein will be terminated. Further, pursuant
to the Amendments, certain debt covenants of the Company
for the benefit of the Holders of the Notes, including
covenants requiring the Company to maintain certain
asset levels and restricting the Company's incurrence of
indebtedness and payment of dividends will be
terminated. In addition, certain restrictions contained
in the Certificate of Designation relating to the
Preferred Stock, including restrictions on issuance of
preferred stock ranking senior to the Preferred Stock
and on payment of dividends on, and repurchases or
redemptions of, capital stock ranking in parity with the
Preferred Stock, will be terminated. The amendment to
the Certificate of Designation will also require the
approval of the holders of a majority of the shares of
Common Stock of the Company.
All or None ........... Holders who desire to convert Preferred Stock or Notes
Conversion in connection with this conversion offer must convert
all, and not less than all, of their Preferred Stock or
Notes.
Expenses................Converting Holders of Preferred Stock or Notes will not
be required to pay brokerage commissions or fees or,
subject to the
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<PAGE> 11
instructions in the Letter of Transmittal, transfer
taxes for conversion of Preferred Stock or Notes or
receipt of additional shares of Common Stock upon such
conversion. The Company will pay all reasonable
out-of-pocket expenses incurred by brokers, custodians,
nominees and fiduciaries in forwarding copies of this
Offering Circular and related documents to the
beneficial owners of Preferred Stock or Notes and in
handling or forwarding deliveries of Preferred Stock or
Notes for conversion. See "Conversion Offer Procedures
-- Payment of Expenses. "
Conditions of the The Company will have no obligation to accept any
Conversion Offer....... Preferred Stock or Notes delivered pursuant to this
Conversion Offer unless the conditions set forth herein
are satisfied. See "The Conversion Offer -- Conditions
of the Conversion Offer."
Certain Federal For a summary discussion of certain federal income tax
Income Tax ............ consequences relating to this Conversion Offer, see
Consequences "Certain Federal Income Tax Consequences."
No Appraisal or No appraisal or similar rights under Delaware General
Similar Rights ........ Corporation Law or other applicable law will be
available to Holders of Preferred Stock or Notes
electing not to convert in connection with this
Conversion Offer.
Expiration Date........ This Conversion Offer will expire at 5:00 p.m. Atlanta,
Georgia time, on October 22, 1997, unless extended as
provided in this Offering Circular. See "Conversion
Offer Procedures -- Expiration Date; Extension;
Amendment; Termination."
Procedures for ........ To be delivered properly under this Conversion Offer,
Delivery certificates evidencing the Preferred Stock and/or the
Notes, together with a properly completed and duly
executed Letter of Transmittal (or facsimile thereof)
and any other documents required by the Letter of
Transmittal, and an executed Consent must be received by
the Conversion Agent at the address set forth on the
back cover of this Offering Circular prior to 5:00 p.m.,
Atlanta, Georgia time, on the Expiration Date, or
Holders of the Preferred Stock and/or the Notes must
comply with the specific procedures for guaranteed
delivery described herein. See "Conversion Offer
Procedures -- Procedures for Conversion;" "-- Guaranteed
Delivery Procedures."
Withdrawal Rights...... The Preferred Stock and Notes delivered for conversion
in connection with this Conversion Offer may be
withdrawn at any time prior to 5:00 p.m., Atlanta,
Georgia time on the Expiration Date.
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Conversion Agent....... Continental Stock Transfer and Trust Company is serving
as Conversion Agent for this Conversion Offer. All
documents to be submitted in connection with this
Conversion Offer should be delivered to the Conversion
Agent at its address set forth on the back cover of this
Offering Circular.
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<PAGE> 13
BACKGROUND OF THE COMPANY'S CONVERSION OFFER
The Company is a mortgage company engaged in originating, purchasing,
servicing and selling first mortgage loans secured shared by single family (1 -
to - 4 family) residences made to credit-impaired individuals who are generally
unable to obtain financing from conventional lending sources. By its nature, the
Company's business requires continual access to short-term and long-term sources
of debt and equity capital. The Company requires cash for loan originations and
loan repurchases, as well as payment of operating and interest expense, capital
expenditures, and start-up expenses for expansion into new geographic areas.
The Company generally sells mortgage loans originated by it a short
period after origination or acquisition. The Company's sales of mortgage loans
in recent years have involved sales of mortgage loans to a major loan
securitizer pursuant to which the premium received by the Company on sale is in
the form of an interest only strip receivable. As a result, the Company's gain
on sale of mortgage loans in these transactions is not paid in cash and instead
was in the form of a receivable which is reduced to cash over the lives of the
mortgage loans sold. While the Company believes that sales of loans on these
terms results in a higher premium and increased revenues on the sale of mortgage
loans, the sale of mortgage loans on such terms has increased the Company's need
for additional capital.
In recent years, the Company has taken steps to raise additional
financing in order to meet the Company's capital requirements. In June, 1995,
the Company completed an offering of $3 million of Convertible Mortgage
Participations. In October 1995, the Company issued $6,400,000 of 9% Convertible
Preferred Stock, $2,500,000 of which was issued on conversion of the Convertible
Mortgage Participations. In January 1996 the Company obtained a $1,050,000 term
loan which was repaid in August 1996. In February 1996, the Company sold
$500,000 of Convertible Mortgage Participations. In the period of June through
August 1996, the Company issued $9 million of 10% Convertible Secured Notes. In
April, 1997 the Company sold $1,674,000 of 11% Convertible Redeemable Preferred
Stock. These financings provided the Company with capital to expand its mortgage
loan origination, expand its offices for mortgage loan originations and meet its
working capital requirements. In addition, the Company has been provided
additional financing through the advance of $2,236,000 against the interest only
strip receivable pursuant to its agreement with the mortgage loan securitizer.
The Company has warehouse lines of credit with two providers of such credit
pursuant to which the Company can obtain $13,500,000 of credit for the
origination or acquisition of mortgage loans which enable the Company to
continue its mortgage lending activities (the "Warehouse Line of Credit"). In
July and August 1997, the Company received a secured bridge loan (the "Bridge
Loan") in the principal amount of the $850,000, bearing interest at the rate of
10% per annum and convertible into Common Stock at the rate of $.40 per share of
Common Stock.
Recent Developments. In the Company's fiscal year ended June 30, 1997,
the Company realized a net loss of approximately $3,363,000, of which $3,210,000
was realized in the last six months. The loss in the second half of the fiscal
year 1997 was the result of certain 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
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<PAGE> 14
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 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. Because the Company had no warehouse lines of credit
until 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, which had
not been anticipated at the time of the 11% Preferred Stock offering in April
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. As a result of these losses, which were not
anticipated by the Company at the time it completed its sale of the 11%
Convertible Redeemable Preferred Stock in April, 1997, the Company requires
additional capital to meet its working capital requirements and to increase its
mortgage loan originations. At August 31, 1997, the Company had approximately
$100,000 of cash and liquid assets, all of which was provided pursuant to the
Bridge Loan. The holders were issued warrants to purchase 2,875,000 shares of
Common Stock at an exercise price of $.40 per share, subject to adjustment in
the event of issuances of Common Stock by the Company for prices below the
exercise price. The Bridge Loan is due October 31, 1997.
The Company has recently changed its method of sale of mortgage loans
to whole loan sales at a cash premium rather than whole loan sales in which the
premium is in the form an interest only strip receivable. While this change in
the manner of sale will decrease the premium received when the Company sells
mortgage loans and its revenues from sale of mortgage loans, it is expected to
increase its cash flow. However, this change in method of sale of mortgage loans
by itself is not sufficient to generate sufficient cash flow to meet the
Company's current working capital requirements. The Company will require
additional capital to meet its operating requirements until such time, if ever,
that it can achieve positive cash flow from operations.
The Company requires additional short term bridge financing to enable
it to continue to meet its working capital requirements. In addition, the
Company requires additional longer term financing to meet its working capital
requirements prior to such time, if ever, that it can generate positive cash
flow from its operations and to repay the Bridge Loan. The Company also believes
that it is necessary to obtain a larger warehouse line of credit at some point
in the future in order to meet its long term loan production targets.
Accordingly, the Company requires significant additional financing. The Company
believes that it is necessary to effect a recapitalization to reduce or
eliminate its outstanding Secured Notes and 9% Preferred Stock to enable the
Company to obtain such required financing.
Simultaneously herewith, the Company is soliciting the consent of the
holders of its Common Stock to a 1-for-5 reverse stock split (the "Reverse Stock
Split"). The Reverse Stock
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<PAGE> 15
Split, if approved, will provide the Company with sufficient authorized Common
Stock for issuance pursuant to the Conversion Offer.
Reasons for the Company's Conversion Offer. The Company believes that
its current available cash and liquid assets, together with additional Bridge
Loan financing, are only sufficient to meet the its working capital requirements
through October 31, 1997. In addition, the Company requires financing for
working capital purposes and to repay the Bridge Loan which is due October 31,
1997 and believes that it is necessary at some point in the future to obtain a
larger warehouse line of credit in order to meet its long term loan production
targets. Because of the amount of secured indebtedness and preferred stock
($11,015,000 of fully and partially secured indebtedness and 315,000 shares of
preferred stock having an aggregate liquidation preference of $6,300,000), the
Company's current capital structure makes it difficult to raise equity capital.
In addition, the Company believes that future warehouse lenders will require a
significant increase in the Company's stockholders' equity as a condition to
providing a larger warehouse facility, which the Company believes will be
necessary in order to meet its long term loan production targets. Moreover, the
Company currently has annual interest requirements of $1,101,500 and annual
dividend requirements (if all cumulative dividends are declared and paid) on its
preferred stock of $751,140 and believes that, in order to improve its cash
flow, it needs to substantially reduce its interest and dividend obligations
through this Conversion Offer. Accordingly, the Company believes that it is
necessary to restructure its current capital structure, reduce its outstanding
indebtedness and increase its stockholders' equity in order to obtain necessary
financing and reduce its annual interest and dividend obligations.
The Company intends to seek such financing by raising a maximum of
$3,000,000 through the offer of additional shares of 11% Convertible Redeemable
Preferred Stock which will be convertible into Common Stock at the rate of $.40
per share. There can be no assurance that the financing will be consummated. If
the Company is unable to obtain additional financing, it will be unable to meet
its operating expenses, continue as a going concern, and continue and expand its
current mortgage loan origination and purchase activities and fulfill its
business objectives. There can be no assurance that even if the Conversion Offer
is consummated, that the Company will be able to raise sufficient capital and
obtain sufficient credit facilities to meet its cash requirements and,
ultimately, to become profitable.
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<PAGE> 16
CONSIDERATIONS APPLICABLE TO CONVERTING
IN CONNECTION WITH THIS CONVERSION OFFER
The Company believes that this Conversion Offer is in the best
interests of the Company. However, neither the Company nor its Board of
Directors or executive officers makes any recommendation to any Holder as to
whether to tender or refrain from tendering any or all of such Holder's
Preferred Stock and/or Notes and has not authorized any person to make any such
recommendation. Holders are urged to evaluate carefully all information in the
offer and consult investment and tax advisors to determine whether to tender the
Notes or Preferred Stock. Outlined below are some of the reasons the Company
believes that Holders of Preferred Stock and Notes may choose to accept this
Conversion Offer. Along with these reasons, Holders should weigh and take into
account all of the factors listed under the captions "Risks Applicable to
Holders of Preferred Stock or Notes Who Do Convert in Connection With this
Conversion Offer" and "Considerations Applicable to Holders of Preferred Stock
and Notes Who Do Not Convert in Connection with this Conversion Offer" in making
a determination of whether to accept or reject this Conversion Offer. The share
numbers provided herein do not give effect to the Reverse Stock Split.
The Issuance of the Additional Shares and the Adjustment of the
Conversion Price Limited to this Conversion Offer. The issuance of the
Additional Shares of Common Stock on the conversion of the Preferred Stock and
the adjustment of the Conversion Price of the Notes will result in the issuance
of an additional approximately 22 shares of Common Stock (plus such number of
additional shares as are issuable on the conversion of Preferred Stock dividends
accrued and in arrears as of the Expiration Date, at a rate of one share of
Common Stock for each $.65 of such dividends) on the conversion of each share of
Preferred Stock (having a liquidation preference of $20 per share), and an
additional 1,600 shares of Common Stock on the conversion of each $1,000 in
Notes (plus such number of additional shares as are issuable on the conversion
of interest accrued through the Expiration Date at a rate of one share of Common
Stock for every $.50 of accrued interest). Following the Expiration Date,
Holders of the Preferred Stock and Notes who choose not to accept this
Conversion Offer will not be entitled upon conversion to the Additional Shares
and/or adjustment in the Conversion Price being offered in this Conversion Offer
as a result of amendments to the Loan Agreement and the Letter Agreement
pursuant to the Consents.
Need for Conversion Offer To Enable The Company to Obtain Additional
Financing. The Company believes that the proposed changes in the capital
structure pursuant to the Conversion Offer are necessary to enable the Company
to raise additional financing and obtain an additional larger warehouse credit
facility in the future. Because of the amount of secured indebtedness and
preferred stock ($8,257,000 of secured indebtedness, $8,140,000 of partially
unsecured indebtedness and shares of preferred stock having an aggregate
liquidation preference of $7,974,000), it is more difficult to raise equity
capital. In addition, the Company also believes that it is necessary to obtain a
larger warehouse line of credit at some point in the future in order to meet its
long term loan production targets and believes that warehouse lenders will
require a significant increase in the Company's stockholders' equity as a
condition to such a warehouse facility. If the Company is unable to obtain
additional financing, it will be unable to meet its operating expenses and
continue and expand its current mortgage loan origination and purchase
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<PAGE> 17
activities and fulfill its business objectives. However, there can be no
assurance that even if the Conversion Offer is consummated that the company will
be able to raise sufficient capital and obtain sufficient credit facilities to
meet its cash requirements and, ultimately, to become profitable.
Uncertainty as to Future Dividend or Interest Payments. It is unclear
when or if the Company will be able to resume regular dividend payments and make
interest payments if the Company fails to complete a successful restructuring
and if additional financing is not subsequently secured. If the Company is
unable to obtain such additional financing and additional credit facilities, the
Company will be required to curtail its mortgage loan origination and purchase
activities, curtail its lending and take other measures to cut back its
operations and reduce its operating expenses. If these efforts are unsuccessful,
the Company may be unable to meet its working capital requirements and continue
as a going concern. Nevertheless, the Preferred Stock and the Notes do have
certain preferences (as compared with Common Stock) that Holders will surrender
upon accepting this Conversion Offer. See "9% Convertible Preferred Stock;" and
"10% Convertible Secured Notes."
No Established Market for the Securities. The Preferred Stock and Notes
are not traded on any established market and, to the Company's knowledge, no
broker or dealer "makes a market" in shares of Preferred Stock or Notes.
Accordingly, the Preferred Stock and Notes are, and are likely to remain, highly
illiquid. Because the Preferred Stock and Notes are illiquid, the offered
conversion provides Holders of Preferred Stock and Notes with the potential for
obtaining liquidity in their securities. However, it should be noted that the
Common Stock of the Company is currently thinly traded and there can be no
assurance that Holders who accept the Conversion Offer will be able to sell
their shares of Common Stock when they desire to do so.
No Preferred Stock Right of Redemption. Because the Holders of the
Preferred Stock have no rights of optional redemption (only the Company can
elect to redeem the Preferred Stock), the Holders have no right to compel the
payment of dividends or redemption of their securities. However, the dividends
on the Preferred Stock are cumulative and no dividends can be declared or paid
on shares of Common Stock and no shares of Common Stock can be repurchased
unless all cumulative dividends have been paid.
No Appraisal or Similar Rights. Neither the Delaware General
Corporation Law nor the Company's organizational documents provide for
dissenters rights of appraisal (or other comparable rights) for Holders of the
Preferred Stock or the Notes not accepting this Conversion Offer.
Cancellation of Rights of Preferred Stock and Notes. As a condition of
accepting this Conversion Offer, the Company requires each Holder to execute a
Consent which will constitute a vote in favor of terminating certain rights of
Holders of Preferred Stock or Notes, including anti-dilution protections in the
case of issuances of Common Stock and securities convertible into, or
exercisable for, Common Stock below the conversion price of the Notes or Common
Stock, and certain covenants of the Company in favor of the Holders of the
Notes. As a result, Holders will not be entitled to certain protections to which
they are currently entitled pursuant to
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<PAGE> 18
the terms of the instruments governing the Notes and Preferred Stock. See 9%
Convertible Preferred Stock and "10% Convertible Secured Notes."
THE CONVERSION OFFER
The Company is making this Conversion Offer to induce conversion of the
outstanding shares of its Preferred Stock and Notes, as follows:
9% Convertible Preferred Stock. A total of approximately 30 shares of
Common Stock will be issued to the holder of each share of Preferred Stock
(having a liquidation preference of $20 per share) converted in connection with
this Conversion Offer (plus such number of additional shares of Common Stock as
are issuable on the conversion of Preferred Stock dividends accrued and in
arrears as of the Expiration Date, at a rate of one share of Common Stock for
each $.65 of such dividends): each share of Preferred Stock is convertible into
eight (8) shares of Common Stock in accordance with the stated terms of the
Preferred Stock, and an additional approximately 22 additional shares of Common
Stock (plus shares of Common Stock issued on the conversion of dividends) will
be issued as to each share of Preferred Stock converted pursuant to the
Conversion Offer. See "The Conversion Offer" for a further description.
10% Convertible Secured Notes. Prior to the Conversion Offer, each
$1,000 principal amount of Notes was convertible into 400 shares of Common Stock
at a conversion Price of $2.50 per share. The adjustment of the Conversion Price
from $2.50 to $.50 per share will result in the issuance of 1,600 additional
shares of Common Stock or an aggregate of 2,000 shares of Common Stock (plus
such number of additional shares as are issuable on the conversion of interest
accrued through the Expiration Date at a rate of one share of Common Stock for
every $.50 of accrued interest), on the conversion of each $1,000 principal
amount of Notes pursuant to the conversion rights contained in the Loan
Agreement governing the Notes.
Entire Agreement. This Conversion Offer is made upon the terms and
subject to the conditions set forth in this Offering Circular and in the
accompanying Letter of Transmittal.
Unpaid Dividends and Interest. The Company did not pay the dividend on
the Preferred Stock on June 30, 1997 and does not expect to pay the September
30, 1997 Preferred Stock dividend and, without the successful completion of this
Conversion Offer and the consummation of the Proposed Financing or other similar
additional financing, the Company expects that it will not be able to pay these
or future scheduled quarterly dividend payments on the Preferred Stock. The
Company may also be unable to pay the semi-annual interest payments on the
Notes. On the Expiration Date, each share of Preferred Stock will have an
aggregate dividend arrearage of $.90; none of the interest payments will be in
arrears. The Preferred Stock dividends accrued and in arrears as of the
Expiration Date will be converted into shares of Common Stock at a rate of one
share of Common Stock for each $.65 of such dividends. The interest on the Notes
accrued through the Expiration Date will be converted into shares of Common
Stock at a rate of one share of Common Stock for every $.50 of accrued interest.
As a result of the Consents executed by Holders in connection with this
Conversion Offer, upon the successful conclusion of this Conversion Offer, the
Conversion Prices for the Preferred Stock and Notes remaining
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<PAGE> 19
outstanding after the Expiration Date will NOT be adjusted on account of
additional shares issued in connection with this Conversion Offer and certain
other rights of the Preferred Stock and Notes will be modified. See "Common
Stock," "9% Convertible Convertible Secured Notes." See "-- Consents Eliminating
Anti-Dilution Provisions and Restrictive Covenants."
No Subsequent Issuance of Additional Shares or Conversion Price
Adjustment. The number of Additional Shares to be issued on the conversion of
each share of Preferred Stock and the Conversion Price of the Notes being
offered to convert will NOT be adjusted by the Company for any fluctuations in
the relative market values of the Company's Common Stock.
All or None Conversion; Delivery. Holders of the Preferred Stock and/or
the Notes who desire to convert their securities in connection with this
Conversion Offer must convert all, and not less than all, of the Preferred Stock
and/or Notes owned by them. By delivering or by causing the Registered Holder
(as defined below) to effect delivery for conversion, each beneficial owner of
such Preferred Stock and/or Notes represents and warrants that delivery has been
effected with respect to all Preferred Stock and/or Notes beneficially owned by
such owner.
Withdrawal. Preferred Stock and/or Notes shares delivered for
conversion in connection with this Conversion Offer may be withdrawn at any time
prior to 5:00 p.m., Atlanta, Georgia time, on the Expiration Date. See
"Conversion Offer Procedures -- Withdrawal of Deliveries."
Consents Eliminating Anti-Dilution Provisions and Restrictive
Covenants. In order to accept the Conversion Offer, Holders of the Notes and
Preferred Stock will be required to simultaneously execute certain consents (the
"Consents"). Pursuant to the Consents, Holders will agree to the amendment to
the Company's Certificate of Designation relating to the Preferred Stock, the
Loan Agreement and the Letter Agreement dated April 16, 1996 (under which
Holders of the Preferred Stock were granted certain anti-dilution rights). The
amendment to the Loan Agreement and the amendment to the Letter Agreement dated
April 6, 1996 each provide that the Holders of the Notes and the Preferred Stock
will not be entitled to any anti-dilution adjustments by reason of the issuance
of the Common Stock pursuant to the Conversion Offer and further terminate all
future anti-dilution adjustments with respect to the Notes and Preferred Stock
as a result of any issuance of Common Stock (or securities convertible into or
exercisable for Common Stock) at a price below the conversion price of the
Preferred Stock and Notes.
In addition to the amendment with respect to the anti-dilution
provision, the amendment to the Loan Agreement will make the following changes
in the Loan Agreement: (i) eliminate covenants limiting certain restricted
payments (principally consisting of certain payments of dividends and of the
distributions on and purchases, redemptions and acquisitions of, equity
securities); (ii) eliminate the covenant limiting certain distributions and
other payments, including loans and advances, by the subsidiaries of the
Company; (iii) eliminate the covenant that requires the Company to have assets
equal to at least 70% of the outstanding principal balance of the Notes; (iv)
eliminate the covenant restricting asset sales; (v) eliminate the covenant
restricting certain real property acquisitions; and (vi) eliminate the event of
default as a result of certain indebtedness of the Company becoming due and
payable prior to maturity.
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<PAGE> 20
In addition, the Certificate of Designation relating to the Preferred
Stock will be modified pursuant to the Consent to eliminate the restriction on
paying dividends on capital stock ranking pari passu with the Preferred Stock,
unless all dividends on the Preferred Stock have been paid, and to eliminate the
restrictions on creation of preferred stock ranking senior to the Preferred
Stock.
The amendment to the Loan Agreement will become effective on approval
by the Holders of the majority in principal amount of the Notes. The approval of
the amendment to the Letter Agreement will become effective on (i) the approval
of the Holders of a majority of the outstanding Preferred Stock and a majority
of the outstanding principal amount of the Notes and (ii) the execution of a
waiver of such Letter Agreement on behalf of such Holders by Heiko Thieme (which
waiver will only be executed following the execution of Consents by the Holders
of a majority of the outstanding Preferred Stock and a majority of the
outstanding principal amount of the Notes). The amendment to the Certificate of
Designation will be effective on approval of the Holders of a majority of the
outstanding Preferred Stock and on the approval of the Holders of a majority of
the outstanding Common Stock, which is being solicited simultaneously with the
solicitation of the consent of holders of the Common Stock to the Reverse Stock
Split. See "Background of the Company's Conversion Offer". In addition each of
these amendments will be effective only if the Conversion Offer is consummated.
Conditions of the Conversion Offer. The Company will have no obligation
to accept any Preferred Stock and/or Notes delivered for conversion pursuant to
this Conversion Offer if any of the following conditions exist, and may
terminate or amend this Conversion Offer as provided herein before the
acceptance of any such shares for conversion:
(a) If a minimum of 75%, or 236,250 shares, of the outstanding
Preferred Stock and a minimum of 75%, or $6,105,000 principal amount of
the outstanding Notes are not tendered for conversions and if Consents
are not received from such Securityholders.
(b) If the amendment to the Company's Certificate of Incorporation
effecting a the Reverse Stock Split is not approved by the Company's
shareholders and become effective.
(c) If any action or proceeding is instituted or is threatened in any
court or by or before any governmental agency or instrumentality with
respect to (i) this Conversion Offer or (ii) the Company or its capital
stock which, in the judgment of the Company, has or may have a material
adverse effect on the business, financial condition, operations or
prospects of the Company or impairs or may impair the benefits of this
Conversion Offer to the Company or the ability of the Company to
proceed with this Conversion Offer; or
(d) If there has been proposed, adopted or enacted any law, statute,
rule or regulation that, in the judgment of the Company, has or may
have a material adverse effect on the business, financial condition,
operations or prospects of the Company or impairs or may impair the
material benefits of this Conversion Offer to the Company or the
ability of the Company to proceed with this Conversion Offer; or
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<PAGE> 21
(e) If any change or changes have occurred or are threatened in the
business, assets, liabilities, condition (financial or otherwise),
operations, results of operations or prospects of the Company that, in
the judgment of the Company, has or may have a material adverse effect
on the Company; or
(f) There shall have occurred:
(i) the declaration of any banking moratorium or suspension of
payments in respect of banks in the United States;
(ii) any general suspension of trading in, or limitation on
prices for, securities on any United States national
securities exchange or in the over-the-counter market;
(iii) the commencement or escalation of a war, armed hostilities
or any other national or international crisis directly or
indirectly involving the United States;
(iv) any limitation (whether or not mandatory) by any
governmental, regulatory or administrative agency or
authority on, or any event which, in the Company's sole
judgment, might affect, the extension of credit by banks or
other lending institutions in the United States; or
(v) in the case of any of the foregoing existing at the time of
the commencement of the Conversion Offer, in the Company's
sole judgment, a material acceleration or worsening
thereof; or
(g) (i) any entity, "group" (as that term is used in Section 13(d)(3)
of the Exchange Act) or person (other than entities, groups or persons,
if any, who have filed with the SEC on or before a Schedule 13G or a
Schedule 13D with respect to any of the shares of Common Stock) shall
have acquired or proposed to acquire beneficial ownership of more than
5% of the outstanding shares of Common Stock, or (ii) such entity,
group, or person that has publicly disclosed any such beneficial
ownership of more than 5% of the shares of Common Stock prior to such
date shall have acquired, or proposed to acquire, beneficial ownership
of additional shares of Common Stock constituting more than 2% of the
outstanding shares of Common Stock or shall have been granted any
option or right to acquire beneficial ownership of more than 2% of the
outstanding shares of Common Stock or (iii) any person or group shall
have filed a Notification and Report Form under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976 or made a public announcement
reflecting an intent to acquire the Company or any of its subsidiaries
or any of their respective assets or securities; or
(h) If after the date of the commencement of the Conversion Offer, any
tender or exchange offer for 15% or more of the outstanding shares of
Common Stock, Series A Preferred or Series B Preferred (other than the
Conversion Offer), or any merger, acquisition, business combination or
other similar transaction with or involving the
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Company, shall have been proposed, announced or made by any person or
entity other than the Company or any subsidiary.
The Company reserves the right, in its judgment, (i) to terminate this
Conversion Offer if any of the events set forth above has occurred and the
condition is not waived by the Company, by giving oral or written notice of such
termination to the Conversion Agent and (ii) to extend or otherwise amend the
terms of this Conversion Offer in any manner. The amendment, extension or
termination of this Conversion Offer as to the Preferred Stock and the Notes, or
the waiver of a condition as to either the Notes or Preferred Stock, need not be
accompanied by the same action as to the other securities. Any such amendment,
extension or termination will be followed as promptly as practicable by public
announcement thereof. If this Conversion Offer is amended in a manner determined
by the Company to constitute a material change, the Company will promptly
disclose such amendment in a manner reasonably calculated to inform the holders
of such amendment and, if such amended Conversion Offer would otherwise expire
during such period, the Company will extend each such amended Conversion Offer
for a period which the Company in its judgment deems appropriate, depending upon
the significance of the amendment and the manner of disclosure to Holders of the
Preferred Stock and/or Notes. Any such extension will be in compliance with the
applicable rules and regulations of the SEC. See "Conversion Offer Procedures --
Expiration Date; Extension; Amendment; Termination."
The foregoing conditions are for the sole benefit of the Company and
may be asserted by the Company regardless of the circumstances giving rise to
such conditions and may be waived by the Company in whole or in part at any time
and from time to time in the judgment of the Company. Any determination by the
Company concerning the events described above will be final and binding upon all
parties.
Interests of Certain Persons in the Conversion Offer. No officer,
Director, stockholder, equity holder or affiliate of the Company has any
material interest, direct or indirect, in this Conversion Offer other than
interests, if any, of such individuals as stockholders, equity holders or
Noteholders of the Company that are shared by all other stockholders,
Noteholders and equity holders of the Company.
Anticipated Accounting Treatment of Conversion Offer. See "Selected
Historical and Pro Forma Financial Data" for a description of the Company's
financial and accounting treatment of this Conversion Offer.
Fees and Expenses. Holders of the Preferred Stock and/or Notes
delivered for conversion will not be required to pay brokerage commissions or
fees or, subject to the instructions in the Letter of Transmittal, transfer
taxes with respect to the conversion of the Preferred Stock and/or Notes or the
issuance of additional shares of Common Stock in connection with this Conversion
Offer. The Company will pay all reasonable out-of-pocket expenses incurred by
brokers, custodians, nominees and fiduciaries in forwarding copies of this
Offering Circular and related documents to the beneficial owners of the
Preferred Stock and/or Notes, and in handling or forwarding deliveries of the
Preferred Stock and/or Notes for conversion. Holders of the Preferred Stock
and/or Notes will be responsible for all other costs incurred in converting
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Preferred Stock or Notes pursuant to this Conversion Offer. See "Conversion
Offer Procedures --Payment of Expenses."
Conversion Agent. Continental Stock Transfer and Trust Company is
serving as Conversion Agent for this Conversion Offer. All documents to be
submitted in connection with this Conversion Offer should be delivered to the
Conversion Agent at its address set forth on the back cover of this Offering
Circular.
RISKS APPLICABLE TO HOLDERS OF PREFERRED STOCK
OR NOTES WHO DO CONVERT IN CONNECTION WITH THIS CONVERSION OFFER
A conversion of Preferred Stock or Notes involves an investment in the
Common Stock of the Company and involves a high degree of risk. Holders should
carefully consider, among other things, the following factors concerning the
business of the Company and this Conversion Offer and should consult independent
advisors as to the technical, tax, business and legal considerations regarding
an investment in such Common Stock.
Elimination of Preferred Stock Dividend Rights, Liquidation Preferences
and Protective Covenants. Holders of Preferred Stock who convert their shares of
Preferred Stock into Common Stock will no longer be entitled to the liquidation
preferences, protective covenants and dividend rights of the Preferred Stock.
Such Holders will become subject to all of the risks associated with common
equity, including the preferential claims of Holders of the Company's debt and
holders of then-outstanding preferred stock, in the event of a liquidation,
dissolution or winding up of the Company. Further, the special voting rights now
exercisable by the Holders of Preferred Stock regarding further Preferred Stock
issuances will be surrendered by Holders accepting this Conversion Offer,
although such Holders will thereafter hold voting rights as holders of Common
Stock. See "9% Convertible Preferred Stock."
The Board of Directors is authorized under the Certificate of
Incorporation, as amended (the "Certificate"), without a further vote of the
stockholders of the Company, to issue up to 2,000,000 shares of preferred stock
(less any shares of preferred stock then outstanding) in one or more series and
to fix the designations, preferences, powers and relative, participating,
optional or other rights and restrictions thereof. The Company may issue
additional shares of 11% Convertible Redeemable Preferred Stock as well as
additional series of preferred stock in the future that will have preferences
over the Common Stock with respect to the payment of dividends and upon
liquidation, dissolution or winding-up of the Company or otherwise. See "9%
Preferred Stock."
Even if all of the Noteholders convert their Notes and all of the
Holders of Preferred Stock convert their Preferred Stock, the Company will still
have outstanding $4,900,000 in senior and subordinated debt and Preferred Stock
having an aggregate liquidation preference of $1,674,000 which will have
priority over the Common Stock received on conversion. Additionally, the Company
may issue additional senior or subordinated debt and Preferred Stock with
priority over the Common Stock issued on conversion.
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<PAGE> 24
Elimination of Noteholders' Security Interests and Priority. Holders of
the Notes who convert their Notes to Common Stock pursuant to the Conversion
Offer will lose the benefit of the security interests to which they are
currently entitled as Holders of the Notes. In the event of a bankruptcy,
liquidation, reorganization or dissolution of the Company, Holders of Notes are
currently entitled to priority over unsecured creditors and holders of equity
securities of the Company. In addition, assets available for distribution will
be distributed to creditors of the Company (such as Holders of the Notes) prior
to any distributions to holders of equity securities, and assets will only be
available to holders of Common Stock after all distributions have been made with
respect to outstanding indebtedness and other liabilities and to holders of
preferred stock. Accordingly, in such events, Holders of the Notes who are
issued Common Stock pursuant to the Conversion Offer will lose the benefit of
their security interests and are likely to receive less than they would
otherwise have received if they continued to hold the Notes. The Company
currently requires substantial additional financing to enable it to meet its
operating expenses and continue as a going concern and there can be no assurance
that such financing will be obtained. While the Company believes that the
restructuring of its capital structure pursuant to the Conversion Offer is
necessary to enable it to obtain additional financing, there can be no assurance
that, even if such restructuring is consummated, additional financing will be
obtained at all or on terms favorable to the Company.
Exchange Offer is a Taxable Transaction. A portion of the additional
shares of Common Stock received by holders of the Preferred Stock who accept
this Conversion Offer may be currently taxable to the recipient as ordinary
income, and Holders of the Notes will realize gain or loss in connection with
the conversion of the Notes for Common Stock pursuant to the Conversion Offer.
See "Federal Income Tax Consequences."
Limited Revenues and Continuing Operating Losses; Accumulated Deficit.
In the Company's fiscal year ended June 30, 1997, the Company realized a net
loss of approximately $3,363,000, of which $3,210,000 was realized in the last
six months. The loss in the second half of the fiscal year 1997 was the result
of certain 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 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. Because the Company had no warehouse lines of credit until 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,
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although not in time to positively affect the financial results for the year
ended June 30, 1997. In addition, the Company has recently made certain changes
in its strategy for sales of mortgage loans. The Company believes that the
change in its method of sale will improve its cash flow on sales of mortgage
loans, but will reduce its margin on sale and its revenues on individual
mortgage loans sales. See "Changes in Company Strategy." Although the Company
had modest earnings in its 1992 fiscal year, it has incurred losses during all
of its other fiscal years since 1991. There can be no assurance that the Company
will not continue to incur losses.
Independent Accountants' Report; Going Concern Qualification. The
report from the Company's independent accountants includes an explanatory
paragraph which describes substantial doubt concerning the ability of the
Company to continue as a going concern. The Company may incur losses for the
foreseeable future due to its significant costs and cash requirements. See
"Financial Statements -- Report of Independent Accountants."
Liquidity and Financing Requirements; Need for Additional Capital. The
Company's business has required 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. Capital restraints have also, from time to time,
restricted the Company's ability to increase the volume of mortgage loans it
originates, and negatively impacted its ability to hold such loans until a sale
could be arranged on more favorable terms. The Company has determined to change
its strategy and sell mortgage loans on a whole loan basis in transactions in
which the premiums will be paid in cash which is intended to improve the
Company's cash flow from operations. However, there can be no assurance that
this strategy will be successful. See "Changes in Company Strategy." The Company
does not expect to generate a positive cash flow for some time, and therefore
has required and expects to continue to require additional financing to fund
additional geographical expansion, support its infrastructure and increase the
volume of loans it can originate.
The Company has recently experienced a significant cash flow shortage.
In July and August, 1997 the Company obtained $850,000 in the Bridge Financing
in the form of notes due October 31, 1997 without which it would have been
unable to meet its working capital and operating requirements. The Company
believes that its current cash and liquid assets together with additional Bridge
Loans expected to be $300,000, is only sufficient to meet its working capital
requirements through October 31, 1997 and requires substantial additional
capital in order to meet its working capital requirements continue as a going
concern, and to continue and expand its mortgage loan production and implement
its business strategy. If the Company is unable to obtain such additional
financing, the Company may be unable to meet its working capital requirements
and continue as a going concern, and will be required to curtail its mortgage
loan origination and purchase activities, curtail its lending and take other
measures to cut back its operations and reduce its operating expenses. Following
the proposed changes to its capital structure as a result of the Conversion
Offer, the Company intends to raise a maximum of $3,000,000 in additional
capital through the offering of additional shares of 11% Convertible Redeemable
Preferred Stock and to seek additional credit facilities. However, there can be
no assurance that, even if the Conversion Offer is consummated, such proposed
financing will be
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<PAGE> 26
consummated, or that the Company will be able to raise additional capital and/or
obtain sufficient financing facilities to meet its cash requirements.
Even if the Company is successful in raising additional capital, the
Company may still require additional capital in the future. In recent years, the
Company has financed its operations through private placements of debt and
equity securities. As of June 30, 1997, the Company's debt under Convertible
Secured Notes was $8,215,000, and the Company had other borrowings of
approximately $2,000,000. The Company also has issued Preferred Stock having an
aggregate liquidation preference of $7,974,000. The Company also obtained a
$2,300,000 warehouse line of credit convertible into Common Stock and has
recently obtained warehouse facilities under which it can obtain $13,500,000 of
credit through the sale of mortgage loans originated or acquired by the Company.
There can be no assurance that the Company will not continue to required
additional capital or that capital, if necessary, will be on terms favorable to
the Company. In the past, the Company has sought equity or debt financing or
sold mortgage loans on terms less favorable than might otherwise be available to
meet its capital requirements under these circumstances. The Company has, in the
past, issued convertible securities which have resulted in substantial dilution
to holders of Common Stock and future financings, if necessary, could result in
further dilution to holders of Common Stock.
Changes in Company Strategy. The Company had adopted a strategy of
geographical expansion to increase its mortgage loan production and sales of
mortgage loans to a loan securitizer in transactions in which the Company's
premiums were in the form of an interest only strip receivable. While this
strategy increased the Company's revenues on sale of mortgage loans, it also
increased the Company's capital requirements because the gain on sale was in the
form of a non-cash receivable which would only be reduced to cash over the lives
of the mortgage loans. The Company has determined that it would require too much
additional capital to continue this strategy. Accordingly, the Company has
determined to change its strategy and to sell mortgage loans on a whole loan
basis in transactions in which the premiums will be paid in cash. Sales of
mortgage loans on this basis are expected to result in lower gains on sale.
Accordingly, the Company will need to substantially increase its loan volume to
reduce its operating losses and become profitable. To do so, the Company will
need to raise additional capital and ultimately obtain a larger warehouse credit
facility to increase its mortgage loan originations. However, there can be no
assurance that the Company will be successful in this regard and that the
Company will not continue to incur losses.
Restrictions on Conversion Offer. Issuance of Common Stock in
connection with this Conversion Offer will be made as of the Expiration Date
only after a timely receipt by the Conversion Agent of a properly completed and
duly executed Letter of Transmittal, including all other documents required by
such Letter of Transmittal. Therefore, Holders of Preferred Stock and Notes
desiring to convert such securities should allow sufficient time to ensure
timely delivery. The Conversion Agent and the Company are under no duty to give
notification of defects or irregularities with respect to the deliveries of
Preferred Stock and Notes for conversion.
Leverage and Debt Service. As of June 30, 1997, the Company's aggregate
indebtedness was $16,947,883. The Company may incur additional indebtedness in
the future. The degree to
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which the Company is leveraged could have important consequences to Holders of
the Securities, including, but not limited to, the following: (i) the Company's
ability to obtain additional financing in the future for working capital,
general corporate purposes or other purposes may be limited or become impaired;
(ii) certain of the Company's borrowings may continue to be at variable rates of
interest, which could result in higher interest expenses in the event of
increases in interest rates; and (iii) the instruments governing such
indebtedness may contain financial and restrictive covenants, the failure to
comply with which may result in an event of default which, if not cured or
waived, could have a material adverse effect on the Company.
Defaults on Customer Loans; High Delinquency Rate. The lending business
is subject to the risk that borrowers will not satisfy their debt service
payments, including interest charges and principal amortization obligations. The
Company's borrowers typically do not meet the credit standards established by
commercial banks and other conventional lenders, because of the borrowers'
credit histories (due to circumstances such as a pattern of credit weakness,
unverifiable income, insufficient credit history or previous bankruptcies or
insolvencies) or other factors. Thus, there can be no assurance that such
borrowers will be able to meet their repayment obligations to the Company. If
the Company experiences defaults on its loans and if the properties securing
such loans cannot be sold for amounts sufficient to repay the balances of the
outstanding loans and expenses related thereto, the Company will not recover the
balances of the originated loans. Further, in the event of a default by a
borrower, the Company may experience procedural or other delays in enforcing its
rights as a mortgagee and may incur significant costs associated with protecting
its investment. Of the 199 mortgage loans originated by the Company from July 1,
1994, through June 30, 1997, which were held by the Company on June 30, 1997, or
sold prior thereto on a service-retained basis, having an aggregate principal
balance of $7,232,000, 3 mortgages loan have been foreclosed (1.2% of such
aggregate principal balance) and borrowers under six mortgage loans, with an
aggregate principal balance of $627,000 (8.7% of such aggregate principal
balance), have sought protection from creditors pursuant to Federal bankruptcy
laws. In addition, at June 30, 1997, approximately $786,000 aggregate principal
balance outstanding (10.9% of the principal balance of loans outstanding at such
date) were overdue by more than 60 days.
The following table sets forth the delinquency rate on mortgage loans
originated by the Company which were held on the dates indicated or sold prior
thereto on a servicing retained basis:
June 30
----------------------------------
1997 1996 1995 1994
---- ---- ---- ----
Delinquency Rates
30-59 days 3.12% 3.50% 4.38% 10.40%
60-89 days 2.79% 2.13% 2.30% 1.71%
90-119 days 0.64% 0.83% 1.40% 0.82%
120 days & over 7.45% 5.59% 5.00% 3.74%
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Lower Credit Standards for Borrowers. Although the Company has
maintained a policy of originating mortgage loans only to borrowers whom it
believes will make payments on such loans, the Company's credit standards are
lower than the credit standards typically established by commercial banks and
other conventional lenders. The Company's borrowers typically would not have
satisfied the creditworthiness standards established by commercial banks and
other conventional lenders because of the borrowers' credit histories, income
levels, or a combination of these factors, and many of such borrowers would be
categorized as "high risk" by conventional lenders and would generally be unable
to obtain mortgage financing from such lenders. Thus, there can be no assurance
that the Company's borrowers will be able to pay all sums due under their loans,
including scheduled principal and interest payments thereunder. In addition, the
Company does not typically restrict a borrower from incurring indebtedness
secured by the property subject to the Company's mortgage which is subordinate
to the Company's first mortgage. Accordingly, borrowers may incur indebtedness
in excess of their abilities to pay, thereby impairing their ability to repay
the mortgage loans.
Possible Decline in Real Estate Values; Economic Conditions. An overall
decline in the residential real estate market or in the residential real estate
market in particular states in which the Company originates mortgage loans or
the general 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 the mortgage loans.
To the extent real estate values may decline, the amount which may be recovered
on the foreclosure and sale of properties upon mortgage loan defaults may also
decline, and the Company may be unable to sell such foreclosed properties on a
timely basis or on terms acceptable to the Company. As of June 30, 1997, the
Company held real estate acquired as a result of foreclosures representing a
principal balance of defaulted loans of approximately $89,000, which properties
may or may not be sold at prices equal to the value of the principal and accrued
interest on the foreclosed loans. There can be no assurance that the
loan-to-value ratios of such loans, determined as of a date subsequent to the
origination date, will be the same or lower than the loan-to-value ratios for
such loans, determined as of the origination date.
Interest Rate Fluctuations and Prepayment. Profitability of the Company
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, including the interest rates
payable on the indebtedness incurred by the Company to provide funds for the
origination or acquisition of mortgage loans. Additionally, the value and
effective 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 and the outstanding principal balance of mortgage loans
which were sold with a retained interest by increasing the
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<PAGE> 29
level of loan prepayments and thereby result in write-down of the Interest Only
Strip ("I/O Strip") or Excess Servicing Asset (as hereinafter defined).
Dependence on Secondary Markets. The Company originates and acquires
mortgage loans with a view to selling the mortgage loans to third parties a
relatively short period of time after origination or acquisition rather than
holding such mortgage loans for its own account. Accordingly, the Company is
dependent upon its ability to sell its loans to third party investors. The
Company's current plan is to sell such mortgage loans to financial service
companies for inclusion in mortgage loan pools for securitization transactions
on a whole loan basis. In the event that the Company's loans are or become
unattractive to investors or investors choose not to purchase the Company's
loans for any other reason, the Company's inability to sell its loans would have
a material adverse effect on the business and operations of the Company.
Prior to the Company's change in strategy (See "Changes in Company
Strategy"), the Company was selling substantially all of its mortgage loans to a
financial services company pursuant to an agreement entered in November 1996.
Substantially all of the Company's gain on sale in these transactions was in the
form of I/O Strips representing unsecured payment obligations of this entity. In
the event of a bankruptcy, insolvency or other financial difficulty of this
entity, the Company's ability to receive payments on account of the I/O Strips
could be materially adversely affected and the Company could be required to
write down their carrying value.
The Company's ability to sell mortgage loans to third parties for
inclusion in securitization transactions is dependent, among other things, on
the Company's ability to meet the requirements of insurance companies that
insure the mortgages in the pools with respect to mortgage loans originated
and/or acquired by the Company. There can be no assurance that the Company will
be able to meet the criteria for sales of mortgage loans to mortgage loan pools.
Balloon Mortgages. Until October 1994, substantially all of the
Company's mortgage loans had been balloon loans that provided for equal monthly
payments, consisting of principal and interest, based generally on a 15-year
amortization schedule, and a single payment of the remaining balance of the
balloon loan five years after origination. Amortization of a balloon loan based
on a scheduled period that is longer than the term of the loan results in a
remaining principal balance at maturity that is substantially larger than the
regular scheduled payments. If borrowers are unable to refinance the amounts due
upon the maturity date of the balloon mortgage loans, borrowers may default on
the "balloon" principal payments due at maturity. 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.
Environmental Considerations. In certain circumstances, state and
Federal laws may impose statutory liens for the cleanup costs expended by state
or Federal governments on account of hazardous wastes or hazardous substances
released or disposed of improperly. Such a lien generally will have priority
over all subsequent liens on the property and, in certain instances may have
priority over prior recorded liens, including the lien of a mortgage. In
addition, under the Comprehensive Environmental Response Compensation and
Liability Act ("CERCLA"), owners and operators of a contaminated property are
among the class of persons and entities
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liable for such cleanup costs. However, CERCLA provides a "security interest
exemption" under Section 101(20) for persons who, without participating in the
management of a contaminated facility, hold an "indicia of ownership" in the
property primarily to protect a security interest. However, such a party may
lose this exemption in the event that: (i) the party participates in management
activities to an extent beyond merely protecting its security interest; or (ii)
the party forecloses on the contaminated property and thereafter conducts itself
in such a way as to engage in management beyond mere protection of a security
interest. While the Company intends to make every effort to comply with the
foregoing guidelines, there can be no assurance that the Company, after
acquisition of title to a property following default, may not engage in
activities which may cause it to lose its security interest exemption with
respect to specific properties.
Restrictions on Transferability of Certain Shares of the Common Stock
Issuable on Conversion. A registration statement has been filed, but is not
current, covering the shares of Common Stock issuable on the conversion of the
Preferred Stock and the Notes at the original Conversion Prices. The issuance of
the Additional Shares and the additional shares of Common Stock issuable as a
result of the adjustment of the Conversion Price of the Notes in this Conversion
Offer have not been registered. As a result of the issuance of the Additional
Shares and the adjustment of the Conversion Price of the Notes, an additional
approximately 22 shares of Common Stock are issuable on conversion of each share
of Preferred Stock (plus such number of additional shares as are issuable on the
conversion of Preferred Stock dividends accrued and in arrears as of the
Expiration Date, at a rate of one share of Common Stock for each $.65 of such
dividends), and an additional 1600 shares of Common Stock are issuable on the
conversion of each $1,000 in Notes (plus such number of additional shares as are
issuable on the conversion of interest accrued through the Expiration Date at a
rate of one share of Common Stock for every $.50 of accrued interest),
(collectively, the "Additional Shares") in reliance upon the exemption under
Rule 3(a)(9) under the Securities Act of 1933 (the "Securities Act"). Because
such Additional Shares will be issued in exchange for securities acquired by
investors in transactions exempt from registration under the Securities Act,
such shares of Common Stock are "restricted securities" for purposes of the
Securities Act, and cannot be resold or otherwise transferred unless they are
first registered under the Securities Act and any applicable state securities
laws or are transferred pursuant to an exemption from registration such as that
provided under Rule 144. Rule 144 promulgated under the Act requires, among
other conditions, either a one-year holding period prior to the resale (in
limited amounts) or a two-year holding period (for unlimited sales for all
holders other than the affiliates of the Company or persons who were affiliates
within three months of the date of sale) of the Common Stock acquired on
conversion of the Securities subject to this Conversion Offer. Holders will be
permitted to tack their holding period for the Notes and the Preferred Stock, as
applicable, for purposes of Rule 144 under the Securities Act. The Preferred
Stock was acquired by Holders thereof in October 1995 and the Notes were
acquired by Holders thereof in June through August 1996. Accordingly, subject to
certain additional restrictions, the Common Stock issuable on Conversion of the
Preferred Stock or the Notes may be resold by the Holder thereof in limited
amounts to the extent that such Holder has held the Preferred Stock and/or the
Notes for at least one year and may be freely resold to the extent that such
Holder held such Preferred Stock and/or the Notes for two years. There can be no
assurance that the Company will fulfill in the future any reporting requirements
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or
disseminate to the public any current financial or other information concerning
the Company, as is required by Rule 144 as
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<PAGE> 31
one of the conditions of its availability if the Notes or Preferred Stock were
acquired less than two years prior to the date hereof or are held by persons who
are affiliates of the Company.
Legal Considerations; Government Regulations. The origination,
servicing and collection of mortgage loans are subject to state regulation and
law with respect to interest rates, permissible charges, disclosure to
borrowers, legal and equitable principles regarding protection of consumers and
unfair and deceptive practices. The origination, servicing and closing of
mortgage loans are also subject to Federal laws, including: (i) the Federal
Truth-in-Lending Act and Regulation Z promulgated thereunder, which require
certain disclosures to the borrowers regarding the terms of the mortgage loans;
(ii) the Equal Credit Opportunity Act and Regulation B promulgated thereunder,
which prohibit discrimination on the basis of age, race, color, sex, religion,
marital status, national origin, receipt of public assistance or the exercise of
any right under the Consumer Credit Protection Act, in the extension of credit;
and (iii) the Fair Credit Reporting Act, which regulates the use and reporting
of information related to the borrower's credit experience.
The Company's mortgage banking business is subject to extensive
regulation, supervision and licensing by Federal and state authorities.
Regulated matters include, without limitation, maximum interest rates and fees
which may be charged by the Company, disclosures in connection with loan
originations, credit reporting requirements, servicing requirements, Federal and
state taxation, and multiple qualification and licensing requirements for doing
business in various jurisdictions. While the Company believes that it maintains
all requisite licenses, permits and approvals and is in compliance in all
material respects with applicable Federal and state regulations, there can be no
assurance that more restrictive laws or regulations will not be adopted which
could make compliance in the future more difficult and/or more expensive.
Legislative and regulatory proposals are periodically advanced which, if
adopted, could adversely affect the Company's profitability or the manner in
which the Company conducts its activities.
Loan Repurchase and Loss Obligations. The Company has sold loans to
investors which contain provisions that the Company will repurchase at the
request of the investor any loan that becomes past due by over 90 days. At June
30, 1997, the aggregate principal amount of loans outstanding subject to these
repurchase provisions was $2,060,000, $23,000 of which was past due by over 90
days and subject to repurchase by the Company at the option of the investor.
From March 1996 to June 30, 1997, the Company has also sold approximately
$96,292,000 of loans in which the Company retains a residual interest in the
form of an I/O Strip with a "first loss" provision, pursuant to which, if the
purchaser forecloses upon a loan and takes a loss (or gain), the Company would
be obligated to reimburse the purchaser for the loss (or be entitled to receive
the proceeds from a gain). At June 30, 1997, no loans sold in this manner had
been foreclosed upon. The Company maintains a loan loss reserve which, in the
opinion of management, is adequate to cover losses both from loans held by the
Company for its own portfolio and for loans sold subject to these repurchase and
loss obligations. In the event, however, of increased rates of default, the
Company may be required to repurchase additional loans, reimburse foreclosure
losses or incur losses which would reduce the value of the Company's retained
interest in the mortgage loans sold, which could have a material adverse effect
on the Company's ability to originate or acquire new mortgage loans and on the
financial
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condition and operations of the Company. There can be no assurance that the
Company will have sufficient available cash to meet its repurchase and
foreclosure loss obligations.
Excess Servicing Asset/Interest-Only Strip Receivable. Prior to
December 1994, the Company sold the majority of its loans with the servicing
retained and received a servicing fee and the right to receive a portion of the
interest to be received on the mortgage loans. In addition, although the Company
has recently changed its strategy for sale of mortgage loans to the sale of
mortgage loans on a whole loan basis in transactions in which it receives a cash
premium instead of an I/O Strip (See "-- Interest Rate Fluctuations and
Prepayment"). The Company is currently selling a portion of its loans on
service-released basis pursuant to which the Company retains a right to receive
payments based on a portion of the interest to be received on the mortgage
loans. A large portion of the Company's revenue on both of these type sales is
recognized as a gain on sale of mortgage loan receivables, which primarily
represents the present value of the cash flow resulting from the difference
between the interest rate charged by the Company to a borrower and the interest
rate received by the purchaser of the loan receivable (the "Spread"). If the
Company retains the servicing, the Spread is reduced by a normal loan servicing
fee, and the Company will record a corresponding asset equal to the amount of
the gain or the Excess Servicing Spread Asset, ("ESA"). If the Company retains
an interest in the sold loan but does not perform the servicing, an I/O Strip is
recorded as the corresponding asset equal to the amount of the gain. The Company
recognizes such gain on sale of loans in the fiscal year in which such loans are
sold, although cash (representing ESA and servicing fees or the I/O Strip) is
received by the Company over the lives of the loans. Both the ESA and I/O Strip
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 from the ESA or I/O Strip, the amount
of cash which the Company is entitled to receive over the lives of the loans
normally exceeds the gain recognized at the time the loans were sold. In the
subsequent years, the Company recognizes additional income and fees to the
extent actual cash flows from such loans exceed the amortization of the ESA or
I/O Strip. If the Company's assumptions used in deriving the value of the I/O
Strip differ from the actual results, there can be an adverse impact on the
Company's financial condition and results of operations. The principal
assumptions relate to prepayment spreads, discount rates and anticipated credit
losses. If actual prepayments with respect to loans sold occur faster than they
were projected at the time such loans were sold or loans go into foreclosure,
the carrying value of the ESA or I/O Strip is written down through a charge to
earnings in the period of adjustment. In the year ended June 30, 1997, actual
prepayments exceeded those previously anticipated at the time of the sale of the
loans for which the Company recorded an ESA. Accordingly, the Company adjusted
the value of the ESA previously recorded by approximately $39,000 at June 30,
1997 to reflect the actual prepayments incurred.
Risks of Expansion. The Company is pursuing a growth strategy, has
opened thirteen new offices in the last 12 months, and intends to open
additional branch offices in the future. The success of the Company's planned
expansion will depend on numerous factors, many of which are beyond the
Company's control, including, among other factors, the securing of necessary
governmental permits and regulatory approvals, the hiring and training of
management personnel, the terms and availability of financing and other general
economic and business
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conditions. Any problems or delays encountered in any one or more of these areas
can result in delays in the opening of branch offices. There can be no assurance
that the Company will effectively manage its expanding operations and anticipate
all of the changing demands that its planned expansion will impose on its
resources. The Company also intends to expand its mortgage loan capacity through
acquisition of companies engaged in origination of mortgage loans in regions
into which the Company desires to expand. There can be no assurance that the
Company will consummate any acquisition or that the Company will not experience
difficulties in connection with proposed acquisitions, including difficulties in
integrating the operations of any acquired companies with those of the Company.
Competition. As a purchaser and originator of mortgage loans, the
Company faces intense competition, primarily from mortgage banking companies,
commercial banks, credit unions, thrift institutions, credit card issuers and
finance companies. Most of these competitors in the financial services business
are substantially larger and have more capital and other resources than the
Company. Furthermore, certain large national finance companies and conforming
mortgage originators have announced their intention to adapt their conforming
origination programs and allocate resources to the origination of non-conforming
loans. In addition, certain of these larger mortgage companies and commercial
banks have begun to offer products similar to those offered by the Company,
targeting customers similar to those of the Company. The entrance of these
competitors into the Company's market could have a material adverse effect on
the Company's results of operations and financial condition.
Competition can take many forms, including convenience in obtaining a
loan, service, marketing and distribution channels and interest rates.
Furthermore, the current level of gains realized by the Company and its
competitors on the sale of the type of loans purchased and originated is
attracting additional competitors, including at least one quasi-governmental
agency, into this market with the effect of lowering the gains that may be
available in this market. Competition may be affected by fluctuations in
interest rates and general economic conditions.
Dependence on Key Personnel. The Company's success depends upon the
continued contributions of its executive officers, and sales and marketing
personnel. There can be no assurance that the Company will be able to retain
existing personnel or attract additional qualified personnel.
Restrictive Covenants In Outstanding Debt Instruments. $850,000 in
Bridge Notes issued in July and August 1997 and due October 31, 1997 contain
various operating covenants including, among others, restrictions on the ability
of the Company to incur additional indebtedness, to create liens or other
encumbrances, to make certain payments and investments, to pay dividends on
Common Stock and to sell or otherwise dispose of assets and merge or consolidate
with another entity. Any failure of the Company to pay the Bridge Notes when due
or to comply with the covenants contained in such instruments could result in an
event of default which could permit acceleration of the obligations thereunder
and acceleration of debt under other instruments that may contain
cross-acceleration or cross-default provisions. Other indebtedness of the
Company in the future including any future warehouse financing facility that the
Company is likely to seek could contain financial and other covenants more
restrictive than those contained in such instruments.
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Market for Common Stock. The market price of the Common Stock could be
subject to significant fluctuations in response to variations in quarterly
operating results and other factors. In addition, the stock market in recent
years has experienced extreme price and volume fluctuations that often have been
unrelated or disproportionate to the operating performance of companies. These
broad fluctuations may adversely affect the market price of the Common Stock.
Moreover, the trading volume for the Company's Common Stock is not significant
and this could affect the ability of holders of the Company's Common Stock to
sell the Common Stock when they desire to do so and the extent of the volatility
of the market price of the Common Stock.
Shares Available for Resale. Substantially all of the 22,596,000 shares
of Common Stock outstanding after this Conversion Offer (assuming 90%
conversion) and the 11,225,000 shares of Common Stock issuable upon conversion
of outstanding convertible securities or exercise of remaining outstanding
options or warrants are eligible for immediate sale in the public market,
subject, in the case of certain of such shares to compliance with the provisions
of Rule 144 under the Securities Act, or are subject to registration rights in
favor of the holders thereof and are covered by an effective registration
statement. Sales of substantial amounts of Common Stock pursuant to Rule 144 or
the exercise of registration rights or otherwise, or the possibility of such
sales, may have an adverse effect on the market price of the Common Stock.
Effect of Outstanding Convertible Securities, Options and Warrants.
Upon completion of the Conversion Offer (assuming 75% conversion), the Company
will have outstanding (i) Convertible Secured Notes, other convertible debt and
Convertible Preferred Stock (in addition to the shares of Common Stock issuable
on conversion of the Preferred Stock offered hereby) convertible into 6,547,000
shares of Common Stock at a weighted average conversion price of $1.15 per
share; (ii) Warrants to purchase an aggregate of 5,879,000 shares of Common
Stock at a weighted average exercise price of $1.37 per share; and (iii) options
to purchase an aggregate of 1,362,000 shares of Common Stock. Additional shares
of Common Stock could become issuable pursuant to anti-dilution adjustments
under these convertible securities and warrants. The Company has an additional
638,000 shares of Common Stock reserved for issuance under its 1993 Stock Option
Plan. For the respective terms of such convertible securities, warrants and
options, the holders thereof are given an opportunity to profit from a rise in
the market price of the Company's Common Stock with a resulting dilution in the
interests of the other stockholders. Further, the terms on which the Company may
obtain additional financing during that period may be adversely affected by the
existence of such convertible securities, options and warrants. The holders of
the convertible securities, warrants and options may convert or exercise them at
a time when the Company might be able to obtain additional capital through a new
offering of securities on terms more favorable than those provided therein.
Possible Delisting of Securities from the Nasdaq Stock Market. The
Company's Common Stock is currently listed on the Nasdaq SmallCap Market. The
Board of Directors believes that the continued listing of the Company's Common
Stock on the Nasdaq SmallCap Market is important for the marketability of the
Common Stock and the prestige of the Company in the financial community. The
Company has received a letter 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
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on the Nasdaq Stock Market. The Company must respond by October 22, 1997 with a
plan and schedule to get the Company back in compliance with these requirements.
While the Company anticipates that the conversion of the Notes and Reverse Stock
Split would bring the Company in compliance with these requirements, there can
be no assurance that the Company will be successful in these efforts. 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 specifying a delisting date for the Company's Common
Stock. The Company's securities will remain listed on the Nasdaq Small Cap
Market pending review of their continued listing by a Committee of the NASD
Board of Governors. On September 3, 1997, the last reported sale price of the
Common Stock on the Nasdaq SmallCap Market was $.75 per share.
Nasdaq has recently adopted more stringent financial requirements with
respect to continued listing. Such new requirements are (i) either at least
$2,000,000 in net tangible assets, a $35,000,000 market capitalization or net
income of at least $500,000 for the latest fiscal year or in two of the last
three fiscal years, (ii) at least 500,000 shares in the public float valued at
$1,000,000 or more, (iii) a minimum Common Stock bid price of $1.00, (iv) at
least two active market makers, and (v) at least 300 holders of the Common
Stock. The Board of Directors believes that the Reverse Stock Split, by
decreasing the number of shares outstanding, should increase the bid price per
share of Common Stock and is necessary in order to permit the Company to meet
the bid price requirement for continued listing on the Nasdaq SmallCap Market.
The Company believes that the consummation of the conversion of at least 75% of
the principal amount of the Notes and 75% of the Preferred Stock will be
sufficient to satisfy the asset requirement for continued listing, in
conjunction with the increased share price expected to result from the Reverse
Stock Split, will enable the Company to continue to list its Common Stock on the
Nasdaq SmallCap Market. However, the decision of the NASD committee is beyond
the control of the Company and may depend on a number of factors in addition to
the quantitive criteria discussed herein, and there can be no assurance that the
Company will be successful in its appeal. There can be no assurance that the
market price of the Common Stock will increase to, or remain above $1.00 per
share after the Reverse Stock Split or, even if it does, that the Company will
be able to raise a minimum of $2,000,000 in the Proposed Financing to meet the
criteria for continued listing of its Common Stock on the Nasdaq SmallCap
Market.
Risk of Low-Priced Stock. If the Company's Common Stock were delisted
from the Nasdaq SmallCap Market (See " - Possible Delisting of Securities from
the Nasdaq"), it could become subject to Rule 15g-9 under the Securities
Exchange Act of 1934 (the "Exchange Act"), which imposes additional sales
practice requirements on broker-dealers which sell such securities to persons
other than established customers and "accredited investors" (generally,
individuals with net worths in excess of $1,000,000 or annual incomes exceeding
$200,000, or $300,000 together with their spouses). For transactions covered by
this rule, a broker-dealer must make a special suitability determination for the
purchaser and have received the purchaser's written consent to the transaction
prior to sale. Consequently, such rule may adversely affect the ability of
broker-dealers to sell the Company's Common Stock and may adversely affect the
ability of purchasers in this Offering to sell the Common Stock acquired in the
secondary market.
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SEC regulations generally define a "penny stock" to be any non-Nasdaq
equity security that has a market price (as therein defined) of less than $5.00
per share or with an exercise price of less than $5.00 per share, subject to
certain exceptions. For any transaction involving a penny stock, unless exempt,
the rules require delivery, prior to any transaction in a penny stock, of a
disclosure schedule prepared by the SEC relating to the penny stock market.
Disclosure is also required to be made about commissions payable to both the
broker-dealer and the registered representative and current quotations for the
securities. Finally, monthly statements are required to be sent disclosing
recent price information for the penny stock held in the account and information
on the limited market in penny stocks.
The foregoing required penny stock restrictions will not apply to the
Company's Common Stock if the Common Stock continues to be listed on Nasdaq and
have certain price and volume information provided on a current and continuing
basis or meet certain minimum net tangible assets or average revenue criteria.
There can be no assurance that the Company's Common Stock will qualify for
exemption from these restrictions. In any event, even if the Company's Common
Stock were exempt from such restrictions, it would remain subject to Section
15(b)(6) of the Exchange Act, which gives the SEC the authority to prohibit any
person that is engaged in unlawful conduct while participating in a distribution
of a penny stock from associating with a broker-dealer or participating in a
distribution of a penny stock, if the SEC finds that such a restriction would be
in the public interest.
If the Company's Common Stock were subject to the existing or proposed
rules on penny stocks, the market liquidity for the Company's securities could
be severely adversely affected.
Potential Anti-takeover Effects. The Company is governed by the
provisions of Section 203 of the General Corporation Law of the State of
Delaware, anti-takeover law enacted in 1988. In general, the law prohibits a
public Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. "Business combination"
is defined to include mergers, asset sales and certain other transactions
resulting in a financial benefit to the stockholders. An "interested
stockholder" is defined as a person who, together with affiliates and
associates, owns (or, within the prior three years, did own) 15% or more of a
corporation's voting stock. As a result of the application of Section 203,
potential acquirers of the Company may be discouraged from attempting to effect
an acquisition transaction with the Company, thereby possibly depriving holders
of the Company's securities of certain opportunities to sell or otherwise
dispose of such securities at above-market prices pursuant to such transactions.
Safe Harbor Statement Under the Private Securities Litigation Reform
Act 1995. Certain statements contained herein and in the documents incorporated
herein by reference 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 and in the documents
incorporated by reference 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
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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 continue to sell its mortgage loans as
described under "-- Dependence on Secondary Markets," the effect of the recent
changes in the Company's strategy for sale of mortgage loans as described under
"--Changes in Company Strategy" and market conditions and other factors relating
to the mortgage lending business. Investors are also directed to the other risks
discussed herein, in the Company's Annual Report on Form 10-KSB and in other
documents filed by the Company with the SEC and incorporated herein by
reference.
CONSIDERATIONS APPLICABLE TO HOLDERS OF PREFERRED
STOCK AND NOTES WHO DO NOT CONVERT IN CONNECTION
WITH THIS CONVERSION OFFER
Securityholders who choose not to convert in this Conversion Offer and
remain Holders of Preferred Stock or Notes are urged to consider the following
factors, including the fact, that upon a successful consummation of this
Conversion Offer, certain rights and privileges of Holders of the Preferred
Stock and the Notes will be eliminated and the likelihood of future dividend or
interest payments remains uncertain.
Issuance of the Additional Shares and Adjustment of the Conversion
Price Limited to this Conversion Offer. The issuance of the Additional Shares
and the adjustment of the Conversion Price of the Notes represents approximately
a 375% increase in the number of shares of Common Stock issuable on the
conversion of the Preferred Stock and an 80% reduction in the Conversion Price
of the Notes and will result in the issuance of an additional approximately 22
shares of Common Stock on the conversion of each share of Preferred Stock and an
additional approximately 1,600 shares of Common Stock on the conversion of each
$1,000 in Notes, as a result of conversion rights provisions contained in such
securities (plus such number of additional shares of Common Stock as are
issuable on the conversion of Preferred Stock dividends and interest on the
Notes accrued and in arrears as of the Expiration Date, at a rate of one share
of Common Stock for each $.65 of such dividends and one share of Common Stock
for each $.50 of such interest, respectively). Following the Expiration Date,
Holders of the Preferred Stock and Notes who choose not to accept this
Conversion Offer will not be entitled upon conversion to such Additional Shares
or the adjustment in the Conversion Price being offered in this Conversion
Offer.
No Preferred Stock Right of Redemption. Because the Holders of the
Preferred Stock have no rights of optional redemption (only the Company can
elect to redeem the Preferred Stock), the Holders have no right to compel the
payment of dividends or redemption of their securities. However, dividends will
accrue and be cumulative to the extent not paid on any dividend payment date and
no dividends may be paid on the Company's Common Stock unless accrued dividends
on the Preferred Stock have been paid.
No Appraisal or Similar Rights. Neither the Delaware General
Corporation Law nor the Company's organizational documents provide for
dissenters rights of appraisal (or other comparable rights) for Holders of the
Preferred Stock or the Notes not accepting this Conversion Offer.
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No Established Market for the Securities. The Preferred Stock and Notes
are not traded on any established market and, to the Company's knowledge, no
broker or dealer "makes a market" in shares of Preferred Stock or Notes.
Accordingly, the Preferred Stock and Notes are, and are likely to remain, highly
illiquid. Because the Preferred Stock and Notes are illiquid, the offered
conversion enables Holders of Preferred Stock and Notes to obtain liquidity in
their securities. However, it should be noted that the Common Stock of the
Company is currently thinly traded and there can be no assurance that Holders
who accept the Conversion Offer will be able to sell their shares of Common
Stock when they desire to do so. Additionally, the Company has received a letter
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
Stock Market. While the Company anticipates that the conversion of the Notes and
Reverse Stock Split would bring the Company in compliance with these
requirements, there can be no assurance that the Company will be successful in
these efforts. Additionally, Nasdaq has recently adopted more stringent
financial requirements with respect to continued listing. The Company believes
that the consummation of the conversion of at least 75% of the principal amount
of the Notes and 75% of the Preferred Stock will be sufficient to satisfy the
asset requirement for continued listing, in conjunction with the increased share
price expected to result from the Reverse Stock Split, will enable the Company
to continue to list its Common Stock on the Nasdaq SmallCap Market, although
there can be no assurance to such effect. However, the decision of the NASD
committee is beyond the control of the Company and may depend on a number of
factors in addition to the quantitive criteria discussed herein, and there can
be no assurance that the Company will be successful in its appeal. See "Risks
Applicable to Holders of Preferred Stock Or Notes Who Do Convert in Connection
with this Conversion Offer -- Possible Delisting of Securities from the Nasdaq
Stock Market"
Ability to Realize on Collateral. The ability of the Holders of the
Notes to foreclose on any of the Collateral, upon the occurrence of an event of
default under the Notes or otherwise, will be subject to the provisions of the
Loan Agreement and, in certain instances, to perfection and priority issues and
to practical problems associated with realization of security interests.
Moreover, the book value of the Collateral may be less than the outstanding
principal balance of the Notes. Even if the book value of the Collateral exceeds
the principal balance of the Secured Notes, if an event of default occurs under
the Notes, it may not be possible to sell the Collateral for a purchase price
equal to its book value. The Company also has certain rights under the Loan
Agreement to obtain a release of collateral from the security interest granted
to secure the Secured Notes.
Accordingly, there can be no assurance that, if an event of default
occurs under the Notes, the Holders of the Notes will be able to realize a
sufficient amount from sale of the Collateral to repay the Notes in full.
Liquidation Preference of Preferred Stock. While the Preferred Stock is
entitled to a liquidation preference in the event of a liquidation, dissolution
or winding up of the Company, it is likely that, in the event of a bankruptcy or
insolvency of the Company, Holders of the Preferred Stock will not be able to
realize on all or a portion of their liquidation preference. In addition, while
Holders of Preferred Stock are entitled to cumulative dividends, such dividends
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are payable only when, as and if declared by the Board of Directors, and
Preferred Stockholders do not have a claim against the Company for undeclared
and unpaid dividends. While the Company will be unable to pay dividends on
preferred stock ranking junior to the Preferred Stock, pursuant to the Amendment
provided in the Consent, the Company may pay dividends on preferred stock
ranking pari passu with the Preferred Stock and may issue preferred stock
ranking senior to the Preferred Stock without the consent of the Holders
thereof.
Certain Bankruptcy Considerations. The right of the Holders of the
Notes to repossess and dispose of the Collateral upon the occurrence of an event
of default is likely to be significantly impaired by applicable bankruptcy law
if a bankruptcy proceeding were to be commenced by or against the Company prior
to the Holders' having disposed of the Collateral. Under applicable bankruptcy
law, a secured creditor, such as a Holder of the Notes, is prohibited from
disposing of security repossessed from a debtor in a bankruptcy case without
bankruptcy court approval. Moreover, bankruptcy law prohibits a secured creditor
from disposing of collateral even though the debtor is in default under the
applicable debt instruments if the secured creditor is given "adequate
protection." The meaning of the term "adequate protection" may vary according to
circumstances, but this concept is intended in general to protect the value of
the secured creditor's interest in the collateral and this term may include cash
payments or the granting of additional security, if and at such times as the
court in its discretion determines, to compensate for any diminution in the
value of the collateral as a result of the stay of disposition during the
pendency of the bankruptcy case. In view of the lack of a precise definition of
the term "adequate protection" and the broad discretionary powers of a
bankruptcy court, it is impossible to predict how long payments under the Notes
could be delayed following commencement of a bankruptcy case, whether or when
the Holders of the Notes could dispose of the Collateral or whether or to what
extent Holders would be compensated for any delay in payment or loss of value of
the Collateral through the requirement of "adequate protection."
Subsidiary Guarantees; Fraudulent Conveyance. Most of the Company's
operations are carried on through its subsidiaries and consequently the
Company's operating cash flow and its ability to service debt, including the
Notes, is dependent on the operating cash flow of the subsidiaries and the
payment of funds by the Subsidiary to the Company. The Company's obligations
with respect to the Notes have been guaranteed by the Subsidiaries. The
subsidiaries' guarantees are subject to review under relevant federal and state
fraudulent conveyance and similar statutes in a bankruptcy or reorganization
case or a lawsuit by or on behalf of creditors of the Company or the Subsidiary
(including a lawsuit brought under circumstances not including bankruptcy) or a
representative of such creditors, such as a trustee or the Company as debtor-in-
possession. Under these statutes, if a court were to find that obligations (such
as the subsidiaries' guarantees) were incurred with the intent of hindering,
delaying or defrauding present or future creditors or that the Company or any
Subsidiary received less than reasonably equivalent value or fair consideration
for those obligations and that the Company or any of the subsidiary either (i)
was insolvent or rendered insolvent by reason thereof, (ii) was engaged or was
about to engage in a business or transaction for which its remaining
unencumbered assets constituted unreasonably small capital or (iii) intended to
or believed that it would incur debts beyond its ability to pay such debts as
they matured or became due, such court could void a subsidiary's obligations
under its guarantee, subordinate the guarantees to other indebtedness of such
subsidiary or take other action detrimental to the Holders of the Notes. In
addition, the subsidiaries' guarantees may be
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subject to the claim that, since the subsidiaries' guarantees were incurred for
the benefit of the Company (and only indirectly for the benefit of the
subsidiary), they were incurred for less than equivalent value or fair
consideration.
Collateral of the Notes Includes Unsecured Payment Obligation of a
Third Party. A substantial portion of the collateral securing the Notes is in
the form of an interest only strip receivable (an "I/O Strip"), representing the
present value of the difference between the interest paid by the borrower and
the interest rate received by a particular company which purchases interests in
the mortgage loans and substantially all of the IO/Strips represent an unsecured
payment obligation of this company. In the event of a default on the Notes,
there may not be a sufficient market for the I/O Strips to allow them to be sold
for an amount sufficient to pay in full the balance due under the Notes. In
addition, in the event of a bankruptcy, insolvency or other financial difficulty
of this company, the Company's ability to receive payments on account of the
IO/Strips could be materially adversely affected.
FEDERAL INCOME TAX CONSEQUENCES
This discussion is based on the provisions of the Internal Revenue Code
of 1986, as amended (the "Code"), final, temporary and proposed United States
Treasury Regulations promulgated thereunder, and the administrative and judicial
interpretations thereof, all as in effect as of the date of this Offering
Circular. Such laws or interpretations are subject to change (possibly with
retroactive effect) or different interpretations. The effectiveness of this
Conversion Offer is not conditioned upon the receipt of any ruling from the
Internal Revenue Service, and no ruling has been or will be requested on any tax
matters relating to this Conversion Offer.
The following discussion is of a general nature and does not address
any state, local or foreign tax consequences for any Holder or the federal
income tax consequences for Holders who do not hold Preferred Stock or Notes as
a capital asset or for foreign Holders. This discussion is for general
information only, and each Holder should consult with his, her or its own tax
advisor as to the consequences of this conversion offer. This discussion is
based on the provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), final, temporary and proposed United States Treasury Regulations
promulgated thereunder, and the administrative and judicial interpretations
thereof, all as in effect as of the date of this Offering Circular. Such laws or
interpretations are subject to change (possibly with retroactive effect) or
different interpretations. The effectiveness of this Conversion Offer is not
conditioned upon the receipt of any ruling from the Internal Revenue Service,
and no ruling has been or will be requested on any tax matters relating to this
Conversion Offer.
TAX CONSEQUENCES TO HOLDERS OF PREFERRED STOCK
Conversion of the Preferred Stock in connection with this Conversion
Offer will most likely be treated as a recapitalization for federal income tax
purposes under Section 368(a)(1)(E) of the Code. Therefore, a Holder of
Preferred Stock accepting this Conversion Offer will not recognize gain or loss
on the conversion of such Holder's Preferred Stock. However, Holders of
Preferred Stock will be deemed to have received a distribution to which Section
301 of the Code applies (the "Deemed Distribution") equal to the lesser of: (i)
the amount by which the fair
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market value of the Common Stock received on the distribution date exceeds the
issue price of the Preferred Stock, and (ii) the amount of the unpaid dividend
arrearage with respect to the Preferred Stock on such date.
The Deemed Distribution will constitute a dividend for tax purposes
taxable as ordinary income, to the extent of the Company's current or
accumulated earnings and profits. Based upon current information, the Company
does not expect to have sufficient earnings and profits for tax purposes such
that there is expected to be no amount taxable as ordinary income attributable
to the Deemed Distribution. A Holder's basis in the Common Stock received will
equal such Holder's basis in the Preferred Stock converted in connection with
this Conversion Offer. The holding period for each share of Common Stock will
include the period for which the Preferred Stock was held by the Holder.
TAX CONSEQUENCES TO HOLDERS OF NOTES
The most likely tax treatment of the exchange of Notes for shares of
Common Stock is that it will be a taxable event for federal income tax purposes.
A Holder will recognize taxable gain (or loss) equal to the amount by which the
fair market value of the Common Stock received for the Notes, respectively,
exceeds (or is less than) the Holder's adjusted tax basis in the Notes. The fair
market value of the Common Stock received will depend on the price of the Common
Stock on the Expiration Date, and, accordingly is not presently determinable. A
Holder's basis in the Notes, if held from the date of original issuance, is
generally his original purchase price subject to adjustment for interest accrued
or deemed accrued. The taxable gain (or loss) will be characterized as capital
gain (or loss) if the Notes are capital assets in the hands of a Holder. The
accrued interest to be paid to a Holder upon the conversion in the form of
Common Stock will also be recognized as taxable interest income if not
previously accrued as income by the Holder.
Holders should consult their tax advisors concerning the specific tax
consequences to them of the Conversion Offer, including state, local and foreign
tax consequences.
TAX CONSEQUENCES TO THE COMPANY
The Company will not recognize gain or loss for federal income tax
purposes in connection with the conversion of the Preferred Stock pursuant to
this Conversion Offer. The Company will realize taxable cancellation of
indebtedness income to the extent, if any, that the fair market value of the
Common Stock issued upon the exchange of Notes therefor, at the date of such
exchange, is less than the amount of indebtedness represented by the Notes so
exchanged. Any such income tax consequence, if it occurs, is not expected to be
material, and is expected to be offset by the Company's federal net operating
loss carryforwards.
THE ABOVE DISCUSSION IS OF A GENERAL NATURE AND DOES NOT ADDRESS ANY STATE,
LOCAL OR FOREIGN TAX CONSEQUENCES OR THE FEDERAL INCOME TAX CONSEQUENCES FOR
STOCKHOLDERS WHO DO NOT HOLD PREFERRED STOCK OR NOTES AS A CAPITAL ASSET OR FOR
FOREIGN STOCKHOLDERS. THIS DISCUSSION IS FOR GENERAL INFORMATION ONLY, AND EACH
STOCKHOLDER
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SHOULD CONSULT WITH HIS, HER OR ITS OWN TAX ADVISOR AS TO THE CONSEQUENCES OF
THIS CONVERSION OFFER.
DESCRIPTION OF SECURITIES
Common Stock
The Company's Common Stock is traded on the NASDAQ SmallCap Market
under the symbol "LEND." The following table sets forth the range of high and
low bid prices for the Common Stock as reported by the NASDAQ Small
Capitalization Market for the periods indicated. These prices do not reflect
retail markups, mark downs or commissions.
<TABLE>
<CAPTION>
Fiscal 1994 High Low
---- ---
<S> <C> <C>
First Quarter (ended September 30, 1993) $10.00 $7.13
Second Quarter (ended December 31, 1993) 7.75 6.25
Third Quarter (ended March 31, 1994) 8.25 5.50
Fourth Quarter (ended June 30, 1994) 7.63 5.00
Fiscal 1995
First Quarter (ended September 30, 1994) 8.00 6.50
Second Quarter (ended December 30, 1994) 6.00 5.06
Third Quarter (ended March 31, 1995) 5.50 4.34
Fourth Quarter (ended June 30, 1995) 6.00 3.88
Fiscal 1996
First Quarter (ended September 30, 1995) 6.50 4.25
Second Quarter (ended December 31, 1995) 7.00 3.00
Third Quarter (ended March 31, 1996) 4.125 2.375
Fourth Quarter (ended June 30, 1996) 3.875 2.375
Fiscal 1997
First Quarter (ended September 30, 1996) 4.625 2.50
Second Quarter (ended December 31, 1996) 4.25 2.9375
Third Quarter (through March 31, 1997) 4.0625 3.375
Fourth Quarter (ended June 30, 1997) 3.75 1.25
Period Ending September 15, 1997 1.313 0.688
-------- ------
</TABLE>
The Closing bid price for the Company's Common Stock on September 15,
1997 was $.75 per share.
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9% Convertible Preferred Stock
The Company is authorized to issue 2,000,000 shares of Preferred Stock,
$.001 value per share, 315,000 shares of which were issued as the 9% Convertible
Preferred Stock subject to this Conversion Offer and are outstanding and 16,740
of which were issued in connection with a private offering of 11% Convertible
Redeemable Preferred Stock in April 1997 and are outstanding. The Board of
Directors is authorized, without further action of the shareholders of the
Company, to issue preferred stock in additional series and to fix the rights and
preferences thereof, including the dividend rights, dividend rate, conversion
rights, voting rights, terms of redemption (including sinking fund provisions),
redemption prices and liquidation preferences.
The following is a summary of the terms of the Preferred Stock. This
summary is not intended to be complete and is subject to, and qualified in its
entirety by, reference to the Certificate of Designation to be filed with the
Secretary of State of the State of Delaware amending the Company's Certificate
of Incorporation and setting forth the rights, preferences and limitations of
the Preferred Stock, a form of which is attached as Exhibit 5.
Dividends. The Holders of the Preferred Stock are entitled to receive,
if, when and as declared by the Board of Directors out of funds legally
available as prescribed by statute, cumulative dividends at the rate of 9% per
annum per share on the purchase price of the Preferred Stock, payable quarterly
in cash on January 15, April 15, July 15 and October 15, commencing on January
15, 1996, to holders of record as of a date not more than 30 days prior to the
dividend payment date as may be fixed by the Board of Directors. Dividends
accrue from the first day of the quarterly period in which such dividends may be
payable, except with respect to the first quarterly dividend which shall accrue
from the date of issuance of the Preferred Stock. Dividends will accrue and be
cumulative to the extent not paid on any dividend payment date. No dividends may
be paid on any shares of capital stock ranking junior to the Preferred Stock
(including Common Stock) unless and until all accumulated and unpaid dividends
on the Preferred Stock have been declared and paid in full Conversion. Pursuant
to the amendment to the Certificate of Designation, certain protective
provisions currently contained in the Certificate of Designation which restrict
payment of dividends on capital stock ranking pari passu with the Preferred
Stock will be eliminated.
Conversion. Each share of Preferred Stock is convertible, at any time
after the date of issuance and prior to redemption, at the option of the Holder,
into shares of Common Stock at a conversion price per share equivalent to $2.50
(reduced from $4.00 as a result of prior anti-dilution adjustment). The number
of shares of Common Stock to be received upon conversion of Preferred Stock and
the conversion price per share of Common Stock are subject to adjustment from
time to time in the event of (i) the combination, subdivision or
reclassification of the Common Stock; (ii) the issuance of Common Stock as a
dividend or distribution on any class of capital stock of the Company; and (iii)
the distribution to all holders of Common Stock of evidences of the Company's
indebtedness or assets (including securities, but excluding cash dividends or
distributions paid out of earned surplus) the terms of which were adjusted
pursuant to the Letter Agreement. No adjustment in the conversion rate will be
required until cumulative adjustments require an adjustment of at least 1-1/2%
in the conversion rate. No fractional shares will be issued upon conversion, but
any fractions will be adjusted in cash on the basis of the then
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current market price of the Common Stock. Payment of accumulated and unpaid
dividends will be made upon conversion to the extent of legally available funds.
The right to convert the Preferred Stock terminates on the date fixed for
redemption.
Pursuant to the Letter Agreement, the Conversion Price of the Preferred
Stock will also be adjusted to a price equal to the weighted average of Common
Stock issued (or issuable on conversion of convertible securities or exercise of
warrants) by the Company through April 16, 1998, subject to certain exclusions.
In no event will such price adjustment increase the conversion price of the
Preferred Stock above $2.50. In addition, if the conversion price has initially
been reduced pursuant to this provision and thereafter any adjustment would
result in an increase in the Conversion Price, such increase will not be
effective until twenty days after a Holder has received written notice of the
adjustment from the Company. The adjustment in the conversion price pursuant to
this paragraph will also be taken into account in determining the redemption
price of the Preferred Stock. On the consummation of this Conversion Offer. As a
result of the execution of the Consents, the Letter Agreement will be amended to
eliminate anti-dilution adjustments as a result of the issuance of Common Stock
or securities convertible into Common Stock below the conversion price.
Redemption. The Company may at its option, commencing on the second
anniversary of the initial closing, redeem the shares of Preferred Stock, in
whole or in part, at a redemption price of $20.00 per share plus accrued and
unpaid dividends on 30 days notice to the Holders thereof, provided the average
of the closing bid prices of the Common Stock as reported by Nasdaq shall have
for 20 consecutive trading days ending within 10 days of the date of the notice
of redemption is given by the Company equalled or exceeded two hundred fifty
percent (250%) of the then conversion price and a registration statement
covering the underlying Common Stock is then in effect and current or the Common
Stock is freely transferable without registration. Notice of redemption must be
mailed to each Holder of Preferred Stock to be redeemed at its last address as
it appears upon the Company's registry books at least 30 days prior to the
record date for such redemption. On and after the redemption date, dividends
will cease to accumulate on shares of Preferred Stock called for redemption.
If the Company redeems less than all of the outstanding shares of
Preferred Stock, the Board of Directors will determine the shares to be redeemed
by lot or pro rata or by any other means the Board of Directors determines to be
equitable.
Voting Rights. The Holders of Preferred Stock are not entitled to vote,
except as set forth below and as provided by applicable law. On matters subject
to a vote by Holders of Preferred Stock, the Holders are entitled to one vote
per share.
The Certificate of Incorporation currently provides that affirmative
vote, in person or by proxy, of the Holders of at least a majority of the
outstanding shares of Preferred Stock, voting as a class, shall be required to
authorize, effect or validate the creation and issuance of any class or series
of capital stock ranking superior to the Preferred Stock with respect to the
declaration and payment of dividends or distribution of assets on liquidation,
dissolution or winding up. Pursuant to the Consents, if the Conversion Offer
with respect to the Preferred Stock is consummated and Holders of more than 75%
of the Preferred Stock accept the conversion, then this provision will
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be eliminated upon the approval of the holders of a majority of the Common Stock
of the Company.
Liquidation Preference. In the event of any voluntary or involuntary
liquidation, dissolution or winding-up of the Company, before any payment or
distribution of the assets of the Company (whether capital or surplus), or the
proceeds thereof, may be made or set apart for the holders of Common Stock or
any series or class of stock ranking junior to the Preferred Stock, the Holders
of Preferred Stock will be entitled to receive, out of the assets of the Company
available for distribution to stockholders, a liquidating distribution of $20.00
per share, plus any accumulated and unpaid dividends. If, upon any voluntary or
involuntary liquidation, dissolution or winding up of the Company, the assets of
the Company are insufficient to make the full payment of $20.00 per share, plus
accumulated and unpaid dividends thereon and similar payments on any other class
or series of stock ranking on parity with the Preferred Stock upon liquidation,
then the Holders of the Preferred Stock and such other shares will share ratably
in any such distribution of the Company's assets in proportion to the full
respective distributable amounts to which they are entitled.
Miscellaneous. The Company is not subject to any mandatory redemption
or sinking fund provision with respect to the Preferred Stock. The Holders of
the Preferred Stock are not entitled to preemptive rights to subscribe for or to
purchase any shares or securities of any class which may at any time be issued,
sold or offered for sale by the Company. Shares of Preferred Stock redeemed by
the Company shall be retired by the Company and shall not be available for
subsequent issuance.
Registration Rights. The Company agreed at its expense to use its best
efforts to prepare and file one registration statement ("Registration
Statement") on the appropriate form under the Securities Act with respect to the
shares of Common Stock issued and issuable upon conversion of the Notes promptly
following the final closing of the offering relating to the sale thereof and to
keep the Registration Statement effective and current for a period of two years.
To date the Company has filed such Registration Statement which remains in
effect but is not current.
10% Convertible Secured Notes
The Notes mature on June 30, 2001, and bear interest from the date of
issuance at a rate of 10% per annum, payable semiannually in arrears on June 30
and December of each year, commencing December 31, 1996, to the persons who are
registered Holders thereof at the close of business on the 15th day immediately
preceding such interest payment date. Interest on the Notes accrues from the
most recent date to which interest has been paid or, if no interest has been
paid, the date of issuance of the Notes to each investor.
The Notes represent secured indebtedness of the Company ranking pari
passu (i.e., ranking equally and without preference) with all other existing and
future indebtedness of the Company. The Notes are secured by a first-priority
lien on all of the Company's assets (except as set forth under "Covenants --
Limitations"), including the Company's mortgage loan receivables, accounts
receivable, furniture, equipment, cash and securities owned by the Company,
including the stock of Subsidiaries. The Loan Agreement was amended to include
as a permitted lien, a
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<PAGE> 46
security interest in an I/O Strip due to the Company generated from loans sold
from March 1996 to November 1996 (having a book value of approximately
$2,273,000) under a sales agreement dated March 26, 1996. The security interest
in the I/O Strip was granted to secure a loan of up to $4,000,000, of which
approximately $2,500,000 has been loaned to date. The Notes are unconditionally
guaranteed by the Subsidiaries. The Subsidiary Guarantees are secured by a
pledge of all of the assets of the Subsidiaries, except as set forth under
"Covenants -- Limitations on Liens." See "Guarantee" and "Collateral and
Security."
Optional Redemption. The Notes may not be redeemed prior to January 1,
1998. Thereafter, the Notes may be redeemed, in whole or in part, at the option
of the Company, on not less than 30 nor more than 60 days' notice, at the
following redemption prices (expressed as percentages of principal amount), plus
accrued interest (if any) to the date of redemption:
Period During Which Redeemed Redemption Price
---------------------------- ----------------
January 1, 1998 through December 31, 1998 106%
January 1, 1999 through December 31, 1999 104%
and thereafter at 100% of the principal amount of the Notes.
Sinking Fund. There is no mandatory sinking fund payments for the
Notes.
Conversion at Option of Holder. The Notes are convertible at the
Holder's option into shares of Common Stock at any time before redemption or
maturity initially at a Conversion Price equal to $2.50 per share, subject to
adjustment as described below. If a Note is called for redemption, the
conversion right with respect to such Note will terminate at the close of
business on the date fixed for redemption of the Notes (provided that no default
by the Company in the payment of the applicable redemption price including any
accrued and unpaid interest shall have occurred and be continuing on the date
fixed for such redemption) and will be lost if not exercised before that time.
Holders of record of the Notes on a record date with respect to the
payment of interest on the Notes are entitled to receive such interest on such
Notes on the corresponding interest payment date notwithstanding the conversion
thereof after such record date or default by the Company in the payment of the
interest payable on such interest payment date. However, Notes surrendered for
conversion during the period from the close of business on any record date for
the payment of interest on the Notes to the opening of business on the
corresponding interest payment date must be accompanied by a payment of an
amount equal to the portion of the interest payable on such interest payment
date that accrues during the period from the date of such surrender until such
interest payment date. Holders of record of the Notes on a record date with
respect to the payment of interest on the Notes who convert such Notes on or
after the corresponding interest payment date will receive the interest payable
by the Company on such date and need not include payment in the amount of such
interest upon surrender of such Notes for conversion. Otherwise, no payment or
adjustment is to be made on conversion for interest accrued on the Notes or for
dividends on the Common Stock issued in conversion.
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<PAGE> 47
The Conversion Price shall be adjusted in certain events, including (i)
the issuance of Common Stock as a dividend or distribution on any class of
capital stock of the Company, (ii) the combination, subdivision or
reclassification of the Common Stock, (iii) the issuance to all holders of
Common Stock of rights or warrants entitling them to subscribe for or purchase
Common Stock at less than the then current market price (as defined herein) of
the Common Stock, (iv) the distribution to all holders of Common Stock of
evidences of the Company's indebtedness and/or securities of the Company, cash
or other assets (excluding the rights, warrants, dividends and distributions
referred to above and any regular dividend payable solely in cash out of the
retained earnings of the Company that may from time to time be fixed by the
Board of Directors), or (v) events described in the following paragraph. No such
adjustment of less than 1% of the Conversion Price will be required; however,
any such adjustment not made due to this limitation will be carried forward and
taken into account in any subsequent adjustment.
The Conversion Price of the Notes will also be adjusted to a price
equal to the weighted average of Common Stock issued (or issuable on conversion
of convertible securities or exercise of warrants) by the Company through April
16, 1998, subject to certain exclusions. In no event will such price adjustment
increase the conversion price of the Notes above the initial Conversion Price of
the Notes. In addition, if the conversion price has initially been reduced
pursuant to this provision and thereafter any adjustment would result in an
increase in the Conversion Price, such increase will not be effective until
twenty days after a Holder has received written notice of the adjustment from
the Company. The adjustment in the conversion price pursuant to this paragraph
will also be taken into account in determining the redemption price of the
Notes.
If this Conversion Offer is successfully consummated, the execution of
the Consents will result in an amendment to the Loan Agreement eliminating of
the provisions providing for such adjustments.
In case of (i) any capital reorganization of the Company, (ii) any
reclassification or change of outstanding shares of Common Stock (other than a
change relating to par value, or as a result of a subdivision or combination of
the Common Stock), (iii) any consolidation, merger or combination of the Company
with or into another corporation, or (iv) any sale or conveyance of the
properties and assets of the Company as, or substantially as, an entirety to any
other entity, in each case as a result of which Common Stock holders are
entitled to receive consideration for their Common Stock, there shall be no
adjustment of the Conversion Price, but the Holders of the Notes then
outstanding shall have the right thereafter to convert such Notes into the kind
and amount of securities, cash or other property that the Holder would have
owned or been entitled to receive immediately after such reorganization,
reclassification, change, consolidation, merger, combination, sale or
conveyance, if such Notes had been converted immediately before the effective
date of such reorganization, reclassification, change, consolidation, merger,
combination, sale or conveyance.
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<PAGE> 48
Conversion at Option of Company. The Notes are convertible at the
Company's option into shares of Common Stock if, for a period of 30 consecutive
trading days ending not more than 10 days prior to the date the Company sends
notice to the Holders, the average of the last closing bid price of the Common
Stock, as reported on the principal exchange on which the Common Stock is listed
or on Nasdaq, has been at least 200% of the then Conversion Price.
Covenants; Limitation on Liens. The Loan Agreement provides that
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 owned or hereafter acquired, except:
(a) 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 generally
accepted accounting principles;
(b) 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 (i) the underlying obligations are not overdue for a
period of more than 60 days or (ii) 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 generally accepted accounting principles or (iii) the
underlying obligations do not exceed $1,000,000 in the aggregate at any time for
the Company and its Subsidiaries;
(c) pledges or deposits in connection with workmen's compensation,
unemployment insurance and other social security legislation;
(d) 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;
(e) 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 in 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;
(f) liens on assets which are subject to leases which are capitalized
on the books of the Company and its Subsidiaries;
(g) liens arising by operation of law in connection with judgments;
(h) liens on assets securing only indebtedness incurred concurrently
with, or within 90 days after, the acquisition or construction thereof to
finance the cost of such acquisition or construction;
(i) liens created by the Loan and Security Agreements;
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(j) 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;
(k) liens on mortgage loans originated by the Company, properties
acquired on foreclosure thereof 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;
(l) liens securing up to $3,375,000 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 participations being made simultaneously herewith (See "Recent
Developments");
(m) liens securing up to $2,530,000 of indebtedness under a secured
warehouse facility to be issued in exchange for up to $2,530,000 of Subordinated
Notes;
(n) liens which may be granted in the future under the Company's
repurchase agreement with Greenwich;
(o) additional liens securing obligations in an aggregate amount not
exceeding $250,000; and
(p) liens granted to secure indebtedness or other obligations of the
Company to the extent that the value of the Collateral immediately prior to at
the time of the grant of such lien shall exceed a book value for such Collateral
of not less than 120% of the aggregate balance of the Notes.
(q) liens on the assets to secure the Bridge Notes in an aggregate
principal amount not exceeding $4,000,000.
Limitation on Restricted Payments. The Loan Agreement currently
provides that the Company will not, and will not permit any of its Subsidiaries
to, directly or indirectly: (i) declare or pay any dividend or make any other
distribution in cash or property on account of the Company's or any of its
Subsidiary's capital stock (other than dividends payable from any Subsidiary to
the Company or to a wholly owned subsidiary of the Company and dividends or
distributions payable in capital stock of the Company) or (ii) purchase, redeem
or otherwise acquire or retire for value any capital stock of the Company or any
Subsidiary (other than any such stock owned by the Company or any wholly owned
Subsidiary of the Company).
The foregoing provisions do not prohibit (i) the payment of any regular
dividends on Preferred Stock which are on commercially reasonable terms at the
time of issuance of the Preferred Stock, as determined at the time of such
issuance in good faith by the Company's Board of Directors or (ii) the
redemption, repurchase, retirement or other acquisition of any capital stock of
the Company in exchange for, or out of the proceeds of, the substantially
concurrent sale of other capital stock of the Company.
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<PAGE> 50
If this Conversion Offer is successfully consummated, the execution of
the Consents will result in an amendment to the Loan Agreement eliminating this
provision.
Other Covenants. The Loan Agreement currently provides that the
Company will not permit the aggregate book value of the following assets as
reflected in the Company's consolidated quarterly or annual financial statements
included in its Quarterly Reports on Form 10-QSB and Annual Reports on Form
10-KSB (or equivalent reports if the Company is no longer filing such reports)
to be below 70% of the outstanding principal balance of the Notes: (a) unpledged
mortgage loans owned by the Company, (b) excess servicing assets, (c) furniture
and equipment owned by the Company, (d) other receivables due to the Company and
(e) cash, cash equivalents and other investments having a maturity of less than
one year. See "Reports."
If the Conversion Offer is successfully consummated, the execution of
the Consents will result in an amendment to the Loan Agreement eliminating this
provision.
Events of Default. An "Event of Default" shall be deemed to occur upon
the occurrence of certain events, including any of the following events: (i)
failure by the Company to pay interest on the Notes when the same becomes due
and payable and the continuance of any such failure for 10 days, (ii) failure to
pay principal on the Notes when and as the same shall become due and payable, at
maturity, upon acceleration, redemption, conversion, required redemption or
otherwise, (iii) failure to perform, or breach of, any material covenant in the
Loan and Security Agreements by the Company or the Subsidiary which materially
adversely impacts the practical realization of the benefits to the Holders of
the Notes of the security interests granted to the Holders of the Notes, and
continuance of such failure for 30 days after written notice is given to the
Company or the Subsidiary by the Holders of more than 75% in principal amount of
the Notes or (iv) the occurrence of certain bankruptcy, insolvency or
reorganization proceedings with respect to the Company or the Subsidiary.
If an Event of Default (other than an Event of Default relating to
certain events of bankruptcy, insolvency or reorganization with respect to the
Company) occurs and is continuing, the Holders of a majority in aggregate
principal amount of the Notes then outstanding will be authorized to declare the
principal amount of Notes due and payable, together with accrued and unpaid
interest thereon to the date the Notes are paid. If an Event of Default relating
to certain events of bankruptcy, insolvency or reorganization with respect to
the Company occurs and is continuing, then the principal of the Notes, together
with accrued and unpaid interest to the date the Notes are paid, shall
automatically become and be immediately due and payable without any declaration
or other act on the part of any Holder.
Amendment, Supplement or Waiver. The terms of the Notes may be amended
or supplemented, and any 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 Notes then outstanding. However, without the consent of each
Holder of an outstanding Secured Note, no amendment may (i) reduce the amount of
Notes whose Holders must consent to an amendment, (ii) reduce the rate of or
extend the time for payment of interest on any Notes, (iii) reduce the principal
of or extend the stated maturity of any Notes by more than one year, (iv) reduce
the premium payable upon redemption of any Notes or change the time at which any
Notes may or shall be redeemed,
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<PAGE> 51
(v) make any Notes payable in money other than that stated in the Notes, or (vi)
impair the right of any Holder to institute suit for the enforcement of any
payment on or with respect to any Notes or (vii) increase the conversion price
(provided that this does not restrict a waiver of an adjustment to the
Conversion Price).
Guarantee. The Company's payment obligations under the Notes are
jointly and severally, absolutely and unconditionally guaranteed (the
"Subsidiary Guarantees"), by all of the Company's existing and future, direct
and indirect Subsidiaries (the "Guarantors"). The Company has no independent
operations or assets separate from the investment by the Company in its
subsidiaries, except for the support functions the Company provides to its
subsidiaries and the assets used in connection therewith. The obligations of
each Guarantor under its Subsidiary Guarantee will be secured by a security
interest in the assets of such Subsidiary (subject to the limitations set forth
under "Limitations on Liens") and will be limited to such amount as will not
result in such Subsidiary Guarantee being a fraudulent conveyance under
applicable law.
A Subsidiary Guarantor may be released from its Guarantee and its
related obligations under Loan and Security Agreements only if 80% or more of
the Capital Stock of a Subsidiary Guarantor is sold to another person or if such
Subsidiary Guarantor consolidates with, merges into or sells all or
substantially all of its assets to, another person, in accordance with the
requirements of the Loan and Security Agreements, provided that substantially
all of the assets received by the Company in any such transaction are subject to
the security interest granted to the Holders of the Notes. Except as provided in
the preceding sentence, a Subsidiary Guarantor may not otherwise be released
from its Guarantee.
Collateral and Security. Pursuant to the Loan Agreement, (i) the
Company has assigned and pledged to the Custodian, for the ratable benefit of
the Holders of the Notes, a lien on the Company's mortgage loan receivables,
accounts receivable, furniture, equipment, cash and other assets, and on
securities owned by the Company, including the stock of any subsidiaries, and
(ii) the Guarantors have assigned and pledged to the Custodian, for the ratable
benefit of the Holders of the Notes, a security interest in the Subsidiary
mortgage loan receivables, accounts receivable, furniture, equipment, cash and
other assets and on securities owned by the Subsidiary (together with the
collateral referred to above, the "Collateral"). The security interest on any
trademarks or other proprietary rights of the Company, cash held in bank
accounts and real property are not perfected.
Collateral may be sold or disposed of by the Company or any Guarantor
free and clear of the lien referred to above, provided that substantially all of
the assets received by the Company in any such transaction are subject to the
security interest granted to the Holders of the Notes. In addition, the Company
may obtain a release of Collateral from the lien referred to above, and may
repledge such Collateral to secure indebtedness to third parties, to the extent
permitted under the provisions of "Covenants -- Limitations on Liens."
The Notes and other documentation evidencing mortgage loans originated
or purchased by the Company or the Subsidiary (other than mortgage loans pledged
to third parties, as permitted by the Loan and Security Agreements) have been
delivered to the Custodian and held by the Custodian on behalf of the Holders of
the Notes. The Company is permitted to sell the
-44-
<PAGE> 52
mortgage loans from time to time in its discretion. The Custodian will deliver
the notes and other documentation held by it to the Company upon the Company's
request if the Company is making a sale of the mortgage loans or to the extent
necessary in connection with the foreclosure of mortgage loans.
Holders of a majority in principal amount of the Notes may notify
account debtors that payments be made to the Custodian if an Event of Default
has occurred and is continuing. Until such time, the Company will not be
required to deposit any cash with the Custodian.
If the Notes become due and payable prior to the final stated maturity
thereof or are not paid in full at the final stated maturity thereof and any
applicable grace period has expired, the Holders of a majority in aggregate
principal amount of the Notes may take such actions as they deem appropriate to
foreclose upon the Collateral in accordance with the Loan and Security
Agreements. The proceeds will be applied first to pay the expenses of such
foreclosure, and thereafter to pay, pro rata, the principal of and interest on
the Notes.
Reports. So long as the Notes are outstanding, the Company will furnish
to the Holders of the Notes all quarterly financial statements and annual
financial reports (containing audited financial statements, including a balance
sheet and the related statement of operations, stockholders equity and cash
flows and accompanied by a report of an independent public accountant) that the
Company is required to file with the Securities and Exchange Commission under
the Securities Exchange Act of 1934, as amended (or similar reports if the
Company is not at the time required to file such reports with the Commission)
not later than 15 days after the date quarterly and annual financial reports are
required to be filed with the Securities and Exchange Commission.
Collateral Agent and Custodian. JMR Funding, Inc., acts as agent for
the investors under the Security Agreement. The Agent will act on behalf of the
investors to enforce their rights under the Security Agreement, but will only
act on the instructions of Holders of a majority in principal amount of the
Notes.
John J. McManus & Associates, P.C. serves as the Custodian. The
Custodian holds certain of the Collateral as agent for the Holders of the Notes.
The Custodian will not be obligated to take any action to foreclose upon the
Collateral or otherwise enforce the rights of the Holders and any such actions
shall be taken by the Holders of a majority in principal amount of the Notes
then outstanding. The Custodian is a law firm which represents the Company on
certain legal matters.
Registration Rights. The Company agreed at its expense to use its best
efforts to prepare and file one registration statement ("Registration
Statement") on the appropriate form under the Securities Act with respect to the
shares of Common Stock issued and issuable upon conversion of the Notes promptly
following the final closing of the offering relating to the sale thereof and to
keep the Registration Statement effective and current for a period of two years.
To date the Company has filed such Registration Statement which remains in
effect but is not correct. Accordingly, no common stock may be acquired pursuant
to the Registration Statement.
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<PAGE> 53
The Holders of the Preferred Stock have one demand registration right
and unlimited piggyback registration rights.
-46-
<PAGE> 54
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
Included in Appendix A, Appendix B and Appendix C are the Company's
Consolidated Financial Statements and Notes thereto and Management's Discussion
and Analysis. Holders of the Preferred Stock and the Notes should refer to
Appendix A, Appendix B and Appendix C for detailed financial information about
the Company.
The following historical and pro forma unaudited financial information
is based on the consolidated financial statements of the Company and has been
prepared to give effect to this Conversion Offer as if each had been consummated
on June 30, 1997. The pro forma adjustments assume acceptance of this Conversion
Offer, in the alternative, by Holders of 75% and 100% of the outstanding shares
of Preferred Stock and the Notes. The pro forma financial information does not
purport to be indicative of the results which would actually have been obtained
had such transactions been completed as of the assumed date and for the period
presented or which may be obtained in the future, and should be read in
conjunction with the consolidated financial statements of the Company and the
related notes appearing in Appendix A and Appendix B to this Offering Circular.
The assumptions on which the following pro forma financial information are based
are further described in the accompanying footnotes.
PRO FORMA BALANCE SHEET
Assuming conversion of 75% of Notes and Preferred Stock
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Historical Adjustment Balance
---------- ---------- -----------
<S> <C> <C> <C>
ASSETS
Cash 1,536,252 540,500 2,076,752(i)
Loans receivable 5,256,518 5,256,518
Interest-only strip receivable 7,268,930 7,268,930
Other assets (a) 3,263,021 (1,000,000) 2,263,021
---------- ----------
Total Assets 17,324,721 16,865,221
========== ==========
LIABILITIES
10% Convertible notes (b) 8,140,000 (6,105,000) 2,035,000
Warehouse lines of credit 5,656,386 5,656,386
Advance on interest-only strip
receivable 2,100,651 2,100,651
Other debt & liabilities 1,050,846 1,050,846
---------- ----------
Total Liabilities 16,947,883 10,842,883
SHAREHOLDERS EQUITY
Common Stock (c) 4,073 19,479 23,552
Preferred Stock (d) 332 (225) 107
Paid-in-capital & retained
earnings 372,433 5,626,246 5,998,679
---------- ----------
Total Shareholders Equity 376,838 6,022,338
---------- ----------
Total Liabilities & Shareholders
Equity 17,324,721 16,865,221
========== ==========
</TABLE>
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<PAGE> 55
PRO FORMA BALANCE SHEET
Assuming conversion of 100% of Notes and Preferred Stock
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Historical Adjustment Balance
---------- ---------- -------
<S> <C> <C> <C>
ASSETS
Cash 1,536,252 804,000 2,340,252(i)
Loans receivable 5,256,518 5,256,518
Interest-only strip receivable 7,268,930 7,268,930
Other assets (a) 3,263,021 (1,200,000) 2,063,021
---------- ----------
Total Assets 17,324,721 16,928,721
========== ==========
LIABILITIES
10% Convertible notes (b) 8,140,000 (8,140,000) 0
Warehouse lines of credit 5,656,386 5,656,386
Advance on interest-only strip
receivable 2,100,651 2,100,651
Other debt & liabilities 1,050,846 1,050,846
---------- ----------
Total Liabilities 16,947,883 8,807,883
SHAREHOLDERS EQUITY
Common Stock (c) 4,073 25,972 30,045
Preferred Stock (d) 332 (315) 17
Paid-in-capital & retained
earnings 372,433 7,718,343 8,090,776
---------- ----------
Total Shareholders Equity 376,838 8,120,838
---------- ----------
Total Liabilities & Shareholders
Equity 17,324,721 16,928,721
========== ==========
</TABLE>
PRO FORMA STATEMENT OF OPERATIONS
Assuming conversion of 75% of Notes and Preferred Stock
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Historical Adjustment Balance
---------- ---------- ------------
<S> <C> <C> <C>
REVENUES 5,858,158 5,858,158(i)
EXPENSES:
Operating expenses (e) 7,352,301 250,000 7,602,301
Provision for credit loss 425,231 425,231
Interest expense & amortization of
deferred financing costs (f) 1,443,625 (790,500) 653,125
----------- -------- -----------
9,221,157 (540,500) 8,680,657
----------- -------- -----------
Loss before provision for taxes (3,362,999) 540,500 (2,822,499)
Provision for income taxes 0 0 0
----------- -------- -----------
Net loss (g) (3,362,999) 540,500 (2,822,499)
=========== ======== ===========
Weighted average shares outstanding 3,701,574 23,180,574
Net loss per share of common stock (h) -1.06 -0.13
</TABLE>
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<PAGE> 56
PRO FORMA STATEMENT OF OPERATIONS
Assuming conversion of 100% of Notes and Preferred Stock
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Historical Adjustment Balance
---------- ---------- -------
<S> <C> <C> <C>
REVENUES 5,858,158 5,858,158(i)
EXPENSES:
Operating expenses (e) 7,352,301 250,000 7,602,301
Provision for credit loss 425,231 425,231
Interest expense & amortization of
deferred financing costs (f) 1,443,625 (1,054,000) 389,625
---------- ----------- ---------
9,221,157 (804,000) 8,417,157
---------- ----------- ---------
Loss before provision for taxes (3,362,999) 804,000 (2,558,999)
Provision for income taxes 0 0 0
---------- ----------- ---------
Net loss (g) (3,362,999) 804,000 (2,558,999)
========== =========== ==========
Weighted average shares outstanding 3,701,574 29,673,574
Net loss per share of common stock (h) -1.06 -0.09
</TABLE>
Notes to Pro Forma Financial Statements:
(a) Adjustment represents write-off of unamortized deferred financing costs
incurred with the issuance of the Notes.
(b) Adjustment represents the amount of Notes to be exchanged for common stock.
(c) Adjustment represents the par value of common stock to be issued in
exchange for the Notes and Preferred Stock.
(d) Adjustment represents the par value of Preferred Stock to be exchanged or
common stock.
(e) Adjustment represents all estimated transaction costs (including legal
fees) to be incurred for the conversion offer.
(f) Adjustment represents interest expense and amortization of deferred
financing costs associated with the converted Notes.
(g) Net loss does not include a pre-tax debt conversion charge to
operations which the Company would recognize in the second quarter of
fiscal 1998 in the amount of $7,326,000 and $9,768,000 based on
conversion percentages of 75% and 100%, respectively.
(h) Net loss per share includes dividends on preferred stock, which are not
reflected in the net loss amount but are added when calculating net
loss per share.
(i) Increase in cash is the effect of the adjustments discussed in notes (e)
and (f).
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<PAGE> 57
CAPITALIZATION
The following table presents the pro forma capitalization of the
company i) as of August 30, 1997 and ii) giving effect to the conversion of 100%
of the Secured Notes and 100% of the 9% Preferred Stock, the sale of a maximum
of $3,000,000 of 11% Preferred Stock in the Proposed Financing and the repayment
of the Bridge Loan. This table does not give effect to the Reverse Stock Split.
PRO FORMA CAPITALIZATION TABLE(1)
<TABLE>
<CAPTION>
Prior to After Description
Conversion Offer(2) Conversion Offer(4)
- -------------------------------------------------------------------------------------
<S> <C> <C>
EXISTING SHARES OUTSTANDING 4,072,761 30,045,069
SHARES RESERVED FOR ISSUANCE:
CONVERTIBLE DEBT:
10% convertible notes 3,256,000 0
10% convertible warehouse lines 3,075,000 3,075,000
10% convertible secured notes 2,125,000 0
CONVERTIBLE PREFERRED STOCK:
11% convertible preferred stock 4,185,000 4,185,000
9% convertible preferred stock 2,520,000 0
Proposed Financing (11% preferred stock) 0 7,500,000
WARRANTS ISSUED TO CONVERTIBLE SECURITY HOLDERS:
11% convertible preferred stock 669,600 669,600
9% convertible preferred stock 800,000 800,000
10% convertible secured notes 2,125,000 2,125,000
Proposed Financing 0 7,500,000
OTHER CONVERTIBLE INSTRUMENTS:
Underwriter's warrants5 1,351,918 1,351,918
Employee stock option plans (actual outstanding) 1,344,500 1,344,500
Other warrants 932,500 932,500
-------------------------------
FULLY DILUTED SHARES OUTSTANDING 26,457,279 59,528,587
</TABLE>
- ----------------------------
(1) Does not give effect to the Reverse Stock Split
(2) At August 30, 1997
(3) Assumes:(i) 100% conversion of the Secured Notes and the 9% Preferred
Stock,
(ii) Maximum amount of $3,000,000 of 11% Preferred Stock is raised
(iii) Bridge Loan is repaid out of the proceeds Proposed Financing
(4) If the Reverse Stock Split is approved, there would be 35,000,000 shares
authorized, 6,009,014 shares outstanding, 5,896,703 reserved for issuance,
and 23,094,283 shares authorized but not reserved or issued.
(5) The Company expects that the exercise price of these Common Stock Purchase
Warrants issued to Thieme Fonds International, a 27.13% stockholder of the
Company, VPM Verwaltungs AG, a 17.34% stockholder of the Company, Taglich
Brothers, D'Amadeo & Wagner and J. Michael Reisert, Inc. will be adjusted
pursuant to anti-dilution provisions contained therein.
-50-
<PAGE> 58
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding ownership of
Common Stock for (i) each person known by the Company to own beneficially five
percent or more of the outstanding shares of the Company's Common Stock, (ii)
each director of the Company, (iii) each of the executive officers of the
Company, and (iv) all officers and directors of the Company as a group as of
August 20, 1997. This table does not give effect to the Reverse Stock Split. As
a result of the Conversion Offer, the number of shares of outstanding Common
Stock beneficially owned by principal shareholders of the Company (assuming that
they convert their shares in the Conversion Offer) will be increased. Set forth
below in the "As Adjusted" column is the number of shares of Common Stock that
beneficial owners of 5% of the Common Stock will beneficially own after giving
effect to the Conversion Offer.
<TABLE>
<CAPTION>
Name and Address Shares Beneficially Owned (1)
of Beneficial Owner ----------------------------------------------------
or Identity of Group Number Percent of Class As Adjusted(2)
- -------------------- ------ ---------------- --------------
<S> <C> <C> <C>
Gerald F. Sullivan (3) 355,000 (18) 8.02 (42)
Craig J. Brunet (3) 160,000 (19) 3.78 (42)
Samuel R. Dunlap, Jr. (3) 399,064 (20) 8.92 (42)
Joel C. Williams (3) 90,000 (21) 2.16 (42)
Samuel Scott Hemingway (3) 125,000 (22) 2.98 (42)
Carlos R. Munoz (3) 20,000 (23) * (42)
John C. Thomas, Jr. (3) 167,584 (24) 3.95 (42)
Donald S. Sigler (4) 383,688 8.61 (42)
Greenwich Capital Products, Inc. (5) 300,000 (25) 6.86 (42)
NewSouth Special Equities, L.P. (6) 920,000 (26) 18.43 (42)
Jackt Holdings Corp. (7) 300,000 (27) 6.86 (42)
Ranier Heubach (8) 551,250 (28) 11.92 1,746,635
VPM Verwaltungs AG (9) 854,639 (29) 17.34 1,993,101
Kingsley & Company (10) 393,750 (30) 8.82 1,247,596
Muico & Company (11) 315,000 (31) 7.18 998,077
Dr. Dieter Quast (12) 452,500 (32) 10.00 2,166,346
</TABLE>
-51-
<PAGE> 59
<TABLE>
<S> <C> <C> <C>
Arkansas Teachers Retirement
System (13) 360,000 (33) 8.12 1,800,000
Michigan Municipal Employee
Retirement System (13) 800,000 (34) 16.42 4,000,000
Lancer Partners, LP (14) 660,000 (35) 13.95 3,300,000
The Intergroup Corporation (15) 870,000 (36) 17.60 (42)
Portsmouth Square (15) 350,000 (37) 7.91 (42)
Santa Fe Financial (15) 870,000 (38) 17.60 (42)
E. H. Arnold (16) 500,000 (39) 10.93 (42)
Thieme Fonds International (17) 1,881,250 (40) 31.60 (42)
All executive officers and directors
as a group (9 persons) 1,516,648 (41) 27.13 (42)
</TABLE>
- -----------------
* Less than 1%
(1) Except as otherwise indicated, each of the parties has sole voting and
investment power over the shares owned.
(2) Adjusted to give effect to the conversion of all 9% Preferred Stock
and/or Secured Notes held by such beneficial owner. In addition, the
Company is engaged in discussions with Mr. Thieme concerning Mr.
Thieme's serving as a director or Chairman of the Board of the Company.
The election of Mr. Thieme to either of these positions is subject to
the approval of the Board of Directors and there can be no assurance
that Mr. Thieme will be elected to either of such positions.
(3) c/o Credit Depot Corporation, 700 Wachovia Center, Gainesville, GA
30501
(4) 3242 Dunlap Drive, Gainesville, GA 30506
(5) 600 Steamboat Road, Greenwich, CT 06830
(6) 1000 Ridgeway Loop Rd., Memphis, TN 38117
(7) c/o Promena, AG, Rheinestrasse 81, CH-4133 Pratteln 1, Switzerland
(8) Unterberstrasse 104, A-5084 Grossgrnain, Salzburg, Austria
(9) Therwilerstrasse 10, CH-4103 Bottmingen, Switzerland
(10) c/o Quintus Trust, Mr. Charles T. Collis, Sr. and Mr. Werner Hoffer,
TTEE, Conyers, Dill & Pearman, Clarendon House, Church Street,
Hamilton, Bermuda
(11) c/o Putnam Investments, One Post Office Square, 11th Floor, Boston, MA
02109
(12) c/o Soriano-Eupen GmbH, Friesenplatz 5, D-50672 Keoln, Germany
(13) c/o KCM, 10829 Olive Blvd., St. Louis, MO 63141-7739
(14) 237 Park Avenue, New York, NY 10017
(15) 2121 Avenue of the Stars, Suite 2020, Los Angeles, CA 90067
(16) c/o Taglich Brothers, D'Amadeo & Wagner, 100 Wall Street, New York, NY
10005
(17) 2 Place de Metz, L-1930 Luxembourg, Attention: Heiko Thieme Heiko
Thieme is the President of Thieme Fonds International
-52-
<PAGE> 60
(18) Includes Common Stock issuable on exercise of options to purchase
293,750 shares of Common Stock under the Company's 1990 Stock Option
Plan and the 1993 Plan (collectively, the "Plans") exercisable within
60 days and options to purchase 55,000 shares of Common Stock that have
been granted outside the Plans exercisable within 60 days. Does not
include 11,250 shares issuable on exercise of options of Common Stock
issuable on exercise of options which are not exercisable within 60
days.
(19) Includes Common Stock issuable on exercise of options to purchase
155,000 shares of Common Stock under the Plans exercisable within 60
days.
(20) Includes Common Stock issuable on exercise of options to purchase
85,000 shares of Common Stock under the Plans exercisable within 60
days.
(21) Includes Common Stock issuable on exercise of options to purchase
90,000 shares under the Plans exercisable within 60 days.
(22) Includes Common Stock issuable on exercise of options to purchase
125,000 shares of Common Stock under the Plans exercisable within 60
days. (23) Includes Common Stock issuable on exercise of options to
purchase 20,000 shares of Common Stock under the Plans exercisable
within 60 days. (24) Includes Common Stock issuable on exercise of
options to purchase 85,000 shares of Common Stock under the Plans
exercisable within 60 days and options to purchase 45,000 shares of
Common Stock that have been granted outside the Plans exercisable
within 60 days.
(25) Represents immediately exercisable warrants to purchase 300,000 shares
of Common Stock.
(26) Represents 920,000 shares of Common Stock issuable upon the conversion
of a 10% convertible warehouse line.
(27) Represents 300,000 shares of Common Stock issuable upon the conversion
of convertible participations and warrants.
(28) Represents 551,250 shares of Common Stock issuable upon the conversion
of 9% Preferred Stock and warrants.
(29) Represents 525,000 shares of Common Stock issuable upon the conversion
of 9% Preferred Stock, and 329,639 shares issuable on exercise of
immediately exercisable warrants.
(30) Represents 393,750 shares of Common Stock issuable upon the conversion
of 9% Preferred Stock and warrants.
(31) Represents 315,000 shares of Common Stock issuable upon the conversion
of 9% Preferred Stock.
(32) Represents 400,000 shares of Common Stock issuable upon the conversion
of 10% convertible debt and 52,500 shares of Common Stock issuable upon
conversion of preferred stock.
(33) Represents 360,000 shares of Common Stock issuable upon conversion of
10% convertible debt.
(34) Represents 800,000 shares of Common Stock issuable upon the conversion
of 10% convertible debt.
(35) Represents 660,000 shares of Common Stock issuable upon the conversion
of 10% convertible debt.
(36) Represents 870,000 shares of Common Stock issuable upon conversion of
11% Series B Convertible Preferred Stock and warrants.
(37) Represents 350,000 shares of Common Stock issuable upon conversion of
11% Series B Convertible Preferred Stock and warrants.
(38) Represents 870,000 shares of Common Stock issuable upon conversion of
11% Series B Convertible Preferred Stock and warrants.
(39) Represents 500,000 shares of Common Stock issuable upon conversion of
10% secured promissory note and warrants.
(40) Represents 1,750,000 shares of Common Stock issuable upon conversion of
10% secured promissory notes and exercise of warrants and 131,250
shares issuable upon conversion of 9% Preferred Stock and exercise of
warrants.
(41) Includes 930,250 shares of Common Stock issuable upon exercise of
options under the Plan exercisable within 60 days. Does not include
123,500 shares issuable on exercise of options to purchase Common Stock
not exercisable within 60 days.
(42) No change in beneficial ownership.
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<PAGE> 61
CONVERSION OFFER PROCEDURES
Expiration Date; Extension; Amendment; Termination. This Conversion
Offer will expire at 5:00 p.m., Atlanta, Georgia time, on October 22, 1997,
unless extended by the Company.
The Company reserves the right, in its judgment, (i) to terminate this
Conversion Offer if any of the events set forth under the caption "The
Conversion Offer -- Conditions of the Conversion Offer" have occurred and have
not been waived by the Company, by giving oral or written notice of such
termination to the Conversion Agent and (ii) to extend or otherwise amend the
terms of this Conversion Offer in any manner. The amendment, extension or
termination of this Conversion Offer as to the Preferred Stock and the Notes, or
the waiver of a condition as to either security, need not be accompanied by the
same action as to the other security. Any such extension, termination or
amendment will be followed as promptly as practicable by public announcement
thereof. If this Conversion Offer is amended in a manner determined by the
Company to constitute a material change, the Company will promptly disclose each
amendment in a manner reasonably calculated to inform the holders of such
amendment and, if such amended Conversion Offer would otherwise expire during
such period, the Company will extend each such amended Conversion Offer for a
period which the Company in its judgment deems appropriate, depending upon the
significance of the amendment and the manner of disclosure to Holders of the
Preferred Stock and the Notes. Any such extension will be in compliance with the
applicable rules and regulations of the Commission.
Subject to applicable law (including Rule 13e-4(e)(2) under the
Exchange Act, to the extent it may be applicable or relevant, which requires
that material changes be promptly disseminated to Holders in a manner reasonably
calculated to inform them of such changes) and without limiting the manner in
which the Company may choose to make a public announcement, if any, of any
extension, amendment, waiver or termination of this Conversion Offer, the
Company will have no obligation to publish, advertise, or otherwise communicate
any such public announcement, other than by making a timely release to the Dow
Jones News Service.
If, prior to the Expiration Date, the Company should decide to increase
or decrease the number of shares of Preferred Stock and Notes that it desires to
be converted or to increase or decrease the additional shares of Common Stock
being offered in this Conversion Offer and, at the time notice of any such
increase or decrease is first published, sent or given to holders of such
shares, this Conversion Offer is scheduled to expire at any time earlier than
the period ending on the tenth business day from and including the date that
such notice is first so published, sent or given, this Conversion Offer will be
extended at least until the expiration of such ten business day period. For
purposes of this Conversion Offer, a "business day" means any day other than a
Saturday, Sunday or federal holiday, and consists of the time period from 12:01
a.m. through 12:00 midnight, Atlanta, Georgia time.
Procedures for Conversion. Each Holder of Preferred Stock who elects to
convert such shares shall deliver the Preferred Stock certificate(s) and will be
issued certificates for the number of shares of Common
-54-
<PAGE> 62
Stock into which the Preferred Stock tendered by the Holder pursuant to the
Conversion Offer may be converted. Each Holder of Notes who elects to convert
such Holder's Notes shall deliver the Notes and will be issued certificates for
the number of shares of Common Stock into which the Notes tendered by the Holder
pursuant to the Conversion Offer may be converted. Each Holder who elects to
convert pursuant to the Conversion Offer shall also be required to deliver an
executed Consent.
The delivery of certificates for Preferred Stock or Notes for
conversion in this Conversion Offer by a Holder pursuant to one of the
procedures set forth below will constitute an agreement between such Holder and
the Company in accordance with the terms and subject to the conditions set forth
in this Offering Circular, in the Letter of Transmittal and in each security.
The Holder of a share or shares of Preferred Stock or Notes may
exercise the conversion rights as to such securities under the certificate(s) or
Notes and receive the Common Stock into which such securities are convertible by
delivering to the Conversion Agent the certificate(s) for all of the Preferred
Stock and/or Notes held by such Holder, together with the properly completed
Letter of Transmittal (or manually signed facsimile thereof), executed by the
Registered Holder (defined below) thereof, any other documents required by the
Letter of Transmittal (such as appropriate stock powers, if the certificates for
such Preferred Stock and/or Notes have not been endorsed, and evidence of
authority to act, if the Letter of Transmittal or any certificates for Preferred
Stock and/or Notes or related stock powers are signed by someone acting in a
fiduciary or representative capacity), and the executed Consent, all of which
must be received by the Conversion Agent at its address set forth on the back
cover of this Offering Circular prior to 5:00 p.m., Atlanta, Georgia time, on
the Expiration Date. The term "Registered Holder" will mean the person in whose
name the Preferred Stock and/or Notes is registered on the books of the
Company's transfer agent. LETTERS OF TRANSMITTAL, CONSENTS AND CERTIFICATES FOR
THE PREFERRED STOCK AND NOTES SHOULD BE DELIVERED TO THE CONVERSION AGENT AND
NOT TO THE COMPANY.
Signatures on the Letter of Transmittal must be guaranteed by a firm
that is a financial institution (including most commercial banks, savings and
loan associations and brokerage houses) that is a participant in one of the
signature guarantee programs described in the Letter of Transmittal (each, an
"Eligible Institution") unless the certificate or certificates for the Stock and
the Notes Preferred to be converted pursuant thereto are delivered (i) by a
Registered Holder of such units or shares who has not completed either of the
boxes entitled "Special Issuance Instructions" or "Special Delivery
Instructions" on the Letter of Transmittal or (ii) for the account of an
Eligible Institution.
THE METHOD OF DELIVERY TO THE CONVERSION AGENT IS AT THE ELECTION AND
RISK OF THE HOLDER, BUT IF SUCH DELIVERY IS BY MAIL IT IS RECOMMENDED THAT
HOLDERS USE REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED. IN
ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE
CONVERSION AGENT BEFORE THE EXPIRATION DATE.
Only a Registered Holder of Preferred Stock or Notes may deliver
certificates for Preferred Stock or Notes with respect to this Conversion Offer.
If the Letter of Transmittal is signed by a person other than the Registered
Holder of the Preferred Stock or Notes, the certificates representing such
Preferred Stock or Notes must be endorsed or accompanied by appropriate stock
powers, in either case signed exactly as the name or names of the Registered
Holder (or Registered Holders)
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<PAGE> 63
appear on such certificates, together with a letter (or other evidence)
describing the transaction pursuant to which the Preferred Stock or Notes was
transferred. If the Letter of Transmittal or any certificates for Preferred
Stock or Notes or related stock powers or endorsements are signed by trustees,
executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing and, unless waived by the Company,
provide evidence satisfactory to the Company of their authority to so act.
Any beneficial owner whose Preferred Stock or Notes is registered in
the name of its broker, dealer, commercial bank, trust company or other nominee
and who wishes to convert Preferred Stock or Notes in connection with this
Conversion Offer should contact such Registered Holder promptly and instruct
such Registered Holder to effect delivery on its behalf. If such beneficial
owner wishes to effect delivery on its own behalf, such beneficial owner must,
prior to completing and executing the Letter of Transmittal and delivering the
certificate or certificates for its Preferred Stock or Notes, either make
appropriate arrangements to register ownership of the Preferred Stock or Notes
in such Holder's name or obtain a properly completed stock power from the
Registered Holder. Beneficial owners should be aware that the transfer of record
ownership may take considerable time.
By delivering certificates for Preferred Stock or Notes for conversion
in connection with this Conversion Offer, each Registered Holder represents and
warrants to the Company that such Registered Holder has full power and authority
to convert the Preferred Stock or Notes and that such shares are free and clear
of all liens, restrictions, charges and encumbrances and are not subject to any
adverse claim. Each Registered Holder will, upon request, execute and deliver
any additional documents deemed by the Conversion Agent or the Company to be
necessary or desirable to complete the conversion of the Preferred Stock or
Notes.
Guaranteed Delivery Procedures. If a Registered Holder of the Preferred
Stock or Notes desires to deliver the certificate or certificates and such
certificates are not immediately available (or the procedures for book-entry
transfer cannot be completed on a timely basis), or time will not permit such
Holder's certificates or other required documents to reach the Conversion Agent
before the Expiration Date, a delivery for conversion may be effected if (i) the
delivery is made by or through an Eligible Institution, (ii) prior to the
Expiration Date, the Conversion Agent receives from such Eligible Institution a
properly completed and duly executed Notice of Guaranteed Delivery (by telegram,
telex, facsimile transmission, mail or hand delivery) setting forth the name and
address of the Holder of the Preferred Stock or Notes and the number of shares
of Preferred Stock or principal amount of Notes to be converted, stating that
the delivery for conversion is being made thereby and guaranteeing that, within
three NASDAQ trading days after execution of the Notice of Guaranteed Delivery,
the certificates for the Preferred Stock or Notes, in proper form for
conversion, or book-entry confirmation, along with a duly executed Letter of
Transmittal, and any other documents required by the Letter of Transmittal will
be deposited by the Eligible Institution with the Conversion Agent, and (iii)
the certificates for the Preferred Stock or Notes, in proper form for
conversion, or book-entry confirmation, along with a duly executed Letter of
Transmittal, and all other documents required by the Letter of Transmittal are
received by the Conversion Agent within three NASDAQ trading days after
execution of Notice of Guaranteed Delivery.
-56-
<PAGE> 64
Effective Deliveries; Compliance with Conditions of this Conversion
Offer; Delivery of Common Stock. Upon the terms and subject to the conditions of
the certificate and this Conversion Offer (including the terms and conditions of
any extension or amendment), the certificates for all Preferred Stock and Notes
with respect to the conversion that are validly delivered pursuant to this
Conversion Offer and not properly withdrawn prior to 5:00 p.m., Atlanta, Georgia
time, on the Expiration Date will be accepted and deemed delivered to the
Company for conversion and the Preferred Stock and Notes will be converted as of
the Expiration Date and entitled to the additional benefits of this Conversion
Offer. Each Letter of Transmittal for validly delivered certificate(s) that is
not withdrawn will constitute written notice of conversion pursuant to the
respective terms of the Preferred Stock and Notes; provided, that such notice of
conversion will not be deemed delivered or effective until the Company has
notified the Conversion Agent of acceptance as set forth below. The Company,
through the Conversion Agent, will deliver certificates for Common Stock issued
in respect of converted shares within five NASDAQ trading days following the
later to occur of (i) the Expiration Date or (ii) receipt of the certificate or
certificates for Preferred Stock and Notes with respect to the conversion and
all other documents required by the Letter of Transmittal pursuant to the
guaranteed delivery procedures set forth herein. See "Conversion Offer
Procedures -- Guaranteed Delivery Procedures."
All questions as to the validity, form, eligibility (including time of
receipt), delivery and withdrawal of certificate(s) for shares of Preferred
Stock and Notes will be resolved by the Company, whose determination will be
final and binding on all parties, The Company reserves the absolute right to
reject any or all deliveries for conversion that are not in proper form or which
would, in the opinion of counsel for the Company, be unlawful. The Company also
reserves the right, in its judgment, to waive any irregularities or conditions
of delivery as to particular Preferred Stock or Notes. The Company's
interpretation of the terms and conditions of this Conversion Offer (including
the instructions in the Letter of Transmittal) and the certificate(s) will be
final and binding. Unless waived, any irregularities or defects in connection
with deliveries must be cured within such time as the Company determines.
Neither the Company, the Conversion Agent nor any other person will be under any
duty to give notification of irregularities or defects in such deliveries or
shall incur any liability for failure to give such notification. Deliveries will
not be deemed to have been made until such irregularities have been cured or
waived.
If any shares of Preferred Stock or Notes are not converted in
connection with this Conversion Offer because of an invalid delivery, the
occurrence or nonoccurrence of certain other events set forth herein or
otherwise, such unaccepted certificates for Preferred Stock or Notes will be
returned, at the Company's expense, to the Registered Holder thereof as promptly
as practicable after the Expiration Date or the termination of this Conversion
Offer, as applicable.
Withdrawal of Deliveries. Any Holder of Preferred Stock or Notes who
has delivered a certificate or certificates for, or effected delivery with
respect to, shares of Preferred Stock or Notes for conversion may withdraw such
delivery at any time prior to 5:00 p.m., Atlanta, Georgia time, on the
Expiration Date.
To be effective, a written telegraphic, telex or facsimile transmission
notice of withdrawal must (i) be received by the Conversion Agent at the address
set forth on the back cover of this
-57-
<PAGE> 65
Offering Circular prior to 5:00 p.m., Atlanta, Georgia time, on the Expiration
Date, (ii) specify the name of the person having made or effected the delivery
to be withdrawn, (iii) identify the Preferred Stock or Notes with respect to
which delivery is to be withdrawn and (iv) be (a) signed by the Registered
Holder in the same manner as the original signature on the Letter of Transmittal
by which the certificates representing such Preferred Stock or Notes were
delivered (including any required signature guarantees) or (b) accompanied by
evidence satisfactory to the Company that the Registered Holder withdrawing such
delivery has succeeded to beneficial ownership of such Preferred Stock or Notes.
If certificates representing Preferred Stock or Notes have been delivered or
otherwise identified to the Conversion Agent, the name of the Registered Holder
and the serial numbers of the particular certificate(s) to be withdrawn must
also be so furnished to the Conversion Agent as aforesaid prior to the physical
release of the withdrawn certificate(s). A properly withdrawn delivery will
thereafter be deemed not validly delivered for purposes of this Conversion
Offer; provided, however, that delivery may be again made following one of the
procedures described herein at any time prior to 5:00 p.m., Atlanta, Georgia
time, on the Expiration Date.
All questions as to the validity, form and eligibility (including time
of receipt) of notices of withdrawal will be determined by the Company, whose
determination will be final and binding on all parties. Neither the Company, the
Conversion Agent, nor any other person will be under any duty to give
notification of any defects or irregularities in any notice of withdrawal or
incur any liability for failure to give any such notification.
PAYMENT OF EXPENSES
This Conversion Offer is being made by the Company in reliance on the
exemption from the Securities Act registration requirements afforded by Section
3(a)(9) thereof. Therefore, the Company has not retained any dealer-manager in
connection with this Conversion Offer and will not make any payments to brokers,
dealers, salespersons or others for soliciting conversion in connection with
this Conversion Offer. The Company, however, will pay the Conversion Agent
reasonable and customary fees for its services and will reimburse it for its
reasonable out-of-pocket expenses in connection therewith. The Company will also
pay the reasonable out-of-pocket expenses incurred by brokers, custodians,
nominees and fiduciaries in forwarding copies of this Offering Circular and
related documents to the owners of Preferred Stock or Notes, and in handling or
forwarding deliveries of Preferred Stock or Notes for conversion. Holders of
Preferred Stock or Notes will be responsible for all other costs incurred in
evaluating or converting in connection with this Conversion Offer.
The estimated expenses to be incurred in connection with this
Conversion Offer will be paid by the Company and are estimated in the aggregate
to be $250,000.
The Company will pay all transfer taxes, if any, applicable to the
conversion of the Preferred Stock and the Notes in connection with this
Conversion Offer and issuance of additional shares of Common Stock. If, however,
Common Stock is to be delivered to, or is to be registered or issued in the name
of, any person other than the Registered Holder of the Preferred Stock or the
Notes with respect to the conversion is registered in the name of any person
other than the person signing the Letter of Transmittal, or if a transfer tax is
imposed for any reason other than the issuance of
-58-
<PAGE> 66
Common Stock pursuant to this Conversion Offer, the amount of any such transfer
taxes (whether imposed on the Registered Holder or any other person) will be
payable by the delivering Holder. Such Holder hereby acknowledges and agrees
that the Company and the Conversion Agent may defer effecting such transfer and
may retain such shares of Common Stock until satisfactory evidence of the
payment of such taxes, or exemption therefrom, is submitted to them.
-59-
<PAGE> 1
EXHIBIT (a)(2)
CONVERSION NOTICE AND LETTER OF TRANSMITTAL
CREDIT DEPOT CORPORATION
CONVERSION OFFER
CONVERSION OF 9% CONVERTIBLE
PREFERRED STOCK INTO APPROXIMATELY
30 SHARES OF COMMON STOCK
AND
CONVERSION OF 10% CONVERTIBLE
SECURED NOTES TO COMMON STOCK
AT A CONVERSION PRICE OF $.50
AS DESCRIBED IN THE OFFERING CIRCULAR, DATED SEPTEMBER 23, 1997 THIS CONVERSION
OFFER, AND WITHDRAWAL RIGHTS FOR THE PREFERRED STOCK AND THE NOTES DELIVERED FOR
CONVERSION IN CONNECTION WITH THE CONVERSION OFFER, WILL EXPIRE AT 5:00 P.M.,
ATLANTA, GEORGIA TIME, ON OCTOBER 22, 1997 (THE "EXPIRATION DATE"), UNLESS
EXTENDED.
The Conversion Agent for the Conversion Offer is:
CONTINENTAL STOCK TRANSFER & TRUST COMPANY
By Mail:
Two Broadway, 19th Floor
New York, New York 10004
By Facsimile Transmission
(For Eligible Institutions Only)
(212) 509-5150
By Hand or Overnight Courier:
Two Broadway, 19th Floor
New York, New York 10004
DELIVERY OF THIS NOTICE OF CONVERSION AND LETTER OF TRANSMITTAL (THE "LETTER OF
TRANSMITTAL") TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A
VALID DELIVERY.
<PAGE> 2
THE INSTRUCTIONS ACCOMPANYING THIS LETTER OF TRANSMITTAL SHOULD BE READ
CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL IS COMPLETED.
This Letter of Transmittal is to be used by holders ("Holders") of 9%
Convertible Preferred Stock (the "Preferred Stock") and 10% Convertible Secured
Notes (the "Notes") (collectively, the "Securities") if certificates for such
Securities are to be forwarded herewith. Holders who cannot deliver the
certificates for Preferred Stock and/or Notes and all other documents required
hereby to the Conversion Agent on or prior to the Expiration Date or who cannot
complete the procedures for book-entry transfer on a timely basis, or who cannot
deliver a Letter of Transmittal and all other required documents to the
Conversion Agent on or prior to the Expiration Date, must tender their Preferred
Stock and/or Notes pursuant to the guaranteed delivery procedure set forth under
"Conversion Offer Procedures -- Guaranteed Delivery Procedures" in the Offering
Circular.
1. [ ] CHECK HERE IF SECURITIES ARE BEING DELIVERED PURSUANT TO
NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE
CONVERSION AGENT AND COMPLETE THE FOLLOWING. PLEASE
ENCLOSE A PHOTOCOPY OF SUCH NOTICE OF GUARANTEED DELIVERY.
Name(s) of Registered Holders(s):
Window Ticket Number (if any):
Date of Execution of Notice of Guaranteed Delivery:
Name of Eligible Institution that Guaranteed Delivery:
If delivery is by book entry transfer:
Account No.:
Transaction Code No.:
2. LIST BELOW THE SECURITIES TO WHICH THIS LETTER OF TRANSMITTAL
RELATES:
Preferred Stock: _________ shares
Notes: $________ principal amount.
NAME(S) AND ADDRESS(ES) OF REGISTERED HOLDER(S) OF SECURITIES ENCLOSED
(ATTACH ADDITIONAL LIST, IF NECESSARY):
<PAGE> 3
PREFERRED STOCK CERTIFICATE NUMBER _____________
NUMBER OF SHARES ________________
AMOUNT OF NOTES $_____________
Instructions:
(a) "Registered Holder" means the person in whose name the Preferred
Stock or Notes is registered on the books of the Company's transfer
agent. If not already printed hereon, please print the name and address
of the Registered Holder exactly as they appear on the certificate(s)
representing the Preferred Stock or Notes delivered hereby.
(b) Need not be completed by Book Entry Holders. If space is
inadequate, please attach a separate signed schedule.
(c) Holders who desire to convert Preferred Stock or Notes in
connection with this Conversion Offer must deliver all, and not less
than all, of their Preferred Stock or Notes for conversion.
No payment is being made in respect of accrued and unpaid dividends on
Preferred Stock delivered and accepted for conversion.
NOTE: Each holder of Preferred Stock who elects to convert such
holder's Preferred Stock will deliver the Preferred Stock
certificate(s) and will be issued certificates for the number of shares
of Common Stock into which the Preferred Stock tendered by the holder
pursuant to the Conversion Offer have been converted. Holders of Notes
who elect to convert their Notes will deliver the Notes and will be
issued certificates for the number of shares of Common Stock into which
the Notes tendered by the holder pursuant to the Conversion Offer have
been converted.
<PAGE> 4
NOTE: SIGNATURES MUST BE PROVIDED BELOW. PLEASE READ CAREFULLY THE ACCOMPANYING
INSTRUCTIONS.
Ladies and Gentlemen:
The undersigned hereby delivers the above-described Preferred Stock
and/or Notes of the Company, in accordance with the Company's offer i) to issue
an aggregate of approximately 30 shares of Common Stock of the Company on the
conversion of each share Preferred Stock (each share of Preferred Stock is
convertible into eight (8) shares of Common Stock in accordance with the stated
terms of the Preferred Stock, and an additional approximately 22 additional
shares of Common Stock will be issued as to each share of Preferred Stock
converted pursuant to the Conversion Offer, plus such number of additional
shares of Common Stock as are issuable on the conversion of Preferred Stock
dividends accrued and in arrears as of the Expiration Date, at a rate of one
share of Common Stock for each $.65 of such dividends), and ii) to adjust the
Conversion Price of the Notes from $2.50 to $.50 resulting in the issuance of
1,600 additional shares of Common Stock, or an aggregate of 2,000 shares of
Common Stock (plus such number of additional shares as are issuable on the
conversion of interest accrued through the Expiration Date at a rate of one
share of Common Stock for every $.50 of accrued interest), on the conversion of
each $1,000 principal amount of Notes, pursuant to the conversion rights
contained in the Loan and Security Agreement governing the Notes, and upon the
terms and subject to the conditions set forth in the Offering Circular dated
September 23, 1997 (the "Offering Circular"), and in this Letter of Transmittal
(together with the Offering Circular, the "Conversion Offer"). Receipt of the
Offering Circular and Letter of Transmittal are hereby acknowledged.
On the terms and subject to the conditions of the Conversion Offer, and
subject to, and effective upon, acceptance for conversion by the Company of the
Preferred Stock and/or Notes delivered herewith and the issuance of shares of
Common Stock in respect thereof in accordance with the terms of the Conversion
Offer, the undersigned hereby relinquishes all right, title and interest in and
to all such Preferred Stock and/or Notes as are being delivered hereby and that
are accepted for conversion pursuant to the Conversion Offer. The undersigned
hereby irrevocably constitutes and appoints the Conversion Agent as the true and
lawful agent and attorney-in-fact of the undersigned (with full knowledge that
the Conversion Agent also acts as the agent of the Company) with respect to the
Preferred Stock and/or Notes delivered hereby and accepted for conversion
pursuant to the Conversion Offer, with full power of substitution (such power of
attorney being deemed to be an irrevocable power coupled with an interest), to
(a) deliver the Preferred Stock and/or Notes to the Company for conversion and
(b) receive the Common Stock to be issued in connection with conversion of the
Preferred Stock and/or Notes pursuant to the Conversion Offer, all in accordance
with the terms and subject to the conditions of the Conversion Offer; provided,
however, that the undersigned shall retain the voting rights with respect to
such Preferred Stock until the Company has accepted the same for conversion in
connection with the Conversion Offer.
<PAGE> 5
By delivering certificates for Preferred Stock and/or Notes for
conversion in connection with this Conversion Offer, the undersigned represents
and warrants to the Company that the undersigned has full power and authority to
convert the Preferred Stock and/or Notes and that such securities are free and
clear of all liens, restrictions, charges and encumbrances and are not subject
to any adverse claim. The undersigned will, upon request, execute and deliver
any additional documents deemed by the Conversion Agent or the Company to be
necessary or desirable to complete the conversion of the securities delivered
hereby. The undersigned understands that the delivery of securities for
conversion in connection with this Conversion Offer by a holder pursuant to one
of the procedures set forth in the Offering Circular and this Letter of
Transmittal will constitute an agreement between the undersigned and the Company
in accordance with the terms and subject to the conditions of the Conversion
Offer. All authority conferred, or agreed to be conferred, in this Letter of
Transmittal shall survive the death or incapacity of the undersigned and any
obligation of the undersigned hereunder shall be binding upon the heirs,
executors, administrators, legal representatives, successors, and assigns of the
undersigned.
Unless otherwise indicated herein under "Special Issuance Instructions,
"please issue the shares of Common Stock due in respect of the Preferred Stock
and/or Notes accepted for conversion in the name(s) of the Registered Holder(s)
appearing above under "Description of Preferred Stock or Notes Delivered." In
addition, unless otherwise indicated under "Special Delivery Instructions,"
please mail the shares of Common Stock due in respect of the Preferred Stock or
Notes accepted for conversion, and return any Preferred Stock or Notes not
accepted and accompanying documents, as appropriate, to the Registered Holder(s)
at the address(es) appearing above under "Description of Preferred Stock or
Notes Delivered." If both the "Special Issuance Instructions" and "Special
Delivery Instructions" are completed, please issue the shares of Common Stock
due in respect of the Preferred Stock or Notes accepted for conversion in the
name(s) of, and mail the shares of Common Stock due in respect of the Preferred
Stock or Notes accepted for conversion to, the person(s) so indicated. The
undersigned recognizes that the Company has no obligation pursuant to the
"Special Issuance Instructions" to transfer any Preferred Stock or Notes from
the name(s) of the Registered Holder(s) thereof if the Company does not accept
for conversion any of the Preferred Stock or Notes so delivered. The undersigned
acknowledges and agrees that the Company and the Conversion Agent may in
appropriate circumstances defer effecting such transfer and may retain such
shares of Common Stock until satisfactory evidence of the payment of transfer
taxes payable on account of such transfer by the undersigned, or exemption
therefrom, is submitted to them.
THE UNDERSIGNED HEREBY DELIVERS TO THE CONVERSION AGENT FOR CONVERSION THE
PREFERRED STOCK AND/OR NOTES SET FORTH ABOVE UNDER "DESCRIPTION OF PREFERRED
SHARES AND/OR NOTES DELIVERED."
<PAGE> 6
SPECIAL ISSUANCE INSTRUCTIONS
(See Instructions 1, 2, 7 and 8)
To be completed ONLY if the shares of Common Stock to be issued upon
conversion of the Preferred Shares or Notes accepted for conversion are to be
sent to someone other than the Registered Holder appearing above under
"Description of Preferred Stock or Notes Delivered."
Issue Common Stock certificates to:
Name:
---------------------------------------------------------------------------
(Please Print)
Address:
------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Include Zip Code)
- --------------------------------------------------------------------------------
(Taxpayer Identification or Social Security No.)
SPECIAL ISSUANCE INSTRUCTIONS
(See Instructions 1, 2, 7 and 8)
To be completed ONLY if the shares of Common Stock to be issued upon
conversion of the Preferred Stock or Notes accepted for conversion are to be
issued in the name of someone other than the Registered Holder appearing above
under "Description of Preferred Stock or Notes Delivered." Issue Common Stock
to:
Mail Common Stock certificates to:
Name:
--------------------------------------------------------------------------
(Please Print)
Address:
------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Include Zip Code)
- --------------------------------------------------------------------------------
(Taxpayer Identification or Social Security No.)
NOTE: SIGNATURE MUST BE PROVIDED ON FOLLOWING PAGE
<PAGE> 7
SIGN HERE
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Signature(s) of Owner(s)
(Must be signed by the registered holder(s) exactly as name(s) appear(s) on the
Preferred Stock Certificate(s) and/or Notes or on a security position listing or
by person(s) authorized to become registered holder(s) by certificates and
documents transmitted herewith. If signature is by trustees, executors,
administrators, guardians, attorneys-in-fact, officers of corporations or others
acting in a fiduciary or representative capacity, please provide the necessary
information. See Instruction 1.)
Name(s):
-----------------------------------------------------------
- ------------------------------------------------------------------
(Please Print)
Capacity (Full Title):
--------------------------------------------
Address:
----------------------------------------------------------
- ------------------------------------------------------------------
(Include Zip Code)
Area Code and Telephone Number:
----------------------------------
Tax Identification or Social Security No.:
------------------------
Dated:
------------------------------------------------------------
GUARANTEE OF SIGNATURE(S)
(If Required--See Instructions 1 and 2)
Authorized Signature:
---------------------------------------------
Name:
-------------------------------------------------------------
Name of Firm:
-----------------------------------------------------
Address:
----------------------------------------------------------
- ------------------------------------------------------------------
(Include Zip Code)
Area Code and Telephone Number:
----------------------------------
Dated:
-------------------------
HOLDERS WHO DO NOT WISH TO CONVERT THEIR PREFERRED STOCK OR NOTES NEED NOT TAKE
ANY ACTION WITH RESPECT TO THIS CONVERSION OFFER.
<PAGE> 8
INSTRUCTIONS
1. SIGNATURES ON LETTERS OF TRANSMITTAL.
Only a Registered Holder of Preferred Stock or Notes may deliver
Preferred Stock or Notes for conversion of Securities in this Conversion Offer.
Any beneficial owner whose Preferred Stock or Notes are registered in the name
of its broker, dealer, commercial bank, trust company or other nominee and who
wishes to convert his or her Preferred Stock or Notes in connection with this
Conversion Offer should contact such Registered Holder promptly and instruct
such Registered Holder to effect delivery on its behalf. If this Letter of
Transmittal is signed by the Registered Holder(s) of the Preferred Stock or
Notes delivered hereby, the signatures must correspond exactly with the name(s)
as written on the face of the Securities without any change whatsoever. If any
of the Preferred Stock or Notes delivered hereby are owned of record by two or
more joint owners, all such owners must sign this Letter of Transmittal.
If the Letter of Transmittal is signed by a person other than the
Registered Holder of the Preferred Stock or Notes, such Preferred Stock or Notes
must be endorsed or accompanied by appropriate stock powers, in either case
signed exactly as the name or names of the Registered Holder (or Registered
Holders) appear on such Securities, together with a letter (or other evidence)
describing the transaction pursuant to which the Preferred Stock or Notes were
transferred. Signatures on any stock powers or other transfer documents
submitted in connection with this Letter of Transmittal must be guaranteed by an
Eligible Institution (defined below). See Instruction 2.
If the Letter of Transmittal or any for Preferred Stock or Notes or
related stock powers or assignments are signed by trustees, executors,
administrators, guardians, attorneys-in-fact, officers of corporations or others
acting in a fiduciary or representative capacity, such persons should so
indicate when signing and provide evidence satisfactory to the Company of their
authority to so act.
2. GUARANTEE OF SIGNATURES.
Except as provided below, all signatures on this Letter of Transmittal
must be guaranteed by a financial institution (including most commercial banks,
savings and loan associations and brokerage houses) that is a participant in the
Security Transfer Agents Medallion Program, the New York Stock Exchange
Medallion Signature Guarantee Program or the Stock Exchange Medallion Program
("Eligible Institutions"). Signatures on this Letter of Transmittal need not be
guaranteed if (i) the Letter of Transmittal is signed by a Registered Holder of
such Preferred Stock or Notes whose name appears on a security position listing
as the owner of Preferred Stock or Notes delivered herewith and such Registered
Holder(s) have not completed either of the boxes entitled "Special Issuance
Instructions" or "Special Delivery Instructions" herein or (ii) such Preferred
Stock or Notes are for the account of an Eligible Institution.
<PAGE> 9
3. DELIVERY OF THIS LETTER OF TRANSMITTAL AND CERTIFICATES; BOOK
ENTRY TRANSFER.
Unless guaranteed delivery procedures are utilized, this Letter of
Transmittal (or a manually signed facsimile thereof), properly completed and
duly executed, along with any required signature guarantees and any other
documents required by this Letter of Transmittal, must be received by the
Conversion Agent at its address set forth herein on or prior to 5:00 p.m.,
Atlanta, Georgia time, on the Expiration Date.
In addition, unless guaranteed delivery procedures are utilized (or
book entry transfer is effected as provided below), for all Preferred Stock or
Notes with respect to the conversion must be received by the Conversion Agent at
its address set forth herein prior to 5:00 p.m., Atlanta, Georgia time, on the
Expiration Date.
If a Registered Holder of Preferred Stock or Notes desires to deliver
such Securities to be converted and such Securities are not immediately
available (or the procedures for book-entry transfer discussed below cannot be
completed on a timely basis), or time will not permit such holder's Securities
or other required documents to reach the Conversion Agent before the Expiration
Date, a delivery for conversion may be effected by following the guaranteed
delivery procedures set forth in the Offering Circular under "Conversion Offer
Procedures -- Guaranteed Delivery Procedures."
The Letter of Transmittal (or facsimile thereof), with any required
signature guarantees and any other required documents, must, in any case, be
transmitted to and received or confirmed by the Conversion Agent at its address
as set forth herein prior to 5:00 p.m. Atlanta, Georgia time, on the Expiration
Date (unless guaranteed delivery procedures are utilized). THE METHOD OF
DELIVERY OF PREFERRED STOCK OR NOTES AND ALL OTHER REQUIRED DOCUMENTS TO THE
CONVERSION AGENT IS AT THE ELECTION AND RISK OF THE HOLDER DELIVERING SUCH
PREFERRED STOCK OR NOTES. IF SENT BY MAIL IT IS RECOMMENDED THAT THE HOLDER USE
REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE CONVERSION AGENT
BEFORE THE EXPIRATION DATE.
No alternative, conditional or contingent deliveries will be accepted.
All holders delivering Preferred Stock or Notes for conversion, by execution of
this Letter of Transmittal (or facsimile thereof), waive any right to receive
any notice of the acceptance of the Securities for conversion. All questions as
to the validity, form and eligibility (including time of receipt) of deliveries
for conversion of the Securities will be resolved by the Company, whose
determination will be final and binding on all parties. The Company reserves the
absolute right to reject any or all deliveries for conversion that are not in
proper form or which would, in the opinion of counsel for the Company, be
unlawful. Neither the Company, the Conversion Agent nor any other person will be
under any duty to give notification of any defects or irregularities in any
deliveries or incur any liability for failure to give any such notification.
Deliveries will not be deemed to have been made until such irregularities have
been cured or waived. The Company also reserves the right, in its judgment, to
waive any irregularities or conditions of delivery as to particular
<PAGE> 10
shares of Preferred Stock or Notes. The Company's interpretation of the terms
and conditions of this Conversion Offer (including the instructions in the
Letter of Transmittal) will be final and binding. Unless waived, any
irregularities or defects in connection with deliveries must be cured within
such time as the Company determines.
4. WITHDRAWAL OF DELIVERIES.
Any holder of Preferred Stock or Notes who has delivered, or effected
delivery with respect to, the Securities for conversion may withdraw such
delivery at any time prior to 5:00 p.m., Atlanta, Georgia time, on the
Expiration Date.
All questions as to the validity, form and eligibility (including time
of receipt) of notices of withdrawal will be determined by the Company, whose
determination will be final and binding on all parties. Neither the Company, the
Conversion Agent, nor any other person will be under any duty to give
notification of any defects or irregularities in any notice of withdrawal or
incur any liability for failure to give any such notification.
5. NO PARTIAL CONVERSIONS.
Holders of Preferred Stock or Notes who desire to convert their
Securities in connection with this Conversion Offer must convert all, and not
less than all, of the Preferred Stock or Notes owned by them.
6. RETURN OF CERTIFICATES NOT ACCEPTED FOR CONVERSION.
If any Preferred Stock or Notes delivered for conversion are not
converted in connection with this Conversion Offer because of an invalid
delivery, the occurrence or nonoccurrence of certain other events set forth in
the Offering Circular or otherwise, such unaccepted Preferred Stock or Notes
will be returned, at the Company's expense, to the Registered Holder thereof as
promptly as practicable after the Expiration Date or the termination of this
Conversion Offer, as applicable.
7. TRANSFER TAXES.
The Company will pay all transfer taxes, if any, applicable to the
conversion of Securities in connection with this Conversion Offer and issuance
of additional shares of Common Stock. If, however, Common Stock is to be
delivered to, or is to be registered or issued in the name of, any person other
than the Registered Holder of the Preferred Stock or Notes, or if the Securities
to be converted are registered in the name of any person other than the person
signing the Letter of Transmittal, or if a transfer tax is imposed for any
reason other than the issuance of Common Stock pursuant to this Conversion
Offer, the amount of any such transfer taxes (whether imposed on the Registered
Holder or any other person) will be payable by the delivering holder. Such
holder hereby acknowledges and agrees that the Company and the Conversion Agent
may defer effecting such transfer and may retain such shares of Common Stock
until satisfactory evidence of the payment of such taxes, or exemption
therefrom, is submitted to them.
<PAGE> 11
8. SPECIAL ISSUANCE INSTRUCTIONS AND SPECIAL DELIVERY
INSTRUCTIONS.
If certificates representing shares of Common Stock are to be issued to
a person other than the person signing this Letter of Transmittal or if such
certificates are to be sent or returned to someone other than the person signing
this Letter of Transmittal or to an address other than that shown above, the
appropriate information set forth in "Special Issuance Instructions" and
"Special Delivery Instructions" should be completed.
9. BACKUP WITHHOLDING.
Federal income tax law requires that, unless an exception applies, a
recipient (a "Payee") of the shares of Common Stock issued in respect of
converted Securities must provide the Conversion Agent (as payor) with such
Payee's taxpayer identification number ("TIN") and certify that such number is
correct. In the case of a Payee who is an individual, the Payee's TIN is his or
her social security number. In addition, a Payee must certify that such Payee is
not subject to backup withholding. If the foregoing requirements are not
satisfied, the Payee may be subject to a $50 penalty imposed by the Internal
Revenue Service (the "IRS") and to backup withholding. The Payee with respect to
any converted Securities will be either (i) the delivering holder of such
Preferred Stock or Notes or (ii) if the shares of Common Stock are issued to one
or more other persons pursuant to the Special Issuance Instructions, as
indicated in the applicable box, such other person or persons. Certain Payees
(including among others, all corporations and certain foreign Payees) are not
subject to these backup withholding and reporting requirements. In order to
satisfy the Conversion Agent that a foreign individual qualifies as an exempt
recipient, such Payee must submit a statement, signed under penalties of
perjury, attesting to that individual's exempt status. Such statement can be
obtained from the Conversion Agent. Foreign Payees should consult their own tax
advisers with respect to the tax consequences (including backup withholding
requirements) of the Conversion Offer. If backup withholding applies, the
Conversion Agent is required to withhold 31% of any "Deemed Distribution" (as
defined in the Offering Circular) made to the Payee. Backup withholding is not
an additional tax. Rather, the tax liability of persons subject to backup
withholding will be reduced by the amount of tax withheld. If withholding
results in an overpayment of taxes, a refund may be obtained provided that the
required information is furnished to the IRS.
To prevent backup withholding, each nonexempt Payee must provide his or
her correct TIN by completing a Form W-9 (available on request from the
Company), certifying that the TIN provided is correct (or that such Payee is
awaiting a TIN). See the Guidelines for Certification of Taxpayer Identification
Number on Form W-9 for additional instructions. In addition, the Payee must also
certify that he or she is not subject to backup withholding either because (i)
such Payee has not been notified by the IRS that he or she is subject to backup
withholding as a result of failure to report all interest or dividends or (ii)
the IRS has notified such Payee that he or she is no longer subject to backup
withholding. Failure to complete the Form W-9 will not, by itself, cause
Preferred Shares to be deemed invalidly delivered, but may subject the payee to
backup withholding.
<PAGE> 12
10. WAIVER OF CONDITIONS.
Subject to the terms of the Conversion Offer, the conditions of the
Conversion Offer may be waived by the Company, in whole or in part, at any time
and from time to time, in the Company's judgment, in the case of any Preferred
Stock or Notes delivered.
11. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES.
Requests for assistance may be directed to, and additional copies of
the Offering Circular, this Letter of Transmittal and the Notice of Guaranteed
Delivery may be obtained from the Conversion Agent.
12. LOST, DESTROYED OR STOLEN CERTIFICATES.
Please check the box if any certificate(s) representing Preferred Stock
or Notes has been lost, destroyed or stolen. Instructions will be given to you
as to what steps must be taken to obtain a replacement certificate(s). The
Letter of Transmittal and related documents cannot be processed until the
procedures for replacing such missing certificate(s) have been followed.
Conversion Agent for the Conversion Offer is:
CONTINENTAL STOCK TRANSFER & TRUST COMPANY
By Mail:
Two Broadway, 19th Floor
New York, New York 10004
By Facsimile Transmission
(For Eligible Institutions Only)
(212) 509-5150
By Hand or Overnight Courier:
Two Broadway, 19th Floor
New York, New York 10004
Questions and requests for assistance may be directed to the Conversion Agent at
its address and telephone number listed above. Additional copies of the Offering
Circular, this Letter of Transmittal and other conversion offer materials may be
obtained from the Conversion Agent as set forth above, and will be furnished
promptly at the Company's expense. You may also contact your broker, dealer,
commercial bank, trust company or other nominee for assistance concerning this
Conversion Offer.
<PAGE> 1
EXHIBIT (a)(3)
CREDIT DEPOT CORPORATION
NOTICE OF GUARANTEED DELIVERY
FOR CONVERSION OF 9% CONVERTIBLE PREFERRED STOCK
OR 10% CONVERTIBLE SECURED NOTES
As set forth in "Conversion Offer Procedures" of the Offering Circular
(as defined below), this form or one substantially equivalent hereto must be
used to convert shares of 9% Convertible Preferred Stock (the "Preferred Stock")
or 10% Convertible Secured Notes (the "Notes") pursuant to the Conversion Offer
(as defined below) if certificates for shares of Preferred Stock or Notes of
Credit Depot Corporation, a Delaware corporation, are not immediately available
or time will not permit all documents required by the Letter of Transmittal to
reach the Conversion Agent by the Expiration Date (as defined in the Offering
Circular). Such form may be delivered by hand or transmitted by telegram,
facsimile transmission, mail or hand delivery to the Conversion Agent. See
"Conversion Offer Procedures" of the Offering Circular.
TO: CONTINENTAL STOCK TRANSFER & TRUST COMPANY,
CONVERSION AGENT
By Mail:
Two Broadway, 19th Floor
New York, New York 10004
By Facsimile Transmission:
(For Eligible Institutions Only)
(212) 509-5150
By Hand or Overnight Courier:
Two Broadway, 19th Floor
New York, New York 10004
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OR TRANSMISSION OF INSTRUCTIONS VIA
FACSIMILE TRANSMISSION OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID
DELIVERY.
Ladies and Gentlemen:
The undersigned hereby delivers to Credit Depot Corporation, a Delaware
corporation, for conversion and upon the terms and subject to the conditions set
forth in the Offering Circular dated September 23, 1997 (the "Offering
Circular") and the related Letter of Transmittal (which together constitute the
"Conversion Offer"), receipt of which is hereby acknowledged, the
<PAGE> 2
number of Preferred Stock or Notes indicated below pursuant to the guaranteed
delivery procedure set forth in the Conversion Offer.
Number of Preferred Stock shares:
Certificate Nos. (if available):
Principal Amount of Notes:
Name(s) of Record Holder(s):
(PLEASE TYPE OR PRINT)
Address:
Area Code and
Telephone No.:
SIGN HERE
Signature(s):
--------------------------------
Dated:
-2-
<PAGE> 3
THE GUARANTEE BELOW MUST BE COMPLETED
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a firm that is a bank, broker, dealer, credit union,
savings association or other entity which is a member in good standing of the
Securities Transfer Agent's Medallion Program, hereby (a) represents that the
conversion of the Preferred Stock and/or Notes effected hereby complies with
Rule 14e-4 under the Securities Exchange Act of 1934, as amended, and (b)
guarantees to deliver to the Conversion Agent, at its address set forth above,
the certificate(s) representing all Preferred Stock and/or Notes for delivered
for conversion, in proper form for transfer, or a Book-Entry Confirmation (as
defined in the Conversion Offer), together with a properly completed and duly
executed Letter of Transmittal (or facsimile thereof), with any required
signature guarantees, and any other documents required by the Letter of
Transmittal within five Nasdaq National Market ("Nasdaq") trading days after the
date of execution of this Notice of Guaranteed Delivery.
Name of Firm:
---------------------- -------------------------------------
Address: (Authorized Signature)
--------------------------
Title:
- ----------------------------------- -------------------------------
(Zip Code) Name:
--------------------------------
Area Code and (Please type or print)
Telephone Number: Date:
------------------ --------------------------------
NOTE: DO NOT SEND PREFERRED STOCK CERTIFICATES OR NOTES WITH THIS
NOTICE OF GUARANTEED DELIVERY. PREFERRED STOCK CERTIFICATES OR
NOTES SHOULD BE SENT WITH YOUR LETTER OF TRANSMITTAL.
-3-
<PAGE> 1
EXHIBIT (a)(4)
CONSENT OF HOLDERS OF 9% CUMULATIVE
CONVERTIBLE PREFERRED STOCK
In October 1995, you participated in a private placement (the "Private
Placement") of 9% Cumulative Convertible Preferred Stock (the "Preferred Stock")
of Credit Depot Corporation (the "Company") through J. Michael Reisert, as
Placement Agent.
The Company is currently (i) offering to reduce the Conversion rice of
the Preferred Stock and certain 10% Convertible Secured Notes (the "Notes") as
more particularly set forth in the Conversion Offer attached herewith; and (ii)
proposing to effect a one-for-five reverse stock split.
In connection therewith, the Company is proposing to amend the
Certificate of Designation relating to the Preferred Stock. The Amendment to the
Certificate of Designation (a form of which is attached hereto) will eliminate
certain protective provisions currently contained in the Certificate of
Designation (i) which restrict payment of dividends for any period on capital
stock ranking pari passu with the 9% Preferred Stock without declaring and
paying dividends on the 9% Preferred Stock for such period; and (ii) which
restrict the issuance of preferred stock ranking senior with respect to
liquidation preference or dividend rights to the 9% Preferred Stock without the
consent of the holders of majority of the outstanding 9% Preferred Stock.
The Company is also proposing to eliminate the provisions of the letter
agreement dated April 16, 1996 (the "Letter Agreement"), executed subsequent to
your investment in the Private Placement, which contains certain provisions
regarding the adjustment of the conversion price of your Preferred Stock (the
"Conversion Price") in the event of an issuance by the Company of Common Stock,
or convertible securities entitling the holders thereof to subscribe for or
purchase shares of Common Stock, at a price per share less than the Conversion
Price.
Accordingly, in consideration of the above and for other good and
valuable consideration, the receipt of which is hereby acknowledged, the
Amendment to the Certificate of Designation and the termination of the Letter
Agreement is hereby approved.
Acknowledged and Agreed to:
---------------------------
Print Name:
<PAGE> 2
AMENDMENT TO CERTIFICATE OF DESIGNATION, PREFERENCES
AND RIGHTS OF 9% CUMULATIVE CONVERTIBLE
PREFERRED STOCK
-OF-
CREDIT DEPOT CORPORATION
CREDIT DEPOT CORPORATION, a corporation organized and existing
under the General Corporation Law of the State of Delaware (the "Company"), by
its President and Secretary, does hereby certify that, pursuant to authority
conferred upon the Board of Directors of the Company by Paragraph 3 of Article
Sixth of the Certificate of Incorporation of the Company, as amended, the Board
of Directors, at a meeting duly held on _____,1997, duly adopted a resolution
providing for the amendment of the Certificate of Designation, Preferences and
Rights of 9% Cumulative Convertible Preferred Stock, which resolution was duly
adopted by the stockholders of the Corporation in accordance with the provisions
of Section 242 of the Delaware General Corporation Law, as amended, as follows:
RESOLVED, that the Certificate of Designation, Preferences and
Rights of 9% Cumulative Convertible Preferred Stock be amended by terminating
the following provisions thereof:
1. Dividends. Section 2, paragraph (E); and
2. Voting Rights. Section 7, paragraph (A).
<PAGE> 3
IN WITNESS WHEREOF, Credit Depot Corporation has caused this
Amendment to be signed by Gerald F. Sullivan, its President, on this ___ day of
_____, 1997, and such person hereby affirms under penalty of perjury that this
Amendment is the act and deed of Credit Depot Corporation and that the facts
stated herein are true and correct.
CREDIT DEPOT CORPORATION
By: /s/ Gerald F. Sullivan
---------------------------------
Gerald F. Sullivan, President
Attest:
/s/ John C. Thomas
- -----------------------------
John C. Thomas, Secretary
-2-
<PAGE> 4
State of GEORGIA )
: ss.:
County of Hall )
On this __ day of ______, 1997, before me, the undersigned, a Notary
Public of the State of New York, personally appeared Gerald F. Sullivan, known
to me to be the President of CREDIT DEPOT CORPORATION, the corporation that
executed the within instrument, and known to me to be the person who executed
the within instrument on behalf of said corporation and acknowledged to me that
such corporation executed the same pursuant to its By-Laws and a resolution of
its Board of Directors.
WITNESS my hand and official seal the day and year first above
written.
------------------------------------
Notary Public
-3-
<PAGE> 1
EXHIBIT (a)(5)
CONSENT OF HOLDERS OF 10% CONVERTIBLE SECURED NOTES
In June 1996, you participated in a private placement (the "Private
Placement") of 10% Convertible Secured Notes (the "Notes") of Credit Depot
Corporation (the "Company") through J. Michael Reisert, as Placement Agent.
The Company is currently (i) offering to reduce the Conversion Price
of the Notes and to issue additional shares of Common Stock of the Company on
the conversion of certain 9% Convertible Preferred Stock (the"Preferred Stock")
as more particularly set forth in the Conversion Offer attached herewith; and
(ii) proposing to effect a one-for-five reverse stock split.
In connection therewith, the Company is proposing to amend the Loan
Agreement, dated June 12, 1996 (the "Loan Agreement"), relating to the Notes.
The Amendment to the Loan Agreement (a form of which is attached hereto) will
(i) eliminate covenants limiting certain restricted payments (principally
consisting of certain payments of dividends and of the distributions on and
purchases, redemptions and acquisitions of, equity securities); (ii) eliminate
the covenant limiting certain distributions and other payments, including loans
and advances, by the subsidiaries of the Company; (iii) eliminate the covenant
that requires the Company to have assets equal to at least 70% of the
outstanding principal balance of the Notes; (iv) eliminate the covenant
restricting asset sales; (v) eliminate the covenant restricting certain real
property acquisitions; (vi) eliminate the event of default as a result of
certain indebtedness of the Company becoming due and payable prior to maturity;
and (vii) eliminate certain provisions regarding the adjustment of the
conversion price of your Notes (the "Conversion Price") in the event of an
issuance by the Company of Common Stock, or convertible securities entitling
the holders thereof to subscribe for or purchase shares of Common Stock, at a
price per share less than the Conversion Price.
Accordingly, in consideration of the above and for other good and
valuable consideration, the receipt of which is hereby acknowledged, the
Amendment to the Loan Agreement is hereby approved.
Acknowledged and Agreed to:
---------------------------
Print Name:
<PAGE> 2
CREDIT DEPOT CORPORATION
AMENDMENT TO THE LOAN AGREEMENT
This agreement (the "Amendment"), dated as of October __, 1997, amends
a Loan Agreement (the "Loan Agreement"), dated June 12, 1996, among CREDIT
DEPOT CORPORATION, a Delaware corporation (the "Company"), 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 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, each a guarantor of the Company's obligations
hereunder (collectively, the "Guarantors"), and JOHN J. MCMANUS & ASSOCIATES,
P.C., a Georgia Professional Corporation (the "Custodian").
WHEREAS, the Company is currently (i) offering to reduce the
Conversion price of the 10% Convertible Secured Notes (the "Notes") and to
issue additional shares of Common Stock of the Company on the conversion of
certain 9% Convertible Preferred Stock (the"Preferred Stock") as more
particularly set forth in the Conversion Offer attached herewith; and (ii)
proposing to effect a one-for-five reverse stock split; and
WHEREAS, in connection therewith, the parties hereto desire to amend
the Loan Agreement relating to the Notes to (i) eliminate covenants limiting
certain restricted payments (principally consisting of certain payments of
dividends and of the distributions on and purchases, redemptions and
acquisitions of, equity securities); (ii) eliminate the covenant limiting
certain distributions and other payments, including loans and advances, by the
subsidiaries of the Company; (iii) eliminate the covenant that requires the
Company to have assets equal to at least 70% of the outstanding principal
balance of the Notes; (iv) eliminate the covenant restricting asset sales; (v)
eliminate the covenant restricting certain real property acquisitions; (vi)
eliminate the event of default as a result of certain indebtedness of the
Company becoming due and payable prior to maturity; and (vii) eliminate certain
provisions regarding the adjustment of the conversion price of the Notes (the
"Conversion Price") in the event of an issuance by the Company of Common Stock,
or convertible securities entitling the holders thereof to subscribe for or
purchase shares of Common Stock, at a price per share less than the Conversion
Price.
NOW THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Agreement is amended as follows:
Sections 4.05, 4.06, 4.09, 4.13, 4.16, 6.02 and 10.07 of the Loan
Agreement are hereby eliminated.
<PAGE> 3
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of
the day and year first above written.
Dated as of , 1997 CREDIT DEPOT CORPORATION
--------------
ATTEST By:
By: -----------------------------------
------------------------------ Name: Gerald F. Sullivan, Sr.
Assistant Secretary Title: President and Chief Executive
Officer
(CORPORATE SEAL)
Dated as of , 1997 CREDIT DEPOT CORPORATION OF OHIO, as
-------------- Guarantor
ATTEST By:
By: -----------------------------------
------------------------------ Name: Gerald F. Sullivan, Sr.
Assistant Secretary Title: President and Chief Executive
Officer
(CORPORATE SEAL)
Dated as of , 1997 CREDIT DEPOT CORPORATION OF SOUTH
-------------- CAROLINA, as Guarantor
ATTEST By:
By: -----------------------------------
------------------------------ Name: Gerald F. Sullivan, Sr.
Assistant Secretary Title: President and Chief Executive
Officer
(CORPORATE SEAL)
Dated as of , 1997 CREDIT DEPOT CORPORATION OF NORTH
-------------- CAROLINA, as Guarantor
ATTEST By:
By: -----------------------------------
------------------------------ Name: Gerald F. Sullivan, Sr.
Assistant Secretary Title: President and Chief Executive
Officer
(CORPORATE SEAL)
-2-
<PAGE> 4
Dated as of , 1997 CREDIT DEPOT CORPORATION OF FLORIDA, as
-------------- Guarantor
ATTEST By:
By: -----------------------------------
------------------------------ Name: Gerald F. Sullivan, Sr.
Assistant Secretary Title: President and Chief Executive
Officer
(CORPORATE SEAL)
Dated as of , 1997 CREDIT DEPOT CORPORATION OF INDIANA, as
-------------- Guarantor
ATTEST By:
By: -----------------------------------
------------------------------ Name: Gerald F. Sullivan, Sr.
Assistant Secretary Title: President and Chief Executive
Officer
(CORPORATE SEAL)
Dated as of , 1997 CREDIT DEPOT CORPORATION OF TENNESSEE,
-------------- as Guarantor
ATTEST By:
By: -----------------------------------
------------------------------ Name: Gerald F. Sullivan, Sr.
Assistant Secretary Title: President and Chief Executive
Officer
(CORPORATE SEAL)
Dated as of , 1997 CREDIT DEPOT CORPORATION OF GEORGIA,
-------------- as Guarantor
ATTEST By:
By: -----------------------------------
------------------------------ Name: Gerald F. Sullivan, Sr.
Assistant Secretary Title: President and Chief Executive
Officer
(CORPORATE SEAL)
-3-
<PAGE> 5
Dated as of , 1997 CASH BACK MORTGAGE CORPORATION,
-------------- as Gaurantor
ATTEST By:
By: -----------------------------------
------------------------------ Name: Gerald F. Sullivan, Sr.
Assistant Secretary Title: President and Chief Executive
Officer
(CORPORATE SEAL)
Dated as of , 1997 JOHN J. MCMANUS & ASSOCIATE, P.C. A
-------------- GEORGIA PROFESSIONAL CORPORATION,
Custodian
ATTEST By:
By: -----------------------------------
------------------------------ Name: John J. McManus
Assistant Secretary Title: President
(CORPORATE SEAL)
-4-
