<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT.
<PAGE>
FILED PURSUANT TO RULE 424(b)(2)
REGISTRATION NO. 333-18027
SUBJECT TO COMPLETION, DATED OCTOBER 1, 1997
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED MARCH 7, 1997)
$50,000,000
[LOGO]
(FORMERLY OLYMPIC FINANCIAL LTD.)
11 1/2% SENIOR NOTES DUE 2007
The 11 1/2% Senior Notes due 2007 (the "Notes") are being offered (the
"Offering") by Arcadia Financial Ltd. (the "Company"). Interest on the Notes is
payable semi-annually on March 15 and September 15 of each year, commencing
March 15, 1998. The Notes are not redeemable prior to March 15, 2002.
Thereafter, the Notes are redeemable, in whole or in part, at the option of the
Company, at the redemption prices set forth herein, together with accrued and
unpaid interest to the date of redemption. Upon a Change of Control (as
defined), the Company will be obligated to make an offer to purchase all
outstanding Notes at a price of 101% of the principal amount thereof, together
with accrued and unpaid interest to the date of purchase. See "Description of
Notes."
The Notes are general, unsecured obligations of the Company and will rank
senior to all outstanding subordinated notes of the Company ($51.2 million
aggregate principal amount outstanding as of August 31, 1997) and PARI PASSU in
right of payment with all unsecured and unsubordinated indebtedness of the
Company. The Company and its subsidiaries are parties to certain warehouse
credit facilities that finance purchases of automobile loans to be held on a
short-term basis pending securitization in the ordinary course of the Company's
business. The Company's obligations under such facilities are secured by the
loans financed thereby, and the Notes are effectively subordinated to such
obligations to the extent of the security interest in such loans. Moreover, the
Company engages in securitization of automobile receivables through subsidiaries
in the ordinary course of the Company's business, and the Notes are effectively
subordinated to the obligations of such subsidiaries. At August 31, 1997,
subsidiaries of the Company had $359.9 million aggregate principal amount of
warehouse debt outstanding.
There is no existing market for the Notes and the Company does not intend to
list the Notes on any securities exchange. See "Risk Factors--Absence of Public
Market."
SEE "RISK FACTORS" BEGINNING ON PAGE S-11 HEREOF FOR A DISCUSSION OF
MATERIAL RISKS RELATING TO AN INVESTMENT IN THE NOTES OFFERED HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS TO WHICH IT RELATES. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
PRICE UNDERWRITING PROCEEDS
TO THE DISCOUNTS AND TO THE
PUBLIC (1)(2) COMMISSIONS (2)(3) COMPANY (1)(4)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Note........................................... % % %
Total.............................................. $50,000,000 $ $
- ------------------------------------------------------------------------------------------------------
</TABLE>
(1) PLUS ACCRUED INTEREST, IF ANY, FROM THE DATE OF ISSUANCE.
(2) $3,150,000 IN PRINCIPAL AMOUNT OF THE NOTES WILL BE SOLD TO CERTAIN OFFICERS
AND A DIRECTOR OF THE COMPANY AT A PRICE EQUAL TO THE PRICE TO PUBLIC LESS
THE UNDERWRITING DISCOUNTS AND COMMISSIONS.
(3) SEE "UNDERWRITING" FOR INDEMNIFICATION ARRANGEMENTS WITH THE UNDERWRITERS.
(4) BEFORE DEDUCTING EXPENSES PAYABLE BY THE COMPANY, ESTIMATED AT $258,000.
The Notes are offered by the Underwriters, subject to prior sale, when, as
and if delivered to and accepted by the Underwriters and subject to certain
prior conditions, including the right of the Underwriters to reject any order in
whole or part. It is expected that delivery of the Notes will be made in New
York, New York on or about , 1997.
<TABLE>
<S> <C>
DONALDSON, LUFKIN & JENRETTE J.P. MORGAN & CO.
SECURITIES CORPORATION
</TABLE>
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS , 1997.
<PAGE>
ARCADIA'S
HUBS AND SPOKES
[MAP]
The Company has used its low-cost "hub and spoke" strategy to expand its
network of dealer development representatives to serve over 8,800 dealers in 42
states. This "hub and spoke" strategy has been designed to allow the Company to
increase the volume of automobile loans it purchases through its Premier and
Classic programs without incurring the additional costs that would be associated
with establishing a proportionate number of new buying centers. In addition, the
Company has a national customer service center and four regional collection
centers.
"Premier" and "Classic" are proprietary trademarks of the Company.
------------------------
INFORMATION CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS
SUPPLEMENT OR IN THE ACCOMPANYING PROSPECTUS CONTAINS "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995, WHICH CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH
AS "MAY," "WILL," "EXPECT," "ANTICIPATE," "ESTIMATE," "SHOULD" OR "CONTINUE" OR
THE NEGATIVE THEREOF OR OTHER VARIATIONS THEREON OR COMPARABLE TERMINOLOGY.
WITHOUT LIMITATION TO THE FOREGOING, SUCH FORWARD-LOOKING STATEMENTS INCLUDE
STATEMENTS UNDER THE CAPTIONS "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--THREE AND SIX MONTHS ENDED JUNE 30, 1997
AND 1996--RESULTS OF OPERATIONS--SPECIAL CHARGES," "--THREE AND SIX MONTHS ENDED
JUNE 30, 1997 AND 1996--RESULTS OF OPERATIONS--GAIN ON SALE OF LOANS," "--THREE
AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996--RESULTS OF OPERATIONS--OPERATING
EXPENSES,"
"--DELINQUENCY, CREDIT LOSS AND REPOSSESSION EXPERIENCE" AND "--LIQUIDITY" IN
THE COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1997,
AND "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--THREE MONTHS ENDED MARCH 31, 1997 AND 1996--RESULTS OF
OPERATIONS--SPECIAL CHARGES," "--THREE MONTHS ENDED MARCH 31, 1997 AND
1996--RESULTS OF OPERATIONS-- OPERATING EXPENSES" AND "--LIQUIDITY" IN THE
COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1997,
WHICH ARE INCORPORATED HEREIN BY REFERENCE. THE MATTERS SET FORTH UNDER THE
CAPTION "RISK FACTORS" IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS CONSTITUTE CAUTIONARY STATEMENTS IDENTIFYING IMPORTANT FACTORS WITH
RESPECT TO SUCH FORWARD-LOOKING STATEMENTS, INCLUDING CERTAIN RISKS AND
UNCERTAINTIES, THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
IN SUCH FORWARD-LOOKING STATEMENTS.
------------------------
ANY STATEMENT CONTAINED IN A DOCUMENT INCORPORATED OR DEEMED TO BE
INCORPORATED BY REFERENCE HEREIN SHALL BE DEEMED TO BE MODIFIED OR SUPERSEDED
FOR PURPOSES OF THIS PROSPECTUS SUPPLEMENT AND THE REGISTRATION STATEMENT TO
WHICH IT RELATES TO THE EXTENT THAT A STATEMENT CONTAINED IN THIS PROSPECTUS
SUPPLEMENT OR ANY OTHER SUBSEQUENTLY FILED DOCUMENT WHICH ALSO IS OR IS DEEMED
TO BE INCORPORATED BY REFERENCE HEREIN MODIFIES OR REPLACES SUCH STATEMENT. ANY
STATEMENT SO MODIFIED OR SUPERSEDED SHALL NOT BE DEEMED, EXCEPT AS SO MODIFIED
OR SUPERSEDED, TO CONSTITUTE PART OF THIS PROSPECTUS SUPPLEMENT OR THE
REGISTRATION STATEMENT TO WHICH IT RELATES. WITHOUT LIMITATION TO THE FOREGOING,
ANY STATEMENTS CONTAINED HEREIN FOR OR WITH RESPECT TO PERIODS ENDING AFTER JUNE
30, 1997, SHALL BE DEEMED TO SUPERSEDE ANY STATEMENTS RELATING TO THE SAME
SUBJECT MATTER CONTAINED IN THE COMPANY'S QUARTERLY REPORTS ON FORM 10-Q FOR THE
QUARTERS ENDED MARCH 31 AND JUNE 30, 1997, WHICH ARE INCORPORATED BY REFERENCE
HEREIN.
------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE NOTES.
SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING AND
MAY BID FOR AND PURCHASE NOTES IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
S-2
<PAGE>
PROSPECTUS SUPPLEMENT SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO OF THE
COMPANY APPEARING ELSEWHERE OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS
SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS. UNLESS OTHERWISE INDICATED,
REFERENCES IN THIS PROSPECTUS SUPPLEMENT TO THE COMPANY INCLUDE ARCADIA
FINANCIAL LTD. AND ITS SUBSIDIARIES.
THE COMPANY
Arcadia Financial Ltd. purchases, securitizes and services consumer
automobile loans originated primarily by car dealers affiliated with major
foreign and domestic manufacturers. The Company purchases loans from more than
8,800 dealers in 42 states, a substantial majority of which sell loans to the
Company on a regular basis. Loans are purchased through 18 regional buying
centers serving as "hubs" in 15 states, supplemented by a network of dealer
development representatives ("DDRs"). DDRs generate loans in "hubs" or "spokes"
(markets outside the specific areas of the "hubs"), while credit approval and
loan processing are generally performed at the "hub" or at the Company's
headquarters in Minneapolis, Minnesota. As a result of this strategy, the
Company has expanded the number of dealers in its network and has significantly
increased its annual volume of automobile loans purchased, from $743.3 million
in 1994 to $2.8 billion in 1996, without incurring the additional costs that
would be associated with establishing a proportionate number of new buying
centers. During the first six months of 1997, the Company purchased $1.5 billion
of automobile loans compared to $1.3 billion in the first six months of 1996.
The Company services loans primarily through its national customer service
center and four regional collection centers.
The Company purchases loans based on its underwriting procedures, which
focus on a borrower's qualifications and collateral value. The Company's
underwriting criteria do not distinguish between new and used vehicles, which
represented approximately 17.7% and 82.3%, respectively, of the Company's loan
purchases during the first six months of 1997. The Company seeks to maximize
gross interest rate spreads relative to expected net losses by maintaining a
tiered pricing system based on the borrower's credit characteristics as measured
by the Company's underwriting and proprietary credit scoring criteria. The
Company markets its loan products to dealers under two programs, designated
Premier and Classic. Premier borrowers generally have stronger credit
characteristics than Classic borrowers. Classic loans purchased during the first
six months of 1997 had annual percentage rates of interest ("APRs") typically
ranging from 16% to 23%, with a weighted average APR of approximately 17.9%,
while the APRs of Premier loans purchased during the same period typically
ranged from 8% to 16%, with a weighted average APR of approximately 13.5%. The
Company has been expanding the level of loan purchases under its Classic program
primarily to increase gross interest rate spreads. For the month of June 1997,
the Company purchased 54% of the principal amount of its loans under the Classic
program, compared with 36% and 17% for all of 1996 and 1995, respectively. The
Company may change its loan purchase "mix" at any time and from time to time.
The Company considers substantially all of the loans it purchases under both the
Premier and the Classic programs to be in the "prime" or "non-prime" loan
categories, but does not consider the loans it purchases under such programs to
be in the "sub-prime" loan category.
In accordance with prevailing industry practice, the Company pays an
up-front dealer participation to the originating dealer for each loan purchased.
These dealer participations vary in amount among the Company's loan products and
are generally greater for products under the Premier program than for products
under the Classic program. Average dealer participations in the first six months
of 1997 were 3.20% of the principal amount of loans purchased by the Company,
compared with 3.45% and 4.21% during 1996 and 1995, respectively. The decline in
1997 and 1996 was principally due to the increase in the Company's loan
purchases under its Classic program and a reduction in the maximum participation
rate allowable under the Premier program.
The Company acts as the servicer of all loans originated and securitized by
it in return for a monthly servicing fee. Servicing fee income was $20.5 million
in the first six months of 1997, compared with $28.3 million and $14.0 million
in all of 1996 and 1995, respectively. In response to the rapid growth of its
S-3
<PAGE>
servicing portfolio, continued expansion of its Classic program (which generally
requires greater collection efforts than its Premier program), and increases in
delinquencies and default rates on its servicing portfolio, the Company
substantially increased its servicing and collection staff and, in October 1996,
implemented a strategy to regionalize its collection activities into four new
locations: Charlotte, North Carolina; Dallas, Texas; Denver, Colorado and
Minneapolis, Minnesota. At August 31, 1997, the Company employed over 700
service representatives and collection associates who are responsible for
various aspects of the collection and repossession procedures, compared with 510
and 188 at December 31, 1996 and 1995, respectively. The Company generally
utilizes its highly automated telephone dialing systems (the "autodialer") to
contact delinquent obligors throughout the first 30 days after a past due date
(typically every third day) if previous efforts do not result in the account
deficiency being cured. In addition to telephone inquiries, the Company's
computerized collection system generates past due notices which typically are
mailed to the obligor at various intervals during the first 30 days after a past
due date generally beginning approximately 13 days after a past due date. If the
collection effort during the first 20 days after a past due date does not result
in a satisfactory resolution of the delinquent account, then the account is
generally forwarded to collection specialists, who typically send a final demand
letter and make a recommendation as to whether the automobile should be
repossessed or other action, such as a contract extension, should be taken.
The Company relies significantly upon the resale of its repossession
inventory through retail markets, primarily retail used car consignment lots.
The Company believes that the greater recoveries available from the retail
market justify the costs of maintaining higher levels of unsold repossession
inventory and managing the retail program. In addition, the use of retail
markets provides the Company with an opportunity to finance the repossessed
vehicles with new buyers. In March and April 1997, following a review by the
Company's new chief executive officer, the Company modified its retail
liquidation strategy, increasing its use of wholesale auctions to enable it to
liquidate vehicles at a pace satisfactory to management, thereby better
controlling inventory levels, and introducing a policy that limits the length of
time a repossessed vehicle may be held for resale through retail channels. Since
1996, the Company has been adjusting its strategies for identifying and
utilizing dealers who demonstrate the ability to sell the Company's repossession
inventory at prices and within periods of time that are acceptable to the
Company's management. At August 31, 1997, the Company had arrangements with
approximately 60 consignment lots, compared with 67 consignment lots at December
31, 1996 and ten large retail consignment lots at December 31, 1995. At August
31, 1997, the inventory of repossessed automobiles managed by the Company and
held for resale was $54.8 million, compared with $49.0 million at June 30, 1997,
$64.9 million at December 31, 1996 and $17.7 million at December 31, 1995.
During the first half of 1997, approximately 55% of repossessed vehicles sold
were liquidated through retail markets and the Company financed approximately
90% of these sales, while during 1996, the Company sold approximately 70% of its
repossession inventory through retail markets and financed approximately 90% of
these sales. The Company believes this strategy had the effect of reducing the
Company's loan losses in 1996 and, to a lesser extent, in the first half of 1997
(relative to a wholesale-based strategy) while delaying cash distributed from
securitization trusts as a result of slower inventory turnover. The strategic
benefits of the retail program were partially offset in 1996 and the first half
of 1997 by the performance of the Company's portfolio of repossessed automobile
loans, which experienced delinquency, default and loss rates substantially
higher than the Company's other loan products, and by lower retail prices for
used cars in 1997. Since the latter part of 1996, the Company has taken a series
of steps intended to improve the performance of its financed repossession
portfolio, including introducing greater verification of credit applications,
tightening supervision of the buying process and lowering the loan-to-value
ratios on loans purchased. See "Business--Loan Purchases and
Underwriting--Resale and Financing of Repossessions."
The Company primarily uses warehouse facilities to fund its initial purchase
of loans. At August 31, 1997, the Company had an aggregate borrowing capacity of
approximately $647.7 million under two primary warehouse facilities, of which
approximately $287.8 million was available. Such facilities expire in December
1997 and July 1998, subject to renewal or extension at the option of the
lenders. The Company securitizes purchased loans as asset-backed securities,
generally on a quarterly or more frequent basis. In its securitizations, the
Company, through a special purpose subsidiary, transfers loans to newly formed
S-4
<PAGE>
securitization trusts which issue one or more classes of asset-backed
securities. The asset-backed securities are simultaneously sold to investors and
the Company recognizes a gain on sale of the loans. Each month, collections of
principal and interest on the securitized loans are used by the trustee to pay
holders of the related asset-backed securities, to establish and maintain spread
accounts as a source of cash to cover shortfalls in collections and to pay
expenses associated with the securitizations and subsequent servicing. After
such application by the trustee, excess cash is generally distributed to the
Company, subject to its agreements with Financial Security Assurance Inc.
("FSA"). All of the Company's securitization trusts and one of the Company's
warehouse facilities are credit-enhanced through financial guaranty insurance
policies issued by FSA, which insure payments of principal and interest due on
the related asset-backed securities. Asset-backed securities insured by FSA have
been rated AAA by Standard & Poor's and Aaa by Moody's Investors Service, Inc.
At August 31, 1997 the aggregate principal amount of loans held by
securitization trusts was approximately $4.2 billion, with aggregate restricted
cash in spread accounts of $222.9 million, compared with $3.8 billion and $143.0
million, respectively, at December 31, 1996 and $2.3 billion and $63.6 million,
respectively, at December 31, 1995. Excess cash from securitization trusts
distributed to the Company was $58.9 million (including $14.5 million that was
restricted pursuant to an arrangement between the Company and FSA) in the first
nine months of 1997, compared with $43.4 million in all of 1996 and $21.1
million in all of 1995. In September 1997, the Company completed an additional
$775.0 million securitization.
STRATEGIES
The Company's business objective is to maximize the volume and profitability
of loans it purchases, securitizes and services. To achieve this objective, the
Company employs the following strategies:
- EMPHASIS ON DEALER RELATIONSHIPS. The Company believes that one of its
key competitive advantages is its ability to identify and meet a dealer's
financing needs. When presented with a loan application, the Company
attempts to notify the dealer within one hour or less whether it will
approve, conditionally approve or deny the automobile loan for purchase
from the dealer. The Company's business hours generally coincide with
those of the dealership and, in some cases, the Company will provide loan
processing on the dealer's premises during dealer promotions. When the
Company considers a borrower's credit quality to be adequate, the Company
may provide the dealer with flexibility in developing loan structures to
accommodate a borrower's needs, such as extended payment terms or low
down-payment requirements. To further assist the dealer, the Company may
perform more in-depth underwriting analysis when warranted by special
circumstances. A DDR maintains frequent contact with the dealer and
recommends service enhancements from time to time. By employing consistent
loan underwriting and purchasing procedures, the Company believes that it
provides the dealer with a reliable and consistent source of financing.
- TIERED PRICING STRATEGY. The Company maintains a tiered pricing system,
allowing it to price different loan products according to the profiles of
borrowers' credit characteristics as measured by the Company's proprietary
credit scoring system. The Company's tiered pricing system seeks to (i)
maximize gross interest rate spreads relative to expected net losses
within each credit tier, (ii) provide a greater opportunity to expand its
automobile loan market share through loan products that address a greater
variety of customer needs and (iii) reduce initial cash requirements
relative to the Premier program because the Company offers lower dealer
participations on Classic loans. The Company generally achieves
significantly higher pricing under the Classic program than under the
Premier program. The higher pricing of the Classic program is intended to
compensate the Company for the higher delinquency and default rates
associated with the Classic program, which the Company addresses through
higher reserves for loan losses. At June 30, 1997, the Company had an
aggregate of $209.6 million reserved for loan losses, compared with $95.0
million at December 31, 1996 and $42.3 million at December 31, 1995.
Reserves as a percentage of outstanding loans securitized increased from
1.86% at December 31, 1995 to 2.51% at December 31, 1996 and 4.64% at June
30, 1997. The Company may change its loan purchase mix at any time and
from time to time. See "Business--Loan Purchases and Underwriting."
S-5
<PAGE>
- MAINTENANCE OF UNDERWRITING PROCEDURES. The Company has developed a
proprietary credit scoring system designed to maintain consistent
underwriting procedures for its loan authorizations. The Company's credit
scoring system monitors six evaluation criteria, including debt-to-income,
payment-to-income, loan-to-value, bankruptcy score, credit score and loan
size. Based on the results of the credit scoring system, loan applications
are reviewed by one of the Company's credit specialists and, based on the
Company's underwriting procedures, are frequently reviewed by one or more
credit managers, to determine whether the loan should be approved. To
monitor the integrity of the underwriting procedures, management tracks on
a daily basis the approval rates and delinquency and loss rates by credit
specialist, buying center and dealer. On a regular basis, the Company
evaluates its underwriting procedures and implements enhancements when
management believes appropriate.
- SERVICING. The Company operates a national servicing center in
Minneapolis, Minnesota and four regional collection centers located in
Charlotte, North Carolina; Dallas, Texas; Denver, Colorado and
Minneapolis, Minnesota. These centers are staffed with over 700 trained
personnel responsible for various servicing, collection and repossession
activities. Collectors are assisted by highly automated telephone dialing
systems which improve the Company's ability to make early contact with
delinquent obligors. In addition the Company utilizes a computerized
collection system to aid its servicing and collection efforts. The Company
regularly monitors and periodically evaluates its servicing and collection
centers with a view to improving their procedures and anticipating
expansion of loan purchase volume or changes in product mix.
- FUNDING AND LIQUIDITY THROUGH WAREHOUSING AND SECURITIZATIONS. The
Company funds the acquisition of automobile loans principally through two
warehouse facilities with asset-backed commercial paper programs.
Currently, these facilities provide sufficient capacity to handle the
Company's loan purchases. The Company securitizes purchased loans as
asset-backed securities and uses such securitizations as a cost
competitive source of capital compared to traditional sources of corporate
debt financing. Securitization enables the Company to sell automobile
loans on a regular basis, while retaining the right to receive future
servicing fees and excess cash flows. Securitization also allows the
Company to use the net proceeds from such sales to fund the purchase of
additional automobile loans. Since inception, the Company has securitized
approximately $8.1 billion of automobile loans.
- RETAILING OF REPOSSESSED AUTOMOBILES. The Company relies significantly
upon the resale of its repossession inventory through retail markets,
primarily retail used car consignment lots. The Company believes that the
greater recoveries available from the retail market justify the costs of
maintaining unsold repossession inventory and managing the retail program.
In addition, the use of retail markets provides the Company with an
opportunity to finance the sale of repossessed automobiles to new buyers.
RECENT DELINQUENCY, LOSS AND REPOSSESSION EXPERIENCE
Delinquencies (loans over 30 days past due) as a percentage of the balance
of loans outstanding at August 31, 1997 increased to 3.07% from 2.64% at
December 31, 1996 and 2.15% at August 31, 1996. Annualized gross charge-offs as
a percentage of the average servicing portfolio for the eight months ended
August 31, 1997 were 3.77%, compared to gross charge-offs as a percentage of the
average servicing portfolio of 1.18% during the year ended December 31, 1996.
Annualized net losses as a percentage of servicing portfolio for the eight
months ended August 31, 1997 were 3.56% compared to net losses as a percentage
of servicing portfolio of 0.99% during the year ended December 31, 1996. The
significant increase in the rates of gross charge-offs and net losses during the
first eight months of 1997, experienced by both the Premier and Classic
programs, was primarily due to a valuation adjustment to existing inventory when
the Company changed its accounting policy with respect to the valuation of
repossession inventory in March 1997, as discussed above, and the application of
such policy beginning in the second quarter of 1997, which has resulted in
substantially lower recovery rates on repossessed vehicles compared to prior
periods. These increases also resulted from (i) increased demands on the
Company's servicing and
S-6
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collection resources as a result of growth in its servicing portfolio, continued
expansion of the Classic loan program (which generally requires greater
collection efforts than its Premier program) and a recent increase in the rate
of turnover for servicing and collection personnel, (ii) the performance of the
Company's Classic product for first time automobile buyers (discontinued in
March 1996) and the Company's financed repossession program, both of which have
experienced significantly higher delinquencies, repossessions and losses than
the Company's other products and programs, and (iii) the continued seasoning of
the Company's servicing portfolio to include a greater proportion of loans,
particularly Classic loans, in the period of highest probability for
delinquencies and defaults (generally six to 14 months from the origination
date). See "Risk Factors--Loan Performance Risks" and "--Economic
Conditions--Labor Market Conditions."
The Company's principal executive offices are located at Olympic Financial
Center, 7825 Washington Avenue South, Minneapolis, Minnesota 55439-2435, and its
telephone number is (612) 942-9880. Following a request from the U.S. Olympic
Committee, the Company changed its name from Olympic Financial Ltd. to Arcadia
Financial Ltd. in April 1997.
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THE OFFERING
<TABLE>
<S> <C>
SECURITIES OFFERED................ $50.0 million principal amount of 11 1/2% Senior Notes
due 2007 (the "Notes").
MATURITY DATE..................... March 15, 2007.
INTEREST PAYMENT DATES............ March 15 and September 15 of each year, commencing March
15, 1998.
OPTIONAL REDEMPTION............... The Notes will be redeemable at the option of the
Company, in whole or in part, at any time on or after
March 15, 2002, at the redemption prices set forth
herein, together with accrued and unpaid interest to the
date of redemption.
CHANGE OF CONTROL................. Upon a Change of Control (as defined), the Company will
be obligated to make an offer to repurchase all
outstanding Notes at a price of 101% of the principal
amount thereof, together with accrued and unpaid
interest to the date of purchase.
ASSET SALES....................... The Supplemental Indenture relating to the Notes,
together with the Senior Note Indenture described in the
accompanying Prospectus (the "Indenture"), requires that
the proceeds of certain Asset Sales (as defined) be
applied as specified in the Indenture or be used to
repurchase Notes, at the option of the holder thereof,
at 100% of the principal amount thereof plus accrued and
unpaid interest thereon to the date of purchase. If, as
a result of any Asset Sale of Excess Spread (as
defined), Finance Income Receivable relating to the
aggregate remaining Excess Spread not sold or disposed
of in such Asset Sale (the "Remaining Finance Income
Receivable") would be less than the Minimum Finance
Income Receivable (as defined), the Indenture requires
that a portion of the proceeds of such Asset Sale equal
to the amount by which the Remaining Finance Income
Receivable is less than the Minimum Finance Income
Receivable be used to repurchase Notes, at the option of
the Holder thereof, at 101% of the principal amount
thereof plus accrued and unpaid interest thereon to the
date of purchase. Such offers shall be made (i) only
after asset sale offers required by the terms of the
Company's 11 1/2% Senior Notes due 2007 issued March 12,
1997 (the "Senior Term Notes"), (ii) only if and to the
extent that there are funds remaining following such
asset sale offers on the Senior Term Notes and (iii) pro
rata in proportion to the principal amount (or accreted
value, if applicable) outstanding in respect of any
asset sale offer required by the terms of any PARI PASU
Indebtedness, other than the Senior Term Notes, incurred
in accordance with the Indenture.
RANKING........................... The Notes are general, unsecured obligations of the
Company and will rank senior to all outstanding
subordinated indebtedness of the Company ($51.2 million
aggregate principal amount outstanding as of August 31,
1997) and PARI PASSU in right of payment with all
current and future unsecured and unsubordinated
indebtedness of the Company. The Company and its
subsidiaries are parties to certain warehouse facilities
that finance purchases of automobile loans to be held on
a
</TABLE>
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<TABLE>
<S> <C>
short-term basis pending securitization in the ordinary
course of the Company's business. The obligations under
such facilities are secured by the loans financed
thereby and the Notes are effectively subordinated to
such obligations to the extent of the security interest
in such loans. Moreover, the Company engages in
securitization of automobile receivables through
subsidiaries in the ordinary course of the Company's
business, and the Notes are effectively subordinated to
the obligations of such subsidiaries. At August 31,
1997, subsidiaries of the Company had $359.9 million
aggregate principal amount of warehouse debt
outstanding.
CERTAIN COVENANTS................. The Indenture will restrict, among other things,
dividends and certain other distributions, the purchase,
redemption or retirement of Equity Interests (as
defined), the payment of principal on or purchase,
redemption, defeasance or retirement for value of
certain indebtedness (other than at final maturity or in
accordance with mandatory redemption, sinking fund or
similar provisions), investments outside Permitted
Businesses (as defined) and the incurrence of certain
additional indebtedness, and will restrict the ability
of the Company's subsidiaries to pay dividends or
distributions to the Company, the creation of certain
liens, certain transactions with Affiliates (as defined)
and certain mergers and consolidations.
REPORTS TO NOTEHOLDERS............ The Company will furnish to holders of the Notes annual
reports containing audited financial statements and
quarterly reports containing unaudited summary financial
information for the first three quarters of each fiscal
year.
USE OF PROCEEDS................... Net proceeds from the sale of the Notes (after deducting
underwriting discounts and estimated offering expenses)
are estimated to be approximately $48.4 million and will
be used to fund purchases of automobile loans and for
working capital and other general corporate purposes.
Prior to application for the foregoing purposes, the net
proceeds will be used to reduce outstanding indebtedness
under the Company's warehouse facilities.
</TABLE>
S-9
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEAR ENDED DECEMBER 31, 30,
(Dollars in thousands except per ------------------------------------------------------------- ------------------------
share amounts) 1992 1993 1994 1995 1996 1996 1997
--------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net interest margin............. $ 752 $ 2,525 $ 9,828 $ 31,192 $ 62,963 $ 27,385 $ 37,495
Gain on sale of loans (1)....... 2,698 7,650 13,579 62,182 115,773 50,681 (51,428)
Servicing fee income............ 408 1,685 4,502 13,987 28,284 12,300 20,525
Other non-interest income....... -- 24 879 1,371 6,475 3,173 4,384
--------- ----------- ----------- ----------- ----------- ----------- -----------
Total revenues.............. 3,858 11,884 28,788 108,732 213,495 93,539 10,976
Operating expenses.............. 4,390 8,691 17,342 42,727 92,298 39,953 79,568
Long term debt and other
interest expense.............. 810 1,798 5,416 17,170 25,193 11,949 18,242
--------- ----------- ----------- ----------- ----------- ----------- -----------
Total expenses.............. 5,200 10,489 22,758 59,897 117,491 51,902 97,810
--------- ----------- ----------- ----------- ----------- ----------- -----------
Operating income (loss) before
income taxes and extraordinary
item.......................... (1,342) 1,395 6,030 48,835 96,004 41,637 (86,834)
Provision for income taxes...... -- -- 1,845 19,518 35,688 15,844 (33,066)
--------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) before
extraordinary items........... (1,342) 1,395 4,185 29,317 60,316 25,793 (53,768)
Extraordinary items (2)......... (458) -- -- (3,856) -- -- (15,828)
--------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)............... $ (1,800) $ 1,395 $ 4,185 $ 25,461 $ 60,316 $ 25,793 $ (69,596)
--------- ----------- ----------- ----------- ----------- ----------- -----------
--------- ----------- ----------- ----------- ----------- ----------- -----------
PRIMARY EARNINGS PER SHARE:
Net income (loss) per common
share before extraordinary
items......................... $ (0.24) $ 0.11 $ 0.17 $ 1.35 $ 1.79 $ 0.85 $ (1.37)
Extraordinary items per common
share (2)..................... (0.08) -- -- (0.19) -- -- (0.41)
--------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) per common
share......................... $ (0.32) $ 0.11 $ 0.17 $ 1.16 $ 1.79 $ 0.85 $ (1.78)
--------- ----------- ----------- ----------- ----------- ----------- -----------
--------- ----------- ----------- ----------- ----------- ----------- -----------
FULLY DILUTED EARNINGS PER SHARE:
Net income (loss) per share
before extraordinary items.... $ (0.24) $ 0.11 $ 0.17 $ 1.11 $ 1.65 $ 0.76 $ (1.37)
Extraordinary items per share
(2)........................... (0.08) -- -- (0.15) -- -- (0.41)
--------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) per share..... $ (0.32) $ 0.11 $ 0.17 $ 0.96 $ 1.65 $ 0.76 $ (1.78)
--------- ----------- ----------- ----------- ----------- ----------- -----------
--------- ----------- ----------- ----------- ----------- ----------- -----------
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING:
Primary......................... 5,668,272 10,996,536 10,818,908 20,029,769 33,065,473 29,397,320 39,163,325
Fully diluted................... 5,668,272 11,186,033 16,683,380 26,455,876 36,449,995 33,981,805 39,239,574
FINANCIAL RATIOS AND OTHER DATA
(3):
Ratio of earnings to fixed
charges....................... -- 1.72x 2.06x 3.75x 4.64x 4.33x --
Deficiency in earnings to fixed
charges....................... $ 1,342 -- -- -- -- -- $ 86,834
</TABLE>
S-10
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEAR ENDED DECEMBER 31, 30,
------------------------------------------------------------- ------------------------
(Dollars in thousands) 1992 1993 1994 1995 1996 1996 1997
--------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED CASH FLOW DATA:
Total cash used in operating
activities.................... $ (17,991) $ (51,056) $ (78,774) $ (135,659) $ (253,127) $ (155,021) $ (119,204)
Total cash used in investing
activities.................... (1,104) (455) (917) (2,588) (6,600) (2,131) (4,434)
Total cash provided by financing
activities.................... 41,372 31,040 93,572 122,970 274,444 178,387 135,716
--------- ----------- ----------- ----------- ----------- ----------- -----------
Net increase (decrease) in
cash.......................... $ 22,277 $ (20,471) $ 13,881 $ (15,277) $ 14,717 $ 21,235 $ 12,078
--------- ----------- ----------- ----------- ----------- ----------- -----------
--------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE SHEET DATA (AT PERIOD
END):
Cash and cash equivalents....... $ 23,207 $ 2,736 $ 16,617 $ 1,340 $ 16,507 $ 22,575 $ 28,135
Finance income receivable....... 6,133 26,247 58,540 186,001 362,916 264,466 338,092
Restricted cash in spread
accounts...................... 5,207 15,109 21,408 63,580 142,977 101,948 189,643
Total long-term debt............ 15,626 33,506 46,804 161,929 206,418 204,734 349,996
Total preferred shareholders'
equity........................ -- 27,289 27,279 25,379 -- 17,204 --
Total common shareholders'
equity........................ 30,072 31,410 33,583 155,434 393,093 339,591 335,270
OPERATING DATA:
Automobile dealer relationships
(at period end)............... 339 857 2,344 5,110 7,727 6,468 8,869
Automobile loan purchases....... $ 97,819 $ 305,823 $ 743,256 $ 2,052,413 $ 2,750,553 $ 1,291,389 $ 1,520,374
Automobile loan
securitizations............... $ 79,759 $ 336,077 $ 712,211 $ 1,933,525 $ 2,787,412 $ 1,330,262 $ 1,522,135
Annualized operating expenses as
a percentage of average
servicing portfolio........... 6.52% 4.39% 3.28% 2.78% 3.06% 3.03% 3.83%
SERVICING DATA:
Servicing portfolio (at period
end).......................... $ 103,507 $ 316,933 $ 837,095 $ 2,267,107 $ 3,791,857 $ 3,004,706 $ 4,514,009
Average servicing portfolio
during the period............. $ 67,339 $ 198,018 $ 528,577 $ 1,534,720 $ 3,015,411 $ 2,635,759 $ 4,150,719
Delinquencies of more than 30
days as a percentage of
servicing portfolio (at period
end).......................... 0.36% 0.96% 0.82% 1.33% 2.64% 1.95% 2.66%
Net losses as a percentage of
average servicing portfolio
(4)........................... 0.22% 0.52% 0.66% 0.67% 0.99% 0.83% 3.63%
</TABLE>
- --------------------------
(1) Included in gain on sale of loans during the six months ended June 30, 1997
is a non-recurring pretax charge to gain on sale of loans of $98.0 million
resulting in a year-to-date loss on sale of loans. The special charge was
due primarily to (i) a change in estimated recovery rates on current
repossessed inventory and anticipated future inventory arising from existing
securitization transactions and (ii) a change in the Company's accounting
policy with respect to the estimated recovery rate realized upon disposition
of repossessed inventory. See "Business-- Loan Purchases and Underwriting."
(2) Extraordinary items relate to prepayment fees and charge-off of capitalized
debt financing costs in connection with early extinguishment of certain debt
obligations.
(3) For purposes of calculating the ratio of earnings to fixed charges, earnings
are defined as income (loss) before income taxes plus fixed charges. Fixed
charges consist of interest expense, amortization of debt discount and the
interest factor in rental expenses.
(4) A change in the Company's estimated recovery rate for repossessed inventory,
as discussed in note (1) above, resulted in a write down of existing
inventory and an increase in net losses during the six months ended June 30,
1997. See "Business--Loan Purchases and Underwriting."
S-11
<PAGE>
RISK FACTORS
INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING MATTERS IN CONNECTION WITH
AN INVESTMENT IN THE NOTES OFFERED HEREBY IN ADDITION TO THE OTHER INFORMATION
CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT OR IN THE
ACCOMPANYING PROSPECTUS. INFORMATION CONTAINED OR INCORPORATED BY REFERENCE IN
THIS PROSPECTUS SUPPLEMENT OR IN THE ACCOMPANYING PROSPECTUS CONTAINS
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995, WHICH CAN BE IDENTIFIED BY THE USE OF FORWARD-
LOOKING TERMINOLOGY SUCH AS "MAY," "WILL," "EXPECT," "ANTICIPATE," "ESTIMATE,"
"SHOULD" OR "CONTINUE" OR THE NEGATIVE THEREOF OR OTHER VARIATIONS THEREON OR
COMPARABLE TERMINOLOGY. WITHOUT LIMITATION TO THE FOREGOING, SUCH
FORWARD-LOOKING STATEMENTS INCLUDE STATEMENTS UNDER THE CAPTIONS "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--THREE
AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996--RESULTS OF OPERATIONS--SPECIAL
CHARGES," "--THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996-- RESULTS OF
OPERATIONS--GAIN ON SALE OF LOANS," "--THREE AND SIX MONTHS ENDED JUNE 30, 1997
AND 1996-- RESULTS OF OPERATIONS--OPERATING EXPENSES," "--DELINQUENCY, CREDIT
LOSS AND REPOSSESSION EXPERIENCE" AND "--LIQUIDITY" IN THE COMPANY'S QUARTERLY
REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1997, AND "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--THREE
MONTHS ENDED MARCH 31, 1997 AND 1996--RESULTS OF OPERATIONS--SPECIAL CHARGES,"
"--THREE MONTHS ENDED MARCH 31, 1997 AND 1996--RESULTS OF OPERATIONS--OPERATING
EXPENSES" AND "--LIQUIDITY" IN THE COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR
THE QUARTER ENDED MARCH 31, 1997, WHICH ARE INCORPORATED HEREIN BY REFERENCE.
THE FOLLOWING MATTERS CONSTITUTE CAUTIONARY STATEMENTS IDENTIFYING IMPORTANT
FACTORS WITH RESPECT TO SUCH FORWARD-LOOKING STATEMENTS, INCLUDING CERTAIN RISKS
AND UNCERTAINTIES, THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE IN SUCH FORWARD-LOOKING STATEMENTS. THE FOLLOWING RISK FACTORS ARE
INTENDED TO UPDATE AND SUPERSEDE THE CORRESPONDING RISK FACTORS PRESENTED IN THE
ACCOMPANYING PROSPECTUS AND THOSE INCORPORATED BY REFERENCE THEREIN.
LIQUIDITY AND ACCESS TO CAPITAL RESOURCES
NEGATIVE OPERATING CASH FLOWS. The Company's business requires substantial
cash to support the payment of dealer participations, the funding of spread
accounts in connection with securitizations, the purchase of loans pending
securitization, the financing of repossessed inventory and other cash
requirements, in addition to debt service and dividends. These cash requirements
increase as the volume of the Company's loan purchases increases. To the extent
that increases in the volume of loan purchases and securitizations provide
income, a substantial portion of such income is received by the Company in cash
over the life of the loans. The Company has operated historically on a negative
operating cash flow basis and expects to continue to do so for so long as the
Company's volume of loan purchases continues to grow. As a result of the
Company's historical growth rate, the Company has used increasingly larger
amounts of cash than it has generated from its operating activities. The Company
has funded these negative operating cash flows principally through borrowings
from financial institutions, sales of equity securities and sales of senior and
subordinated notes. The Company's ability to execute its growth strategy depends
upon its continued ability to obtain substantial additional long-term debt and
equity capital through access to the capital markets or otherwise. There can be
no assurance that the Company will have access to the capital markets when
needed or will be able to obtain financing upon terms reasonably satisfactory to
the Company. Factors which could affect the Company's access to the capital
markets, or the costs of such capital, include changes in interest rates,
general economic conditions, the perception in the capital markets of the
Company's business, results of operations, leverage, financial condition and
business prospects, and the performance of the Company's securitization trusts.
In addition, covenants with respect to the Company's debt securities and credit
facilities may significantly restrict the Company's ability to incur additional
indebtedness and to issue new classes of preferred stock.
POTENTIAL INABILITY TO REFINANCE EXISTING INDEBTEDNESS. The Company's
ability to repay its outstanding indebtedness at maturity may depend on its
ability to refinance such indebtedness, which could be adversely affected if the
Company does not have access to the capital markets for the sale of additional
debt or equity through public offerings or private placements on terms
reasonably satisfactory to the Company. See "Negative Operating Cash Flows"
above.
S-12
<PAGE>
DEPENDENCE ON WAREHOUSE FINANCING. The Company depends on warehouse
facilities with financial institutions or institutional lenders to finance its
purchase of loans on a short-term basis pending securitization. At August 31,
1997, the Company had $647.7 million of warehouse facilities through
institutionally managed asset-backed commercial paper conduits, of which $287.8
million was available. These facilities expire in December 1997 and July 1998,
subject to renewal or extension at the lenders' option. Implementation of the
Company's growth strategy requires continued availability of warehouse
facilities and may require increases in the capacity of warehouse facilities.
There can be no assurance that such financing will be available on terms
reasonably satisfactory to the Company. The inability of the Company to arrange
additional warehouse facilities or to extend or replace existing facilities when
they expire would have a material adverse effect on the Company's business,
financial condition and results of operations and on the Company's outstanding
securities.
DEPENDENCE ON SECURITIZATION. The Company has relied upon its ability to
aggregate and sell loans as asset-backed securities in the secondary market to
generate cash proceeds for repayment of warehouse facilities and to purchase new
loans from dealers. Since inception, the Company has securitized approximately
$8.1 billion of automobile loans. At August 31, 1997, approximately $4.2 billion
of these loans were outstanding and in September 1997 the Company completed an
additional $775.0 million securitization. Accordingly, adverse changes in the
Company's asset-backed securities program or in the asset-backed securities
market for automobile receivables generally could materially adversely affect
the Company's ability to purchase and resell loans on a timely basis and upon
terms reasonably satisfactory to the Company. The Company endeavors to effect
public securitizations of its loans on at least a quarterly basis. However,
market and other considerations, including the conformity of loans to insurance
company and rating agency requirements, could affect the timing of such
transactions. Any delay in the sale of loans beyond a quarter-end would
eliminate the related gain on sale in the given quarter and adversely affect the
Company's reported earnings for such quarter. All of the Company's
securitizations since March 1993 and one of the Company's warehouse facilities
have utilized credit enhancement in the form of financial guaranty insurance
policies issued by FSA to achieve "AAA/Aaa" ratings with respect to the
asset-backed securities. The Company believes that financial guaranty insurance
policies reduce the costs of the securitizations and such warehouse facility
relative to alternative forms of credit enhancements available to the Company.
The Company has committed to use FSA for future credit enhancement on insured
securitizations through 1998 in consideration for certain limitations on FSA
insurance premiums. FSA is not required to insure Company-sponsored
securitizations and there can be no assurance that it will continue to do so or
that future Company-sponsored securitizations will be similarly rated.
LOAN PERFORMANCE RISKS
POTENTIAL NEGATIVE EFFECTS ON FINANCIAL CONDITION, RESULTS OF OPERATIONS AND
LIQUIDITY. The Company's business, financial condition, results of operations
and liquidity depend, to a material extent, on the performance of loans
purchased and sold by the Company. When such loans are sold in securitizations,
the Company recognizes gain on sale. Finance income receivable, the Company's
principal asset, has been calculated using assumptions concerning future
default, prepayment and net loss rates on securitized loans that are consistent
with the Company's historical experience and market conditions and present value
discount rates that the Company believes would be requested by an unrelated
purchaser of an identical stream of estimated cash flows. Management believes
that the Company's estimates of excess cash flow were reasonable at the time
each gain on sale of loans was recorded. However, the actual rates of default
and/or prepayment and/or net loss on such loans may exceed those estimated for
purposes of calculating the Company's finance income receivable and consequently
may adversely affect anticipated future excess cash flow. The Company
periodically reviews its default, prepayment and net loss assumptions in
relation to current performance of the loans and market conditions, and, if
necessary, writes down the balance of finance income receivable. The Company
made a significant adjustment to its finance income receivable at March 31, 1997
after completing such a review, primarily relating to the recovery rates on
repossessed vehicles and the Company's disposition strategy. See "Business--Loan
Purchases and Underwriting." The Company's business, financial condition,
results of operations and liquidity could be materially adversely affected by
such adjustments in the future. No assurance can be given that loan losses and
prepayments
S-13
<PAGE>
will not exceed the Company's estimates or that finance income receivable could
be sold at its stated value on the balance sheet, if at all.
POSSIBLE RESTRICTIONS ON CASH FLOW FROM SECURITIZATIONS. The Company's
future liquidity and financial condition, and its ability to finance the growth
of its business and to repay or refinance its indebtedness, will depend to a
material extent on distributions of excess cash flow from securitization trusts.
The Company's agreements with FSA provide that the Company must maintain in a
spread account for each insured securitization trust specified levels of excess
cash during the life of the trust. These spread accounts are initially funded
out of initial deposits or cash flows from the related trust. Thereafter, during
each month, excess cash flow due to Arcadia Receivables Finance Corp. (formerly
Olympic Receivables Finance Corp.) ("ARFC"), from all insured securitization
trusts is first used to replenish any spread account deficiencies and is then
distributed to the Company. The timing and amount of distributions of excess
cash from securitization trusts varies based on a number of factors, including
but not limited to loan delinquencies, defaults and net losses, the rate of
turnover of repossession inventory and recovery rates, the ages of loans in the
portfolio, prepayment experience and required spread account levels. A
deterioration of the Company's loan delinquencies, cumulative defaults or net
losses, or a build-up in repossession inventory, or the continuing increase in
the proportion of repossession inventory sold in the wholesale auction markets,
or the increase in loans entering the seasoning period, could reduce excess cash
available to the Company. At August 31, 1997, the Company had an aggregate of
$222.9 million of restricted cash in spread accounts. There can be no assurance
that in the future the Company will not experience an interruption of excess
cash flow from ARFC, which could adversely affect the Company's ability to pay
its obligations, including the Notes.
Each insured securitization trust has certain portfolio performance tests
relating to levels of delinquency, defaults and net losses on the loans in such
trust based in part on the relative percentage of Premier and Classic loans.
Portfolio performance tests require that the loan portfolio of each insured
securitization trust (i) have an average delinquency ratio not equal to or in
excess of a specified percentage, (ii) have a cumulative default rate not equal
to or in excess of specified percentages which vary based on the aging of the
loan portfolio, and (iii) have a cumulative net loss rate not equal to or in
excess of specified percentages which vary based on the aging of the loan
portfolio. If any of these tests are exceeded (a "violation"), the amount
required to be retained in the spread account related to such securitization
trust will be increased to an amount generally equal to the greater of 10% of
the outstanding balance of loans or 1% of the original balance of loans held by
the securitization trust. As a consequence, a violation generally will decrease
excess cash flow available from such securitization trust until loan portfolio
performance has returned to the required limits for a specified period,
generally three to five months, unless waived by FSA. FSA and the Company have
an arrangement under which, if any insured securitization trust exceeds the
specified portfolio performance tests, ARFC may, in lieu of retaining the excess
cash from that securitization trust in the related spread account, pledge an
equivalent amount of cash, which has the effect of preventing the violation of
the portfolio performance test. Although certain trusts, primarily those that
contained loans originated in 1995, exceeded portfolio performance tests in the
first eight months of 1997 and are still in excess of such tests, this
arrangement with FSA has prevented a violation, although it has reduced the
amount of cash that would otherwise have been available to the Company if the
Company had sought and received a waiver of such violation from FSA. A
deterioration of the Company's delinquencies, cumulative defaults or net losses
would result in one or more additional existing securitization trusts exceeding
one or more of these tests in the absence of changes to the trigger levels.
There can be no assurance that, in such event, waivers will be available from
FSA permitting payments to ARFC.
Upon the occurrence of certain events with respect to any series of
asset-backed securities insured by FSA, including the failure to meet loan
portfolio performance tests of the nature described above but at significantly
higher levels, or upon a breach of the collateral coverage requirements of the
FSA-insured warehouse facility (an "Insurance Agreement Event of Default"), the
Company will be in default under its insurance agreement with FSA. Upon an
Insurance Agreement Event of Default, unless waived by FSA, FSA may suspend
distributions of cash flow from the related securitization trust and all other
FSA-insured trusts (including the FSA-insured warehouse facility) until the
asset-backed securities have been redeemed,
S-14
<PAGE>
capture excess cash flow from performing trusts, increase its premiums and
replace the Company as servicer with respect to all FSA-insured trusts. There
can be no assurance that a further deterioration of the Company's loan
delinquencies, gross charge-offs and net losses would not result in an Insurance
Agreement Event of Default, which could adversely affect the Company's ability
to satisfy its obligations, including the Notes. Certain of the Company's
securitization trusts exceeded such insurance agreement thresholds prior to 1996
and the Company obtained waivers from FSA to permit distributions of cash to
ARFC. There can be no assurance that in the future, if such thresholds are
exceeded, waivers will be available.
In addition, the spread account for each securitization is
cross-collateralized to the spread accounts established in connection with the
Company's other securitization trusts (including the FSA-insured warehouse
facility) such that excess cash flow from a performing securitization trust may
be used to support negative cash flow from, or to replenish a deficient spread
account in connection with, a nonperforming securitization trust, thereby
further restricting excess cash flow available to ARFC. If excess cash flow from
all insured securitization trusts is not sufficient to replenish all such spread
accounts, no cash flow would be available to the Company from ARFC for that
month. In January 1996, approximately $0.5 million of the Company's $63.6
million of restricted cash in spread accounts at December 31, 1995 under insured
securitization trusts was utilized for payments on related asset-backed
securities due to insufficient current cash flow in four such securitization
trusts. Excess cash flows from the other securitization trusts were not
sufficient to replenish such withdrawals and, consequently, the Company did not
receive excess cash flow from Olympic Receivables Finance Corp. (the predecessor
of ARFC) during that month. In February 1996, current excess cash flows again
began releasing to the Company. There can be no assurance that in the future the
Company will not experience an interruption of excess cash flow from ARFC such
as occurred in January 1996, which could adversely affect the Company's ability
to pay its
obligations, including the Notes. FSA also has a collateral security interest in
the stock of ARFC. If FSA were to foreclose on such security interest following
an event of default under an insurance agreement with respect to a
securitization trust (including the FSA-insured warehouse facility), FSA could
preclude payment of dividends by ARFC to the Company, thereby eliminating the
Company's right to receive distributions of excess cash flow from all the
FSA-insured securitization trusts. The Company's right to service the loans sold
in securitizations insured by FSA is also generally subject to the discretion of
FSA. Accordingly, there can be no assurance that the Company will continue as
servicer for such loans and receive related servicing fees.
Any increase in limitations on cash flow available to the Company from ARFC
(including any increase in the amount of cash pledged under the arrangement with
FSA), inability to obtain any necessary waivers from FSA or termination of
servicing arrangements could materially adversely affect the Company's cash flow
and liquidity, and, ultimately, its business, financial condition and results of
operations and its outstanding securities.
IMPACT OF PORTFOLIO GROWTH AND PRODUCT MIX. The Company has experienced
rapid growth in its loan servicing portfolio, although the rate of such growth
has slowed in 1997. Historically, the statistical incidence of delinquencies and
defaults in connection with automobile loans tends to vary over the age of the
loan. For example, statistically, loans that are between six and fourteen months
old have had a higher likelihood of being delinquent or defaulting than loans
with similar credit characteristics that are three months old. Accordingly, to
the extent that portfolio growth results in a servicing portfolio containing
disproportionately more loans originated within the prior six months, the
current and historical delinquency and default rates of loans in the servicing
portfolio may understate future delinquency and default rates. Also, there can
be no assurance that the Company's transition from centralized to regional
servicing and collection will not adversely affect the rate of loan
delinquencies and defaults.
In addition, to the extent the Company offers new loan products which
involve different underwriting policies, the delinquency and default rates of
the Company's servicing portfolio may change. The Company has instituted a
tiered pricing system and has periodically increased the authorized amount of
loans purchased under its Classic program involving borrowers who do not meet
all of the underwriting standards in the Company's Premier program and are
charged rates of interest higher than those under the
S-15
<PAGE>
Company's Premier program. The Company increased its purchase of loans under the
Classic program from 17% of the principal amount of loans purchased in 1995 to
36% in 1996 and to 50% during the six months ended June 30, 1997, and in the
month of June 1997, 54% of loans purchased were Classic loans. As a result of
the increases in Classic loans as a proportion of the Company's portfolio, there
has been an increase in the rates of, and reserves for, delinquencies,
repossessions and losses historically reported by the Company. The expansion of
the Classic loan program and seasoning of the Company's existing servicing
portfolio will likely continue to cause the Company's loan performance
statistics to show higher delinquencies, gross charge-offs and net losses when
compared with historical performance even if such loan performance statistics
are consistent with the Company's reserves for loan losses.
To estimate future delinquency, repossession and loss experience on its
loans, the Company uses a combination of factors, including actual loan
performance experience for that loan program, and industry experience on loans
with similar credit characteristics. However, there can be no assurance that its
loans will perform under varying economic conditions in the manner estimated by
the Company. Any increase in delinquency, repossession and loss rates related to
its loans above the rates estimated by the Company could have a material adverse
effect on the Company's business, financial condition and results of operations,
as well as its liquidity. In addition, certain of the Company's loan products
which produce higher delinquency, repossession and loss rates than initially
expected may continue to have an impact on the Company's overall loan
performance, even after being discontinued or modified, until the initially
generated loans mature beyond the six- to fourteen-month period. In 1996, the
Company discontinued a Classic loan product directed at first-time credits and
modified a Classic program for financing the sale of its repossessed inventory
in retail markets, each of which had experienced higher than expected
delinquency, repossession and loss rates.
EXTENSIONS AND AMENDMENTS. Like others in the industry, the Company gives
certain obligors extensions or amendments to loan terms in certain
circumstances, including when the Company believes such obligors will thereby be
more likely to repay their loans, and losses on such loans can be reduced. Loans
that have been extended or amended generally present substantially higher
default risks than loans that have neither of these characteristics. Primarily
as a result of the expansion of the Classic program (which involves higher
credit risks than the Premier program), the portion of the Company's servicing
portfolio which exhibits one or both of these characteristics has increased.
Extensions and amendments (in the aggregate) averaged approximately 2.7% of the
servicing portfolio per month in 1996 and 1.9% per month in 1995, and with
seasonal peaks occurring during the Christmas holiday season. Extensions and
amendments (in the aggregate) averaged approximately 3.4% per month for the
first eight months of 1997, compared to 2.7% per month for the first eight
months of 1996, and in the months of July and August 1997 were 3.0% and 2.7%,
respectively, compared to 2.9% and 2.8% in the months of July and August 1996,
respectively. The Company believes that one reason for the 1997 increase in
extensions and amendments as a percentage of the servicing portfolio is the
slower rate of growth in the size of the Company's portfolio, which results in a
higher percentage of loans of the age that are more likely to be extended or
amended. Any continued slowing of growth could contribute to a further increase
in such statistics. The Company considers these characteristics when
establishing its loss reserves. In certain circumstances, loans that have been
extended or amended have the effect of removing the related loan from delinquent
status.
POTENTIAL NEGATIVE IMPACT OF COVENANTS UNDER FINANCE AGREEMENTS. Increases
in loan delinquency and loss rates with respect to any securitization trust may
result in the trust's portfolio exceeding the various pool performance levels
established by FSA, thereby restricting or cutting off cash distributions to
ARFC from the securitization spread accounts. See "Cash Flow from
Securitizations" above. In addition, such increases may cause the Company to
exceed certain pool performance tests established in other agreements governing
its indebtedness. If at the end of any month the Portfolio Loss Ratio (as
defined) exceeds 3.5% (which is calculated excluding the effect of the Company's
March 1997 special charge), the Company's Delinquency Rates (as defined) exceed
3.5%, the Warehousing Loss Ratio (as defined) exceeds 1.0%, or the Average Net
Excess Spread (as defined) is not less than 4.0%, an event of default will occur
under one of the Company's outstanding warehouse facilities. The delinquency
level is calculated as a percentage of outstanding principal balance of all
automobile loans owned or securitized by the Company
S-16
<PAGE>
as to which a payment is more than thirty days past due. Upon the occurrence of
an event of default under such warehouse facility, the lending banks under such
facility would have no further obligation to extend additional credit.
Furthermore, any such event of default or acceleration may trigger
cross-defaults under other outstanding indebtedness of the Company and may
result in the acceleration of amounts due thereunder. The increase in Classic
loans, among other things, has increased the risk that the Company may trigger
its Portfolio Loss Ratio covenants in the future.
RESALE AND FINANCING OF REPOSSESSIONS The Company relies significantly upon
the resale of its repossession inventory through retail markets, primarily
retail used car consignment lots. During the six months ended June 30, 1997,
approximately 55% of repossessed vehicles sold were liquidated through retail
markets, compared with 70% in 1996 and 40% in 1995. This strategy delays the
Company's excess cash flow during the period repossessions are held in inventory
pending resale, which is typically a longer period of time than for wholesale
auctions. In addition, the Company's repossession inventory has increased as a
percentage of its servicing portfolio due to the increase in the rate of loan
defaults and the Company's transition from using a few large retail consignment
lots for repossession sales to using multiple retail consignment lots. At August
31, 1997, the Company had $54.8 million of repossessed inventory, compared with
$49.0 million at June 30, 1997, $64.9 million at December 31, 1996, and $17.7
million at December 31, 1995.
As of March 31, 1997, the Company took an after-tax charge of $60.8 million
due primarily to a reduction in the estimated recovery rates on then current
repossessed inventory and anticipated future inventory arising from then
existing securitization transactions to 60% of principal balance outstanding (as
discussed in the Company's Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1997 and June 30, 1997). The Company selected this 60% recovery rate
on the basis of the recovery rate the Company believes it could achieve if all
of its repossession inventory, including those higher value vehicles that are
ultimately sold through retail channels, were sold through wholesale channels.
In addition, the Company changed its accounting policy with respect to the
estimated recovery rate realized upon disposition of repossessed inventory to
estimate recovery rates based on such wholesale values and to record any
recoveries in excess of such levels at the time such excess recoveries are
realized. Since the Company changed its strategy at the end of the first quarter
of 1997, the Company's overall recovery rate (for both wholesale and retail
sales) has averaged approximately 62.5%. There can be no assurance that a change
in the proportions of vehicles sold through retail and wholesale channels or any
further softening of used car markets will not require additional adjustments to
repossession inventory or estimated recovery rates used to calculate finance
income receivable, which could be required if the Company's recovery rate were
to decline further. Futhermore, with the significant increase in the number of
repossessions, the Company has increased purchases of loans that finance resales
of repossessions to new buyers. Delinquency, gross charge-off and net loss rates
associated with loans on repossessed automobiles have historically been
substantially in excess of the same statistics associated with the Company's
remaining servicing portfolio. There can be no assurance that management's
recent efforts to improve the Company's retail repossession finance program will
be successful. If and to the extent the Company further modifies its current
disposition strategy with respect to use of the wholesale auction markets, this
modification could decrease recovery rates and increase net losses.
POTENTIAL NEGATIVE IMPACT OF INCREASE IN PERSONAL BANKRUPTCIES. Recent
media reports have suggested an increase in the number of personal bankruptcy
filings and the Company has in recent months experienced a slight increase in
the proportion of its servicing portfolio representing loans to borrowers who
have filed for bankruptcy protection. A continuation or increase in such trend
could contribute to greater default and net loss rates than the Company has
historically experienced.
SUBSTANTIAL INDEBTEDNESS
The issuance of the Notes offered hereby will have the effect of further
increasing the Company's leverage. The degree to which the Company is leveraged
could have important consequences to holders of the Notes, including the
following: (i) the Company's ability to obtain additional financing in the
future for working capital, capital expenditures, acquisitions, general
corporate purposes or other purposes may be
S-17
<PAGE>
impaired; (ii) the Company's debt service costs will increase as the result of
the issuance of the Notes; (iii) a substantial portion of the Company's cash
flow from operations will be dedicated to the payment of principal and interest
on its indebtedness, thereby reducing the funds available to the Company for its
operations and expansion plans; (iv) the Company's increased level of
indebtedness may make it more vulnerable in the event of a downturn in its
business; and (v) such indebtedness, including the Notes, contains numerous
financial and other restrictive covenants, the failure to comply with which may
result in an event of default. If the Company should require, but be unable to
obtain, any cure, modification or waiver of noncompliance with any such
covenants in the future, default could occur with respect to the relevant
indebtedness and, under cross-default provisions, other indebtedness of the
Company, and there can be no assurance that the Company would be able to repay
or refinance such obligations in such circumstances. The terms of a series of
Debt Securities issued by the Company in the future may contain similar
covenants.
The Company's ability to make scheduled payments or to refinance its
obligations with respect to its indebtedness depends on its financial and
operating performance, which, in turn, is subject to prevailing economic
conditions and to financial, business and other factors beyond its control.
Although the Company's cash flow from its operations has historically been
sufficient to meet its debt service obligations, there can be no assurance that
the Company's operating results will continue to be sufficient for payment of
the Company's indebtedness.
STRUCTURAL SUBORDINATION OF THE NOTES
Any right of the Company to receive assets of any of its subsidiaries upon
the latter's liquidation or reorganization (and the consequent right of the
holders of the Notes to participate in those assets) will be effectively
subordinated to the claims of creditors of such subsidiaries before such
proceeds may be available for distribution to the parent Company. Substantially
all of the Company's securitizations through June 30, 1997 provide that ARFC, a
special purpose subsidiary, owns the rights to excess cash flow from such
securitization trusts. Consequently, a significant portion of the Company's
available cash flow is in the form of distributions from ARFC. ARFC is a
separate and distinct legal entity and has no obligation, contingent or
otherwise, to pay any amounts due under the Notes or to make any funds available
therefor, whether by dividends to the Company or otherwise. Substantially all of
the Company's finance income receivable at June 30, 1997 is held by ARFC, and,
in the event of liquidation of both the Company and ARFC, creditors of ARFC
would have first claim to such assets before holders of the Notes. To the extent
any restriction on the distribution of cash from ARFC or other subsidiaries to
the Company is applicable and enforced, the Company's ability to pay interest
and principal on the Notes may be impaired. See "Loan Performance Risks--Cash
Flow from Securitizations" above.
ECONOMIC CONDITIONS
MARKET CONDITIONS. Periods of economic slowdown or recession, whether
general, regional or industry-related, may increase the risk of default on
automobile loans and may have an adverse effect on the Company's business,
financial condition and results of operations. Such periods also may be
accompanied by decreased consumer demand for automobiles, resulting in reduced
demand for automobile loans and declining values of automobiles securing
outstanding loans, thereby weakening collateral coverage and increasing the
possibility of losses in the event of default. In addition, recent reports of
increases in consumer bankruptcy filings and default rates on consumer credit
during a period of economic growth indicate that the impact of consumer behavior
on default rates is not limited to periods of economic slowdown or recession.
The increased proportion of loans under the Company's Classic program has
increased the Company's sensitivity to changes in economic conditions.
Significant increases in the inventory of used automobiles during recessionary
economies may depress the prices at which repossessed automobiles may be sold or
delay the timing of such sales. A continuation of the recent softening of the
used car market as the result of factors including the recent start-up of
superstore competition or forecasted levels of used lease vehicles that will be
available in the market could have a similar effect on prices for and timing of
sales of
S-18
<PAGE>
repossession inventory. There can be no assurance that the used automobile
markets will be adequate for the sale of the Company's repossessed automobiles
and any material deterioration of such markets could increase the Company's loan
losses or reduce recoveries from the sale of repossession inventory. In
addition, the Company has channeled a significant portion of its repossession
inventory through retail resale markets instead of wholesale markets, including
the financing of such retail sales through its Classic program, which had the
effect of reducing the Company's loan losses while increasing repossession
inventory and delaying cash flow recovered from inventory turnover. There can be
no assurance that the Company will continue to use such retail resale channels,
that it will be able to realize such benefits to loan losses in the future or
that its inventories will not reach levels at which they cannot readily be
liquidated through such channels. Any such event might have an adverse effect on
loan loss levels.
INTEREST RATES. The Company's profitability may be directly affected by the
level of and fluctuations in interest rates, which affect the Company's gross
interest rate spread. The Company monitors the interest rate environment and
employs prefunding or other hedging strategies designed to mitigate the impact
of changes in interest rates on its gross interest rate spread. However, there
can be no assurance that the profitability of the Company would not be adversely
affected during any period of changes in interest rates.
LABOR MARKET CONDITIONS. The Company's ability to manage portfolio
delinquency, default and loss rates is dependent on its ability to attract and
retain qualified servicing and collection personnel. In recent months, low
unemployment rates driven by economic growth and the continued expansion of the
consumer credit markets have contributed to an increase in employee turnover
rate, especially among the Company's collection personnel. Continued high
turnover relative to historical levels, or an inability to attract and retain
replacement personnel, could have an adverse effect on the Company's portfolio
delinquency, default and net loss rates and, ultimately, its financial
condition, results of operations and liquidity. See "Business--Servicing."
LITIGATION
On March 4, 1997 a shareholder commenced an action against the Company and
certain named directors and officers of the Company entitled Taran v. Olympic
Financial Ltd. et al. in the United States District Court for the District of
Minnesota. Four similar lawsuits, three of them in the United States District
Court for the District of Minnesota (Frank Dibella, on behalf of himself and all
others similarly situated vs. Olympic Financial Ltd. et al., Michael Diemer vs.
Olympic Financial Ltd. et al. and Howard Pisnoy vs. Olympic Financial Ltd. et
al.) and one in the United States District Court for the Eastern District of New
York (North River Trading, LLC, and Allan Farkas, and All Others Similarly
Situated vs. Olympic Financial Ltd. et al.) were filed after that time. These
suits have been consolidated in one suit, In re Olympic Financial Ltd.
Securities Litigation, in the United States District Court for the District of
Minnesota. Plaintiffs in the consolidated action allege that during the period
from July 20, 1995 through March 3, 1997 the defendants, in violation of federal
securities laws, engaged in a scheme that had the effect of artificially
inflating, maintaining and otherwise manipulating the value of the Company's
Common Stock by, among other things, making baseless, false and misleading
statements about the current state and future prospects of the Company,
particularly with respect to the Classic program and the refinancing of
repossessed automobiles. Plaintiffs allege that this scheme included making
false and misleading statements and/or concealing material adverse facts. The
consolidated action is in the preliminary stages and the parties have not begun
discovery. The Company has reviewed the complaint in the consolidated action and
believes that the consolidated action is without merit and intends to defend it
vigorously. There can, however, be no assurance that the Company will prevail in
such defense or that any order, judgment, settlement or decree arising out of
this litigation will not have a material adverse effect on the Company's
financial condition, results of operations or liquidity.
MANAGEMENT OF GROWTH
The growth of the Company's servicing portfolio has resulted in increased
demands on the Company's personnel and systems. The Company's ability to
support, manage and control continued growth is dependent upon, among other
things, its ability to hire, train, supervise and manage its larger workforce.
S-19
<PAGE>
Furthermore, the Company's ability to manage portfolio delinquency and loss
rates is dependent upon the maintenance of efficient collection and repossession
procedures and adequate staffing therefor. There can be no assurance that the
Company will have trained personnel and systems adequate to support such growth.
As discussed under "Business--Servicing," in 1996 the Company opened four
regional collection centers and has taken a number of initiatives to improve its
servicing and collection performance. There can be no assurance that these
efforts will be successful.
COMPETITION
The business of financing automobiles is highly competitive. Existing and
potential competitors include well-established financial institutions, such as
banks, other automobile finance companies, small loan companies, thrifts,
leasing companies and captive finance companies owned by automobile
manufacturers, such as General Motors Acceptance Corporation, Chrysler Credit
Corp. and Ford Motor Credit Company. Many of these competitors have greater
financial, technical and marketing resources than the Company and from time to
time offer special buyer incentives in the form of below-market interest rates
on certain classes of vehicles. Many of such competitors also have longstanding
relationships with automobile dealers and some of such major competitors provide
other forms of financing to automobile dealers, including dealer floor plan
financing and leasing, which is not provided by the Company. There can be no
assurance that the Company will be able to compete successfully with such
competitors.
REGULATION
The Company's business is subject to numerous federal and state consumer
protection laws and regulations, which, among other things: (i) require the
Company to obtain and maintain certain licenses and qualifications; (ii) limit
the interest rates, fees and other charges the Company is allowed to charge;
(iii) limit or prescribe certain other terms of the Company's automobile loan
contracts; (iv) require specific disclosures; and (v) define the Company's
rights to repossess and sell collateral. The Company believes it is in
substantial compliance with all such laws and regulations, and that such laws
and regulations have had no material effect on the Company's ability to operate
its business. Changes in existing laws or regulations, or in the interpretation
thereof, or the promulgation of any additional laws or regulations, could have a
material adverse effect on the Company's business, financial condition and
results of operations and upon its outstanding securities.
CHANGE OF CONTROL
The terms of the Notes will provide that, upon the occurrence of any Change
of Control (as defined in the Indenture), the Company will be required to make
an offer to purchase all the Notes issued and then outstanding under the
Indenture at a purchase price equal to 101% of the principal amount thereof,
plus accrued and unpaid interest thereon to the date of purchase. The Senior
Term Notes have an identical requirement and certain future credit or other
borrowing agreements may contain similar restrictions. In 1996, the Company
received an indication of interest to buy the Company and requested its
financial advisor to examine the strategic alternatives available to the
Company, including a sale of the Company. No definitive offers to buy the
Company were received, but there can be no assurance that a change in control of
the Company will not occur in the future. There can be no assurance that the
Company would have sufficient resources to purchase any Notes tendered pursuant
to a Change of Control offer.
ABSENCE OF PUBLIC MARKET
Prior to this Offering there has been no existing market for the Notes and
there can be no assurance as to the liquidity of any market that may develop for
the Notes, the ability of holders of the Notes to sell their Notes or the price
at which Holders will be able to sell their Notes. If such a market were to
develop, the Notes could trade at prices that may be higher or lower than the
initial offering price thereof depending on many factors, including prevailing
interest rates, the Company's operating results and the markets for similar
securities. The Underwriters have advised the Company that they currently intend
to make a market in the Notes; however, they are not obligated to do so and any
market may be discontinued at any time without notice. The Company does not
intend to apply for listing of the Notes on any securities exchange.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND SHAREHOLDERS
Under the Indenture, acceptance of a Note by a purchaser will constitute
waiver and release of all liability of any director, officer, employee,
incorporator or shareholder of the Company, as such, for any obligations of the
Company on the Notes or the Indenture or for any claim based on, or in respect
of, or by reason of, such obligations or their creation.
S-20
<PAGE>
USE OF PROCEEDS
The net proceeds from the Offering are estimated to be approximately $48.4
million, after deducting estimated offering expenses and underwriting discounts.
The net proceeds from the Offering will be used to fund purchases of automobile
loans and for working capital and other general corporate purposes. Prior to
application for the foregoing purposes, the net proceeds will be used to reduce
outstanding indebtedness under the Company's warehouse facilities. At August 31,
1997, the Company's warehouse facilities had a weighted average interest rate of
5.60%.
CAPITALIZATION
The following table sets forth the short-term debt and capitalization of the
Company as of June 30, 1997 (unaudited) and as adjusted to give effect to the
Offering and the application of the estimated net proceeds therefrom.
<TABLE>
<CAPTION>
AT JUNE 30, 1997
-----------------------
(Dollars in thousands) ACTUAL AS ADJUSTED
---------- -----------
<S> <C> <C>
Short-term debt:
Amounts due under warehouse facilities................................................. $ 97,722 $ 49,355
---------- -----------
---------- -----------
Long-term debt:
Senior Term Notes...................................................................... $ 291,671 $ 291,671
Notes offered hereby................................................................... -- 50,000
Unsecured senior subordinated notes.................................................... 30,000 30,000
Unsecured junior subordinated notes.................................................... 21,742 21,742
Capital lease obligations.............................................................. 6,583 6,583
---------- -----------
Total long-term debt............................................................. 349,996 399,996
---------- -----------
Shareholders' equity:
Capital stock, $0.01 par value, 100,000,000 shares authorized:
38,060,023 shares of Common Stock issued and outstanding and no shares of Preferred
Stock issued and outstanding....................................................... 381 381
Additional paid-in capital............................................................. 321,943 321,943
Retained earnings...................................................................... 12,946 12,946
---------- -----------
Total shareholders' equity....................................................... 335,270 335,270
---------- -----------
Total capitalization......................................................... $ 685,266 $ 735,266
---------- -----------
---------- -----------
</TABLE>
S-21
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
(Dollars in thousands except per share ----------------------------------------------------- --------------------
amounts) 1992 1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net interest margin........................ $ 752 $ 2,525 $ 9,828 $ 31,192 $ 62,963 $ 27,385 $ 37,495
Gain on sale of loans (1).................. 2,698 7,650 13,579 62,182 115,773 50,681 (51,428)
Servicing fee income....................... 408 1,685 4,502 13,987 28,284 12,300 20,525
Other non-interest income.................. -- 24 879 1,371 6,475 3,173 4,384
--------- --------- --------- --------- --------- --------- ---------
Total revenues......................... 3,858 11,884 28,788 108,732 213,495 93,539 10,976
Operating expenses......................... 4,390 8,691 17,342 42,727 92,298 39,953 79,568
Long term debt and other interest
expense.................................. 810 1,798 5,416 17,170 25,193 11,949 18,242
--------- --------- --------- --------- --------- --------- ---------
Total expenses......................... 5,200 10,489 22,758 59,897 117,491 51,902 97,810
--------- --------- --------- --------- --------- --------- ---------
Operating income (loss) before income taxes
and extraordinary item................... (1,342) 1,395 6,030 48,835 96,004 41,637 (86,834)
Provision for income taxes................. -- -- 1,845 19,518 35,688 15,844 (33,066)
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) before extraordinary
items.................................... (1,342) 1,395 4,185 29,317 60,316 25,793 (53,768)
Extraordinary items (2).................... (458) -- -- (3,856) -- -- (15,828)
--------- --------- --------- --------- --------- --------- ---------
Net income (loss).......................... $ (1,800) $ 1,395 $ 4,185 $ 25,461 $ 60,316 $ 25,793 $ (69,596)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
PRIMARY EARNINGS PER SHARE:
Net income (loss) per common share before
extraordinary items...................... $ (0.24) $ 0.11 $ 0.17 $ 1.35 $ 1.79 $ 0.85 $ (1.37)
Extraordinary items per common share (2)... (0.08) -- -- (0.19) -- -- (0.41)
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) per common share......... $ (0.32) $ 0.11 $ 0.17 $ 1.16 $ 1.79 $ 0.85 $ (1.78)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
FULLY DILUTED EARNINGS PER SHARE:
Net income (loss) per share before
extraordinary items...................... $ (0.24) $ 0.11 $ 0.17 $ 1.11 $ 1.65 $ 0.76 $ (1.37)
Extraordinary items per share (2).......... (0.08) -- -- (0.15) -- -- (0.41)
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) per share................ $ (0.32) $ 0.11 $ 0.17 $ 0.96 $ 1.65 $ 0.76 $ (1.78)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING:
Primary.................................... 5,668,272 10,996,536 10,818,908 20,029,769 33,065,473 29,397,320 39,163,325
Fully diluted.............................. 5,668,272 11,186,033 16,683,380 26,455,876 36,449,995 33,981,805 39,239,574
FINANCIAL RATIOS AND OTHER DATA (3):
Ratio of earnings to fixed charges......... -- 1.72x 2.06x 3.75x 4.64x 4.33x --
Deficiency in earnings to fixed charges.... $ 1,342 -- -- -- -- -- $ 86,834
SELECTED CASH FLOW DATA:
Total cash used in operating activities.... $ (17,991) $ (51,056) $ (78,774) $(135,659) $(253,127) $(155,021) $(119,204)
Total cash used in investing activities.... (1,104) (455) (917) (2,588) (6,600) (2,131) (4,434)
Total cash provided by financing
activities............................... 41,372 31,040 93,572 122,970 274,444 178,387 135,716
--------- --------- --------- --------- --------- --------- ---------
Net increase (decrease) in cash............ $ 22,277 $ (20,471) $ 13,881 $ (15,277) $ 14,717 $ 21,235 $ 12,078
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
BALANCE SHEET DATA (AT PERIOD END):
Cash and cash equivalents.................. $ 23,207 $ 2,736 $ 16,617 $ 1,340 $ 16,507 $ 22,575 $ 28,135
Finance income receivable.................. 6,133 26,247 58,540 186,001 362,916 264,466 338,092
Restricted cash in spread accounts......... 5,207 15,109 21,408 63,580 142,977 101,948 189,643
Total long-term debt....................... 15,626 33,506 46,804 161,929 206,418 204,734 349,996
Total preferred shareholders' equity....... -- 27,289 27,279 25,379 -- 17,204 --
Total common shareholders' equity.......... 30,072 31,410 33,583 155,434 393,093 339,591 335,270
</TABLE>
S-22
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
(Dollars in thousands except per share ----------------------------------------------------- --------------------
amounts) 1992 1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Automobile dealer relationships (at
period end)........................... 339 857 2,344 5,110 7,727 6,468 8,869
Automobile loan purchases............... $ 97,819 $ 305,823 $ 743,256 $2,052,413 $2,750,553 $1,291,389 $1,520,374
Automobile loan securitizations......... $ 79,759 $ 336,077 $ 712,211 $1,933,525 $2,787,412 $1,330,262 $1,522,135
Annualized operating expenses as a
percentage of average servicing
portfolio............................. 6.52% 4.39% 3.28% 2.78% 3.06% 3.03% 3.83%
SERVICING DATA:
Servicing portfolio (at period end)..... $ 103,507 $ 316,933 $ 837,095 $2,267,107 $3,791,857 $3,004,706 $4,514,009
Average servicing portfolio during the
period................................ $ 67,339 $ 198,018 $ 528,577 $1,534,720 $3,015,411 $2,635,759 $4,150,719
Delinquencies of more than 30 days as a
percentage of servicing portfolio (at
period end)........................... 0.36% 0.96% 0.82% 1.33% 2.64% 1.95% 2.66%
Net losses as a percentage of average
servicing portfolio(4)................ 0.22% 0.52% 0.66% 0.67% 0.99% 0.83% 3.63%
</TABLE>
- ------------------------------
(1) Included in gain on sale of loans during the six months ended June 30, 1997
is a non-recurring pretax charge to gain on sale of loans of $98.0 million
resulting in a year-to-date loss on sale of loans. The special charge was
due primarily to (i) a change in estimated recovery rates on current
repossessed inventory and anticipated future inventory arising from existing
securitization transactions and (ii) a change in the Company's accounting
policy with respect to the estimated recovery rate realized upon disposition
of repossessed inventory. See "Business--Loan Purchases and Underwriting."
(2) Extraordinary items relate to prepayment fees and charge-off of capitalized
debt financing costs in connection with early extinguishment of certain debt
obligations.
(3) For purposes of calculating the ratio of earnings to fixed charges, earnings
are defined as income (loss) before income taxes plus fixed charges. Fixed
charges consist of interest expense, amortization of debt discount and the
interest factor in rental expenses.
(4) A change in the Company's estimated recovery rate for repossessed inventory,
as discussed in note (1) above, resulted in a write down of existing
inventory and an increase in net losses during the six months ended June 30,
1997. See "Business--Loan Purchases and Underwriting."
S-23
<PAGE>
BUSINESS
GENERAL
The Company purchases, securitizes and services consumer automobile loans
originated primarily by car dealers affiliated with major foreign and domestic
manufacturers. At June 30, 1997, the Company had purchased loans from more than
8,800 dealers in 42 states, a substantial majority of which sell loans to the
Company on a regular basis. Loans are purchased through 18 regional buying
centers serving as "hubs" in 15 states, supplemented by a network of dealer
development representatives ("DDRs"). DDRs generate loans in "hubs" or "spokes"
(markets outside the specific areas of "hubs"), while credit approval and loan
processing are generally performed at the "hub" or at the Company's headquarters
in Minneapolis, Minnesota. As a result of this strategy, the Company has
expanded the number of dealers in its network and has significantly increased
its annual volume of automobile loans purchased, from $743.3 million in 1994 to
$2.8 billion in 1996, without incurring the additional costs that would be
associated with establishing a proportionate number of new buying centers.
During the first six months of 1997, the Company purchased $1.5 billion of
automobile loans compared to $1.3 billion in the first six months of 1996. The
Company services loans primarily through its national customer service center
and four regional collection centers.
The Company purchases loans based on its underwriting procedures, which
focus on a borrower's qualifications and collateral value. The Company's
underwriting criteria do not distinguish between new and used vehicles, which
represented approximately 17.7% and 82.3%, respectively, of the Company's loan
purchases during the first six months of 1997. The Company seeks to maximize
gross interest rate spreads relative to expected net losses by maintaining a
tiered pricing system based on the borrower's credit characteristics as measured
by the Company's underwriting and proprietary credit scoring criteria. The
Company markets its loan products to dealers under two programs, designated
Premier and Classic. "Premier" and "Classic" are proprietary trademarks of the
Company. Premier borrowers generally have stronger credit characteristics than
those of Classic borrowers. Classic loans purchased during the first six months
of 1997 had annual percentage rates of interest ("APRs") typically ranging from
16% to 23%, with a weighted average APR of approximately 17.9%, while the APRs
of Premier loans purchased during the same period typically ranged from 8% to
16%, with a weighted average APR of approximately 13.5%. The Company has been
expanding the level of loan purchases under its Classic program primarily to
increase gross interest rate spreads. For the month of June 1997, the Company
purchased 54% of the principal amount of its loans under the Classic program,
compared with 36% and 17% for all of 1996 and 1995, respectively. The Company
may change its loan purchase mix at any time and from time to time. The Company
considers substantially all of the loans it purchases under both the Premier and
Classic programs to be in the "prime" or "non-prime" loan categories, but does
not consider the loans it purchases under such programs to be in the "sub-prime"
loan category.
In accordance with prevailing industry practice, the Company pays an
up-front dealer participation to the originating dealer for each loan purchased.
These dealer participations vary in amount among the Company's loan products and
are generally greater for products under the Premier program than for products
under the Classic program. Average dealer participations in the first six months
of 1997 were 3.20% of the principal amount of loans purchased by the Company,
compared with 3.45% and 4.21% during 1996 and 1995, respectively. The decline in
1997 and 1996 was principally due to the increase in the Company's loan
purchases under its Classic program and a reduction in the maximum participation
rate allowable under the Premier program.
The Company primarily uses warehouse facilities to fund the initial purchase
of loans. The Company securitizes purchased loans as asset-backed securities,
generally on a quarterly or more frequent basis. In its securitizations, the
Company, through a special purpose subsidiary, transfers loans to newly-formed
securitization trusts which issue one or more classes of asset-backed
securities. The asset-backed securities are simultaneously sold to investors and
the Company recognizes a gain on the sale of the loans. Each month, collections
of principal and interest on the securitized loans are used by the trustee to
pay the holders of the related asset-backed securities, to establish and
maintain spread accounts as a source of cash to cover shortfalls in collections
and to pay expenses associated with the securitizations and subsequent
S-24
<PAGE>
servicing. After such application by the trustee, amounts in excess of those
necessary to satisfy requirements associated with the asset-backed securities
are generally distributed to the Company, subject to its agreements with FSA.
All of the Company's securitization trusts and one of the Company's warehouse
facilities are credit-enhanced through financial guaranty insurance policies,
issued by FSA, which insure payments of principal and interest due on the
related asset-backed securities. Asset-backed securities insured by FSA have
been rated AAA by Standard & Poor's and Aaa by Moody's Investors Service, Inc.
At August 31, 1997 the aggregate principal amount of loans held by
securitization trusts was approximately $4.2 billion, with aggregate restricted
cash in spread accounts of $222.9 million, compared with $3.8 billion and $143.0
million, respectively, at December 31, 1996 and $2.3 billion and $63.6 million,
respectively, at December 31, 1995. Excess cash from securitization trusts
distributed to the Company was $58.9 million (including $14.5 million that was
restricted pursuant to an arrangement between the Company and FSA) in the first
nine months of 1997, compared with $43.4 million in all of 1996 and $21.1
million in all of 1995. In September 1997, the Company completed an additional
$775.0 million securitization.
The Company acts as the servicer of all loans originated and securitized by
it in return for a monthly servicing fee. Servicing fee income was $20.5 million
in the first six months of 1997, compared with $28.3 million and $14.0 million
in all of 1996 and 1995, respectively. Until October 1996, servicing and
collection functions were provided through the Company's national servicing and
collection center located in Minneapolis, Minnesota, and in each of its "hubs."
In response to the rapid growth of its servicing portfolio, continued expansion
of its Classic program (which generally requires greater collection efforts than
its Premier program), and increases in delinquencies and default rates on its
servicing portfolio, the Company substantially increased its servicing and
collection staff and, in October 1996, implemented a strategy to regionalize its
collection activities into four new locations: Charlotte, North Carolina;
Dallas, Texas; Denver, Colorado and Minneapolis, Minnesota.
STRATEGIES
The Company's business objective is to maximize the volume and profitability
of loans it purchases, securitizes and services. To achieve this objective, the
Company employs the following strategies:
- EMPHASIS ON DEALER RELATIONSHIPS -- The Company believes that one of its
key competitive advantages is its ability to identify and meet a dealer's
financing needs. When presented with a loan application, the Company
attempts to notify the dealer within one hour or less whether it will
approve, conditionally approve or deny the automobile loan for purchase
from the dealer. The Company's business hours generally coincide with
those of the dealership and, in some cases, the Company will provide loan
processing on the dealer's premises during dealer promotions. When the
Company considers a borrower's credit quality to be adequate, the Company
may provide the dealer with flexibility in developing loan structures to
accommodate a borrower's needs, such as extended payment terms or low
down-payment requirements. To further assist the dealer, the Company may
perform more in-depth underwriting analysis when warranted by special
circumstances. A DDR maintain frequent contacts with the dealer and
recommends service enhancements from time to time. By employing consistent
loan underwriting and purchasing procedures, the Company believes that it
provides the dealer with a reliable and consistent source of financing.
- TIERED PRICING STRATEGY -- The Company maintains a tiered pricing system,
allowing it to price different loan products according to the profiles of
borrowers' credit characteristics as measured by the Company's proprietary
credit scoring system. The Company's tiered pricing system seeks to (i)
maximize gross interest rate spreads relative to expected net losses
within each credit tier, (ii) provide a greater opportunity to expand its
automobile loan market share through loan products that address a greater
variety of customer needs, and (iii) reduce initial cash requirements
relative to the Premier program because the Company offers lower dealer
participations on Classic loans. The higher pricing of the Classic program
is intended to compensate the Company for the higher delinquency and
default rates associated with the Classic program, which the Company
addresses through higher reserves for loan losses. At June 30, 1997, the
Company had an aggregate of $209.6 million reserved for loan losses,
compared with $95.0 million at December 31, 1996 and
S-25
<PAGE>
$42.3 million at December 31, 1995. Reserves as a percentage of
outstanding loans securitized increased from 1.86% at December 31, 1995 to
2.51% at December 31, 1996 and 4.64% at June 30, 1997. The Company may
change its loan purchase mix at any time and from time to time.
- MAINTENANCE OF UNDERWRITING PROCEDURES -- The Company has developed a
proprietary credit scoring system designed to maintain consistent
underwriting procedures for its loan authorizations. The Company's credit
scoring system monitors six evaluation criteria, including debt-to-income,
payment-to-income, loan-to-value, bankruptcy score, credit score and loan
size. Based on the results of the credit scoring system, loan applications
are reviewed by one of the Company's credit specialists and, based on the
Company's underwriting procedures, are frequently reviewed by one or more
credit managers, to determine whether the loan should be approved. To
monitor the integrity of the underwriting procedures, management tracks on
a daily basis the approval rates and delinquency and loss rates by credit
specialist, buying center and dealer. On a regular basis the Company
evaluates its underwriting procedures and implements enhancements when
management believes appropriate.
- SERVICING -- The Company operates a national servicing center in
Minneapolis, Minnesota and four regional collection centers located in
Charlotte, North Carolina; Dallas, Texas; Denver, Colorado and
Minneapolis, Minnesota. These centers are staffed with over 700 trained
personnel responsible for various servicing, collection and repossession
activities. Collectors are assisted by highly automated telephone dialing
systems which improve the Company's ability to make early contact with
delinquent obligors. In addition the Company utilizes a computerized
collection system to aid its servicing and collection efforts. The Company
regularly monitors and periodically evaluates its servicing and collection
centers with a view to improving their procedures and anticipating
expansion of loan purchase volume or changes in product mix.
- FUNDING AND LIQUIDITY THROUGH WAREHOUSING AND SECURITIZATIONS -- The
Company funds the acquisition of automobile loans principally through two
warehouse facilities with asset-backed commercial paper programs.
Currently, these facilities provide sufficient capacity to handle the
Company's loan purchases. The Company securitizes purchased loans as
asset-backed securities and uses such securitizations as a cost
competitive source of capital compared to traditional sources of corporate
debt financing. Securitization enables the Company to sell automobile
loans on a regular basis, while retaining the right to receive future
servicing fees and excess cash flows. Securitization also allows the
Company to use the net proceeds from such sales to fund the purchase of
additional automobile loans. Since inception, the Company has securitized
approximately $8.1 billion of automobile loans.
- RETAILING OF REPOSSESSED AUTOMOBILES -- The Company relies significantly
upon the resale of its repossession inventory through retail markets,
primarily retail used car consignment lots. The Company believes that the
greater recoveries available from the retail market justify the costs of
maintaining unsold repossession inventory and managing the retail program.
In addition, the use of retail markets provides the Company with an
opportunity to finance the sale of repossessed automobiles to new buyers.
AUTOMOBILE DEALER PROGRAM
OVERVIEW. The following table describes the growth in the number of dealers
with whom the Company has entered into a dealer agreement during each of the
three years ended December 31, 1996
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<PAGE>
and during the six months ended June 30, 1997. A substantial majority of these
dealers sell loans to the Company on a regular basis.
<TABLE>
<CAPTION>
OPENING JUNE 30,
REGIONAL BUYING CENTER DATE 1994 1995 1996 1997
- ------------------------------------------------ ----------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
Minnesota....................................... 6/90 340 645 823 892
Colorado........................................ 4/92 240 414 500 562
North Texas..................................... 11/92 334 467 534 606
Washington...................................... 3/93 248 409 532 558
Arizona......................................... 7/93 136 266 344 367
Florida......................................... 8/93 169 332 477 557
Georgia......................................... 11/93 250 395 499 536
South Texas (1)................................. 2/94 175 333 311 351
Northern California............................. 6/94 115 286 424 468
Missouri........................................ 6/94 163 403 547 668
Massachusetts................................... 8/94 123 400 581 619
Tennessee....................................... 10/94 51 218 300 376
Ohio............................................ 3/95 -- 208 395 423
North Carolina.................................. 5/95 -- 309 513 616
Southern California............................. 12/95 -- 25 303 368
New York........................................ 3/96 -- -- 339 420
West Texas (1).................................. 7/96 -- -- 305 373
Maryland........................................ 3/97 -- -- -- 109
--------- --------- --------- -----
Totals...................................... 2,344 5,110 7,727 8,869
--------- --------- --------- -----
--------- --------- --------- -----
</TABLE>
- ------------------------
(1) Prior to July 1996, the West Texas region was included in the South Texas
region.
The Company believes that the volume and quality of the loans it acquires
depends upon its ability to establish and maintain satisfactory relationships
with automobile dealers. The Company's DDRs and other loan purchasing personnel
emphasize dealer service. The Company attempts to identify the particular
service needs of dealers and to provide a reliable source of financing for
qualified automobile buyers. DDRs are the Company's primary contact with its
dealers and are responsible for prospecting new dealerships, selling the
Company's programs, and cultivating dealer relationships. DDRs train dealer
personnel in the Company's programs and meet with dealer management periodically
in an effort to ensure the dealer's needs and expectations are being satisfied.
DDRs operate out of one of the Company's regional buying centers or out of one
of the Company's "spokes," which are typically within a 200-mile radius of a
regional buying center. The Company's cost in maintaining DDRs is primarily
limited to compensation.
LOAN PURCHASES AND UNDERWRITING
LOAN PURCHASES. Retail automobile buyers are customarily directed to a
dealer's finance and insurance department to finalize their purchase agreement
and to review potential financing sources and rates available from the dealer.
If the customer elects to pursue financing through the dealer, an application is
taken for submission to the dealer's financing sources. The Company's agreements
with its dealers are non-exclusive and, typically, a dealer will submit the
purchaser's application to more than one financing source for review. The dealer
in consultation with the borrower will decide which source will finance the
automobile purchase based upon the rates being offered, the terms for approval,
dealer participations or certain incentives offered from time to time in
accordance with captive wholesale financing arrangements with the dealer's
primary supplier of automobiles.
When presented with a loan application, the Company attempts to notify the
dealer within an hour or less whether it will approve, conditionally approve or
deny the loan for purchase from the dealer. A loan purchase by the Company
generally occurs simultaneously with the purchase by the buyer of the related
S-27
<PAGE>
automobile and the making of the loan to the buyer by the dealer. The buyer's
purchase generally is not completed until the Company or another financing
source approves a loan. If the application is approved by the Company and the
buyer accepts the terms of the financing, the buyer enters into an installment
contract or secured note with the dealer on a form prepared and provided to the
dealer by the Company. At the bottom or reverse of the contract or note is an
assignment of the loan to the Company which is signed by the dealer.
UNDERWRITING. The Company purchases loans based on its established
underwriting procedures. The Company's underwriting procedures include scoring
the borrower's loan application in accordance with the Company's proprietary
credit scoring system and comparing such credit scores to established
underwriting criteria. For borrowers with credit scores falling outside
predetermined criteria, the Company's policies require additional review and
approval by supervisory personnel in order to determine whether to approve such
loans. These procedures are intended to assess the applicant's ability to repay
the amounts due on the loan and the adequacy of the financed vehicle as
collateral. The Company's underwriting procedures do not distinguish between new
and used vehicles. The Company maintains a tiered pricing system, allowing it to
price loans according to the borrower's credit characteristics. The Company
markets its loan products to automobile dealers through its Premier and Classic
programs. Premier borrowers generally have stronger credit characteristics than
those of Classic borrowers.
Each applicant for a loan is required to complete and sign an application
which lists the applicant's assets, liabilities, income, credit and employment
history and other personal information. Upon receipt of the completed loan
application, the Company's administrative personnel order a credit bureau report
on the applicant to document the applicant's credit history. The application and
the credit bureau report are given to one of the Company's credit specialists
for analysis under the Company's proprietary credit scoring system.
The Company's credit scoring system evaluates the credit applicant with an
emphasis on cash flow as a principal indicator of repayment capability and
provides credit scores which are utilized by the Company as a basis to determine
if the applicant initially falls within the parameters of the Company's
underwriting criteria for a particular loan product. Assuming that the applicant
qualifies, the Company will expand its credit review by preparing an analysis of
the applicant's debt-to-income and payment-to-income ratios, and purchasing from
a credit bureau an additional credit score which attempts to assess the
likelihood of borrower bankruptcies. If the applicant meets the Company's
underwriting standards, the Company generally will approve the application. For
Classic borrowers (and, if certain scoring criteria are not satisfied, for
Premier borrowers), this data is subject to further investigation. This
investigation typically consists of direct telephone confirmations, when
feasible, of the applicant's employment and may also include direct credit
references from banks and financial institutions noted on the application.
Once scoring and verifications have been completed, one of the Company's
credit specialists reviews the application to ensure that it meets the
requirements of the Company's internal system and also reviews the various
banking and employment verifications obtained. The credit specialist also
considers the amount to be financed in relation to the purchase price and market
value of the automobile. If the vehicle is used, the Company determines market
value based upon the Kelly Blue Book value or the National Automobile Dealers
Association's ("NADA") Guide on Retail and Wholesale Values. Consistent with
industry standards, this assessment does not include inspection of the
automobile. The Company does not reject an applicant solely because of the age
of the automobile.
Objective credit scoring criteria provide the factual background for lending
decisions, but such decisions frequently require the credit judgment of the
Company's credit specialists. To the extent an applicant fails to meet one or
more of the scoring benchmarks for the proposed loan, the Company generally
requires higher levels of management scrutiny before such loans are approved. In
1996 and 1997, a substantial majority of Classic loans and a substantial number
of Premier loans purchased by the Company failed to meet at least one applicable
scoring benchmark and generally were subject to additional management review
before approval of these loans.
S-28
<PAGE>
Upon completion of the credit analysis, the Company decides whether it will
approve, conditionally approve or deny the loan application as submitted.
Conditioning approval of the application involves amending the dealer's proposed
terms of the loan to qualify the application according to Company procedures.
Typical conditions include, but are not limited to, requiring a co-applicant,
amending the length of the proposed term, requiring additional down payment,
substantiating certain credit information, or requiring proof of resolution of
certain credit deficiencies as noted on the applicant's credit history.
Approved, declined or conditioned application decisions are promptly
communicated to the dealer by phone or facsimile. Additionally, the applicant is
informed by the Company of any credit denial or other adverse action by mail, in
compliance with applicable statutory requirements.
The Company regularly reviews the quality of the loans it purchases and
conducts internal compliance reviews on a monthly basis.
RESALE AND FINANCING OF REPOSSESSIONS. The Company relies significantly
upon the resale of its repossession inventory through retail markets, primarily
retail used car consignment lots. The Company believes that the greater
recoveries available from the retail market justify the costs of maintaining
higher levels of unsold repossession inventory and managing the retail program.
In addition, the use of retail markets provides the Company with an opportunity
to finance the repossessed vehicles with new buyers. In late March 1997, the
Company increased its use of wholesale distribution channels after a review by
the Company's new chief executive office and other members of management
indicated that the Company's then-current retail channels were not sufficient to
liquidate vehicles at a pace satisfactory to management. As of March 31, 1997,
the Company took an after-tax charge of $60.8 million primarily due to a
reduction in the estimated recovery rates on then current repossessed inventory
and anticipated future inventory arising from then existing securitization
transactions to 60% of principal balance outstanding (as discussed in the
Company's Quarterly Reports on Form 10-Q for the quarters ended March 31, 1997
and June 30, 1997). The Company selected this 60% recovery rate on the basis of
the recovery rate the Company believes it could achieve if all of its
repossession inventory, including those higher value vehicles that are
ultimately sold through retail channels, were sold through wholesale channels.
In addition, the Company changed its accounting policy with respect to the
estimated recovery rate realized upon disposition of repossessed inventory to
estimate recovery rates based on values expected to be achieved through
wholesale distribution channels and to record any recoveries in excess of such
levels at the time such excess recoveries are realized. Similarly, in April
1997, based on the recommendation of the Company's new chief executive officer
following his review, the Company adopted modifications to its retail
disposition strategy that were intended to reduce liquidity requirements and
establish more efficient operating procedures. These changes included a policy
that limits the length of time a repossessed vehicle may be held for resale
through retail channels. Since 1996, the Company has been adjusting its
strategies for identifying and utilizing dealers who demonstrate the ability to
sell the Company's repossession inventory at prices and within periods of time
that are acceptable to the Company's management. At August 31, 1997, the Company
had arrangements with approximately 60 consignment lots, compared with 67
consignment lots at December 31, 1996 and ten large retail consignment lots at
December 31, 1995. At August 31, 1997, the inventory of repossessed automobiles
managed by the Company and held for resale was $54.8 million, compared with
$49.0 million at June 30, 1997, $64.9 million at December 31, 1996 and $17.7
million at December 31, 1995. The Company intends to measure the effectiveness
of this modified strategy by comparing its profitability to that of a wholesale
disposition strategy. The Company's retail disposition strategy, as modified, is
relatively new and evolving and may be subject to further change.
During the first half of 1997, approximately 55% of repossessed vehicles
sold were liquidated through retail markets and the Company financed
approximately 90% of these sales, while during 1996, the Company sold
approximately 70% of its repossession inventory through retail markets and the
Company financed approximately 90% of these sales. The Company believes this
strategy had the effect of reducing the Company's loan losses in 1996 and, to a
lesser extent, in the first half of 1997 (relative to a wholesale-based
strategy) while delaying cash distributed from securitization trusts as a result
of slower inventory turnover. The strategic benefits of the retail program were
partially offset in 1996 and the first half of 1997 by the performance of the
Company's portfolio of repossessed automobile loans, which experienced
delinquency, default and loss rates substantially higher than the Company's
other loan products, and by
S-29
<PAGE>
lower retail prices for used cars in 1997. Since the latter part of 1996, the
Company has taken a series of steps intended to improve the performance of its
financed repossession portfolio, including introducing greater verification of
credit applications, tightening supervision of the buying process and lowering
the loan-to-value ratios on loans purchased.
The Company applies the same underwriting methodology and procedures to the
financing of repossessed automobiles as it applies to the purchase of other loan
products, but it allows credit specialists and managers greater latitude in the
financed repossession product to approve exceptions (with appropriate management
authorization) to underwriting criteria as compared to other products in the
Premier and Classic programs. The principal amount of retail repossession sales
financed by the Company increased from $25.7 million (1.13% of the total
servicing portfolio) at December 31, 1995 to $96.9 million (2.56% of the total
servicing portfolio) at December 31, 1996 and to $142.7 milllion (3.16% of the
total servicing portfolio) at June 30, 1997. The delinquency, default and loss
rates of the Company's portfolio of repossessed automobile loans have
significantly exceeded the rates of the Company's other loan products,
accounting for a disproportionate amount of the Company's overall delinquencies,
defaults and losses in 1996. The Company has instituted more comprehensive
controls over its financed repossession product for the purpose of reducing
delinquency, default and loss rates to acceptable levels. Acceptable levels of
delinquencies, defaults and losses in the repossession loan portfolio, as
determined by management, are likely to exceed levels typically experienced in
the Company's other loan products.
DEALER PARTICIPATIONS. The Company remits to the dealer the amount financed
pursuant to the terms of the loan and, consistent with industry practice, a
dealer participation for selling such loan to the Company. The Company computes
the dealer participation by calculating the amount of cash flow arising from the
rate differential between the interest rate charged by the automobile dealer to
the borrower and the rate offered by the Company to the dealer. The Company
generally offers two alternative methods for payment of the dealer
participation. Under the "shared participation" method, the dealer generally
receives a percentage of the total participation at the time of sale in exchange
for a shorter charge-back period. During the charge-back period the Company is
entitled to recover the upfront percentage received by the dealer in the event
of a prepayment or default during the first 90 to 180 days. Under an alternative
method, the Company pays the full participation to the dealer less approximately
1% of the outstanding loan balance which is held in reserve to allow for future
charges to the dealer in the event of early prepayment or default. Under the
alternative method, the Company is entitled to recover from the dealer the
unearned portion of the dealer participation in the event of a prepayment or
default in excess of the amount withheld at any point prior to contractual
maturity and the entire reserve amount if the loan defaults within its first 12
months. A substantial majority of the Company's dealers elect the "shared
participation" method.
S-30
<PAGE>
MARKETS AND EXPANSION
The following table illustrates the loan purchasing volume and percentage of
total loan purchases by regional buying center during each of the three years
ended December 31, 1996 and during the six months ended June 30, 1997:
<TABLE>
<CAPTION>
(Dollars in thousands)
REGIONAL BUYING CENTER 1994 1995 1996 JUNE 30, 1997
- ------------------------ ------------------------ ------------------------ ------------------------ ------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Minnesota............... $ 61,135 8.23% $ 117,253 5.71% $ 160,376 5.83% $ 81,542 5.36%
Colorado................ 77,982 10.49 145,552 7.09 161,880 5.89 84,735 5.57
North Texas............. 109,624 14.75 260,775 12.71 299,673 10.90 164,075 10.79
Washington.............. 75,218 10.12 176,241 8.59 198,580 7.22 84,762 5.58
Arizona................. 71,936 9.68 124,921 6.09 204,717 7.44 100,968 6.64
Florida................. 79,598 10.71 123,308 6.01 144,042 5.24 95,173 6.26
Georgia................. 95,123 12.80 143,289 6.98 189,346 6.88 95,357 6.27
South Texas (1)......... 98,699 13.28 335,317 16.34 278,457 10.12 100,770 6.63
Northern California..... 23,822 3.21 149,291 7.27 192,794 7.01 78,003 5.13
Missouri................ 33,267 4.48 172,569 8.41 173,381 6.30 79,626 5.24
Massachusetts........... 12,359 1.66 108,090 5.27 131,794 4.79 62,305 4.10
Tennessee............... 4,493 0.59 99,951 4.87 141,491 5.15 103,074 6.78
Ohio.................... -- -- 9,844 0.48 57,267 2.08 54,699 3.60
North Carolina.......... -- -- 85,978 4.18 202,255 7.35 130,005 8.55
Southern California..... -- -- 34 -- 57,858 2.10 54,088 3.56
New York................ -- -- -- -- 44,516 1.62 49,338 3.25
West Texas (1).......... -- -- -- -- 112,126 4.08 92,992 6.12
Maryland................ -- -- -- -- -- -- 8,862 0.57
------------ --------- ------------ --------- ------------ --------- ------------ ---------
Totals.............. $ 743,256 100.00% $ 2,052,413 100.00% $ 2,750,553 100.00% $ 1,520,374 100.00%
------------ --------- ------------ --------- ------------ --------- ------------ ---------
------------ --------- ------------ --------- ------------ --------- ------------ ---------
</TABLE>
- ------------------------
(1) Prior to July 1996, the West Texas region was included in the South Texas
region.
The Company regularly evaluates its "hub and spoke" strategy and from time
to time has expanded into new markets through the establishment of additional
regional buying centers and "spoke" operations. The Company's expansion program
is directed by personnel with backgrounds in credit administration, finance and
operations, information systems, facilities development, sales and marketing and
human resources. In considering potential markets for expansion, the Company
reviews such factors as population, income per capita, retail sales per capita,
city work force, number of households, average annual income, automobile
registrations, driver licenses issued and number of dealerships in the state and
standard metropolitan statistical areas and the competitive environment for
automobile financing. The Company also considers other general expansion
criteria, including but not limited to, recruiting and staffing, training,
compensation and benefits, policies and procedures, demographics, and legal and
licensing requirements. The Company also reviews the performance of existing
buying centers to evaluate their continuing contribution to the Company's
strategy.
FINANCING
WAREHOUSE FACILITIES. The Company uses warehouse facilities to finance its
purchase of loans on a short-term basis pending securitization. At August 31,
1997, the Company had an aggregate borrowing capacity of approximately $647.7
million under two primary warehouse facilities, of which $287.8 million was
available. The Company, through a wholly-owned special purpose subsidiary, ARFC,
has a $375.0 million receivables warehouse facility (the "BofA Facility") with
Receivables Capital Corporation ("RCC"), a commercial paper conduit sponsored by
Bank of America. At August 31, 1997, the Company, through another wholly-owned
special purpose subsidiary, Arcadia Receivables Finance Corp. II (formerly
Olympic Receivables Finance Corp. II) ("ARFC II"), had an approximately $272.7
million receivables warehouse facility (the "Conduit Facility" and, together
with the BofA Facility, the "Warehouse Facilities") with a commercial paper
conduit managed by Morgan Guaranty Trust Company of New York.
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<PAGE>
In connection with the BofA Facility, the Company, through ARFC, sells loans
to another wholly-owned special purpose subsidiary, Arcadia Receivables Conduit
Corp. ("ARCC"), and ARCC purchases the loans from ARFC and agrees to transfer
the loans back to ARFC on ARFC's demand (at the time, and for the purpose, of
securitization). ARFC is also obligated to repurchase loans from ARCC on or
before the date which is twelve months following their conveyance to ARCC and
upon the occurrence of a default or certain other events. The BofA Facility
provides for the purchase of loans for an aggregate purchase price outstanding
at any time not to exceed $375.0 million. ARCC finances its purchase of loans
from ARFC by issuing asset-backed notes (the "ARCC Notes") to RCC. FSA provides
credit enhancement with respect to the BofA Facility in the form of a financial
guaranty insurance policy guaranteeing certain payments on the ARCC Notes. The
BofA Facility will continue until the earlier of December 2, 1999 or the
occurrence of certain events, subject to early termination as described below.
The purchase price payable to ARFC by ARCC is 98% of the principal balance of
each loan except in the case of loans used to finance the purchase of vehicles
previously repossessed by the Company, in which case the purchase price is 85%
of the principal balance of the loan. Proceeds of the loans, the loan purchase
price payable to ARFC and the repurchase price payable by ARFC are deposited in
a collection account. The loans and the collection account are pledged to secure
payment of the ARCC Notes. Any excess in the collection account over certain
amounts required to be retained in the account is released to a spread account.
The spread account is cross-collateralized with the spread accounts established
in connection with the Company's securitization trusts. If no default exists
with respect to the BofA Facility, all amounts deposited into the spread account
in excess of 1% of the outstanding balance of loans in the BofA Facility are
released to ARFC. In the event that ARFC or ARCC, respectively, default under
any payment obligation under the BofA Facility, ARFC and ARCC are prohibited
from paying dividends or making other distributions to the Company.
RCC's purchase of the ARCC Notes and concurrent issuance of commercial paper
is supported by a liquidity facility provided by financial institutions (the
"BofA liquidity banks"). This liquidity facility is a revolving obligation that
must be renewed annually. The next renewal date is December 2, 1997. Failure by
the BofA liquidity banks to renew this liquidity facility would lead to an early
termination of the BofA Facility. The BofA Facility also includes eligibility
criteria for loans warehoused, normal and customary representations, warranties,
covenants and portfolio performance triggers designed to protect RCC, FSA and
the BofA liquidity banks from various risks relating to the pool of automobile
loans supporting the BofA Facility.
The Company pays usage and non-usage fees to FSA and Bank of America, in
connection with the BofA Facility. The ARCC Notes bear an interest rate equal to
the rate at which funds are obtained by RCC from time to time in the commercial
paper market plus a margin. In the event the ARCC Notes are funded by the BofA
liquidity banks, the rate of interest will be the reserve-adjusted interbank
offered rate in effect from time to time plus a margin.
Under the Conduit Facility, the Company, through ARFC II, may from time to
time warehouse automobile loans by selling them to an owner trust (the "Owner
Trust"). The Company may obtain up to 100% of the principal balance of the
receivables sold to the Owner Trust, but must deposit 6% of such principal
balance (subject to increase to 7% from retained excess spread, and further
increases upon the occurrence of certain events) into a spread account. The
Owner Trust simultaneously issues a Variable Funding Note ("VFN") to the
commercial paper conduit, representing 88% of the outstanding principal balance
of the receivables, and issues certificates (the "Certificates") to
institutional investors, representing 12% of the outstanding principal balance
of the receivables. If this facility were drawn on, the Company would be
required to purchase approximately 54% of the Certificates, but it would be free
to resell such Certificates if it could obtain a price satisfactory to the
Company. The purchase of the VFN will be funded through the issuance of
commercial paper by the commercial paper conduit. The Conduit Facility will
continue until the earlier of July 31, 1998 or the occurrence of certain events.
At the time the Company accesses the public asset-backed securitization market,
the Company's securitization subsidiary (currently ARFC) purchases the loans
using the proceeds from the securitization and the VFN and the Certificates are
redeemed by the Owner Trust. The Company may use the Conduit Facility as a
source of permanent funding for a designated pool of automobile loans, but the
pricing on the facility would be increased under those circumstances.
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The commercial paper conduit's purchase of the VFNs and concurrent issuance
of commercial paper is supported by a liquidity facility provided by financial
institutions (the "conduit liquidity banks"). The liquidity facility is a
revolving obligation that must be renewed annually. In addition to credit
enhancement through the subordination of the Certificates, the spread account
and the liquidity facility, the Conduit Facility includes eligibility criteria
for loans warehoused, normal and customary representations and warranties,
covenants, and portfolio triggers designed to protect the commercial paper
conduit, the liquidity providers, and the private investors purchasing the
Certificates from various risks relating to the automobile loans supporting the
warehouse facility. In addition, the Conduit Facility contains a capital base
covenant with respect to the Company.
The Company pays a commitment fee on the daily unused portion of the Conduit
Facility. The VFNs bear an interest rate equal to the rate at which funds are
obtained by the commercial paper conduit, from time to time in the commercial
paper market plus a margin. The Investor Certificates require a higher market
rate. In the event the VFN is purchased by the conduit liquidity banks, the rate
of interest will be the applicable adjusted Eurodollar rate or base rate (as
defined) plus a margin, if applicable.
SECURITIZATION OF LOANS. The Company pursues a strategy of securitizing
loans through the sale of asset-backed securities on a quarterly or more
frequent basis, based on the availability of loans, profitability and other
relevant factors. Securitization is used as a cost-competitive source of capital
compared to traditional corporate debt financing alternatives. The Company
utilizes the net proceeds from securitizations to purchase additional automobile
loans and to pay down outstanding warehouse facilities, thereby making such
short-term sources available for future loan purchases.
In its securitizations, the Company (through its special purpose subsidiary,
ARFC) transfers automobile loans to newly-formed securitization trusts which
issue one or more classes of asset-backed securities. The asset-backed
securities are simultaneously sold to investors. Each month, collections of
principal and interest on the automobile loans are used by the trustee to pay
the holders of the related asset-backed securities, to fund spread accounts as a
source of cash to cover shortfalls in collections, if any, and to pay expenses.
The Company continues to act as the servicer of the automobile loans held by the
trust in return for a monthly fee.
To improve the level of profitability from the sale of securitized loans,
the Company uses credit enhancement to achieve a desired credit rating on the
asset-backed securities issued. The credit enhancement for the Company's
securitizations has generally taken the form of subordinated tranches of asset-
backed securities and financial guaranty insurance policies issued by FSA. FSA
insures payments of principal and interest due on the asset-backed securities.
Asset-backed securities insured by FSA have been rated AAA by Standard & Poor's
and Aaa by Moody's Investors Service, Inc. The Company has limited reimbursement
obligations to FSA related only to violations of representations and warranties
and not credit performance. However, spread accounts established in connection
with the securitizations provide a source of cash to cover shortfalls in
collections (as described below) and to reimburse FSA for claims made under the
policies issued with respect to the Company's securitizations.
The Company's agreements with FSA provide that the Company must maintain
specified levels of excess cash in a spread account for each insured
securitization trust during the life of the trust. The spread account for any
securitization trust is generally funded with the interest collected on the
loans that exceeds the sum of the interest payable to holders of asset-backed
securities and certain other amounts. In certain securitization trusts, the
spread account is also funded in part through initial deposits by the Company.
Funds may be withdrawn from the spread account to cover any shortfalls in
amounts payable on insured asset-backed securities or to reimburse FSA for draws
or advances under its financial guaranty insurance policy. In addition, under
cross-collateralization arrangements with FSA, the funds on deposit in the
spread account for any one securitization may be used to cover shortfalls in
amounts payable or to reimburse FSA in connection with other FSA-insured
securitizations. ARFC is entitled to receive excess cash monthly from
securitization trusts to the extent that, after payments to holders of
asset-backed securities, the amounts deposited in spread accounts exceed
predetermined required minimum levels. The spread accounts cannot be accessed by
the Company or ARFC without the consent of FSA until such levels have been
reached.
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Each month, excess cash from each securitization trust is used to fund the
Company's spread account obligations related to that securitization trust and to
replenish any spread account deficiencies under other securitization trusts
before distribution of any remaining excess cash flow from that securitization
to ARFC. The spread account for each securitization is cross-collateralized to
the spread accounts established in connection with the Company's other
securitization trusts and the BofA Facility such that excess cash flow from a
performing securitization trust may be used to support negative cash flow from,
or to replenish a deficient spread account in connection with, a nonperforming
securitization trust, thereby further restricting excess cash flow available to
ARFC. If excess cash flow from all insured securitization trusts in any month is
not sufficient to fund current spread account obligations or replenish any prior
deficiency in all such spread accounts, no cash flow would be available to ARFC
for that month. Otherwise, excess cash flow from the securitization trusts is
distributed to ARFC and is available for dividends to the Company by ARFC.
Each insured securitization trust has certain portfolio performance tests
relating to the following: (i) the average delinquency ratio; (ii) the
cumulative default rate; and (iii) the cumulative net loss rate. In each case,
these portfolio performance tests will be triggered if the above ratios equal or
exceed an agreed-upon percentage of the principal balance of loans included in
the securitization trust related to such series for a given time period. For the
cumulative default rate and the cumulative net loss rate, the ratios applicable
to the securitization trusts reflect the relationship between loan delinquencies
and repossession rates at various stages of a loan repayment term, including the
fact that the probability of a loan becoming delinquent or going into default is
highest during the six- to fourteen-month period from the date of origination of
the loan. If any of these levels are exceeded, the amount required to be
retained in the related spread account, and not passed through to ARFC, may be
increased. FSA and the Company have an arrangement under which, if any insured
securitization trust exceeds the specified portfolio performance tests, ARFC
may, in lieu of retaining the excess cash from that securitization trust in the
related spread account, pledge an equivalent amount of cash, which has the
effect of preventing the violation of the portfolio performance test. As the
result of this, although certain trusts, primarily those that contained loans
originated in 1995, exceeded portfolio performance tests in the first eight
months of 1997 and are still in excess of such tests, this arrangement with FSA
has prevented a violation, although it has reduced the amount of cash that would
otherwise have been available to the Company if the Company had sought and
received a waiver of such violation from FSA. In addition, certain adverse
events with respect to the Company (including insolvency and default on certain
long-term obligations) or more adverse portfolio performance with respect to the
tests described above, would cause the Company to be in default under its
insurance agreement with FSA and distributions of cash flow to ARFC from the
related securitization trust may be suspended until the asset-backed securities
have been paid in full or redeemed. There can be no assurance that such
thresholds will not be exceeded in the future or that, if exceeded, waivers will
be available from FSA permitting such payments to ARFC. In the event ARFC
defaults under any payment obligation with respect to any loan securitization,
ARFC would be prohibited from paying dividends or making other distributions to
the Company. FSA also has a collateral security interest in the stock of ARFC.
If FSA were to foreclose on such security interest following an event of default
under an insurance agreement with respect to a securitization trust, FSA could
preclude payment of dividends by ARFC to the Company, thereby eliminating the
Company's right to receive distributions of excess cash flow from all the
FSA-insured securitization trusts.
No information is presented in this Prospectus Supplement, nor should any
such information be deemed incorporated by reference herein, with respect to
cumulative net loss per securitization trust or the methodology by which the
Company calculates (or calculated, with respect to any particular trust) gain on
sale from the securitization of automobile loans.
SERVICING
Under the terms of its warehouse facilities and securitizations, the Company
acts as servicer with respect to the automobile loans warehoused or securitized.
The Company receives servicing fees for servicing securitized loans and loans
held under certain warehouse facilities equal to one percent per
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annum of the outstanding principal balance of the loans for all securitizations
entered into prior to September 1997. The Company receives a servicing fee of
1.25 percent per annum on its third quarter 1997 securitization. The Company
services the loans by collecting payments due from the obligors and remitting
these payments to the trusts or warehouse facility in accordance with the terms
of servicing agreements for pass through to holders of asset-backed securities
and holders of warehouse debt. The Company maintains computerized records with
respect to each loan to record all receipts and disbursements. The Company is
permitted to perform servicing activities through subcontractors, but has not
delegated servicing activities, except for the repossession of automobiles.
Delegation of duties does not relieve the Company of its responsibility to the
trusts with respect to those duties.
The following table represents the amount of the Company's servicing
portfolio and the percentage of the total servicing portfolio by state.
<TABLE>
<CAPTION>
AT DECEMBER 31, AT JUNE 30,
------------------------------------------------------------------------------ ------------------------
(Dollars in
thousands) 1994 1995 1996 1997
------------------------ ------------------------ ------------------------ ------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Arizona............. $ 74,125 8.86% $ 127,292 5.61% $ 201,965 5.33% $ 232,565 5.15%
California.......... 16,162 1.93 99,278 4.38 226,381 5.97 285,295 6.32
Colorado............ 90,805 10.85 132,570 5.85 156,637 4.13 169,312 3.75
Connecticut......... 190 0.02 29,769 1.31 50,090 1.32 59,500 1.32
Florida............. 73,482 8.78 146,629 6.47 213,209 5.62 265,050 5.87
Georgia............. 73,555 8.79 161,260 7.12 269,600 7.11 307,937 6.82
Illinois............ 2,149 0.26 20,741 0.91 45,209 1.19 51,508 1.14
Kentucky............ 343 0.04 7,287 0.32 38,585 1.02 59,457 1.32
Massachusetts....... 11,668 1.39 63,752 2.81 103,221 2.72 110,841 2.46
Minnesota........... 93,752 11.20 105,386 4.65 107,971 2.85 108,629 2.41
Missouri............ 26,780 3.20 124,541 5.49 186,624 4.92 203,401 4.51
Nevada.............. 8,270 0.99 52,683 2.32 102,734 2.71 118,058 2.62
New Mexico.......... 5,410 0.65 27,760 1.22 65,641 1.73 74,032 1.64
New York............ 532 0.06 1,970 0.09 44,806 1.18 84,823 1.88
North Carolina...... 4,321 0.52 34,035 1.50 101,957 2.69 147,314 3.26
Oklahoma............ 10,334 1.23 88,334 3.90 173,531 4.58 212,404 4.71
Oregon.............. 8,821 1.05 61,971 2.73 106,208 2.80 122,959 2.72
South Carolina...... 10,075 1.20 54,282 2.39 118,738 3.13 155,404 3.44
Tennessee........... 4,964 0.59 81,380 3.59 160,930 4.24 218,477 4.84
Texas............... 228,223 27.26 564,606 24.91 826,749 21.80 932,085 20.65
Washington.......... 68,098 8.14 128,859 5.68 163,707 4.32 166,522 3.69
Wisconsin........... 4,226 0.50 26,497 1.17 57,035 1.50 67,097 1.49
All Other States.... 20,810 2.49 126,225 5.58 270,329 7.14 361,339 7.99
------------ --------- ------------ --------- ------------ --------- ------------ ---------
Total........... $ 837,095 100.00% $ 2,267,107 100.00% $ 3,791,857 100.00% $ 4,514,009 100.00%
------------ --------- ------------ --------- ------------ --------- ------------ ---------
------------ --------- ------------ --------- ------------ --------- ------------ ---------
</TABLE>
DELINQUENCY, COLLECTION AND REPOSSESSION ACTIVITIES. As servicer, the
Company is responsible for monitoring collections, collecting delinquent
accounts and, when necessary, repossessing and selling automobiles. Delinquency
rates for all loans purchased by each loan buyer are monitored, and loan buyers
are incentivized to maintain loan quality. In response to the rapid growth of
its servicing portfolio, continued expansion of its Classic program (which
generally requires greater collection efforts than its Premier program), and
increases in delinquencies and default rates on its servicing portfolio, the
Company substantially increased its servicing and collection staff and, in
October 1996, implemented a strategy to regionalize its collection activities
into four new locations: Charlotte, North Carolina; Dallas, Texas; Denver,
Colorado and Minneapolis, Minnesota. At August 31, 1997, the Company employed
over 700 service representatives and collection associates who are responsible
for various aspects of the collection and repossession procedures, compared with
510, 188 and 38 at December 31, 1996, 1995 and 1994, respectively. The Company
also substantially expanded the capacity of its highly automated telephone
dialing systems (the "autodialer") in connection with its establishment of four
regional servicing and
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collection centers. In addition, the Company uses a computerized collection
system to aid its collection associates. The Company regularly evaluates its
servicing staffing needs based on anticipated growth in its servicing portfolio
and estimated delinquency and repossession rates. In recent months, low
unemployment driven by economic growth and the continued expansion of the
consumer credit markets have contributed to an increase in employee turnover
rate relative to historical levels, especially among the Company's collections
personnel.
The Company generally utilizes the autodialer initially to contact
delinquent obligors. Based on parameters established by the Company for each of
its loan programs, the autodialer will phone the obligor within five to ten days
after a past due date. Once the call is answered, the autodialer will
immediately transfer the call to an available customer service representative
located in one of the Company's four regional service and collection centers and
will automatically display the obligor's loan information on the
representative's computer screen. The autodialer will continue to follow up with
obligors at various times throughout the first 30 days after a past due date
(typically every third day) if previous efforts do not result in the account
deficiency being cured. In addition to telephone inquiries, the Company's
computerized collection system generates past due notices which are typically
mailed to the obligor at various intervals during the first 30 days after a past
due date. The first such correspondence is generally sent approximately 13 days
after a past due date.
If the collection effort during the first 20 days after a past due date does
not result in a satisfactory resolution of the delinquent account, then the
account is generally forwarded to collection specialists. These collection
specialists will typically send a final demand letter to the delinquent obligor
allowing the obligor a specified number of days to bring the account current.
During this period, the collection specialist generally will make a
recommendation as to whether the automobile should be repossessed or other
action, such as a contract extension, should be taken. The Company, like other
consumer finance companies, grants extensions in the ordinary course of
business, following a re-evaluation of the obligor's creditworthiness and
approval by a collection department manager. The terms of the Company's
securitization trusts and the Company's policies restrict the number of contract
extensions that the Company may grant. When an extension is granted, the
maturity of the loan is extended for one month and the interest for the
delinquent period is added to the loan balance. Contract extensions are more
frequently granted with respect to Classic and financed repossession loans than
with respect to Premier loans, and are seasonally highest during the Christmas
holiday period. Under special circumstances, the Company, like other consumer
finance companies, may agree to contract modifications, such as lengthening the
term to maturity or adjusting interest rates, subject to limitations set forth
in securitization trusts and agreements with FSA.
The Company uses independent contractors to perform repossessions. Once an
automobile is repossessed, a letter is sent giving the obligor a specified
number of days to pay the entire loan balance in order to recover the
automobile. At the expiration of this time period, the Company will prepare the
automobile for sale and determine the method of sale. The Company has
historically sold repossessed automobiles through wholesale auto auctions and
retail consignment lots. Beginning in 1995, the Company has primarily utilized
retail consignment lots to sell its repossessed inventory. Under this method the
Company retains control of repossessed automobiles on behalf of the relevant
securitization trust until resold through independent dealers. The Company has a
remarketing department responsible for the management of its repossession
inventory, which decides whether to sell each vehicle repossessed in the retail
or wholesale market, manages reconditioning and repairs when necessary, tracks
vehicles until sold and selects and monitors the retail consignment lots used by
the Company.
PROPRIETARY INFORMATION
The Company has developed a credit scoring system for evaluating loan
applications submitted by dealers. The credit scoring system ranks the credit
quality of the applicant. The system is intended by the Company to act as a
predictor of loan repayment probability or loan defaults and serves as the basis
for the Company's underwriting procedures. Although asset-based lenders utilize
a variety of scoring and credit evaluation systems, the Company considers its
credit scoring system to be proprietary and attempts to maintain the system as a
trade secret.
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COMPETITION
Competition in the field of financing retail automobile sales is intense.
Competitors include banks, savings and loans, small loan companies, credit
unions, a variety of local, regional and national consumer financing
institutions and captive finance companies of automobile manufacturers, such as
Ford Motor Credit Company, Chrysler Credit Corp. and General Motors Acceptance
Corporation. Many of these competitors have substantially greater capital
resources than the Company and a number offer other forms of financing to
automobile dealers, including, but not limited to vehicle floor plan financing
and leasing. Captive automobile finance companies also, from time to time, have
national promotions offering below-market interest rates on select vehicles to
automobile purchasers. The Company believes it competes on the basis of
providing a high level of service, offering flexible loan terms which meet
dealers' needs and maintaining good relationships with its dealers. From time to
time, competing finance companies may offer to refinance borrowers' loans
originally purchased by the Company. As a result of such an offer, a borrower
may refinance and prepay an existing loan, or the Company may agree to amend the
terms of the borrower's loan.
REGULATION
The Company's operations are subject to regulation, supervision and
licensing under various federal, state and local statutes, ordinances and
regulations. At June 30, 1997 the Company's business operations were conducted
in 42 states, the laws and regulations of which govern the Company's operations
conducted therein. The Company is required to be, and is, licensed as a sales
finance company in 27 states. The Company is required to be, and is, licensed
under the Ohio Mortgage Loan Act. To the extent the Company expands its
operations into additional states, it will be required to comply with the laws
of those states.
CONSUMER PROTECTION LAWS. Numerous federal and state consumer protection
laws and related regulations impose substantive disclosure requirements upon
lenders and servicers involved in consumer finance. The Federal Trade Commission
("FTC") has adopted the so-called "holder-in-due-course" rule which has the
effect of subjecting persons who finance consumer credit transactions (and
certain related lenders and their assignees) to all claims and defenses which
the purchaser could assert against the seller of the goods and services. The
FTC's Rule on Sale of Used Vehicles requires that all sellers of used vehicles
prepare, complete and display a "Buyer's Guide" which explains the warranty
coverage (if any) for such vehicles. The "Credit Practices Rule" of the FTC
imposes additional restrictions on loan provisions and credit practices.
A majority of states in which the Company operates have adopted motor
vehicle retail installment sales acts or variations thereof. These laws
regulate, among other things, the interest rate and terms and conditions of
motor vehicle retail installment loans. These laws also impose restrictions on
consumer transactions, and some require loan disclosures in addition to those
required under federal law. These requirements impose specific statutory
liabilities upon creditors who fail to comply. In addition, the laws of certain
states grant to the purchasers of vehicles certain rights of rescission under
so-called "lemon laws." Under such statutes, purchasers of motor vehicles may be
able to seek recoveries from, or assert defenses against, the Company. A number
of states impose interest rate limitations under applicable usury laws and
regulate the Company's ability to collect late fees and other charges.
SECURED PARTY RIGHTS AND OBLIGATIONS. In the event of default by an
obligor, the Company has all the remedies of a secured party under the Uniform
Commercial Code ("UCC"), except where specifically limited by other state laws.
The remedies of a secured party under the UCC include the right of repossession
by self-help means, unless such means would constitute a breach of the peace. In
the event of default by the obligor, some jurisdictions require that the obligor
be notified of the default and be given a period of time in which to cure the
default prior to repossession. In addition, courts have applied general
equitable principles to secured parties pursuing repossession or litigation
involving deficiency balances. The obligor also has the right to redeem the
collateral prior to actual sale.
The proceeds from resale of financed vehicles generally will be applied
first to the expenses of repossession and resale and then to the satisfaction of
the automobile loans. A deficiency judgment can be
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<PAGE>
sought in most states subject to satisfaction of statutory procedural
requirements by the secured party and certain limitations as to the initial sale
price of the motor vehicle. Certain state laws require the secured party to
remit the surplus to any holder of a lien with respect to the vehicle, or, if no
such lienholder exists, the UCC requires the secured party to remit the surplus
to the former owner of the financed vehicle.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other statutory provisions, including Federal bankruptcy laws and related state
laws, may interfere with or affect the ability of the Company to realize upon
collateral or enforce a deficiency judgment. The repossession process and the
costs thereof generally result in losses on the underlying automobile loans, and
such losses generally reduce the amounts available for distribution from the
related spread accounts of securitized loan pools.
LITIGATION
On March 4, 1997 a shareholder commenced an action against the Company and
certain named directors and officers of the Company entitled Taran v. Olympic
Financial Ltd. et al. in the United States District Court for the District of
Minnesota. Four similar lawsuits, three of them in the United States District
Court for the District of Minnesota (Frank Dibella, on behalf of himself and all
others similarly situated vs. Olympic Financial Ltd. et al., Michael Diemer vs.
Olympic Financial Ltd. et al. and Howard Pisnoy vs. Olympic Financial Ltd. et
al.) and one in the United States District Court for the Eastern District of New
York (North River Trading, LLC, and Allan Farkas, and All Others Similarly
Situated vs. Olympic Financial Ltd. et al.) were filed after that time. These
suits have been consolidated in one suit, In re Olympic Financial Ltd.
Securities Litigation, in the United States District Court for the District of
Minnesota. Plaintiffs in the consolidated action allege that during the period
from July 20, 1995 through March 3, 1997 the defendants, in violation of federal
securities laws, engaged in a scheme that had the effect of artificially
inflating, maintaining and otherwise manipulating the value of the Company's
Common Stock by, among other things, making baseless, false and misleading
statements about the current state and future prospects of the Company,
particularly with respect to the Classic program and the refinancing of
repossessed automobiles. Plaintiffs allege that this scheme included making
false and misleading statements and/or concealing material adverse facts. The
consolidated action is in the preliminary stages and the parties have not begun
discovery. The Company has reviewed the complaint in the consolidated action and
believes that the consolidated action is without merit and intends to defend it
vigorously. There can, however, be no assurance that the Company will prevail in
such defense or that any order, judgment, settlement or decree arising out of
this litigation will not have a material adverse effect on the Company's
financial condition, results of operations or liquidity.
The nature of the Company's business is such that it is routinely a party or
subject to other items of pending or threatened litigation, including litigation
involving actions against borrowers to collect amounts on loans or to repossess
vehicles and litigation challenging the terms of loans purchased by the Company.
Although the ultimate outcome of certain of these matters cannot be predicted,
management of the Company believes, based upon information currently available
and the advice of counsel, that the resolution of these various matters will not
result in any material adverse effect on the Company's financial condition,
results of operations or liquidity.
EMPLOYEES
The Company employs personnel experienced in all areas of loan origination,
documentation, collection and administration. The Company employs and trains
specialists in loan processing and servicing with minimal cross-over of duties.
As of August 31, 1997, the Company had 1,481 full-time employees and 87
part-time employees. None of the Company's employees is covered by a collective
bargaining agreement.
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DESCRIPTION OF NOTES
GENERAL
The Notes will be issued pursuant to an Indenture dated as of March 12, 1997
(the "Base Indenture"), as supplemented by a Second Supplemental Indenture, to
be dated as of the Issue Date (the "Supplemental Indenture") (the Base Indenture
as so supplemented, the "Indenture"), between the Company and Norwest Bank
Minnesota, National Association, as trustee (the "Trustee"). The terms of the
Notes include those stated in the Indenture and those made part of the Indenture
by reference to the Trust Indenture Act of 1939, as amended (the "Trust
Indenture Act"). The Notes are subject to all such terms, and Holders of Notes
are referred to the Indenture and the Trust Indenture Act for a statement
thereof. The following summary of certain provisions of the Indenture does not
purport to be complete and is qualified in its entirety by reference to the
Indenture, including the definitions therein of certain terms used below.
Reference is made to the "Description of Debt Securities" and the "Description
of Senior Debt Securities" contained in the Prospectus (collectively, the
"Prospectus Note Description") for a description of certain terms of the
Indenture. To the extent the Prospectus Note Description is inconsistent with
the following summary, such summary supersedes the Prospectus Note Description.
A copy of the Indenture (excluding the Supplemental Indenture) has been filed
with the Securities and Exchange Commission and is available as set forth below
under "Additional Information." The definitions of certain terms used in the
following summary are set forth below under "--Certain Definitions." For
purposes of this summary, the term "Company" refers only to Arcadia Financial
Ltd. and not to any of its Subsidiaries.
The Notes will be general unsecured obligations of the Company and will rank
senior to all outstanding subordinated Indebtedness of the Company ($51.2
million aggregate principal amount outstanding as of August 31, 1997) and PARI
PASSU in right of payment with all current and future unsecured unsubordinated
Indebtedness of the Company. The Company is a party to certain Warehouse
Facilities that finance purchases of automobile loans to be held on a short-term
basis pending securitization in the ordinary course of the Company's business.
The Company's obligations under such Warehouse Facilities are secured by the
loans financed thereby, and the Notes are effectively subordinated to such
obligations to the extent of the security interest in such loans. Moreover, the
Company engages in the warehousing and securitization of automobile receivables
through Subsidiaries in the ordinary course of business, and the Notes are
effectively subordinated to the obligations of such Subsidiaries in connection
therewith. The Company is dependent to a material extent upon the cash flow of
its Subsidiaries to meet its obligations, including its obligations under the
Notes. The Company and certain of its Subsidiaries are also parties to
agreements with FSA, which has a pledge of the stock of such Subsidiaries and
the right to restrict cash distributions from such Subsidiaries to the Company
in certain circumstances. See "Risk Factors--Loan Performance Risks" in this
Prospectus Supplement and in the accompanying Prospectus. Any right of the
Company to receive assets of any of its Subsidiaries upon the latter's
liquidation or reorganization (and the consequent right of the Holders of the
Notes to participate in those assets) will be effectively subordinated to the
claims of Subsidiary warehouse lenders, FSA and any other entity providing
credit enhancement for the Company's securitizations since proceeds from any
such liquidation or reorganization will first be applied to satisfy obligations
of such Subsidiaries owing to creditors of such Subsidiaries, including
warehouse lenders and FSA or other credit enhancement providers, before such
proceeds may be available for distribution to the Company. The Company will be
restricted under the Indenture in its ability to pledge any assets to secure
Indebtedness, except for Permitted Liens. Permitted Liens include, among other
things, any liens on Receivables to secure Indebtedness in connection with Loan
Securitizations, obligations under Warehouse Facilities or Hedging Obligations.
In certain circumstances, the Company's Excess Spread also may be pledged to
secure Indebtedness. Consequently, such Indebtedness will be senior to the Notes
to the extent of the security interests in such assets.
As of the Issue Date, all of the Company's Subsidiaries will be Restricted
Subsidiaries. However, under certain circumstances, the Company will be able to
designate current or future Subsidiaries as Unrestricted Subsidiaries.
Unrestricted Subsidiaries will not be subject to many of the restrictive
covenants set forth in the Indenture. As of the Issue Date, the Notes are not
guaranteed by any of the Company's Subsidiaries. The Company may, in the future,
cause one or more Subsidiaries to become Subsidiary
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Guarantors, which would permit such Subsidiaries to incur certain Indebtedness
and issue certain preferred stock, and would permit certain Investments in such
Subsidiaries that would not otherwise be permitted. In such event, the Notes
will be unconditionally guaranteed on a senior unsecured basis by each of the
Subsidiary Guarantors. See "--Subsidiary Guarantees."
PRINCIPAL, MATURITY AND INTEREST
The Notes will be limited in aggregate principal amount to $50.0 million and
will mature on March 15, 2007. Interest on the Notes will accrue at the rate of
11 1/2% per annum and will be payable semi-annually in arrears on March 15 and
September 15, commencing on March 15, 1998, to Holders of record on the
immediately preceding March 1 and September 1. Interest on the Notes will accrue
from the most recent date to which interest has been paid or, if no interest has
been paid, from the date of original issuance. Interest will be computed on the
basis of a 360-day year comprised of twelve 30-day months. Principal, premium,
if any, and interest on the Notes will be payable at the office or agency of the
Company maintained for such purpose within the City and State of New York or, at
the option of the Company, payment of interest may be made by check mailed to
the Holders of the Notes at their respective addresses set forth in the register
of Holders of Notes; PROVIDED that all payments of principal, premium and
interest with respect to Notes the Holders of which have given valid, timely and
complete wire transfer instructions to the Company and the Trustee will be
required to be made by wire transfer of immediately available funds to the
accounts specified by the Holders thereof in such instructions. Until otherwise
designated by the Company, the Company's office or agency in New York will be
the office of the Trustee maintained for such purpose. The Notes will be issued
in denominations of $1,000 and integral multiples thereof.
OPTIONAL REDEMPTION
The Notes will not be redeemable at the option of the Company prior to March
15, 2002. Thereafter, the Notes will be redeemable at the Company's option, in
whole or in part, at any time or from time to time, upon not less than 30 nor
more than 60 days' prior notice to each Holder, at the following redemption
prices (expressed in percentages of principal amount), plus accrued and unpaid
interest thereon to the applicable redemption date, if redeemed during the
twelve-month period commencing on March 15 of the years set forth below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ------------------------------------------------------------------------ -----------
<S> <C>
2002.................................................................... 105.75%
2003.................................................................... 103.83%
2004.................................................................... 101.92%
2005 and thereafter..................................................... 100.00%
</TABLE>
MANDATORY REDEMPTION
The Company is not required to make mandatory redemption or sinking fund
payments with respect to the Notes.
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
The Indenture will provide that, upon the occurrence of a Change of Control,
each Holder of Notes will have the right to require the Company to repurchase
all or any part (equal to $1,000 or an integral multiple thereof) of such
Holder's Notes pursuant to the offer described below (the "Change of Control
Offer") at an offer price in cash equal to 101% of the aggregate principal
amount thereof plus accrued and unpaid interest thereon, if any, to the date of
purchase (the "Change of Control Payment"). Within ten days following any Change
of Control, the Company will mail a notice to each Holder describing the
transaction or transactions that constitute the Change of Control and offering
to repurchase Notes on the date specified in such notice, which date shall be no
earlier than the earliest date permitted under
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Rule 14e-1 under the Exchange Act ("Rule 14e-1") and no later than 60 days from
the date such notice is mailed (the "Change of Control Payment Date"), pursuant
to the procedures required by the Indenture and described in such notice. The
Company will comply with the requirements of Rule 14e-1 and any other securities
laws and regulations thereunder to the extent such laws and regulations are
applicable in connection with the repurchase of the Notes as a result of a
Change of Control. To the extent that the provisions of any securities laws or
regulations conflict with the provisions of the covenant described hereunder,
the Company shall comply with the applicable securities laws and regulations and
shall not be deemed to have breached its obligations under the covenant
described hereunder by virtue thereof.
Pursuant to the Indenture, on the Change of Control Payment Date, the
Company will, to the extent lawful, (1) accept for payment all Notes or portions
thereof properly tendered pursuant to the Change of Control Offer, (2) deposit
with the Paying Agent an amount equal to the Change of Control Payment in
respect of all Notes or portions thereof so tendered and (3) deliver or cause to
be delivered to the Trustee the Notes so accepted together with an Officers'
Certificate stating the aggregate principal amount of Notes or portions thereof
being purchased by the Company. The Paying Agent is required to promptly mail to
each Holder of Notes so tendered the Change of Control Payment for such Notes,
and the Trustee is required to promptly authenticate and mail (or cause to be
transferred by book entry) to each Holder a new Note equal in principal amount
to any unpurchased portion of the Notes surrendered, if any; PROVIDED that each
such new Note will be in a principal amount of $1,000 or an integral multiple
thereof. The Company will publicly announce the results of the Change of Control
Offer on or as soon as practicable after the Change of Control Payment Date.
The Change of Control provisions described above will be applicable whether
or not the covenant described below under "--Merger, Consolidation or Sale of
Assets" is applicable. Except as described above with respect to a Change of
Control, the Indenture does not contain provisions that permit the Holders of
the Notes to require that the Company repurchase or redeem the Notes in the
event of a takeover, recapitalization or similar transaction.
The Company's Warehouse Facilities contain, and future Indebtedness of the
Company may contain, prohibitions of certain events that could constitute a
Change of Control. In addition, the financial effect on the Company of the
exercise by the Holders of Notes of their right to require the Company to
repurchase the Notes could cause a default under outstanding Indebtedness, even
if the Change of Control itself does not. In addition, the Company's ability to
pay cash to the Holders of Notes upon a repurchase may be limited by the
Company's then existing financial resources.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Indenture applicable to a Change of Control Offer made by the Company and
purchases all Notes validly tendered and not withdrawn under such Change of
Control Offer.
"CHANGE OF CONTROL" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation and excluding sales, leases, transfers, conveyances or
other dispositions pursuant to Loan Securitizations or Warehouse Facilities), in
one or a series of related transactions, of all or substantially all of the
assets of the Company and its Restricted Subsidiaries taken as a whole to any
"person" (as such term is used in Section 13(d)(3) of the Exchange Act), (ii)
the adoption of a plan relating to the liquidation or dissolution of the
Company, (iii) the consummation of any transaction (including, without
limitation, any merger or consolidation) the result of which is that any
"person" (as defined above) becomes the "beneficial owner" (as such term is
defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act), directly or
indirectly, of more than 50% of the Voting Stock of the Company (measured by
general voting power rather than number of shares), (iv) the first day on which
a majority of the members of the Board of Directors of the Company are not
Continuing Directors or (v) the Company consolidates with, or merges with or
into, any Person, or any Person consolidates with, or merges with or into, the
Company, in any such event pursuant to a transaction in which any of the
outstanding Voting Stock of the Company is converted into or exchanged for cash,
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securities or other property, other than any such transaction where the Voting
Stock of the Company outstanding immediately prior to such transaction is
converted into or exchanged for Voting Stock (other than Disqualified Stock) of
the surviving or transferee Person constituting a majority of the outstanding
shares of such Voting Stock of such surviving or transferee Person (immediately
after giving effect to such issuance). For purposes of this definition, any
transfer of an equity interest of an entity that was formed for the purpose of
acquiring Voting Stock of the Company will be deemed to be a transfer of such
portion of such Voting Stock as corresponds to the portion of the equity of such
entity that has been so transferred.
"CONTINUING DIRECTORS" means, as of any date of determination, any member of
the Board of Directors of the Company who (i) was a member of such Board of
Directors on the Issue Date or (ii) was nominated for election or elected to
such Board of Directors with the approval of a majority of the Continuing
Directors who were members of such Board at the time of such nomination or
election.
Notwithstanding the foregoing, the Indenture will provide that this covenant
shall be of no further force or effect and shall cease to apply upon and after
the occurrence of an Investment Grade Rating Event.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Company and its Restricted Subsidiaries taken as a whole.
Although there is a developing body of case law interpreting the phrase
"substantially all," there is no precise established definition of the phrase
under applicable law. Accordingly, the ability of a Holder of Notes to require
the Company to repurchase such Notes as a result of a sale, lease, transfer,
conveyance or other disposition of less than all of the assets of the Company
and its Restricted Subsidiaries taken as a whole to another Person or group may
be uncertain.
From August 1996 until December 1996, the Board of Directors of the Company
reviewed strategic alternatives available to the Company, including possible
sale of the Company and its Subsidiaries. No offer to purchase the Company and
its Subsidiaries was made during such time; however, there can be no assurance
that the Company will not engage in a transaction constituting a Change of
Control in the future.
ASSET SALES
The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the
Company (or the Restricted Subsidiary, as the case may be) receives
consideration at the time of such Asset Sale at least equal to the fair market
value (evidenced by an Officers' Certificate delivered to the Trustee and, with
respect to any Asset Sale involving consideration in excess of $5.0 million, a
resolution of the Company's Board of Directors) of the assets or Equity
Interests issued or sold or otherwise disposed of and (ii) at least 85% of the
consideration therefor received by the Company or such Restricted Subsidiary is
in the form of Cash Equivalents; PROVIDED that the amount of (x) any liabilities
(as shown on the Company's or such Restricted Subsidiary's most recent balance
sheet) of the Company or any Restricted Subsidiary (other than contingent
liabilities and liabilities that are by their terms subordinated to the Notes or
any Guarantee thereof) that are expressly assumed by the transferee of any such
assets pursuant to a customary novation agreement that releases the Company or
such Restricted Subsidiary from further liability and (y) any currencies,
securities, notes or other obligations received by the Company or any such
Restricted Subsidiary from such transferee that are converted by the Company or
such Restricted Subsidiary into Cash Equivalents within 30 days after receipt
(to the extent of the cash received), shall be deemed to be Cash Equivalents for
purposes of this provision.
The Indenture will permit the Company or the Restricted Subsidiary, as the
case may be, within 180 days after the receipt of any Net Proceeds from an Asset
Sale subject to this covenant, to apply such Net Proceeds (a) to permanently
reduce Senior Indebtedness (other than the Notes or obligations of a Special
Purpose Entity) of the Company or of any Restricted Subsidiary, or (b) to (i) an
Investment (other than in Receivables that, at the time of purchase, are not
Eligible Receivables), or (ii) the purchase of Receivables that are, at the time
of purchase, Eligible Receivables (including payment of Dealer Participations),
or (iii) the making of any capital expenditure, or (iv) the acquisition of any
other tangible assets, in
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each case, in or with respect to a Permitted Business. Pending the final
application of any such Net Proceeds, the Company or such Restricted Subsidiary
may temporarily reduce the principal obligations outstanding under any Warehouse
Facility or otherwise invest such Net Proceeds in any manner that is not
prohibited by the Indenture. Any Net Proceeds from Asset Sales that are not
applied or invested as provided in the preceding sentence of this paragraph will
be deemed to constitute "Excess Proceeds." When the aggregate amount of Excess
Proceeds exceeds $10.0 million, the Indenture will require the Company to make
an offer to all Holders of Notes (an "Asset Sale Offer") to purchase the maximum
principal amount of Notes that may be purchased out of the Excess Proceeds, at
an offer price in cash in an amount equal to 100% of the principal amount
thereof plus accrued and unpaid interest thereon to the date of purchase, in
accordance with the procedures set forth in the Indenture.
Notwithstanding the foregoing, if any Excess Spread or interest therein is
sold or otherwise conveyed or disposed of in an Asset Sale subject to this
covenant and, immediately thereafter, Finance Income Receivable relating to the
remaining aggregate Excess Spread not sold, conveyed or disposed of pursuant to
such transaction (the "Remaining Finance Income Receivable") would be less than
Minimum Finance Income Receivable, the Company will be required to make an Asset
Sale Offer in the amount by which the Remaining Finance Income Receivable is
less than Minimum Finance Income Receivable (the "FIR Offer Amount"), without
regard to the application of the Net Proceeds of such sale by the Company
pursuant to clause (a) or (b) above; PROVIDED, that any Asset Sale Offer made
pursuant to this sentence shall be at an offer price of 101% of the principal
amount of the Notes plus accrued and unpaid interest thereon to the date of the
purchase. To the extent that the aggregate amount of Notes tendered pursuant to
an Asset Sale Offer is less than the Excess Proceeds or FIR Offer Amount, the
Company or the Restricted Subsidiary, as the case may be, may use any remaining
Excess Proceeds or FIR Offer Amount for general corporate purposes. If the
aggregate principal amount of Notes surrendered by Holders thereof exceeds the
amount of Excess Proceeds or FIR Offer Amount, the Trustee is required to select
the Notes to be purchased on a pro rata basis. Upon completion of such Asset
Sale Offer, the amount of Excess Proceeds shall be reset at zero. The FIR Offer
Amount shall be determined separately for each Asset Sale of Excess Spread.
Notwithstanding the foregoing or following, any Asset Sale Offer on the
Notes shall be subject to the following: (i) any such Asset Sale Offer shall be
made only after asset sale offers required by the terms of the Senior Term
Notes, (ii) any such Asset Sale Offer shall be made only if and to the extent
that there are funds remaining following such asset sale offers on the Senior
Term Notes and (iii) any such Asset Sale Offer shall be made pro rata in
proportion to the principal amount (or accreted value, if applicable)
outstanding in respect of any asset sale offer required by the terms of any PARI
PASSU Indebtedness, other than the Senior Term Notes, incurred in accordance
with the Indenture.
Under the Indenture, the Asset Sale Offer is required to remain open for the
minimum period of time required by Rule 14e-1 and no longer (the "Asset Sale
Offer Period"). Under the Indenture, no later than five Business Days after the
termination of the Asset Sale Offer Period (the "Asset Sale Purchase Date"), the
Company is required to purchase the principal amount of Notes required to be
purchased pursuant to this covenant (the "Asset Sale Offer Amount") or, if less
than the Asset Sale Offer Amount has been tendered, all Notes tendered in
response to the Asset Sale Offer.
If the Asset Sale Purchase Date is on or after an interest payment record
date and on or before the related interest payment date, any accrued and unpaid
interest will be paid to the Person in whose name a Note is registered at the
close of business on such record date, and no additional interest will be
payable to Holders who tender Notes pursuant to the Asset Sale Offer.
Under the Indenture, on or before the Asset Sale Purchase Date, the Company
is required, to the extent lawful, to accept for payment, on a pro rata basis to
the extent necessary, the Asset Sale Offer Amount of Notes or portions thereof
tendered pursuant to the Asset Sale Offer, or if less than the Asset Sale Offer
Amount has been tendered, all Notes tendered, and to deliver to the Trustee an
Officers' Certificate stating that such Notes or portions thereof were accepted
for payment by the Company in accordance with the terms of this covenant. The
Company, the Depositary or the Paying Agent, as the case may be, is required,
not later than five days after the Asset Sale Purchase Date, to mail or deliver
to each
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tendering Holder an amount equal to the purchase price of the Notes tendered by
such Holder and accepted by the Company for purchase, and the Company is
required to issue a new Note, and the Trustee, upon delivery of an Officers'
Certificate from the Company, is required to authenticate and mail or deliver
such new Note to such Holder, in a principal amount equal to any unpurchased
portion of any Note surrendered. Any Note not so accepted is required to be
promptly mailed or delivered by the Company to the Holder thereof. The Company
will publicly announce the results of the Asset Sale Offer on the Asset Sale
Purchase Date.
The Company will comply, to the extent applicable, with the requirements of
Rule 14e-1 and any other securities laws or regulations in connection with the
repurchase of Notes pursuant to the covenant described hereunder. To the extent
that the provisions of any securities laws or regulations conflict with the
provisions of the covenant described hereunder, the Company shall comply with
the applicable securities laws and regulations and shall not be deemed to have
breached its obligations under the covenant described hereunder by virtue
thereof.
Notwithstanding the foregoing, the Indenture will provide that this covenant
shall be of no further force or effect and shall cease to apply upon and after
the occurrence of an Investment Grade Rating Event.
CERTAIN COVENANTS
RESTRICTED PAYMENTS
The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly: (i) declare or
pay any dividend or make any other payment or distribution on account of the
Company's or any of its Restricted Subsidiaries' Equity Interests (including,
without limitation, any payment in connection with any merger or consolidation
involving the Company) other than dividends or other payments or distributions
payable in Equity Interests (other than Disqualified Stock) of the Company or
dividends or other payments or distributions payable to the Company or any
Wholly-Owned Restricted Subsidiary of the Company; (ii) purchase, redeem or
otherwise acquire or retire for value (including, without limitation, any
payment in connection with any merger or consolidation involving the Company)
any Equity Interests of the Company (other than any such Equity Interests owned
by any Wholly-Owned Restricted Subsidiary of the Company) or any direct or
indirect parent of the Company; (iii) make any principal payment on or with
respect to, purchase, redeem, defease or otherwise acquire or retire for value
any Indebtedness that is subordinated to the Notes (other than Hedging
Obligations, Permitted Warehouse Debt or intercompany Indebtedness payable to
the Company or a Restricted Subsidiary of the Company by any Restricted
Subsidiary of the Company), except at final maturity or in accordance with the
mandatory redemption, sinking fund, purchase or repayment provisions set forth
in the documentation governing such Indebtedness when such Indebtedness is
incurred, or when such Indebtedness is amended at any time when it could be
incurred under the test set forth in the first paragraph of the covenant
described below under "--Incurrence of Indebtedness and Issuance of Preferred
Stock"; or (iv) make any Restricted Investment (all such payments and other
actions set forth in clauses (i) through (iv) above being collectively referred
to as "Restricted Payments"), unless, at the time of and after giving effect to
such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof; and
(b) the Company would, at the time of such Restricted Payment and after
giving pro forma effect thereto, have been permitted to incur at least $1.00
of additional Indebtedness pursuant to the test set forth in the first
paragraph of the covenant described below under "--Incurrence of
Indebtedness and Issuance of Preferred Stock"; and
(c) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by the Company and its Restricted
Subsidiaries after March 12, 1997 (excluding Restricted Payments permitted
by clauses (ii), (iii), (v), (vi) and (viii) of the next succeeding
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paragraph), is less than the sum of (i) 25% of the aggregate cumulative
Consolidated Net Income of the Company for the period (taken as one
accounting period) from and after the last day of the first fiscal quarter
ending immediately following March 12, 1997 to the end of the Company's most
recently ended fiscal quarter for which internal financial statements are
available at the time of such Restricted Payment (or, if such Consolidated
Net Income for such period is a deficit, less 100% of such deficit); plus
(ii) 100% of the aggregate net cash proceeds received by the Company from
the issue or sale since March 12, 1997 of Equity Interests of the Company
(other than Disqualified Stock) or of Disqualified Stock or Indebtedness
represented by securities of the Company that have been converted into such
Equity Interests (other than Equity Interests (or Disqualified Stock or
convertible debt securities) sold to a Subsidiary of the Company and other
than Disqualified Stock or other Indebtedness represented by securities that
have been converted into Disqualified Stock); plus (iii) to the extent that
any Restricted Investment that was made after March 12, 1997 is sold for
cash or otherwise liquidated or repaid for cash, the lesser of (A) the cash
return of capital with respect to such Restricted Investment (less the cost
of disposition, if any) and (B) the initial amount of such Restricted
Investment.
The foregoing provisions will not prohibit the following Restricted
Payments: (i) the payment of (A) any dividend within 60 days after the date of
declaration thereof, if at said date of declaration such payment would have
complied with the provisions of the Indenture or (B) any regular quarterly
dividend on the Company's common stock not in excess of $0.01 per share per
fiscal quarter; (ii) the purchase, redemption or other acquisition or retirement
for value of any Equity Interests of the Company in exchange for, or out of the
proceeds of, the substantially concurrent sale (other than to a Subsidiary of
the Company) of other Equity Interests of the Company (other than any
Disqualified Stock); PROVIDED, that the amount of any such net cash proceeds
that are utilized for such redemption, repurchase, retirement or other
acquisition shall be excluded from clause (c)(ii) of the preceding paragraph;
(iii) the payment of principal on, or purchase, redemption, defeasance or other
acquisition or retirement for value of Indebtedness with the net cash proceeds
from an incurrence of Permitted Refinancing Indebtedness or the substantially
concurrent sale (other than to a Subsidiary of the Company) of Equity Interests
of the Company (other than Disqualified Stock); PROVIDED, that the amount of any
such net cash proceeds from any such sale of Equity Interests that are utilized
for such redemption, repurchase, retirement or other acquisition shall be
excluded from clause (c)(ii) of the preceding paragraph; (iv) the redemption of
Indebtedness or preferred stock that is redeemable at the option of the Company
and convertible by its terms into common stock of the Company, and which was
permitted to be incurred or issued by the terms of the Indenture; PROVIDED, that
at the time such securities are called for redemption the number of shares of
common stock of the Company which a holder of such securities would receive upon
such holder's conversion of such securities to common stock multiplied by the
closing bid or comparable market price of the Company's common stock on the
principal securities exchange for such common stock on the Business Day
immediately preceding the day such Indebtedness or preferred stock is called for
redemption would exceed 120% of the redemption price to be paid by the Company
for such Indebtedness or preferred stock in connection with such redemption; (v)
in the absence of a Default or Event of Default which has occurred or would
occur as a consequence thereof, scheduled dividends and mandatory redemptions,
repurchases or sinking fund payments with respect to Disqualified Stock or
preferred stock of a Subsidiary Guarantor, which, when issued, was permitted to
be issued pursuant to the first paragraph of the covenant described below under
"--Incurrence of Indebtedness and Issuance of Preferred Stock"; (vi) in the
absence of a Default or Event of Default which has occurred or would occur as a
consequence thereof, principal payments, purchases, redemptions, defeasance or
other acquisition or retirement for value of any Junior Subordinated Notes
permitted to be incurred pursuant to clause (11) of the second paragraph of the
covenant described below under "--Incurrence of Indebtedness and Issuance of
Preferred Stock"; (vii) payments (A) in an amount not to exceed $1.0 million in
the aggregate during any fiscal year of the Company (plus any such amount not
utilized in any prior fiscal year) in connection with the repurchase, redemption
or other acquisition or retirement for value of any Equity Interest of the
Company held by an employee or director of the Company or any of its
Subsidiaries, related to compensation or severance arrangements or (B) of
withholding taxes due or paying exercise prices in connection with exercises of
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options for common stock of the Company by such persons with such common stock
as consideration therefor; (viii) the making and consummation of any offer to
repurchase any Indebtedness upon the occurrence of a change of control under and
as defined in the documents governing such Indebtedness; PROVIDED, that in
connection with Indebtedness incurred after March 12, 1997, the definition of
"change of control" is the same in all material respects as the definition of
"Change of Control" set forth in the Indenture and payments pursuant thereto are
not required to be made prior to the date on which the Change of Control Payment
is required to be made under the Indenture or, with respect to any Indebtedness
subordinated in right of payment to the Notes, no sooner than 30 days after the
date such Change of Control Offer is required to be made; (ix) any purchase,
redemption or other acquisition or retirement for value of Equity Interests
issued pursuant to the Company's stockholder rights plan, as the same may be
amended from time to time; and (x) payment of cash in lieu of fractional shares
of common stock that otherwise would be issuable upon exercise of warrants to
purchase common stock.
If the Company or any Restricted Subsidiary of the Company sells or
otherwise disposes of any Equity Interests of any direct or indirect Subsidiary
of the Company such that, after giving effect to any such sale or disposition,
such Person is no longer a Restricted Subsidiary of the Company, the Company
shall be deemed to have made an Investment on the date of any such sale or
disposition equal to the fair maket value of the Equity Interests of such
Subsidiary not sold or disposed of in an amount determined as provided in the
second succeeding paragraph below.
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Default. For
purposes of making such determination, all outstanding Investments by the
Company and its Restricted Subsidiaries (except to the extent repaid in cash) in
the Subsidiary so designated will be deemed to be Restricted Payments at the
time of such designation and will reduce the amount available for Restricted
Payments under the first paragraph of this covenant. All such outstanding
Investments will be deemed to constitute Investments in an amount equal to the
fair market value of such Investments at the time of such designation. Such
designation will only be permitted if such Restricted Payment would be permitted
at such time and if such Restricted Subsidiary otherwise meets the definition of
an Unrestricted Subsidiary.
The amount of all Restricted Payments other than cash shall be the fair
market value (evidenced by an Officers' Certificate on the date of the
Restricted Payment) of the asset(s) or securities proposed to be transferred or
issued by the Company or such Restricted Subsidiary, as the case may be,
pursuant to the Restricted Payment. The fair market value of any non-cash
Restricted Payment in excess of $1.0 million shall be determined by the Board of
Directors whose resolution with respect thereto shall be delivered to the
Trustee, such determination to be based upon an opinion or appraisal issued by
an accounting, appraisal or investment banking firm of national standing if such
fair market value exceeds $10.0 million. Not later than the date of making any
Restricted Payment, the Company shall deliver to the Trustee an Officers'
Certificate stating that such Restricted Payment is permitted and setting forth
the basis upon which the calculations required by the covenant "Restricted
Payments" were computed.
Notwithstanding the foregoing, the Indenture will provide that this covenant
shall be of no further force or effect and shall cease to apply upon and after
the occurrence of an Investment Grade Rating Event.
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
The Indenture will provide that the Company will not, and will not permit
any of its Subsidiaries to, directly or indirectly, create, incur, issue,
assume, guaranty or otherwise become directly or indirectly liable, contingently
or otherwise, with respect to (collectively, "incur") any Indebtedness
(including Acquired Debt) or issue Disqualified Stock, and that the Company will
not permit any of its Restricted Subsidiaries to issue any shares of preferred
stock except for preferred stock issued to and held by the Company or any
Wholly-Owned Restricted Subsidiary of the Company, PROVIDED that any subsequent
issuance or transfer of Capital Stock that results in such Wholly-Owned
Restricted Subsidiary ceasing to be a Wholly-Owned Restricted Subsidiary of the
Company or any subsequent transfer of such preferred stock
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(other than to the Company or any of its Wholly-Owned Restricted Subsidiaries)
will be deemed, in each case, to constitute the issuance of such preferred stock
by the issuer thereof; PROVIDED, HOWEVER, that the Company or any Subsidiary
Guarantor may incur Indebtedness (including Acquired Debt) or issue Disqualified
Stock and any Subsidiary Guarantor may issue preferred stock if, on the date of
such incurrence or issuance and after giving effect thereto, the Consolidated
Leverage Ratio does not exceed 2.0 to 1.0.
The foregoing provisions will not apply to:
(1) the incurrence by the Company or any Restricted Subsidiary of
Indebtedness represented by Capital Lease Obligations, mortgage financings or
purchase money obligations, in each case incurred for the purpose of financing
all or any part of the purchase price or cost of construction or improvement of
property used in the business of the Company or such Restricted Subsidiary, in
an aggregate principal amount not to exceed $10.0 million at any time
outstanding;
(2) the existence of Warehouse Facilities, regardless of amount, and the
incurrence of Permitted Warehouse Debt by the Company or any of its Restricted
Subsidiaries; PROVIDED, HOWEVER, that to the extent any such Indebtedness of the
Company or a Restricted Subsidiary of the Company ceases to constitute Permitted
Warehouse Debt, to such extent such Indebtedness shall be deemed to be incurred
by the Company or such Restricted Subsidiary of the Company, as the case may be,
at such time;
(3) the incurrence by the Company or any of its Restricted Subsidiaries of
intercompany Indebtedness owing to the Company or any of its Restricted
Subsidiaries; PROVIDED, HOWEVER, that (i)(A) any subsequent issuance or transfer
of any Capital Stock which results in any such Indebtedness being held by a
Person other than a Restricted Subsidiary of the Company and (B) any sale or
transfer of any such Indebtedness to a Person that is not either the Company or
a Restricted Subsidiary of the Company, shall be deemed, in each case, to
constitute the incurrence of such Indebtedness by the Company or such Restricted
Subsidiary, as the case may be, (ii) any Indebtedness of the Company to any
Restricted Subsidiary of the Company is permitted by the covenant described
above under "--Restricted Payments" and (iii) if the Company is the obligor on
such Indebtedness, such Indebtedness is either (A) owed solely to a Special
Purpose Entity in connection with a Loan Securitization or Warehouse Facility or
(B) expressly subordinated to the prior payment in full in cash of all
obligations with respect to the Notes;
(4) the incurrence by the Company of Indebtedness represented by the Notes
and by the Subsidiary Guarantors of Subsidiary Guarantees;
(5) Indebtedness of the Company, any of its Restricted Subsidiaries or any
Special Purpose Entity outstanding on the Issue Date;
(6) the incurrence by the Company or any of its Restricted Subsidiaries of
Permitted Refinancing Indebtedness with respect to Indebtedness that was
permitted by the Indenture to be incurred or that was outstanding at the Issue
Date; PROVIDED, that Permitted Refinancing Indebtedness with respect to clauses
(1), (2), (3), (7) or (12) of this paragraph (and Indebtedness of like character
outstanding on the Issue Date) would otherwise be permitted to be incurred
pursuant to such clauses, as applicable;
(7) the incurrence by the Company or any of its Restricted Subsidiaries of
Hedging Obligations directly related to (i) Indebtedness of the Company or a
Restricted Subsidiary of the Company that was permitted by the Indenture to be
incurred, (ii) Receivables held by the Company or its Restricted Subsidiaries
pending sale in a Loan Securitization, (iii) Receivables of the Company or its
Restricted Subsidiaries that have been sold pursuant to a Warehouse Facility; or
(iv) Receivables that the Company or a Restricted Subsidiary of the Company
reasonably expects to purchase or commit to purchase, finance or accept as
collateral; PROVIDED, HOWEVER, that, in the case of each of the foregoing
clauses (i) through (iv), such Hedging Obligations are eligible to receive hedge
accounting treatment in accordance with GAAP as applied by the Company and its
Restricted Subsidiaries on the Issue Date;
(8) the incurrence of Acquired Debt by the Company or any of its Restricted
Subsidiaries in an aggregate principal amount not to exceed $10.0 million at any
one time outstanding (reduced by the
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amount of Acquired Debt repaid with Net Proceeds of Asset Sales of the
Restricted Subsidiary acquired subject to such Acquired Debt) that is without
recourse to the Company or any of its Restricted Subsidiaries or any of their
respective assets (other than the Restricted Subsidiary acquired subject to such
Acquired Debt), and is not guaranteed by any such Person; PROVIDED, that at the
time of such incurrence, the Restricted Subsidiary acquired subject to such
Acquired Debt becomes a Subsidiary Guarantor;
(9) the Guarantee by the Company or any of the Subsidiary Guarantors of the
Indebtedness of the Company or another Subsidiary Guarantor that was permitted
to be incurred by another provision of this covenant;
(10) the incurrence by the Company or any Subsidiary Guarantor of
Indebtedness under a Credit Agreement in an aggregate principal amount at any
time outstanding not to exceed $10.0 million;
(11) the incurrence by the Company of Indebtedness which is expressly
subordinated in right of payment to the Notes in an aggregate principal amount
at any time outstanding not to exceed the sum of $75.0 million, PROVIDED,
HOWEVER, that the extension or roll-over of the Junior Subordinated Notes will
not reduce the amount of Indebtedness that may be incurred pursuant to this
clause (11);
(12) (A) the incurrence by a Special Purpose Entity of Indebtedness in
connection with a Loan Securitization; PROVIDED, HOWEVER, that if and to the
extent (and only to the extent) any such Indebtedness ceases to be "without
recourse" (as defined in the definition of "Special Purpose Entity"), such
Indebtedness shall be deemed to be incurred by a Restricted Subsidiary of the
Company at such time; and (B) the issuance by a Special Purpose Entity of
preferred stock representing a residual interest in such Special Purpose Entity;
and
(13) (A) the incurrence by an Unrestricted Subsidiary of the Company of
Non-Recourse Debt (including, without limitation, Non-Recourse Debt that would
constitute Permitted Warehouse Debt if incurred by a Restricted Subsidiary of
the Company); PROVIDED, HOWEVER, that if any such Indebtedness ceases to be
Non-Recourse Debt of the Unrestricted Subsidiary, such event shall be deemed to
constitute an incurrence of Indebtedness by a Restricted Subsidiary of the
Company; and (B) the issuance by an Unrestricted Subsidiary of the Company of
preferred stock.
The Indenture will also provide that the Company will not, and will not
permit any Subsidiary Guarantor to, incur any Indebtedness that is contractually
subordinated to any Indebtedness of the Company or any such Subsidiary Guarantor
unless such Indebtedness is also contractually subordinated to the Notes, or the
Subsidiary Guarantee of such Subsidiary Guarantor (as applicable), on
substantially identical terms; PROVIDED, HOWEVER, that no Indebtedness shall be
deemed to be contractually subordinated to any other Indebtedness solely by
virtue of being unsecured.
For purposes of determining compliance with this covenant, in the event that
an item of Indebtedness meets the criteria of more than one of the categories of
Indebtedness described in clauses (1) through (13) above or is entitled to be
incurred pursuant to the first paragraph of this covenant, the Company shall, in
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its sole discretion, classify such item of Indebtedness in any manner that
complies with this covenant and such item of Indebtedness will be treated as
having been incurred pursuant to only one of such clauses or pursuant to the
first paragraph hereof.
Notwithstanding the foregoing, the Indenture will provide that this covenant
shall be of no further force or effect and shall cease to apply upon and after
the occurrence of an Investment Grade Rating Event.
LIENS
The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly, create, incur,
assume or suffer to exist any Lien on any asset now owned or hereafter acquired,
or any income or profits therefrom or assign or convey any right to receive
income therefrom, except Permitted Liens. Notwithstanding the foregoing, the
Indenture will provide that this covenant shall be of no further force or effect
and shall cease to apply upon and after the occurrence of an Investment Grade
Rating Event.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED SUBSIDIARIES
The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly, create or
otherwise cause or suffer to exist or become effective any encumbrance or
restriction on the ability of any Restricted Subsidiary to (i)(A) pay dividends
or make any other distributions to the Company or any of its Restricted
Subsidiaries (1) on its Capital Stock or (2) with respect to any other interest
or participation in, or measured by, its profits, or (B) pay any indebtedness
owed to the Company or any of its Restricted Subsidiaries, (ii) make loans or
advances to the Company or any of its Restricted Subsidiaries or (iii) transfer
any of its properties or assets to the Company or any of its Restricted
Subsidiaries, except for such encumbrances or restrictions existing under or by
reason of (a) Warehouse Facilities as in effect as of the Issue Date, and any
amendments, modifications, restatements, renewals, increases, supplements,
refundings, additions (including additional Warehouse Facilities), replacements
or refinancings thereof, PROVIDED that such amendments, modifications,
restatements, renewals, increases, supplements, refundings, additions,
replacements or refinancings are no more restrictive with respect to such
dividend and other payment restrictions than those contained in the Warehouse
Facilities as in effect on the Issue Date, (b) applicable law, (c) any
instrument governing Acquired Debt or Capital Stock of a Person acquired by the
Company or any of its Restricted Subsidiaries as in effect at the time of such
acquisition (except to the extent such Acquired Debt was incurred or such
Capital Stock was issued or its terms amended in connection with or in
contemplation of such acquisition), which encumbrance or restriction is not
applicable to any Person, or the property or assets of any Person, other than
the Person or the property or assets of the Person, so acquired, PROVIDED that
such Person is not taken into account in determining on a pro forma basis
whether such acquisition subject to such Acquired Debt was permitted by the
terms of the Indenture, (d) by reason of customary non-assignment provisions in
leases entered into in the ordinary course of business and consistent with past
practices, (e) purchase money obligations for property acquired in the ordinary
course of business that impose restrictions of the nature described in clause
(iii) above on the property so acquired, (f) Credit Enhancement Agreements, (g)
the requirements of any Loan Securitization that are exclusively applicable to
any Special Purpose Entity or (h) Permitted Refinancing Indebtedness; PROVIDED
that the restrictions contained in the agreements governing such Permitted
Refinancing Indebtedness are no more restrictive than those contained in the
agreements governing the Indebtedness being refinanced.
Notwithstanding the foregoing, the Indenture will provide that this covenant
shall be of no further force or effect and shall cease to apply upon and after
the occurrence of an Investment Grade Rating Event.
MERGER, CONSOLIDATION OR SALE OF ASSETS
The Indenture will provide that the Company may not consolidate or merge
with or into (whether or not the Company is the surviving corporation), or sell,
assign, transfer, lease, convey or otherwise dispose
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of all or substantially all of its properties or assets in one or more related
transactions to, another Person unless (i) the Company is the surviving
corporation or the Person formed by or surviving any such consolidation or
merger (if other than the Company) or to which such sale, assignment, transfer,
lease, conveyance or other disposition shall have been made is a corporation
organized or existing under the laws of the United States, any state thereof or
the District of Columbia; (ii) the Person formed by or surviving any such
consolidation or merger (if other than the Company) or the Person to which such
sale, assignment, transfer, lease, conveyance or other disposition shall have
been made assumes all the obligations of the Company under the Notes and the
Indenture pursuant to a supplemental indenture in a form reasonably satisfactory
to the Trustee; (iii) immediately after such transaction no Default or Event of
Default exists; and (iv) the Company or the Person formed by or surviving any
such consolidation or merger (if other than the Company), or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made (A) will have Consolidated Net Worth immediately after the transaction
equal to or greater than the Consolidated Net Worth of the Company immediately
preceding the transaction and (B) will, at the time of such transaction and
after giving pro forma effect thereto, be permitted to incur at least $1.00 of
additional Indebtedness pursuant to the first paragraph of the covenant
described above under "--Incurrence of Indebtedness and Issuance of Preferred
Stock," if such covenant is then applicable. This covenant shall apply to the
Notes in lieu of the "Merger, Consolidation or Sale of Assets" covenant
described in the accompanying Prospectus.
TRANSACTIONS WITH AFFILIATES
The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, sell, lease, transfer or otherwise
dispose of any of its properties or assets to, or purchase any property or
assets from, or enter into or make or amend any transaction, contract,
agreement, understanding, loan, advance or guarantee with, or for the benefit
of, any Affiliate (each of the foregoing actions, considered separately, an
"Affiliate Transaction"), unless (i) such Affiliate Transaction is on terms that
are no less favorable to the Company or the relevant Restricted Subsidiary than
those that would have been obtained in a comparable transaction by the Company
or such Restricted Subsidiary with an unrelated Person and (ii) the Company
delivers to the Trustee (a) with respect to any Affiliate Transaction or series
of related Affiliate Transactions involving aggregate consideration in excess of
$1.0 million, a resolution of the Board of Directors set forth in an Officers'
Certificate certifying that such Affiliate Transaction complies with clause (i)
above and that such Affiliate Transaction has been approved by a majority of the
disinterested members of the Board of Directors and (b) with respect to any
Affiliate Transaction or series of related Affiliate Transactions involving
aggregate consideration in excess of $5.0 million, an opinion as to the fairness
to the Company or such Restricted Subsidiary of such Affiliate Transaction from
a financial point of view issued by an accounting, appraisal or investment
banking firm of national standing; PROVIDED that Affiliate Transactions shall
not include (A) any employment agreement, stock option, employee benefit,
indemnification, compensation (including the payment of reasonable fees to
directors of the Company or its Restricted Subsidiaries who are not employees of
the Company or its Restricted Subsidiaries), business expense reimbursement or
other employment-related agreement, arrangement or plan entered into by the
Company or any of its Restricted Subsidiaries in the ordinary course of business
of the Company or such Restricted Subsidiary, (B) transactions between or among
the Company and/or its Restricted Subsidiaries not otherwise prohibited by the
Indenture, (C) loans or advances to employees in the ordinary course of business
of the Company or its Restricted Subsidiaries, but in any event not to exceed
$500,000 in aggregate principal amount outstanding at any one time, (D)
Restricted Payments that are permitted by the provisions of the Indenture
described above under the caption "--Restricted Payments" and Permitted
Investments and (E) transactions, arising out of and in connection with either a
Loan Securitization or the incurrence of Permitted Warehouse Debt, between the
Company or any Restricted Subsidiary of the Company, on the one hand, and a
Special Purpose Entity or Warehouse Facility or any Person (other than an
Affiliate of the Company that is not a Subsidiary of the Company) which owns an
interest in a Special Purpose Entity or Warehouse Facility, on the other hand.
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Notwithstanding the foregoing, the Indenture will provide that this covenant
shall be of no further force and effect and shall cease to apply upon and after
the occurence of an Investment Grade Rating Event.
NO AMENDMENT TO SUBORDINATION PROVISIONS
The Indenture will provide that, without the consent of the Holders of 90%
of the Notes outstanding, the Company will not amend, modify or alter the terms
of the Subordinated Notes to (i) increase the rate of or change the time for
payment of interest on such Subordinated Notes, (ii) increase the principal of,
advance the final maturity date of or shorten the maturity of such Subordinated
Notes, (iii) increase the redemption price or alter the other redemption
provisions or increase the price or modify the other terms at which the Company
is required to offer to purchase such Subordinated Notes or (iv) amend any of
the provisions governing subordination of such Subordinated Notes in a manner
adverse to the Holders of the Notes; PROVIDED, that no such consent will be
required if, at the effective time of any such amendment, modification or
alteration, the Company would be permitted to incur such amended, modified or
altered Subordinated Notes under the covenant described above under
"--Incurrence of Indebtedness and Issuance of Preferred Stock."
Notwithstanding the foregoing, the Indenture will provide that this covenant
shall be of no further force and effect and shall cease to apply upon and after
the occurrence of an Investment Grade Rating Event.
BUSINESS ACTIVITIES
The Company will not, and will not permit any Restricted Subsidiary to,
engage in any business other than Permitted Businesses. Notwithstanding the
foregoing, the Indenture will provide that this covenant shall be of no further
force or effect and shall cease to apply upon and after the occurrence of an
Investment Grade Rating Event.
PAYMENTS FOR CONSENT
The Indenture will provide that neither the Company nor any of its
Subsidiaries will, directly or indirectly, pay or cause to be paid any
consideration, whether by way of interest, fee or otherwise, to any Holder of
any Notes for or as an inducement to any consent, waiver or amendment of any of
the terms or provisions of the Indenture or the Notes unless such consideration
is offered to be paid or is paid to all Holders of Notes that consent, waive or
agree to amend in the time frame set forth in the solicitation documents
relating to such consent, waiver or agreement. Notwithstanding the foregoing,
the Indenture will provide that this covenant shall be of no further force and
effect and shall cease to apply on and after the occurrence of an Investment
Grade Rating Event.
REPORTS
The Indenture will provide that, in addition to the reports set forth under
the caption "Description of Senior Debt Securities--Certain Covenants in the
Senior Note Indenture--Reports" in the accompanying Prospectus, so long as any
Notes are outstanding and until the occurrence of an Investment Grade Rating
Event, the Company will furnish to the Holders of Notes, either on the face of
the financial statements or the footnotes thereto or in "Management's Discussion
and Analysis of Financial Condition and Results of Operations," the financial
condition, results of operations and statements of cash flow of the Company and
its Restricted Subsidiaries separate from those of the Company's Unrestricted
Subsidiaries.
SUBSIDIARY GUARANTEES
The Indenture will provide that the Company will not, and will not permit
any of the Subsidiary Guarantors to, make any Investment in any Subsidiary of
the Company that is not a Subsidiary Guarantor unless either (i) such Investment
is permitted by the covenant entitled "--Restricted Payments" (including
Investments in Special Purpose Entities) or (ii) such Subsidiary executes a
Subsidiary Guarantee and
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delivers an opinion of counsel in accordance with the provision of the
Indenture. Currently, the Company's only active Restricted Subsidiaries are
Special Purpose Entities and therefore there will be no Subsidiary Guarantees of
the Notes in effect on the Issue Date. The Indenture will provide that each
Subsidiary Guarantor's obligations under its Subsidiary Guarantee will be
unsecured senior obligations of such Subsidiary Guarantor and will be joint and
several with the obligations of each other Subsidiary Guarantor under its
Subsidiary Guarantee of the Notes.
The Indenture will provide that no Subsidiary Guarantor may consolidate with
or merge with or into (whether or not such Subsidiary Guarantor is the surviving
Person) another Person, whether or not affiliated with such Subsidiary
Guarantor, unless (i) subject to the provisions of the following paragraphs, the
Person formed by or surviving any such consolidation or merger (if other than
such Subsidiary Guarantor) assumes all the obligations of such Subsidiary
Guarantor, pursuant to a supplemental indenture in form and substance
satisfactory to the Trustee, under the Indenture, (ii) immediately after giving
effect to such transaction no Default or Event of Default exists, (iii) such
Subsidiary Guarantor, or any Person formed by or surviving any such
consolidation or merger, would have Consolidated Net Worth (immediately after
giving effect to such transaction) equal to or greater than the Consolidated Net
Worth of such Subsidiary Guarantor immediately preceding the transaction, and
(iv) the Company would be permitted, immediately after giving effect to such
transaction, to incur at least $1.00 of additional Indebtedness pursuant to the
first paragraph of the covenant described above under "--Incurrence of
Indebtedness and Issuance of Preferred Stock"; PROVIDED that the foregoing
provisions will not restrict the ability of a Subsidiary Guarantor to
consolidate or merge with the Company or a Wholly-Owned Restricted Subsidiary of
the Company.
The Indenture will provide that, in the event of a sale or other disposition
of all of the assets of any Subsidiary Guarantor (other than to or with the
Company or a Wholly-Owned Restricted Subsidiary of the Company), by way of
merger, consolidation or otherwise, or a sale or other disposition of all the
Capital Stock of such Subsidiary Guarantor (other than to the Company or a
Wholly-Owned Restricted Subsidiary of the Company), then such Subsidiary
Guarantor (in the event of a sale or other disposition, by way of such merger,
consolidation or otherwise, of all of the Capital Stock of such Subsidiary
Guarantor) or the corporation acquiring the property (in the event of a sale or
other disposition of all of the assets of such Subsidiary Guarantor) will be
released and relieved of any obligations under its Subsidiary Guarantee;
PROVIDED that the Net Proceeds of such sale or other disposition are applied in
accordance with the applicable provisions of the Indenture.
Various fraudulent conveyance laws enacted for the protection of creditors
may apply to a Subsidiary Guarantor's issuance of a Subsidiary Guarantee, if
any, with respect to the Notes. To the extent that a court were to find that (x)
a Subsidiary Guarantee was incurred by a Subsidiary Guarantor with intent to
hinder, delay or defraud any present or future creditor, or the Subsidiary
Guarantor contemplated insolvency with a design to prefer one or more creditors
to the exclusion in whole or in part of others or (y) a Subsidiary Guarantor did
not receive fair consideration or reasonably equivalent value for issuing its
Subsidiary Guarantee and such Subsidiary Guarantor (i) was insolvent, (ii) was
rendered insolvent by reason of the issuance of such Subsidiary Guarantee, (iii)
was engaged or about to engage in a business or transaction for which the
remaining assets of such Subsidiary Guarantor constituted unreasonably small
capital to carry on its business or (iv) intended to incur, or believed that it
would incur, debts beyond its ability to pay such debts as they matured, the
court could avoid or subordinate such Subsidiary Guarantee in favor of the
Subsidiary Guarantor's creditors. Among other things, a legal challenge of a
Subsidiary Guarantee on fraudulent conveyance grounds may focus on the benefits,
if any, realized by the Subsidiary Guarantor as a result of the Company's
issuance of the Notes and/or the issuance of such Subsidiary Guarantee. Each
Subsidiary Guarantee will contain a savings clause, which states that the
obligations of each Subsidiary Guarantor under the Subsidiary Guarantee will be
limited to the maximum amount as will, after giving effect to all of the
liabilities of such Subsidiary Guarantor, result in such obligations not
constituting a fraudulent conveyance. To the extent a Subsidiary Guarantee of
any Subsidiary Guarantor was avoided or limited as fraudulent conveyance or held
unenforceable for any other reason, Holders of the Notes would cease to have any
claim against such Subsidiary Guarantor and would be creditors solely of the
Company and any Subsidiary Guarantor whose Subsidiary Guarantee was not avoided
or held unenforceable. In such
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event, the claims of the Holders of the Notes against the issuer of an invalid
Subsidiary Guarantee would be subject to the prior payment of all liabilities
(including trade payables) of such Subsidiary Guarantor. There can be no
assurance that, after providing for all prior claims, there would be sufficient
assets to satisfy the claims of the Holders of the Notes relating to any avoided
portions of any of the Subsidiary Guarantees.
The measure of insolvency for purposes of the foregoing considerations will
vary depending upon the law applied in any such proceeding. Generally, however,
a Subsidiary Guarantor may be considered insolvent if the sum of its debts,
including contingent liabilities, is greater than the value of all of its assets
at a fair valuation or if the present fair saleable value of its assets is less
than the amount that would be required to pay its probable liability on its
existing debts, including contingent liabilities, as they become absolute and
mature.
EVENTS OF DEFAULT AND REMEDIES
The Indenture will provide that each of the following constitutes an Event
of Default: (i) default for 30 days in the payment when due of interest on the
Notes; (ii) default in payment when due of the principal of or premium, if any,
on the Notes; (iii) failure by the Company to comply with the provisions
described above under "--Change of Control," "--Asset Sales," "--Restricted
Payments," "--Incurrence of Indebtedness and Issuance of Preferred Stock,"
"--Merger, Consolidation or Sale of Assets," "--Liens" or "--Business
Activities"; (iv) failure by the Company for 60 days after notice to comply with
any of its other agreements in the Indenture or the Notes; (v) default under any
mortgage, indenture or instrument under which there may be issued or by which
there may be secured or evidenced any Indebtedness for money borrowed by the
Company or any of its Subsidiaries (or the payment of which is guaranteed by the
Company or any of its Subsidiaries) whether such Indebtedness or guarantee now
exists, or is created after the date of the Indenture, which default (a) is
caused by a failure to pay principal of or premium, if any, or interest on such
Indebtedness prior to the expiration of the grace period provided in such
Indebtedness on the date of such default (a "Payment Default") or (b) results in
the acceleration of such Indebtedness prior to its express maturity and, in each
case, the principal amount of any such Indebtedness, together with the principal
amount of any other such Indebtedness under which there has been a Payment
Default or the maturity of which has been so accelerated, aggregates $5.0
million or more; (vi) failure by the Company or any of its Subsidiaries to pay
final judgments aggregating in excess of $5.0 million, which judgments are not
paid, discharged or stayed for a period of 60 days; (vii) certain events of
bankruptcy or insolvency with respect to the Company or any of its Subsidiaries;
and (viii) except as permitted by the Indenture, any Subsidiary Guarantee shall
be held in any judicial proceeding to be invalid or unenforceable or shall cease
for any reason to be in full force and effect or any Subsidiary Guarantor or any
Person acting on behalf of any Subsidiary Guarantor shall deny or disaffirm its
obligations under its Subsidiary Guarantee.
If any Event of Default occurs and is continuing, the Trustee or the Holders
of at least 25% in principal amount of the then outstanding Notes may declare
all the Notes to be due and payable immediately. Notwithstanding the foregoing,
in the case of an Event of Default arising from certain events of bankruptcy or
insolvency, with respect to the Company or any Subsidiary of the Company, all
outstanding Notes will become due and payable without further action or notice.
Holders of the Notes may not enforce the Indenture or the Notes except as
provided in the Indenture. Subject to certain limitations, Holders of a majority
in principal amount of the then outstanding Notes may direct the Trustee in its
exercise of any trust or power. The Trustee may withhold from Holders of the
Notes notice of any continuing Default or Event of Default (except a Default or
Event of Default relating to the payment of principal or interest) if it
determines that withholding notice is in their interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have had
to pay if the Company then had elected to redeem the Notes pursuant to the
optional redemption provisions of the Indenture, an equivalent premium shall
also become and be immediately due and payable to the extent permitted by law
upon the acceleration of the Notes. If an Event of Default occurs prior to March
15, 2002 by reason of any willful action (or inaction) taken (or not
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taken) by or on behalf of the Company with the intention of avoiding the
prohibition on redemption of the Notes prior to March 15, 2002, then the premium
specified in the Indenture shall also become immediately due and payable to the
extent permitted by law upon the acceleration of the Notes.
The Holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the Holders of all of the
Notes waive any existing Default or Event of Default and its consequences under
the Indenture except a continuing Default or Event of Default in the payment of
premium, if any, or interest on, or the principal of, the Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required, upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default. The "Events of Default
and Remedies" provisions described above shall apply to the Notes in lieu of
those described in the accompanying Prospectus.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company,
as such, shall have any liability for any obligations of the Company under the
Notes, the Indenture or for any claim based on, in respect of, or by reason of,
such obligations or their creation. Each Holder of Notes by accepting a Note
waives and releases all such liability. The waiver and release are part of the
consideration for issuance of the Notes. Such waiver may not be effective to
waive liabilities under the federal securities laws and it is the view of the
Commission that such a waiver is against public policy.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture or
the Notes may be amended or supplemented with the consent of the Holders of at
least a majority in principal amount of the Notes then outstanding (including,
without limitation, consents obtained in connection with a purchase of, or
tender offer or exchange offer for, Notes), and any existing default or
compliance with any provision of the Indenture or the Notes may be waived with
the consent of the Holders of a majority in principal amount of the then
outstanding Notes (including consents obtained in connection with a tender offer
or exchange offer for Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting Holder): (i) reduce the
principal amount of Notes whose Holders must consent to an amendment, supplement
or waiver, (ii) reduce the principal of or change the fixed maturity of any Note
or alter the provisions with respect to the redemption of the Notes (other than
provisions relating to the covenants described above under "--Repurchase at the
Option of Holders"), (iii) reduce the rate of or change the time for payment of
interest on any Note, (iv) waive a Default or Event of Default in the payment of
principal of or premium, if any, or interest on the Notes (except a rescission
of acceleration of the Notes by the Holders of at least a majority in aggregate
principal amount of the Notes and a waiver of the payment default that resulted
from such acceleration), (v) make any Note payable in money other than that
stated in the Notes, (vi) make any change in the provisions of the Indenture
relating to waivers of past Defaults or the rights of Holders of Notes to
receive payments of principal of or premium, if any, or interest on the Notes,
(vii) waive a redemption payment with respect to any Note (other than a payment
required by one of the covenants described above under "--Repurchase at the
Option of Holders") or (viii) make any change in the foregoing amendment and
waiver provisions.
Notwithstanding the foregoing, without the consent of any Holder of Notes,
the Company and the Trustee may amend or supplement the Indenture or the Notes
to cure any ambiguity, defect or inconsistency, to provide for uncertificated
Notes in addition to or in place of certificated Notes (provided that the
uncertificated Notes are issued in registered form for purposes of Section
163(f) of the Code, or in a manner such that the uncertificated Notes are
described in Section 163(f)(2)(B) of the Code), to provide for the assumption of
the Company's obligations to Holders of Notes in the case of a merger or
consolidation, to make any change that would provide any additional rights or
benefits to the Holders of
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Notes or that does not adversely affect the legal rights under the Indenture of
any such Holder, or to comply with requirements of the Commission in order to
effect or maintain the qualification of the Indenture under the Trust Indenture
Act. The "Amendment, Supplement and Waiver" provisions described above shall
apply to the Notes in lieu of those described under the caption "Description of
Senior Debt Securities--Modification and Waiver" in the accompanying Prospectus.
ADDITIONAL INFORMATION
Any Holder may obtain a copy of the Indenture without charge by writing to
Arcadia Financial Ltd., 7825 Washington Avenue South, Minneapolis, Minnesota,
55439-2435, Attention: Secretary.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"ACQUIRED DEBT" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person, including,
without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
"AFFILIATE" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; PROVIDED, that
beneficial ownership of 10% or more of the voting securities of a Person shall
be deemed to be control. Notwithstanding the foregoing, no Person (other than
the Company or any Restricted Subsidiary of the Company) in whom a Special
Purpose Entity makes an Investment in connection with a Loan Securitization
shall be deemed to be an Affiliate of the Company or any of its Restricted
Subsidiaries solely by reason of such Investment.
"ASSET SALE" means (i) the sale, lease, conveyance or other disposition of
any assets (including, without limitation, (x) by way of a sale and leaseback
and (y) the sale or other disposition of any Excess Spread) other than sales of
Receivables in connection with Loan Securitizations or Warehouse Facilities and
sales of repossessed assets in the ordinary course of business (PROVIDED that
the sale, lease, conveyance or other disposition of all or substantially all of
the assets of the Company and its Restricted Subsidiaries taken as a whole will
be governed by the provisions of the Indenture described above under the caption
"--Change of Control" and/or the provisions described above under "--Merger,
Consolidation or Sale of Assets" and not by the provisions of the Asset Sale
covenant), and (ii) the issue by the Company or any of its Restricted
Subsidiaries of Equity Interests, or the sale by the Company or any Restricted
Subsidiary of any Equity Interests, of their Subsidiaries (other than directors
qualifying shares), in the case of either clause (i) or (ii), whether in a
single transaction or a series of related transactions (a) that have a fair
market value in excess of $1.0 million or (b) for net proceeds in excess of $1.0
million. Notwithstanding the foregoing, the following will not be deemed to be
Asset Sales: (i) an issuance of Equity Interests by a Wholly-Owned Restricted
Subsidiary of the Company to the Company or to another Wholly-Owned Restricted
Subsidiary of the Company; (ii) a Restricted Payment that is permitted by the
covenant described above under "--Restricted Payments"; (iii) a pledge, or
transfer pursuant to a pledge, of assets, which pledge is a Permitted Lien; (iv)
a disposition by a Restricted Subsidiary of the Company to the Company or a
Wholly-Owned Restricted Subsidiary of the Company or by the Company to a
Wholly-Owned Restricted Subsidiary of the Company; and (v) leasing transactions
and other sales of goods and services in the ordinary course of business of a
Permitted Business.
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"CAPITAL LEASE OBLIGATION" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance with
GAAP.
"CAPITAL STOCK" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership or limited liability
company, partnership (whether general or limited) or membership interests and
(iv) any other interest or participation that confers on a Person the right to
receive a share of the profits and losses of, or distributions of assets of, the
issuing Person.
"CASH EQUIVALENTS" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof having maturities of not more than one
year from the date of acquisition, (iii) certificates of deposit and eurodollar
time deposits with maturities of one year or less from the date of acquisition,
bankers' acceptances with maturities not exceeding one year and overnight bank
deposits, in each case with any domestic commercial bank having capital and
surplus in excess of $500.0 million and a Keefe Bank Watch Rating of "B" or
better, (iv) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (ii) and (iii) above
entered into with any financial institution meeting the qualifications specified
in clause (iii) above, (v) commercial paper having one of the two highest
ratings obtainable from Moody's Investors Service, Inc. or Standard & Poor's and
in each case maturing within nine months after the date of acquisition, and (vi)
money market funds, the portfolios of which are limited to investments described
in clauses (i) through (v) above.
"CODE" means the Internal Revenue Code of 1986, as amended.
"CONSOLIDATED LEVERAGE RATIO" as of any date of determination means the
ratio of (i) the aggregate amount of all consolidated Indebtedness of the
Company and its Restricted Subsidiaries excluding (A) Permitted Warehouse Debt,
(B) Hedging Obligations permitted to be incurred pursuant to clause (5) or (7)
of the covenant described under "--Incurrence of Indebtedness and Issuance of
Preferred Stock" and (C) Indebtedness of a Special Purpose Entity permitted to
be incurred pursuant to clause (5) or (12)(A) of the covenant described under
"--Incurrence of Indebtedness and Issuance of Preferred Stock" to (ii) the
Consolidated Net Worth of the Company.
"CONSOLIDATED NET INCOME" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
(for such period, on a consolidated basis, determined in accordance with GAAP);
PROVIDED, that (i) the Net Income (but not loss) of any Person that is not a
Restricted Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends or
distributions paid in cash to the referent Person or a Wholly-Owned Restricted
Subsidiary thereof, (ii) the Net Income of any Restricted Subsidiary shall be
excluded to the extent that the declaration or payment of dividends or similar
distributions by that Restricted Subsidiary of that Net Income is not at the
date of determination permitted without any prior governmental approval (that
has not been obtained) or, directly or indirectly, by operation of the terms of
its charter or any agreement, instrument, judgment, decree, order, statute, rule
or governmental regulation applicable to that Restricted Subsidiary or its
stockholders; PROVIDED, that this clause (ii) shall not exclude Net Income, the
distribution of which is restricted solely by reason of spread account
requirements with respect to Special Purpose Entities or Warehouse Facilities or
limitations imposed by any Credit Enhancement Agreement or Warehouse Facility
that are permitted by the covenant summarized above under "--Dividend and Other
Payment Restrictions Affecting Restricted Subsidiaries," (iii) the Net Income of
any Person acquired in a pooling of interests transaction for any period prior
to the date of such acquisition shall be excluded, and (iv) the cumulative
effect of a change in accounting principles shall be excluded.
"CONSOLIDATED NET WORTH" means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the common stockholders of such Person
and its consolidated Restricted Subsidiaries as of such date plus (ii) the
respective amounts reported on such Person's balance sheet as of such date with
respect to any series of preferred stock (other than Disqualified Stock) that by
its terms is not entitled to the payment of dividends unless such dividends may
be declared and paid only out of net earnings in
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respect of the year of such declaration and payment, but only to the extent of
any cash received by such Person upon issuance of such preferred stock, less (x)
all write-ups (other than write-ups resulting from foreign currency translations
and write-ups of tangible assets of a going concern business made within 12
months after the acquisition of such business) subsequent to the date of the
Indenture in the book value of any asset owned by such Person or a consolidated
Restricted Subsidiary of such Person, (y) all Investments as of such date in
unconsolidated Restricted Subsidiaries and in Persons that are not Restricted
Subsidiaries (except, in each case, Permitted Investments), and (z) all
unamortized debt discount and expense and unamortized deferred charges as of
such date, all of the foregoing determined in accordance with GAAP.
"CREDIT AGREEMENT" means any credit agreement entered into by and among the
Company (and, if the Company so elects, one or more Subsidiary Guarantors) and
one or more financial institutions, providing for revolving credit borrowings,
including any related notes, Guarantees, collateral documents, instruments and
agreements executed in connection therewith, and in each case as amended,
modified, renewed, refunded, replaced or refinanced from time to time.
"CREDIT ENHANCEMENT AGREEMENTS" means, collectively, any documents,
instruments or agreements entered into by the Company, any of its Restricted
Subsidiaries or any Special Purpose Entities with any Person exclusively for the
purpose of providing credit support for Special Purpose Entities or any of their
respective Indebtedness (including, without limitation, Permitted Warehouse
Debt) or asset-backed securities, including, without limitation, insurance and
indemnity agreements with FSA.
"DEALER PARTICIPATIONS" means, for any period, the cash paid or payable to
originators of Receivables and other Persons by the Company or any of its
Restricted Subsidiaries, net of payments received by the Company or any of its
Restricted Subsidiaries from such Persons with respect to defaults and
prepayments on Receivables, during such period, as participations in connection
with the purchase of Receivables, including, without limitation, commissions
paid to brokers in connection with the foregoing.
"DEFAULT" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"DISQUALIFIED STOCK" means any Capital Stock that either (A) by its terms
(or by the terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, (i) matures or is mandatorily
redeemable, in whole or in part, pursuant to a sinking fund obligation or
otherwise or, (ii) is convertible into or exchangeable for Indebtedness or
Disqualified Stock in whole or in part, or (iii) is redeemable in whole or in
part, at the option of the Holder thereof at any time, in any such case, on or
prior to the date that is 91 days after the date on which the Notes mature, or
(B) is designated by the Company (in a resolution of the Board of Directors
delivered to the Trustee) as Disqualified Stock.
"ELIGIBLE RECEIVABLES" means, at any time, Receivables which meet the sale
or loan eligibility criteria set forth in one or more of the Warehouse
Facilities to which the Company or any of its Restricted Subsidiaries is a party
at such time and is eligible for sale in a Loan Securitization.
"EQUITY INTERESTS" means Capital Stock and all warrants, options or other
rights to acquire such Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, such Capital Stock).
"EXCESS SPREAD" means, over the life of a pool of Receivables that have been
sold by the Company or a Restricted Subsidiary to a Special Purpose Entity or
other Person in a Loan Securitization, the rights, other than servicing rights,
retained by the Company or such Restricted Subsidiary at or subsequent to the
closing of such securitization or sale with respect to such pool, to receive
cash flows attributable to such pool.
"FINANCE INCOME RECEIVABLE" of the Company means the capitalized asset value
of Excess Spread of the Company and its Restricted Subsidiaries appearing from
time to time on the consolidated balance sheet of the Company and its Restricted
Subsidiaries (including finance income receivable and restricted cash in spread
accounts), calculated in accordance with GAAP.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements
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by such other entity as have been approved by a significant segment of the
accounting profession, which are in effect from time to time.
"GUARANTEE" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"HEDGING OBLIGATIONS" means, with respect to any Person, the obligations of
such Person under (i) interest rate or currency swap agreements, cap agreements,
collar agreements and related agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in value of
assets owned, financed or sold, or of liabilities incurred or assumed, or of
pre-funding arrangements, in any case in the ordinary course of business of such
Person and not for speculative purposes.
"INDEBTEDNESS" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of (i) borrowed money or evidenced
by bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's acceptances or
representing Capital Lease Obligations or the balance deferred and unpaid of the
purchase price of any property or representing any Hedging Obligations, except
any such balance that constitutes an accrued expense or trade payable, if and to
the extent any of the foregoing indebtedness (other than letters of credit and
Hedging Obligations) would appear as a liability upon a balance sheet of such
Person prepared in accordance with GAAP, (ii) all indebtedness of others secured
by a Lien (except Liens on Receivables and other assets (including spread
accounts of a Special Purpose Entity incurred in connection with a Loan
Securitization)) on any asset of such Person (whether or not such indebtedness
is assumed by such Person), (iii) without duplication, all Warehouse Debt, (iv)
all obligations of such Person with respect to the redemption, repayment or
other repurchase of any Disqualified Stock and, in the case of any Subsidiary
Guarantor, preferred stock (but excluding in each case any accrued dividends
thereon), and (v) to the extent not otherwise included, the Guarantee by such
Person of any indebtedness of any other Person to the extent of any Guarantee of
such indebtedness provided by such Person. Except in the case of Warehouse Debt
(the amount of which shall be determined in accordance with the definition
thereof) and except in the case of Hedging Obligations (the amount of which
shall be determined on a net basis after rights of set-off and related
positions), the amount of Indebtedness of any Person at any date shall be the
outstanding balance at such date of all unconditional obligations as described
above and the maximum liability, upon the occurrence of the contingency giving
rise to the obligation, of any contingent obligations at such date.
Notwithstanding the foregoing, the term "Indebtedness" does not include (i)
obligations pursuant to representations, warranties, covenants and indemnities
in connection with a Loan Securitization or Warehouse Facility or (ii) deposit
liabilities of any Subsidiary, the deposits of which are insured by the Federal
Deposit Insurance Corporation or any successor thereto.
"INVESTMENT GRADE RATING" means a simultaneous Moody's Investors Service,
Inc. debt rating of Baa3 or higher (or the equivalent rating of any Substitute
Rating Agency) and a Standard & Poor's debt rating of BBB- or higher (or the
equivalent rating of any Substitute Rating Agency).
"INVESTMENT GRADE RATING EVENT" means, and shall be deemed to have occurred
on the first day on which, (i) the Notes have been and are assigned an
Investment Grade Rating and (ii) no Default or Event of Default has occurred and
is continuing under the Indenture.
"INVESTMENTS" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including Guarantees of Indebtedness), advances or capital
contributions (excluding commission, travel and similar advances to officers and
employees made in the ordinary course of business), purchases or other
acquisitions for consideration of Indebtedness, Equity Interests or other
securities, together with all items that are or would be classified as
investments on a balance sheet prepared in accordance with GAAP; PROVIDED that
an acquisition of assets, Equity Interests or other securities by the Company
for consideration consisting of common equity securities of the Company shall
not be deemed to be an Investment.
"ISSUE DATE" means , 1997.
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"JUNIOR SUBORDINATED NOTES" means the Company's 30, 60, 90 and 180 day and
One Year Subordinated Extendible Notes and One, Two, Three, Four, Five and Ten
Year Subordinated Fixed-Term Notes issued under the Indenture dated July 1,
1994, as amended.
"LIEN" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement, any lease in the nature
thereof, any option or other agreement to sell or give a security interest in
and any filing of or agreement to give any financing statement under the Uniform
Commercial Code (or equivalent statutes) of any jurisdiction).
"LOAN SECURITIZATION" means a public or private transfer of Receivables in
the ordinary course of business of the Company and its Restricted Subsidiaries
and by which the Company or any such Restricted Subsidiary directly or
indirectly securitizes a pool of Receivables, including but not limited to any
such transaction involving the sale of specified Receivables to a Special
Purpose Entity.
"MINIMUM FINANCE INCOME RECEIVABLE" means Finance Income Receivable equal to
200% of all Senior Indebtedness of the Company and its Restricted Subsidiaries
as of the time of creation of a Lien or the sale of Excess Spread, as the case
may be. Any determination of whether Finance Income Receivable is greater or
less than Minimum Finance Income Receivable shall be based on the consolidated
balance sheet of the Company and its Restricted Subsidiaries for the most
recently ended fiscal quarter for which financial statements are available,
after giving pro forma effect to the Asset Sale or Lien for which such
determination is being made and to any other sale of or Lien on Excess Spread or
reduction of Finance Income Receivable since the date of such balance sheet.
"NET INCOME" means, with respect to any Person, the net income (loss) of
such Person, determined in
accordance with GAAP and before any reduction in respect of preferred stock
dividends, excluding, however, (i) any gain (but not loss), together with any
related provision for taxes on such gain (but not loss), realized in connection
with (a) any Asset Sale (including, without limitation, dispositions pursuant to
sale and leaseback transactions) or (b) the disposition of any securities by
such Person or any of its Restricted Subsidiaries or the extinguishment of any
Indebtedness of such Person or any of its Restricted Subsidiaries and (ii) any
extraordinary or nonrecurring gain (but not loss), together with any related
provision for taxes on such extraordinary or nonrecurring gain (but not loss).
"NET PROCEEDS" means the aggregate Cash Equivalent proceeds received by the
Company or any of its Restricted Subsidiaries in respect of any Asset Sale
(including, without limitation, any Cash Equivalent received upon the sale or
other disposition of any non-cash consideration received in any Asset Sale), net
of the direct costs relating to such Asset Sale (including, without limitation,
legal, accounting and investment banking fees, and sales commissions) and any
relocation expenses incurred as a result thereof, taxes paid or payable as a
result thereof (after taking into account any available tax credits or
deductions and any tax sharing arrangements), amounts required to be applied to
the repayment of Indebtedness secured by a Lien on the asset or assets that were
the subject of such Asset Sale and any reserve for adjustment in respect of the
sale price of such asset or assets established in accordance with GAAP.
"NON-RECOURSE DEBT" means Indebtedness (i) as to which neither the Company
nor any of its Restricted Subsidiaries (a) provides credit support of any kind
(including any undertaking, agreement or instrument that would consitute
Indebtedness), or (b) is directly or indirectly liable (as a guarantor or
otherwise); and (ii) as to which the lenders have been notified in writing that
they will not have any recourse to the stock or assets of the Company or any of
its Restricted Subsidiaries.
"PERMITTED BUSINESSES" means any consumer or commercial finance business or
any financial service business, including but not limited to banks, savings and
loan associations, credit unions and other financial institutions operated in
conjunction therewith.
"PERMITTED INVESTMENTS" means (a) any Investment in the Company or in a
Restricted Subsidiary of the Company that is a Subsidiary Guarantor; (b) any
Investment in Cash Equivalents; (c) any Investment by the Company or any
Restricted Subsidiary of the Company in a Person if, as a result of such
Investment, (i) such Person becomes a Wholly-Owned Restricted Subsidiary of the
Company and a Subsidiary Guarantor that is engaged in a Permitted Business or
(ii) such Person is merged, consolidated or
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amalgamated with or into, or transfers or conveys substantially all of its
assets to, or is liquidated into, the Company or a Wholly-Owned Restricted
Subsidiary of the Company that is a Subsidiary Guarantor and that is engaged in
a Permitted Business; (d) any Restricted Investment made as a result of the
receipt of non-cash consideration from an Asset Sale that was made pursuant to
and in compliance with the covenant described above under "--Repurchase at the
Option of Holders--Asset Sales"; (e) any Investment in Receivables, including
Dealer Participations; (f) Investments by the Company or any of its Subsidiaries
in Special Purpose Entities, in any Person owning residual interests in a
Special Purpose Entity or in repossessed assets, in each case in the ordinary
course of business in connection with or arising out of Loan Securitizations or
Warehouse Facilities; (g) purchases of all remaining outstanding asset-backed
securities of any Special Purpose Entity for the purpose of relieving the
Company or a Subsidiary of the Company of the administrative expense of
servicing such Special Purpose Entity, but only if 90% or more of the aggregate
principal amount of the original asset-backed securities of such Special Purpose
Entity have previously been retired; and (h) other Investments in any Person
(other than an Affiliate of the Company that is not also a Subsidiary of the
Company) that do not exceed $10.0 million at any time outstanding.
"PERMITTED LIENS" means (i) Liens on Receivables or other assets (other than
Excess Spread) securing Warehouse Debt or Hedging Obligations (or Guarantees of
Warehouse Debt or Hedging Obligations); (ii) Liens on Excess Spread and on the
Capital Stock of Restricted Subsidiaries of the Company substantially all of the
assets of which are Excess Spread; PROVIDED, HOWEVER, that, unless an Investment
Grade Rating Event has occurred, any such Liens may only encumber Excess Spread
in an amount which, in the aggregate, does not exceed 50% of the amount by which
Finance Income Receivable relating to all Excess Spread exceeds Minimum Finance
Income Receivable at the time of the incurrence of such Lien; (iii) Liens in
favor of the Company or any Restricted Subsidiary; (iv) Liens on property of a
Person existing at the time such Person is merged into or consolidated with the
Company or any Restricted Subsidiary of the Company; PROVIDED that such Liens
were in existence prior to the contemplation of such merger or consolidation and
do not extend to any assets other than those of the Person merged into or
consolidated with the Company or such Restricted Subsidiary; (v) Liens on
property existing at the time of acquisition thereof by the Company or any
Restricted Subsidiary of the Company, PROVIDED that such Liens were in existence
prior to the contemplation of such acquisition; (vi) Liens to secure the
performance of statutory obligations, surety or appeal bonds, performance bonds
or other obligations of a like nature incurred in the ordinary course of
business; (vii) Liens to secure Indebtedness (including Capital Lease
Obligations) permitted by clause (1) of the second paragraph of the covenant
entitled "--Incurrence of Indebtedness and Issuance of Preferred Stock" covering
only the assets acquired with such Indebtedness; (viii) Liens existing on the
Issue Date; (ix) Liens for taxes, assessments or governmental charges or claims
that are not yet delinquent or that are being contested in good faith by
appropriate proceedings, PROVIDED that any reserve or other appropriate
provision as shall be required in conformity with GAAP shall have been made
therefor; (x) Liens (including, without limitation, Liens on spread accounts and
any Excess Spread represented thereby) in favor of a monoline insurance company
or other provider of credit enhancement pursuant to a Credit Enhancement
Agreement; (xi) Liens incurred in the ordinary course of business of the Company
or any Restricted Subsidiary of the Company with respect to obligations that do
not exceed $1.0 million at any one time outstanding and that (a) are not
incurred in connection with the borrowing of money or the obtaining of advances
or credit (other than trade credit in the ordinary course of business) and (b)
do not in the aggregate materially detract from the value of the property or
materially impair the use thereof in the operation of business by the Company or
such Restricted Subsidiary; (xii) Liens imposed by law, including but not
limited to carriers', warehousemen's and mechanics' Liens, in each case for sums
not yet due or being contested in good faith by appropriate proceedings or,
other Liens arising out of judgments or awards against the Company or any of its
Restricted Subsidiaries with respect to which the Company or such Restricted
Subsidiary shall then be proceeding with an appeal or other proceedings for
review; (xiii) survey exceptions, easements and other restrictions on the use of
property, (xiv) Liens on assets of Unrestricted Subsidiaries of the Company that
secure Non-Recourse Debt of Unrestricted Subsidiaries of the Company, (xv) Liens
on cash collateral accounts (including any Excess Spread represented thereby)
established to satisfy the requirements of a Warehouse Facility and (xvi) Liens
on Receivables and other assets of a Special Purpose Entity incurred in
connection with a Loan Securitization.
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"PERMITTED REFINANCING INDEBTEDNESS" means any Indebtedness or Disqualified
Stock of the Company or any of its Restricted Subsidiaries issued in exchange
for, or the net proceeds of which are used to extend, refinance, renew, replace,
defease or refund other Indebtedness or Disqualified Stock of the Company or any
of its Restricted Subsidiaries; PROVIDED that: (i) the principal amount (or
accreted value, if applicable) or mandatory redemption amount of such Permitted
Refinancing Indebtedness does not exceed the principal amount of (or accreted
value, if applicable) or mandatory redemption amount, plus accrued interest or
dividends on, the Indebtedness or Disqualified Stock so extended, refinanced,
renewed, replaced, defeased or refunded (plus the amount of contractual
prepayment charges and reasonable expenses incurred in connection therewith);
(ii) such Permitted Refinancing Indebtedness has a final maturity or final
redemption date later than the final maturity or final redemption date of, and
has a Weighted Average Life to Maturity equal to or greater than the Weighted
Average Life to Maturity of, the Indebtedness or Disqualified Stock being
extended, refinanced, renewed, replaced, defeased or refunded; (iii) if the
Indebtedness or Disqualified Stock being extended, refinanced, renewed,
replaced, defeased or refunded is subordinated in right of payment to the Notes,
such Permitted Refinancing Indebtedness is subordinated in right of payment to,
the Notes on terms at least as favorable to the Holders of Notes as those
contained in the documentation governing the Indebtedness or Disqualified Stock
being extended, refinanced, renewed, replaced, defeased or refunded; and (iv)
such Indebtedness is incurred or such Disqualified Stock is issued either by the
Company or by the Restricted Subsidiary who is the obligor on the Indebtedness
or Disqualified Stock being extended, refinanced, renewed, replaced, defeased or
refunded.
"PERMITTED WAREHOUSE DEBT" means Warehouse Debt of the Company or a
Restricted Subsidiary of the Company outstanding under one or more Warehouse
Facilities (excluding any Guarantees issued by the Company or a Restricted
Subsidiary in connection therewith); PROVIDED, HOWEVER, that (i) the assets
purchased with proceeds of such Warehouse Debt are or, prior to any funding
under the Warehouse Facility with respect to such assets, were eligible to be
recorded as held for sale on the consolidated balance sheet of the Company and
its Restricted Subsidiaries in accordance with GAAP, (ii) such Warehouse Debt
will be deemed Permitted Warehouse Debt (a) in the case of a Purchase Facility,
only to the extent the holder of such Warehouse Debt has no contractual recourse
to the Company or any of its Restricted Subsidiaries to satisfy claims in
respect of such Warehouse Debt in excess of the realizable value of the Eligible
Receivables financed thereby, and (b) in the case of any other Warehouse
Facility, at the time such Warehouse Debt is incurred, only to the extent of the
lesser of (A) the amount advanced by the lender with respect to the Eligible
Receivables financed under such Warehouse Facility, and (B) 100% of the
aggregate principal amount of such Eligible Receivables (exclusive of all Dealer
Participations included therein) and (iii) any such Indebtedness incurred under
such Warehouse Facility has not been outstanding in excess of 364 days.
"PERSON" means any individual, corporation, partnership, joint venture,
association, joint stock company, limited liability company, trust,
unincorporated, organization, government or any agency or political subdivision
thereof or any other entity.
"PURCHASE FACILITY" means any Warehouse Facility in the form of a purchase
and sale facility pursuant to which the Company or a Restricted Subsidiary of
the Company sells Receivables to a financial institution, commercial paper
facility or conduit or Special Purpose Entity and retains a right of first
refusal or other repurchase arrangement upon the subsequent resale of such
Receivables by such financial institution, commercial paper facility or conduit
or Special Purpose Entity.
"RECEIVABLES" means installment sale contracts, loans evidenced by
promissory notes secured by assets, leases, mortgages or other finance
receivables or instruments acquired in connection with the operations of any
Permitted Business.
"RESTRICTED INVESTMENT" means an Investment other than a Permitted
Investment.
"RESTRICTED SUBSIDIARY" means any Subsidiary other than an Unrestricted
Subsidiary.
"SENIOR INDEBTEDNESS" means all Indebtedness of any Person that is not
subordinated in right of payment to any other Indebtedness or other obligations
of such Person, excluding Permitted Warehouse Debt and Hedging Obligations.
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"SENIOR TERM NOTES" means the Company's 11 1/2% Senior Notes due 2007 issued
March 12, 1997.
"SPECIAL PURPOSE ENTITY" means any Person (whether or not a Subsidiary of
the Company) established and maintained exclusively for one or more of the
following purposes: (i) purchasing or otherwise acquiring Receivables (together
with any assets related to such Receivables, including, without limitation, all
collateral securing such Receivables, all contracts and all Guarantees or other
obligations in respect of such Receivables, proceeds of such Receivables and
other assets which are customarily transferred in connection with asset
securitization transactions involving Receivables) from the Company or any of
its Restricted Subsidiaries in connection with a Loan Securitization or
Warehouse Facility, (ii) selling such Receivables (and related assets) to a
special purpose owner trust or other Person in connection with a Loan
Securitization or Purchase Facility, (iii) serving as a conduit for the issuance
of commercial paper in connection with the operation of any Purchase Facility,
(iv) issuing asset-backed securities, (v) serving as a corporate general partner
(or managing member of a limited liability company) of another Special Purpose
Entity, (vi) investing in and holding Investments in Special Purpose Entities
issuing securities backed by Receivables originated by the Company or any
Restricted Subsidiary of the Company, or (vii) engaging in activities that are
incidental to and necessary, suitable or convenient for the accomplishment of
the purposes specified above, PROVIDED, HOWEVER, that the obligations of such
Special Purpose Entity are without recourse to the Company and any Restricted
Subsidiary of the Company other than such Special Purpose Entity, except to the
extent of Indebtedness incurred by the Company or a Subsidiary Guarantor in
accordance with the first paragraph of the covenant described above under
"--Incurrence of Indebtedness and Issuance of Preferred Stock." For purposes of
this definition, "without recourse" shall mean that the Indebtedness of such
Special Purpose Entity and none of the other obligations (contingent or
otherwise) of a Special Purpose Entity (i) is guaranteed by the Company or any
other Restricted Subsidiary of the Company, (ii) obligates the Company or any
other Restricted Subsidiary of the Company in any way other than pursuant to
representations, warranties, covenants (including any covenant to deliver
Receivables in a pre-funded Loan Securitization) and indemnities entered into in
connection with a Loan Securitization or Warehouse Facility, or (iii) subjects
any property or asset of the Company or any other Restricted Subsidiary of the
Company, directly or indirectly, contingently or otherwise, to the satisfaction
thereof, other than pursuant to representations, warranties, covenants and
indemnities entered into in connection with a Loan Securitization or Warehouse
Facility. For purposes of the foregoing, a Permitted Investment in a Special
Purpose Entity shall not be deemed recourse. As of the Issue Date, each of
Arcadia Receivables Finance Corp., Arcadia Receivables Finance Corp. II, Arcadia
Receivables Conduit Corp., Arcadia First G.P. Inc., Arcadia Second G.P. Inc. and
Special Purpose Entities formed in connection with any Loan Securitization prior
to the Issue Date shall be deemed to satisfy the requirements of this
definition.
"SUBORDINATED NOTES" means the Junior Subordinated Notes and the 10.125%
Subordinated Notes, Series 1996-A due 2001, of the Company outstanding at the
Issue Date.
"SUBSIDIARY" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a combination
thereof) and (ii) any partnership or limited liability company (a) the sole
general partner or the managing general partner or managing member of which is
such Person or a Subsidiary of such Person or (b) the only general partners or
managing members of which are such Person or of one or more Subsidiaries of such
Person (or any combination thereof).
"SUBSIDIARY GUARANTOR" means any Subsidiary of the Company that executes a
Subsidiary Guarantee in accordance with the provisions of the Indenture.
"SUBSTITUTE RATING AGENCY" means, in the event that at any time either
Moody's Investors Service, Inc. or Standard & Poor's does not have a debt rating
in effect for the Notes, a nationally recognized statistical rating organization
designated by the Company with the approval of the Trustee as a substitute for
Moody's Investors Service, Inc. or Standard & Poor's, as the case may be.
"UNRESTRICTED SUBSIDIARY" means any Subsidiary that is designated by the
Board of Directors as an Unrestricted Subsidiary pursuant to a Board Resolution;
but only to the extent that such Subsidiary: (a) is not party to any agreement,
contract, arrangement or understanding with the Company or any Restricted
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Subsidiary of the Company unless the terms of any such agreement, contract,
arrangement or understanding are no less favorable to the Company or such
Restricted Subsidiary that those that might be obtained at the time from Persons
who are not Affiliates of the Company; (b) is a Person with respect to which
neither the Company nor any of its Restricted Subsidiaries has any direct or
indirect obligation (x) to subscribe for additional Equity Interests or (y) to
maintain or preserve such Person's financial condition or to cause such Person
to achieve any specified levels of operating results; (c) has not guaranteed or
otherwise directly or indirectly provided credit support for any Indebtedness of
the Company or any of its Restricted Subsidiaries; and (d) has at least one
director of its board of directors that is not a director or executive officer
of the Company or any of its Restricted Subsidiaries and has at least one
executive officer that is not a director or executive officer of the Company or
any of its Restricted Subsidiaries. Any such designation by the Board of
Directors shall be evidenced to the Trustee by filing with the Trustee a
certified copy of the Board Resolution giving effect to such designation and an
Officers' Certificate certifying that such designation complied with the
foregoing conditions and was permitted by the covenant described above under the
caption "Certain Covenants--Restricted Payments." If, at any time, any
Unrestricted Subsidiary would fail to meet the foregoing requirements as an
Unrestricted Subsidiary, it shall thereafter cease to be an Unrestricted
Subsidiary for purposes of the Indenture and any Indebtedness of such Subsidiary
shall be deemed to be incurred by a Restricted Subsidiary of the Company as of
such date (and, if such Indebtedness is not permitted to be incurred as of such
date under the covenant described under the caption "Incurrence of Indebtedness
and Issuance of Preferred Stock," the Company shall be in default of such
covenant). The Board of Directors of the Company may at any time designate any
Unrestricted Subsidiary to be a Restricted Subsidiary; PROVIDED that such
designation shall be deemed to be an incurrence of Indebtedness and issuance of
preferred stock by a Restricted Subsidiary of the Company of any outstanding
Indebtedness of such Unrestricted Subsidiary and such designation shall only be
permitted if (i) such Indebtedness and preferred stock is permitted under the
covenant described under the caption "Certain Covenants--Incurrence of
Indebtedness and Issuance of Preferred Stock," (ii) such Subsidiary becomes a
Subsidiary Guarantor, and (iii) no Default or Event of Default would be in
existence following such designation.
"VOTING STOCK" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote generally in the election of the
Board of Directors of such Person.
"WAREHOUSE DEBT" means Indebtedness of the Company or a Restricted
Subsidiary of the Company equal to the greater of (x) the consideration received
by the Company or its Restricted Subsidiaries under a Warehouse Facility and (y)
in the case of a Purchase Facility, the book value of the Eligible Receivables
financed under such Warehouse Facility, until such time as such Eligible
Receivables are (i) securitized, (ii) repurchased by the Company or its
Restricted Subsidiaries or (iii) sold by the counterparty under the Warehouse
Facility to a Person who is not an Affiliate of the Company, including any
Guarantees issued by the Company or a Restricted Subsidiary of the Company in
connection therewith.
"WAREHOUSE FACILITY" means any funding arrangement, including Purchase
Facilities, with a financial institution or other lender or purchaser or any
conduit or special purpose vehicle used in connection with such funding
arrangement, to the extent (and only to the extent) that the Company or any of
its Restricted Subsidiaries incurs Warehouse Debt thereunder exclusively to
finance or refinance the purchase or origination of Receivables by the Company
or a Restricted Subsidiary of the Company prior to securitization.
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness
or Disqualified Stock at any date, the number of years obtained by dividing (i)
the sum of the products obtained by multiplying (a) the amount of each then
remaining installment, sinking fund, serial maturity or other required payments
of principal, including payment at final maturity (or final redemption, in the
case of Disqualified Stock), in respect thereof, by (b) the number of years
(calculated to the nearest one-twelfth) that will elapse between such date and
the making of such payment, by (ii) the then outstanding principal amount of
such Indebtedness or mandatory redemption amount of Disqualified Stock.
"WHOLLY-OWNED RESTRICTED SUBSIDIARY" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall at
the time be owned by such Person or by one or more Wholly-Owned Restricted
Subsidiaries of such Person and one or more Wholly-Owned Restricted Subsidiaries
of such Person.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
It is the opinion of Dorsey & Whitney LLP, counsel to the Company, that the
material federal income tax consequences to purchasers expected to result from
the purchase, ownership and sale or other taxable disposition of the Notes
offered by this Prospectus Supplement under currently applicable law are as
described herein. Such opinion is based upon the current provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), applicable Treasury
Regulations, judicial authority and administrative rulings and practice. There
can be no assurance that the Internal Revenue Service (the "IRS") will not take
a contrary view, and no ruling from the IRS has been or will be sought.
Legislative, judicial or administrative changes or interpretations may be
forthcoming that could alter or modify the statements and conclusions set forth
herein. Any such changes or interpretations may or may not be retroactive and
could affect the tax consequences to holders of Notes.
The following summary is for general information only. The tax treatment of
a holder of Notes may vary depending upon such holder's particular situation.
Certain holders (including insurance companies, tax-exempt organizations,
financial institutions or broker-dealers, foreign corporations and persons who
are not citizens or residents of the United States and persons holding the Notes
as other than "capital assets" within the meaning of Code Section 1221) may be
subject to special rules not discussed below.
Investors should consult their own tax advisors concerning this Offering.
Investors should also consult their own tax advisors as to the tax treatment
arising from the application of foreign, state and local tax laws and
regulations.
STATED INTEREST
The stated interest on the Notes will generally be taxable to a holder as
ordinary income at the time that it is paid or accrued, in accordance with the
holder's method of accounting for federal income tax purposes.
ORIGINAL ISSUE DISCOUNT
The Notes may be deemed to be issued with "original issue discount" within
the meaning of Section 1273(a)(1) of the Code if the "stated redemption price at
maturity" exceeds the "issue price" of the Notes. The original issue discount
with respect to the Notes will be considered to be zero if it is less than 0.25%
of the Notes' stated redemption price at maturity multiplied by the number of
complete years from the date of issue of the Notes to their maturity date. The
"stated redemption price at maturity" of the Notes will generally be equal to
the principal amount thereof. Although under certain circumstances the Notes are
subject to redemption by the Company for an amount in excess of their principal
amount, the Company believes that, based on the Treasury Regulations, this
excess need not be considered when determining the Notes' stated redemption
price at maturity. In general, the "issue price" of a Note is the initial
offering price to the public at which a substantial amount of Notes is first
sold. The Company expects the Notes to be issued with original issue discount.
If the Notes are determined to be issued with original issue discount, a
holder thereof, regardless of such holder's method of accounting, must generally
include the original issue discount in ordinary gross income for federal income
tax purposes as it accrues in advance of the receipt of any cash attributable to
such income. The amount of original issue discount, if any, required to be
included in a Noteholder's ordinary gross income for federal income tax purposes
in any taxable year will accrue on a daily basis under a constant-yield method
that takes into account the compounding of interest. One effect of this method
is that a relatively smaller portion of the original issue discount is included
in income in the earlier years and a relatively larger portion in later years.
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MARKET DISCOUNT
The Notes, whether or not issued with original issue discount, will be
subject to the "market discount rules" of Section 1276 of the Code. In general,
these rules provide that if the holder of a Note purchases a Note at a market
discount (I.E., at a price below its stated redemption price at maturity or, if
the Note was issued with original issue discount, at a price below its original
issue price plus any accrued original issue discount, as described above, in
each case subject to a de minimis exception) and thereafter recognizes gain upon
a disposition or redemption, the lesser of such gain or the accrued market
discount will be taxed as ordinary interest income. Generally, the accrued
market discount will be determined on a straight-line basis, although a holder
may elect to determine accrued market discount under the constant-yield method.
Limitations imposed by the Code, which are intended to match deductions with
the taxation of income, may defer deductions for interest on indebtedness
incurred or continued to purchase or carry a Note with accrued market discount.
A holder of a Note may elect to include market discount in gross income as it
accrues and, if such holder makes such an election, the foregoing rules with
respect to the recognition of ordinary interest income upon a disposition or
redemption and the deferral of interest deductions on indebtedness related to a
Note will not apply. The adjusted basis of a Note subject to such election will
be increased to reflect market discount included in gross income, thereby
reducing any gain or increasing any loss on a sale or taxable disposition.
PREMIUM
In general, if a holder of a Note purchases the Note at a premium (I.E., an
amount in excess of the amount payable upon the maturity thereof), such excess
will be treated as "amortizable bond premium." In such case, a holder may elect,
under Section 171 of the Code, to offset interest income with the amortizable
bond premium as it is amortized under a constant-yield method. The holder's tax
basis in the Note then decreases by the amount of the amortizable bond premium
used to offset interest income. An election under Section 171 of the Code is
available only if a Note is held as a capital asset. Noteholders should consult
with their own tax advisors regarding special rules that apply for determining
the amount and method of amortizing bond premium with respect to the Notes that
may be redeemed prior to maturity.
SALE OF THE NOTES
A holder of a Note will recognize gain or loss upon the sale, retirement or
other taxable disposition of such Note equal to the difference between the
amount of cash plus the fair market value of property received in exchange
therefor (except to the extent attributable to, and taxable as, accrued
interest) and the seller's adjusted basis in the Note. Such adjusted basis
generally will equal the cost of the Note to the seller, increased by any
original issue discount previously included in the seller's ordinary gross
income with respect to the Note and reduced by (a) any principal payments on the
Note previously received by the seller and (b) any amortizable bond premium
previously used to offset interest income by the seller. Except as discussed
with respect to market discount or to the extent cash received is attributable
to, and taxable as, accrued interest, any capital gain or loss recognized upon a
sale, exchange, retirement or other disposition of a Note will be short-term,
mid-term or long-term capital gain or loss, depending upon whether the Note had
been held for no more than one year, more than one year or more than 18 months.
BACKUP WITHHOLDING AND REPORTING REQUIREMENTS
A holder of a Note may be subject to backup withholding at the rate of 31%
with respect to interest paid on a Note and proceeds from the sale, exchange or
redemption of the Note unless the holder (a) is a corporation or comes within
certain other exempt categories and, when required, demonstrates this fact or
(b) provides a correct taxpayer identification number, certifies as to no loss
of exemption from backup withholding and otherwise complies with applicable
requirements of the backup withholding rules. A holder of a Note who does not
provide the Company with his correct taxpayer identification number may be
subject to penalties imposed by the IRS. Backup withholding is not an additional
tax; any amounts
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withheld are creditable against the holder's federal income tax liability,
provided that required information is provided to the IRS.
The Company will report to the holders of Notes and the IRS the amount of
any "reportable payments" (including any original issue discount) and any amount
withheld with respect to the Notes during each calendar year.
THE FOREGOING DISCUSSION OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES IS FOR
GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE. PROSPECTIVE PURCHASERS SHOULD
CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF
THE PURCHASE, OWNERSHIP AND DISPOSITION OF NOTES, INCLUDING THE TAX CONSEQUENCES
UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF
CHANGES IN FEDERAL OR OTHER TAX LAWS.
DESCRIPTION OF OTHER SENIOR DEBT
In March 1997, the Company issued 11 1/2% Senior Notes due 2007 (the "Senior
Term Notes") in the aggregate principal amount of $300.0 million. The Senior
Term Notes bear interest at the rate of 11 1/2% per annum and mature in March
2007. The Senior Term Notes were issued pursuant to the Base Indenture, as
supplemented by a First Supplemental Indenture dated as of March 12, 1997 (the
"First Supplemental Indenture").
The Senior Term Notes are general, unsecured obligations of the Company, and
rank senior to all outstanding subordinated indebtedness of the Company and PARI
PASSU in right of payment with all current and future unsecured unsubordinated
indebtedness of the Company, including the Notes.
The Senior Term Notes have substantially the same terms as the Notes, except
that the Senior Term Notes have priority over the Notes and any other PARI PASSU
indebtedness incurred in accordance with the Indenture with respect to Asset
Sale Offers. See "Description of Notes--Repurchase at the Option of
Holders--Asset Sales."
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UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement (the
"Underwriting Agreement"), each of the Underwriters named below (the
"Underwriters") has agreed to purchase from the Company, and the Company has
agreed to sell to the Underwriters, the aggregate number of Notes set forth
opposite its name below.
<TABLE>
<CAPTION>
PRINCIPAL
UNDERWRITER AMOUNT OF NOTES
- ----------------------------------------------------------------------------- ---------------
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation.......................... $
J.P. Morgan Securities Inc...................................................
---------------
Total...................................................................... $ 50,000,000
---------------
---------------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
to purchase and accept delivery of the Notes offered hereby are subject to
approval of certain legal matters by counsel and to certain other conditions. If
any Notes are purchased by the Underwriters pursuant to the Underwriting
Agreement, all such Notes must be purchased.
The Underwriters propose initially to offer the Notes directly to the public
at the public offering price set forth on the cover page of this Prospectus
Supplement and to certain dealers at such price less a concession not to exceed
% of the principal amount of the Notes. The Underwriters may allow, and such
dealers may reallow, discounts not in excess of % of the principal amount of
the Notes to certain other dealers. After the initial public offering of the
Notes, the offering price, the concession and reallowance and other selling
terms may be changed by the Underwriters. In addition, $3,150,000 in principal
amount of the Notes will be sold to certain officers and a director of the
Company at a price equal to the price to public less the underwriting discounts
and commissions.
There is currently no public market for the Notes. The Company does not
intend to apply for listing of the Notes on any national securities exchange or
automated quotation system. The Company has been advised by the Underwriters
that, following completion of the initial offering of the Notes, they presently
intend to make a market in the Notes although they are under no obligation to do
so and may discontinue any market-making activities at any time without notice.
Accordingly, there can be no assurance as to whether an active trading market
for the Notes will develop or, if such a market develops, as to the liquidity of
the trading market for the Notes.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended,
or to contribute to payments that the Underwriters may be required to make in
respect thereof.
In connection with the Offering, the Underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of the Notes.
Specifically, the Underwriters may overallot the Offering, creating a syndicate
short position. Underwriters may bid for and purchase Notes in the open market
to cover syndicate short positions. In addition, the Underwriters may bid for
and purchase Notes in the open market to stabilize the price of the Notes. These
activities may stabilize or maintain the market price of the Notes above
independent market levels. The Underwriters are not required to engage in these
activities, and may end these activities at any time.
Since January 1995, Donaldson, Lufkin & Jenrette Securities Corporation
("DLJ") has acted as an underwriter of asset-backed securities issued by
Company-sponsored securitization trusts, and of the Company's offerings of its
Units Consisting of 11 1/2% Senior Notes due 2007 and Warrants to Purchase
Common Stock (the "Units"), 13% Senior Term Notes and Common Stock, for which it
receives customary discounts and commissions. In February 1995, the Company paid
OFL Funding, Inc. ("DLJ Bridge"), an affiliate of DLJ, a customary fee and
agreed to reimburse DLJ Bridge for its expenses in consideration of DLJ Bridge's
provision of $70.0 million in senior debt financing, which was repaid with the
proceeds of the Company's 1995 Common Stock offering. The Company has also
engaged DLJ as its financial advisor and has agreed to pay DLJ an annual fee of
$250,000 for services through 1997. In the
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first quarter of 1997, the Company engaged DLJ as its dealer-manager in
connection with the Company's tender offer for its 13% Senior Term Notes and the
related consent solicitation, for which it received customary fees. In addition,
the Company has engaged DLJ as its broker in connection with the hedging
transactions with respect to U.S. Treasury Securities described in "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Capital Resources," for which DLJ receives customary commissions.
J.P. Morgan Securities Inc. has from time to time acted as an underwriter of
asset-backed securities issued by Company-sponsored securitization trusts and as
an underwriter of the Company's Units and has provided other investment banking
services to the Company, for all of which it has received customary discounts
and commissions.
LEGAL MATTERS
Certain legal matters in connection with the issuance of the Securities
offered hereby will be passed upon for the Company by Dorsey & Whitney LLP,
Minneapolis, Minnesota, and for the Underwriters by Latham & Watkins, Chicago,
Illinois.
EXPERTS
The financial statements of the Company incorporated by reference in this
Prospectus Supplement and the related Registration Statement for the years ended
December 31, 1994, 1995 and 1996 have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report incorporated by reference
herein, and are incorporated by reference herein in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
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$500,000,000
[LOGO]
DEBT SECURITIES, PREFERRED STOCK, DEPOSITARY SHARES,
COMMON STOCK, SECURITIES WARRANTS AND UNITS
-----------------
Olympic Financial Ltd. (the "Company") may from time to time offer and sell:
(i) its debt securities, which may be either secured or unsecured senior debt
securities (the "Senior Debt Securities") or unsecured subordinated debt
securities (the "Subordinated Debt Securities" and, together with the Senior
Debt Securities, the "Debt Securities"); (ii) shares of its preferred stock,
$.01 par value per share (the "Preferred Stock"), in one or more series; (iii)
depositary shares (the "Depositary Shares") evidenced by depositary receipts;
(iv) shares of its common stock, par value $.01 per share (the "Common Stock");
and (v) warrants (collectively, the "Securities Warrants") to purchase Debt
Securities (the "Debt Securities Warrants"), Preferred Stock (the "Preferred
Stock Warrants") or shares of Common Stock (the "Common Stock Warrants"), for an
aggregate initial public offering price of up to $500,000,000 (or the equivalent
in foreign currencies, currency units or composite currencies (each, a
"Currency")). The Debt Securities, Preferred Stock, Depositary Shares, Common
Stock and Securities Warrants (collectively, the "Securities") may be offered
independently or together in any combination ("Units") for sale directly to
purchasers or through dealers, underwriters or agents to be designated. The Debt
Securities and Preferred Stock may be convertible into or exchangeable for other
Securities. The Securities will be offered to the public at prices and on terms
determined at the time of offering. The Securities may be sold for U.S. dollars
or other Currencies and any amounts payable by the Company in respect of the
Securities may likewise be payable in U.S. dollars or other Currencies.
The Senior Debt Securities, except to the extent secured by collateral, if
any, will rank PARI PASSU in right of payment with all unsecured and
unsubordinated debt of the Company. The Subordinated Debt Securities will be
subordinated to all existing and future Senior Debt (as defined) of the Company.
The Prospectus Supplement accompanying this Prospectus sets forth (where
applicable), with respect to the series or issue of Securities for which this
Prospectus and such Prospectus Supplement are being delivered: (i) the terms of
any Debt Securities offered, including, where applicable, their title, ranking,
aggregate principal amount, maturity, rate of interest (or method of
calculation) and time of payment thereof, any redemption or repayment terms, any
restrictive covenants, the Currency or Currencies in which such Debt Securities
will be denominated or payable, any index, formula or other method pursuant to
which principal, premium, if any, or interest, if any, may be determined, any
conversion or exchange provisions, and other specific terms not described in
this Prospectus; (ii) the terms of any Preferred Stock offered, including, where
applicable, the specific designation, number of shares, dividend rate (or method
of calculation) and time of payment thereof, liquidation preference, any
redemption or repayment terms, any conversion or exchange provisions, any voting
rights, and other specific terms not described in this Prospectus; (iii) the
terms of any Depositary Shares offered which are not described in this
Prospectus, including the fraction of a share of Preferred Stock represented by
each such Depositary Share; (iv) the terms of any Securities Warrants offered,
including where applicable, the exercise price, detachability, duration and
other specific terms not described in this Prospectus; and (v) the initial
public offering price and the net proceeds to the Company and other specific
terms related to the offered Securities.
As of the date hereof, the Company had outstanding registration statements
filed under the Securities Act of 1933, as amended, relating to continuous
offerings of: (i) up to $50 million aggregate principal amount of the Company's
unsecured subordinated notes issuable at various rates and maturities and
subordinated in right of payment to any Senior Debt Securities or Subordinated
Debt Securities offered hereby (the "Junior Subordinated Notes") and (ii) up to
3,871,364 shares of Common Stock issuable upon the exercise of outstanding
warrants, which have been registered pursuant to the exercise of registration
rights previously granted by the Company (the "Outstanding Warrant Stock"). The
Securities included in this Prospectus do not include Junior Subordinated Notes
or Outstanding Warrant Stock.
This Prospectus may not be used to consummate sales of Securities unless
accompanied by a Prospectus Supplement.
FOR A DISCUSSION OF CERTAIN FACTORS WHICH SHOULD BE CONSIDERED BY PROSPECTIVE
PURCHASERS OF THE SECURITIES OFFERED HEREBY, SEE "RISK FACTORS" AT PAGE 5
HEREIN.
-----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
-------------------
The Securities may be offered directly, through agents designated from time
to time or through underwriters or dealers. If any agents or underwriters are
involved in the sale of any of the Securities, their names, and any applicable
fee, commission, purchase price or discount arrangements with them, will be set
forth, or will be calculable from the information set forth, in the applicable
Prospectus Supplement or Prospectus Supplements.
-------------------
THE DATE OF THIS PROSPECTUS IS MARCH 7, 1997
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities of the Commission, Room 1024, 450 Fifth Street N.W.,
Washington, D.C. 20549, and at the regional offices of the Commission located at
Seven World Trade Center, Suite 1300, New York, New York 10048, and at 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661, and copies of such
materials can be obtained from the Public Reference Branch of the Commission at
450 Fifth Street N.W., Washington, D.C. 20549, at prescribed rates. Reports,
proxy statements and other information concerning the Company can also be
inspected at the offices of the New York Stock Exchange, 20 Broad Street, New
York, New York 10005.
Additional information regarding the Company and the Securities offered
hereby is contained in the Registration Statement and the exhibits relating
thereto in respect of the Securities offered hereby, filed with the Commission
under the Securities Act of 1933, as amended (the "Securities Act"). For further
information pertaining to the Company and the Securities offered hereby,
reference is made to the Registration Statement and the exhibits thereto, which
may be inspected without charge at the office of the Commission at 450 Fifth
Street N.W., Washington, D.C. 20549, and copies thereof may be obtained from the
Commission at prescribed rates.
In addition, the Commission maintains a Web site that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission. The Web site's address is
http://www.sec.gov.
Unless otherwise indicated, currency amounts in this Prospectus and any
Prospectus Supplement are stated in United States dollars ("$," "dollars," "U.S.
dollars," or "U.S. $").
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission pursuant to
the Exchange Act (File No. 1-20526) and the Securities Act are incorporated in
and made a part of this Prospectus by reference:
(i)
Part III of Annual Report on Form 10-K/A-2 for the year ended December 31,
1995, filed March 18, 1996;
(ii)
Annual Report on Form 10-K for the year ended December 31, 1996, filed
February 8, 1997;
(iii)
Current Reports on Form 8-K dated January 6, 1997 and March 7, 1997;
(iv)
The description of the Company's Common Stock contained in the Company's
Registration Statement on Form 8-A filed on March 22, 1996; and
(v)
The description of the Company's Rights Agreement contained in the Company's
Registration Statement on Form 8-A filed on November 7, 1996.
All documents filed by the Company with the Commission pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this
Prospectus and prior to the termination of the offering of the Securities
offered hereby shall be deemed to be incorporated by reference in this
Prospectus and to be a part hereof from the date of filing of such documents.
Any statement contained in a document incorporated or deemed to be incorporated
by reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein or in the accompanying Prospectus Supplement modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
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The Company will provide without charge to each person to whom this
Prospectus is delivered, upon the written or oral request of such person, a copy
of any or all of the documents incorporated herein by reference (other than
exhibits, unless such exhibits are specifically incorporated by reference in
such documents). Written requests for such copies should be directed to the
Company, Olympic Financial Center, 7825 Washington Avenue South, Minneapolis, MN
55439-2435, Attention: Secretary. Telephone requests may be directed to (612)
942-9880.
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<PAGE>
THE COMPANY
The Company purchases, securitizes and services consumer automobile loans
originated primarily by new car dealers affiliated with major foreign and
domestic manufacturers. At September 30, 1996, the Company had purchased loans
from more than 7,000 dealers in 38 states, a substantial majority of which sell
loans to the Company on a regular basis. Loans are purchased through 17 regional
buying centers serving as "hubs" in 14 states, supplemented by a network of
dealer development representatives ("DDRs") serving as "spokes." DDRs operating
in these "spokes" generate loans in their assigned market, and all
administrative functions, including credit approval and loan processing, are
performed at the "hub" or at the Company's headquarters in Minneapolis,
Minnesota. As a result of this expansion strategy, the Company has expanded the
number of dealers in its network and has significantly increased its annual
volume of automobile loans purchased, from $305.8 million in 1993 to $740.3
million in 1994, $2.1 billion in 1995, and $2.0 billion for the nine months
ended September 30, 1996, without incurring the additional costs that would be
associated with establishing a proportionate number of new buying centers. In
1996 the Company implemented a strategy to enhance its servicing and collection
capabilities by regionalizing these functions into four servicing and collection
centers. During the fourth quarter of 1996 the Company opened these new regional
servicing and collection centers in Colorado, Minnesota, North Carolina and
Texas. In addition, in 1996 the Company expanded its program to finance and
resell repossession inventory in the retail markets and diversified its outlets
through multiple used car dealers.
The Company purchases each loan in accordance with its underwriting
guidelines and procedures, which focus on buyer qualifications and collateral
value. The Company's underwriting guidelines do not distinguish between new or
used vehicles. The Company maintains a tiered pricing system, allowing it to
price loans according to the borrower's credit characteristics as measured by
the Company's proprietary underwriting and credit scoring criteria. The Company
prices its loan products in order to maximize interest rate spreads relative to
expected losses within each credit tier. The Company markets its loan products
to dealers under two programs, designated Premier and Classic. Premier borrowers
generally have stronger credit characteristics than Classic borrowers. The
Company considers the loans it purchases under both programs to be in the
"prime" loan category. In accordance with prevailing industry practice, the
Company offers an up-front dealer participation to the originating dealer for
each loan purchased. "Premier" and "Classic" are proprietary trademarks of the
Company.
The Company uses warehouse facilities to fund the initial purchase of loans
and then securitizes loans purchased by it as asset-backed securities, generally
on a quarterly or more frequent basis. In its securitizations, the Company
(through its special purpose subsidiary, Olympic Receivables Finance Corp.
("ORFC")) transfers loans to newly-formed securitization trusts, which issue one
or more classes of asset-backed securities. The asset-backed securities are
simultaneously sold to investors (except for certain subordinated classes of
securities which may be retained by the Company) and the Company recognizes gain
on the sale of the loans. Each month, collections of principal and interest on
the loans are used by the trustee to pay the holders of the related asset-backed
securities, to establish and maintain spread accounts as a source of cash to
cover shortfalls in collections, if any, and to pay expenses associated with the
securitization and subsequent servicing. After such application by the trustee,
excess collections are distributed to ORFC. The Company acts as the servicer of
loans held by each trust in return for a monthly fee. All of the Company's
securitization trusts are credit-enhanced through financial guaranty insurance
policies issued by Financial Security Assurance Inc. ("FSA"), which insure
payments of principal and interest due on the related asset-backed securities.
As a result, such asset-backed securities have been rated AAA by Standard &
Poor's Ratings Services and Aaa by Moody's Investors Service, Inc.
Olympic Financial Ltd. is a Minnesota corporation. The Company's principal
office and mailing address are Olympic Financial Center, 7825 Washington Avenue
South, Minneapolis, Minnesota 55439-2435 and its telephone number is (612)
942-9880. The Company has been requested by the U.S. Olympic Committee to change
its name by June 1, 1997.
4
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RISK FACTORS
INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING MATTERS IN CONNECTION WITH
AN INVESTMENT IN THE SECURITIES IN ADDITION TO THE OTHER INFORMATION CONTAINED
OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS OR IN THE ACCOMPANYING
PROSPECTUS SUPPLEMENT. INFORMATION CONTAINED OR INCORPORATED BY REFERENCE IN
THIS PROSPECTUS OR IN THE ACCOMPANYING PROSPECTUS SUPPLEMENT CONTAINS
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995, WHICH CAN BE IDENTIFIED BY THE USE OF
FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY," "WILL," "EXPECT," "ANTICIPATE,"
"ESTIMATE" OR "CONTINUE" OR THE NEGATIVE THEREOF OR OTHER VARIATIONS THEREON OR
COMPARABLE TERMINOLOGY. THE FOLLOWING MATTERS CONSTITUTE CAUTIONARY STATEMENTS
IDENTIFYING IMPORTANT FACTORS WITH RESPECT TO SUCH FORWARD-LOOKING STATEMENTS,
INCLUDING CERTAIN RISKS AND UNCERTAINTIES, THAT COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE IN SUCH FORWARD-LOOKING STATEMENTS.
LIQUIDITY AND ACCESS TO CAPITAL RESOURCES
NEGATIVE OPERATING CASH FLOWS. The Company's business requires substantial
cash to support the payment of dealer participations, the funding of spread
accounts in connection with securitizations, the purchase of loans pending
securitization, the financing of repossessed inventory and other cash
requirements, in addition to debt service and dividends. These cash requirements
increase as the volume of the Company's loan purchases increases. To the extent
that increases in the volume of loan purchases and securitizations provide
income, a substantial portion of such income is received by the Company in cash
over the life of the loans. The Company has operated historically on a negative
operating cash flow basis and expects to continue to do so for so long as the
Company's volume of loan purchases continues to grow at a significant rate. As a
result of the Company's historical growth rate, the Company has used
increasingly larger amounts of cash than it has generated from its operating
activities. The Company has funded these negative operating cash flows
principally through borrowings from financial institutions, sales of equity
securities and sales of senior and subordinated notes. The Company's ability to
execute its growth strategy depends upon its continued ability to obtain
substantial additional long-term debt and equity capital through access to the
capital markets or otherwise. There can be no assurance that the Company will
have access to the capital markets when needed or will be able to obtain
financing upon terms reasonably satisfactory to the Company. Factors which could
affect the Company's access to the capital markets, or the costs of such
capital, include changes in interest rates, general economic conditions, the
perception in the capital markets of the Company's business, results of
operations, leverage, financial condition and business prospects, and the
performance of the Company's securitization trusts. In addition, covenants with
respect to the Company's debt securities and credit facilities may significantly
restrict the Company's ability to incur additional indebtedness and to issue new
classes of preferred stock.
POTENTIAL INABILITY TO REFINANCE EXISTING INDEBTEDNESS. The Company's
ability to repay its outstanding indebtedness at maturity may depend on its
ability to refinance such indebtedness, which could be adversely affected if the
Company does not have access to the capital markets for the sale of additional
debt or equity through public offerings or private placements on terms
reasonably satisfactory to the Company. See "Negative Operating Cash Flows"
above.
DEPENDENCE ON WAREHOUSE FINANCING. The Company depends on warehouse
facilities with financial institutions or institutional lenders to finance its
purchase of loans on a short-term basis pending securitization. At September 30,
1996, the Company had $700.0 million of warehouse facilities through banks and
institutionally managed asset-backed securities conduits, of which $661.5
million was available. These facilities expire at various times in 1997, subject
to renewal or extension at the lender's option. Implementation of the Company's
growth strategy requires continued availability of warehouse facilities and may
require increases in the capacity of warehouse facilities. There can be no
assurance that such financing will be available on terms reasonably satisfactory
to the Company. The inability of the Company to arrange additional warehouse
facilities or to extend or replace existing facilities when they expire would
have a material adverse effect on the Company's business, financial condition
and results of operations and on the Company's outstanding securities.
DEPENDENCE ON SECURITIZATION. The Company has relied upon its ability to
aggregate and sell loans as asset-backed securities in the secondary market to
generate cash proceeds for repayment of warehouse
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facilities and to purchase new loans from dealers. Through September 30, 1996
the Company had securitized approximately $5.1 billion of automobile loans,
approximately $3.4 billion of which were outstanding at September 30, 1996.
Accordingly, adverse changes in the Company's asset-backed securities program or
in the asset-backed securities market for automobile receivables generally could
materially adversely affect the Company's ability to purchase and resell loans
on a timely basis and upon terms reasonably satisfactory to the Company. The
Company endeavors to effect public securitizations of its loans on at least a
quarterly basis. However, market and other considerations, including the
conformity of loans to insurance company and rating agency requirements, could
affect the timing of such transactions. Any delay in the sale of loans beyond a
quarter-end would eliminate the related gain on sale in the given quarter and
adversely affect the Company's reported earnings for such quarter. All of the
Company's securitizations from March 1993 through September 30, 1996 and one of
the Company's warehouse facilities have utilized credit enhancement in the form
of financial guaranty insurance policies issued by FSA to achieve "AAA/Aaa"
ratings with respect to the asset-backed securities. The Company believes that
financial guaranty insurance policies reduce the costs of the securitizations
and such warehouse facility relative to alternative forms of credit enhancements
available to the Company. The Company has committed to use FSA for future credit
enhancement on insured securitizations through 1997 in consideration for certain
limitations on FSA insurance premiums. FSA is not required to insure
Company-sponsored securitizations and there can be no assurance that it will
continue to do so or that future Company-sponsored securitizations will be
similarly rated.
LOAN PERFORMANCE RISKS
POTENTIAL NEGATIVE EFFECTS ON FINANCIAL CONDITION, RESULTS OF OPERATIONS AND
LIQUIDITY. The Company's business, financial condition, results of operations
and liquidity depend, to a material extent, on the performance of loans
purchased and sold by the Company. When such loans are sold in securitizations,
the Company recognizes gain on sale. Finance income receivable, the Company's
principal asset, has been calculated using assumptions concerning future default
and prepayment rates on securitized loans that are consistent with the Company's
historical experience and market conditions and present value discount rates
that the Company believes would be requested by an unrelated purchaser of an
identical stream of estimated cash flows. Management believes that the Company's
estimates of excess cash flow were reasonable at the time each gain on sale of
loans was recorded. However, the actual rates of default and/or prepayment on
such loans may exceed those estimated for purposes of calculating the Company's
finance income receivable and consequently may adversely affect anticipated
future excess cash flow. The Company periodically reviews its prepayment and
loss assumptions in relation to current performance of the loans and market
conditions, and, if necessary, writes down the balance of finance income
receivable. The Company's business, financial condition and results of
operations could be materially adversely affected by such adjustments in the
future. No assurance can be given that loan losses and prepayments will not
exceed the Company's estimates or that finance income receivable could be sold
at its stated value on the balance sheet, if at all.
POSSIBLE RESTRICTIONS ON CASH FLOW FROM SECURITIZATIONS. The Company's
future liquidity and financial condition, and its ability to finance the growth
of its business and to repay or refinance its indebtedness, will depend to a
material extent on distributions of excess cash flow from securitization trusts.
The Company's agreements with FSA provide that the Company must maintain in a
spread account for each insured securitization trust specified levels of excess
cash during the life of the trust. These spread accounts are initially funded
out of initial deposits or cash flows from the related trust. Thereafter, during
each month, excess cash flow due to ORFC from all insured securitization trusts
is first used to replenish any spread account deficiencies and is then
distributed to the Company. If excess cash flow from all insured securitization
trusts, plus cash flow from recoveries, is not sufficient to replenish all such
spread accounts, no cash flow would be available to the Company from ORFC for
that month. Each insured securitization trust has certain portfolio performance
tests relating to levels of delinquency, defaults and net losses on the loans in
such trust. If any of these levels are exceeded, the amount required to be
retained in the related spread account, and not passed through to ORFC, will be
increased. Such levels have historically been exceeded prior to 1996 and the
Company has obtained waivers from FSA to permit distributions of cash from
certain spread accounts to ORFC. There can be no assurance that such levels will
not be exceeded in
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the future or that, if exceeded, waivers will be available. In certain events
with respect to any series of asset-backed securities insured by FSA, the
Company will be in default under its insurance agreement with FSA and
distributions of cash flow to ORFC from the related securitization trust may be
suspended until the asset-backed securities have been redeemed. Such events
include the cumulative net loss rate, as defined, equaling or exceeding an
agreed upon percentage of the principal balance of loans included in the
securitization trust related to such series. Certain of the Company's
securitization trusts have exceeded such insurance agreement thresholds prior to
1996 and the Company has obtained waivers from FSA to permit distributions of
cash to ORFC. There can be no assurance that such thresholds will not be
exceeded in the future or that, if exceeded, waivers will be available. In
addition, the spread account for each securitization is cross-collateralized to
the spread accounts established in connection with the Company's other
securitization trusts (including one of its warehouse facilities) such that
excess cash flow from a performing securitization trust may be used to support
negative cash flow from, or to replenish a deficient spread account in
connection with, a nonperforming securitization trust, thereby further
restricting excess cash flow available to ORFC. FSA also has a collateral
security interest in the stock of ORFC. If FSA were to foreclose on such
security interest following an event of default under an insurance agreement
with respect to a securitization trust, FSA could preclude payment of dividends
by ORFC to the Company, thereby eliminating the Company's right to receive
distributions of excess cash flow from all the FSA-insured securitization
trusts. The Company's right to service the loans sold in securitizations insured
by FSA is also generally subject to the discretion of FSA. Accordingly, there
can be no assurance that the Company will continue as servicer for such loans
and receive related servicing fees. Any increase in limitations on the Company's
cash flow from securitization trusts or inability to obtain any necessary
waivers from FSA or termination of servicing arrangements could materially
adversely affect the Company's cash flow and liquidity, and ultimately its
business, financial condition and results of operations and its outstanding
securities.
IMPACT OF PORTFOLIO GROWTH AND NEW PRODUCTS. The Company has experienced
rapid growth in its loan servicing portfolio. Historically, the statistical
incidence of delinquencies and defaults in connection with automobile loans
tends to vary over the age of the loan. For example, statistically, loans that
are between six and fourteen months old have had a higher likelihood of being
delinquent or defaulting than loans with similar credit characteristics that are
three months old. Accordingly, to the extent that portfolio growth results in a
servicing portfolio containing disproportionately more loans originated within
the prior six months, the current and historical delinquency and default rates
of loans in the servicing portfolio may understate future delinquency and
default rates. Also, there can be no assurance that the Company's transition
from centralized to regional servicing and collection will not adversely affect
the rate of loan delinquencies and defaults. In addition, to the extent the
Company offers new loan products which involve different underwriting policies,
the delinquency and default rates of the Company's servicing portfolio may
change. The Company has instituted a tiered pricing system and has periodically
increased the authorized amount of loans purchased under its Classic program
involving borrowers who do not meet all of the underwriting standards in the
Company's Premier program and are charged rates of interest higher than those
under the Company's Premier program. As a result of the increases in Classic
loans as a proportion of the Company's portfolio, there has been an increase in
the rates of, and reserves for, delinquency, repossession and loss historically
reported by the Company. To estimate future delinquency, repossession and loss
experience related to Classic loans, the Company uses a combination of factors,
including actual loan performance experience on Premier loans, adjusted for the
estimated effects of less favorable credit characteristics, and industry
experience on loans with similar credit characteristics. However, there can be
no assurance that the Classic loans will perform under varying economic
conditions in the manner estimated by the Company. Any increase in delinquency,
repossession and loss rates related to Classic loans above the rates estimated
by the Company could have a material adverse effect on the Company's business,
financial condition and results of operations, as well as its liquidity.
Furthermore, because loan default and delinquency rates tend to increase during
the six- to fourteen-month period from loan origination, the impact of increases
in the Classic program on the Company's overall delinquency, repossession and
loss rates will not be fully realized until the amount of Classic loans which
have entered this six- to fourteen-month period is proportionate to the amount
of Classic loans being purchased by the Company relative to Premier loans. In
addition, certain of the Company's loan products which produce
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<PAGE>
higher delinquency, repossession and loss rates than initially expected may
continue to have an impact on the Company's overall loan performance, even after
being discontinued or modified, until the initially generated loans mature
beyond the six- to fourteen-month period. In 1996, the Company discontinued a
Classic loan product directed at first-time credits and modified a Classic
program for financing the sale of its repossessed inventory in retail markets,
each of which had experienced higher than expected delinquency, repossession and
loss rates.
POTENTIAL NEGATIVE IMPACT OF COVENANTS UNDER FINANCE AGREEMENTS. Increases
in loan delinquency and loss rates with respect to any securitization trust may
result in the trust's portfolio exceeding the various pool performance levels
established by FSA, thereby restricting or cutting off cash distributions to
ORFC from the securitization spread accounts. See "Cash Flow from
Securitizations" above. In addition, such increases may cause the Company to
exceed certain pool performance tests established in other agreements governing
its indebtedness. Under the terms of the indenture governing the Company's
outstanding Senior Term Notes due 2000 (the "Senior Term Notes"), if at any
month-end the amount of charge-offs (net of recoveries) of automobile loans in
the Company's servicing portfolio during the preceding six-month period, times
two, exceeds 1.65% of the average servicing portfolio in the preceding seven
months ("Portfolio Loss Ratio"), the Company will be prohibited from purchasing
new automobile loans in excess of 20% of the Company's Adjusted Consolidated
Cash Flow (as defined in the indenture governing the Senior Term Notes) plus
proceeds of warehouse facilities and certain other available cash. If the
Portfolio Loss Ratio exceeds 1.65% for two consecutive months, then 50% of such
Adjusted Consolidated Cash Flow (as defined in the indenture governing the
Senior Term Notes) must be used to offer to repurchase Senior Term Notes. Such a
restriction on purchases of new automobile loans could have a material adverse
effect on the Company's business, financial condition and results of operations.
Covenants with respect to a series of Debt Securities may contain similar
restrictions or other covenants relating to portfolio performance. In addition,
if at the end of any month the Portfolio Loss Ratio exceeds 1.65% or the
Company's delinquency level exceeds 3.5%, an event of default will occur under
one of the Company's outstanding warehouse facilities. The delinquency level is
calculated as a percentage of outstanding principal balance of all automobile
loans owned or securitized by the Company as to which a payment is more than
thirty days past due. Upon the occurrence of an event of default under such
warehouse facility, the lending banks under such facility may accelerate the
payment of amounts outstanding thereunder and would have no further obligation
to extend additional credit. Furthermore, any such event of default or
acceleration may trigger cross-defaults under other outstanding indebtedness of
the Company and may result in the acceleration of amounts due thereunder. The
increase in Classic loans during 1996, among other things, has increased the
risk that the Company may trigger its Portfolio Loss Ratio covenants in the
future.
SUBSTANTIAL INDEBTEDNESS
The issuance of Debt Securities offered hereby will have the effect of
increasing the Company's leverage. The degree to which the Company is leveraged
may impair its ability to obtain additional financing in the future. In
addition, the Company's debt service costs will increase as a result of the
issuance of Debt Securities, except to the extent proceeds are used to repay
outstanding indebtedness. The Company is also subject to restrictive covenants
under its debt agreements. If the Company should require, but be unable to
obtain, any cure, modification or waiver of noncompliance with any such
covenants in the future, default could occur with respect to the relevant
indebtedness and, under cross-default provisions, other indebtedness of the
Company, and there can be no assurance that the Company would be able to repay
or refinance such obligations in such circumstances. In addition, the indenture
governing the Senior Term Notes contains covenants requiring the Company to
repurchase such debt securities under certain circumstances, including a change
in control of the Company, as well as covenants that may significantly restrict
the Company's ability to incur additional debt and to issue new classes of
preferred stock. In 1996, the Company received an indication of interest to buy
the Company and requested its financial advisor to examine the strategic
alternatives available to the Company, including a sale of the Company. No
definitive offers to buy the Company were received, but there can be no
assurance that a change in control of the Company will not occur in the future.
The terms of a series of Debt Securities issued by the Company in the future may
contain similar covenants.
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SUBORDINATION OF THE DEBT SECURITIES
CONTRACTUAL SUBORDINATION OF THE SUBORDINATED DEBT SECURITIES. The payment
of principal of or interest or premium on the Subordinated Debt Securities is
subordinated in right of payment to all Senior Debt of the Company, as defined
in the Subordinated Indenture. As a result, in the event of the dissolution,
liquidation, winding up or reorganization of the Company, or of certain
bankruptcy and insolvency-related events, the holders of the Subordinated Debt
Securities would not receive payment until the holders of Senior Debt were paid
in full. Senior Debt is defined in the Indenture to include, among other debt,
any Company guarantees of, or reimbursement commitments with respect to,
indebtedness in connection with securitization transactions. In the event a
default in any payment in respect to any Senior Debt has occurred and is
continuing, the Company may not make any payments on the account of the
Subordinated Debt Securities.
STRUCTURAL SUBORDINATION. Any right of the Company to receive assets of any
of its subsidiaries upon the latter's liquidation or reorganization (and the
consequent right of the holders of the Debt Securities to participate in those
assets) will be effectively subordinated to the claims of creditors of such
subsidiaries before such proceeds may be available for distribution to the
parent Company. Substantially all of the Company's securitizations through
September 30, 1996 provide that ORFC, a special purpose subsidiary, owns the
rights to excess cash flow from such securitization trusts. Consequently, a
significant portion of the Company's available cash flow is in the form of
distributions from ORFC. ORFC is a separate and distinct legal entity and has no
obligation, contingent or otherwise, to pay any amounts due under the Debt
Securities or to make any funds available therefor, whether by dividends to the
Company or otherwise. Substantially all of the Company's finance income
receivable at September 30, 1996 is held by ORFC, and, in the event of
liquidation of both the Company and ORFC, creditors of ORFC would have first
claim to such assets before holders of the Debt Securities. To the extent any
restriction on the distribution of cash from ORFC or other subsidiaries to the
Company is applicable and enforced, the Company's ability to pay interest and
principal on the Debt Securities may be impaired. See "Loan Performance
Risks--Cash Flow from Securitizations" above.
ECONOMIC CONDITIONS
AUTOMOBILE MARKET CONDITIONS. Periods of economic slowdown or recession,
whether general, regional or industry-related, may increase the risk of default
on automobile loans and may have an adverse effect on the Company's business,
financial condition and results of operations. Such periods also may be
accompanied by decreased consumer demand for automobiles, resulting in reduced
demand for automobile loans and declining values of automobiles securing
outstanding loans, thereby weakening collateral coverage and increasing the
possibility of losses in the event of default. The increased proportion of loans
under the Company's Classic program has increased the Company's sensitivity to
changes in economic conditions. Significant increases in the inventory of used
automobiles during recessionary economies may depress the prices at which
repossessed automobiles may be sold or delay the timing of such sales. There can
be no assurance that the used automobile markets will be adequate for the sale
of repossessed automobiles and any material deterioration of such markets could
increase the Company's loan losses or reduce recoveries from the sale of
repossession inventory. In addition, the Company has channeled a significant
portion of its repossession inventory through retail resale markets instead of
wholesale markets, including the financing of such retail sales through its
Classic program, which had the effect of reducing the Company's loan losses
while delaying cash flow recovered from inventory turnover. The Company has
experienced significant growth in its repossesion inventory, which increased
from $4.8 million at September 30, 1995 to $46.5 million at September 30, 1996.
There can be no assurance that the Company will continue to use such retail
resale channels, that it will be able to realize such benefits to loan losses in
the future or that its inventories will not reach levels at which they cannot
readily be liquidated through such channels. Any such event might have an
adverse effect on loan loss levels.
INTEREST RATES. The Company's profitability may be directly affected by the
level of and fluctuations in interest rates, which affect the Company's gross
interest rate spread. The Company monitors the interest rate environment and
employs prefunding or other hedging strategies designed to mitigate the impact
of changes in interest rates on its gross interest rate spread. However, there
can be no assurance that the profitability of the Company would not be adversely
affected during any period of changes in interest rates.
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<PAGE>
MANAGEMENT OF RAPID GROWTH
The rapid growth of the Company's servicing portfolio has resulted in
increased demands on the Company's personnel and systems. The Company's ability
to support, manage and control continued growth is dependent upon, among other
things, its ability to hire, train, supervise and manage its larger workforce.
Furthermore, the Company's ability to manage portfolio delinquency and loss
rates is dependent upon the maintenance of efficient collection and repossession
procedures and adequate staffing therefor. There can be no assurance that the
Company will have trained personnel and systems adequate to support such growth.
COMPETITION
The business of financing automobiles is highly competitive. Existing and
potential competitors include well-established financial institutions, such as
banks, other automobile finance companies, small loan companies, thrifts,
leasing companies and captive finance companies owned by automobile
manufacturers, such as General Motors Acceptance Corporation, Chrysler Credit
Corp. and Ford Motor Credit Company. Many of these competitors have greater
financial, technical and marketing resources than the Company and from time to
time offer special buyer incentives in the form of below-market interest rates
on certain classes of vehicles. Many of such competitors also have longstanding
relationships with automobile dealers and some of such major competitors provide
other forms of financing to automobile dealers, including dealer floor plan
financing and leasing, which is not provided by the Company. There can be no
assurance that the Company will be able to compete successfully with such
competitors.
REGULATION
The Company's business is subject to numerous federal and state consumer
protection laws and regulations, which, among other things: (i) require the
Company to obtain and maintain certain licenses and qualifications; (ii) limit
the interest rates, fees and other charges the Company is allowed to charge;
(iii) limit or prescribe certain other terms of the Company's automobile loan
contracts; (iv) require specific disclosures; and (v) define the Company's
rights to repossess and sell collateral. The Company believes it is in
substantial compliance with all such laws and regulations, and that such laws
and regulations have had no material effect on the Company's ability to operate
its business. Changes in existing laws or regulations, or in the interpretation
thereof, or the promulgation of any additional laws or regulations, could have a
material adverse effect on the Company's business, financial condition and
results of operations and upon its outstanding securities.
SHARES ELIGIBLE FOR FUTURE SALES
Additional shares of Common Stock may be issued upon the exercise of
outstanding stock options, the conversion of outstanding convertible preferred
stock and the exercise of outstanding warrants. Certain holders thereof have
registration rights with respect to such shares. The Company has registered
pursuant to such rights the sale from time to time of up to 3,871,364 shares of
Common Stock when, as and if issued upon the exercise of outstanding warrants.
Such issuances, or the resale of the Common Stock so acquired, could have an
adverse effect on the market price of the Company's Common Stock.
UNDESIGNATED SHARES; ANTI-TAKEOVER CONSIDERATIONS
The authorized and unissued stock of the Company, other than shares reserved
for issuance pursuant to options and warrants, consists of undesignated shares.
The Board of Directors, without any action by the Company's shareholders, is
authorized to designate and issue the undesignated shares in such classes or
series as it deems appropriate and to establish the rights, preferences and
privileges of such shares, including dividend, liquidation and voting rights.
The Company has adopted a shareholder rights plan to deter a hostile takeover.
Further, certain provisions of the Minnesota Business Corporation Act may
operate to discourage a negotiated acquisition or unsolicited takeover of the
Company. See "Description of Common Stock." Each or any of the foregoing could
have the effect of entrenching the Company's directors, impeding or deterring an
unsolicited tender offer or takeover proposal regarding the Company and thereby
depriving the then current shareholders of the ability to sell their shares at a
premium over the market price, or otherwise adversely affecting the voting
power, dividend, liquidation and other rights of holders of Common Stock.
10
<PAGE>
USE OF PROCEEDS
Unless otherwise specified in an applicable Prospectus Supplement, the net
proceeds to be received by the Company from the sale of the Securities offered
hereby will be added to the general funds of the Company and will be available
for working capital and other general corporate purposes, including funding the
growth in the volume of loan purchases and repayment of maturing obligations and
redemption of outstanding indebtedness. Pending such use, the Company may
temporarily invest the net proceeds in short-term investments or use them to
reduce short-term indebtedness.
RATIOS OF EARNINGS TO FIXED CHARGES AND
TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
The following are the consolidated ratios of earnings to fixed charges and
to combined fixed charges and preferred stock dividends for the periods
presented.
<TABLE>
<CAPTION>
MARCH 8, 1990 NINE MONTHS ENDED
(DATE OF SIX MONTHS
INCORPORATION) ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30,
TO DECEMBER DECEMBER 31, ------------------------------------------ --------------------
31, 1991 1991 1992 1993 1994 1995 1995 1996
(DOLLARS IN THOUSANDS) ------------- ------------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ratio of earnings to fixed
charges................. 1.72x 2.06x 3.75x 3.64x 4.53x
Deficiency in earnings to
fixed charges........... $ 1,525 $ 1,158 $ 1,342
Ratio of earnings to
combined fixed charges
and preferred stock
dividends............... 1.56x 1.31x 3.10x 2.95x 4.13x
Deficiency in earnings to
combined fixed charges
and preferred stock
dividends............... $ 1,525 $ 1,158 $ 1,342
</TABLE>
For purposes of calculating the ratios of earnings to fixed charges and
earnings to combined fixed charges and preferred stock dividends, earnings are
defined as income (loss) before income taxes plus fixed charges. Fixed charges
consist of interest expense, amortization of debt discount and the interest
factor in rental charges. Combined fixed charges and preferred stock dividends
consist of the fixed charges described above plus the pre-tax income necessary
to pay dividends on the Company's outstanding 8% Cumulative Convertible
Exchangeable Preferred Stock (the "8% Preferred Stock," all of which was
converted or redeemed on or before December 2, 1996).
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<PAGE>
DESCRIPTION OF DEBT SECURITIES
The following description of the terms of the Debt Securities sets forth
certain general terms and provisions of the Debt Securities to which any
Prospectus Supplement may relate. The terms of the Debt Securities specific to
Senior Debt Securities and to Subordinated Debt Securities are set forth under
the headings "Description of Senior Debt Securities" and "Description of
Subordinated Debt Securities," respectively. Particular terms of the Debt
Securities offered by any Prospectus Supplement and the extent, if any, to which
such general and specific provisions may apply to the Debt Securities so offered
will be described in the Prospectus Supplement relating to such Debt Securities.
The Debt Securities may be issued either separately, or together with, or upon
conversion of or in exchange for, other Securities.
The Debt Securities may be issued from time to time in one or more series.
The terms of each series of Debt Securities, including without limitation any
restrictive covenants with respect thereto, will be established by or pursuant
to a resolution of the Board of Directors of the Company and set forth or
determined in the manner provided in an Officers' Certificate or by a
supplemental indenture. The particular terms of the Debt Securities offered
pursuant to any Prospectus Supplement or Prospectus Supplements will be
described in such Prospectus Supplement or Prospectus Supplements.
The Senior Debt Securities and the Subordinated Debt Securities will be
issued under the indentures (the "Senior Indenture" and the "Subordinated
Indenture," respectively) between the Company and the Trustee named in the
applicable Prospectus Supplement. The forms of Senior Indenture and Subordinated
Indenture (collectively, the "Indentures") have been filed as exhibits to the
Registration Statement of which this Prospectus is a part. The following brief
summary of certain provisions of the Indentures does not purport to be complete
and is subject to, and is qualified in its entirety by reference to, all of the
provisions of the Indentures, and is further qualified by any description
contained in the applicable Prospectus Supplement or Prospectus Supplements.
Certain terms capitalized and not otherwise defined herein are defined in the
Indentures. Wherever particular sections or defined terms of the Indentures are
referred to, such sections or defined terms are incorporated herein by
reference.
GENERAL
The amount of Debt Securities offered by this Prospectus will be limited to
the amount of Securities set forth on the cover of this Prospectus that have not
been otherwise issued or reserved for issuance. The Indentures will not limit
the aggregate principal amount of Debt Securities which may be issued
thereunder.
The Senior Debt Securities, except to the extent secured by collateral, if
any, will rank PARI PASSU with other unsecured, unsubordinated indebtedness of
the Company. The Subordinated Debt Securities will be unsecured and will be
subordinated in right of payment to the prior payment in full of the Senior Debt
of the Company as described under "Description of Subordinated Debt
Securities--Subordination of Subordinated Debt Securities."
The applicable Prospectus Supplement will indicate the form, registered or
bearer, and denominations in which Debt Securities of any series may be issued.
Debt Securities may be issuable in the form of one or more Global Securities, as
described below under "--Global Securities." The Debt Securities (other than
those issued in the form of a Global Security) are exchangeable or transferable
without charge therefor, but the Company may require payment of a sum sufficient
to cover any tax or other governmental charge payable in connection therewith
and require the holders to furnish appropriate endorsements and transfer
documents. (Senior Indenture Section 305; Subordinated Indenture Section 305)
Debt Securities may be issued as original issue discount securities to be
sold at a substantial discount below their principal amount. Special federal
income tax and other considerations applicable thereto and special federal tax
and other considerations applicable to any Debt Securities which are denominated
in a currency other than U. S. dollars will be described in the Prospectus
Supplement or Prospectus Supplements relating thereto.
Principal of and any premium and interest on the Debt Securities will be
payable, and the transfer of the Debt Securities will be registrable, at the
corporate trust office of the Trustee in the case of
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<PAGE>
Subordinated Debt Securities and the office or agency maintained for such
purpose in the case of the Senior Debt Securities. Interest on any Debt Security
that is payable will be paid to the Person in whose name that Debt Security is
registered in the Security Register. In addition, in the case of Subordinated
Debt Securities payment of interest may be made at the option of the Company by
check mailed to the address of the Person entitled thereto as it appears on the
Security Register. (Senior Indenture Sections 301, 305 and 307; Subordinated
Indenture Sections 301, 305, 307, 1001 and 1002)
The applicable Prospectus Supplement or Prospectus Supplements will describe
the terms of the Debt Securities offered thereby, including the following: (i)
the title of the offered Debt Securities and whether the offered Debt Securities
are Senior Debt Securities or Subordinated Debt Securities; (ii) any limit on
the aggregate principal amount of the offered Debt Securities; (iii) the Person
to whom any interest on the offered Debt Securities will be payable, if other
than the Person in whose name they are registered on the regular record date for
such interest; (iv) the date or dates, or the method by which such date or dates
are determined or extended, on which the principal or installments of principal
and premium, if any, of the offered Debt Securities is or are payable; (v) the
rate or rates (which may be fixed or variable) at which the offered Debt
Securities will bear interest, if any, or the method by which such rate or rates
shall be determined, the date from which any such interest will accrue, the
dates on which such interest on the offered Debt Securities will be payable and
the regular record dates therefor, the circumstances, if any, in which the
Company may defer interest payments and the basis for calculating interest if
other than a 360-day year of twelve 30-day months; (vi) the place or places
where the principal of and premium, if any, and interest on the offered Debt
Securities will be payable and the offered Debt Securities may be surrendered
for registration of transfer or exchange, if other than those provided for in
the Senior Indenture or the Subordinated Indenture; (vii) if applicable, the
period or periods within which, the price or prices at which and the terms and
conditions upon which the offered Debt Securities may be redeemed, in whole or
in part, at the option of the Company; (viii) the obligation, if any, of the
Company to redeem or purchase Debt Securities of the series pursuant to any
sinking fund or analogous provisions or at the option of a holder thereof and
the period or periods within which, the price or prices at which and the terms
and conditions upon which Debt Securities of the series shall be redeemed or
purchased, in whole or in part, pursuant to such obligation; (ix) whether the
Debt Securities of the series will be convertible into shares of Common Stock
and/or exchangeable for other securities, and if so, the terms and conditions
upon which such Debt Securities will be so convertible or exchangeable, and any
deletions from or modifications or additions to the applicable Indenture to
permit or to facilitate the issuance of such convertible or exchangeable Debt
Securities or the administration thereof; (x) the identity of each Security
Registrar and Paying Agent, if other than or in addition to the Trustee; (xi) if
the amount of principal of or any premium or interest on the offered Debt
Securities may be determined by reference to an index or pursuant to a formula,
the manner in which such amounts shall be determined; (xii) the applicability
of, and any addition to or change in the covenants and definitions set forth in
the applicable Indenture, as described under "Description of Senior Debt
Securities" and "Description of Subordinated Debt Securities"; (xiii) the
denominations in which any offered Debt Securities will be issuable, if other
than denominations of $1,000 or any amount in excess thereof which is an
integral multiple of $1,000; (xiv) if other than U. S. dollars, the currency or
currencies for the payment of principal of and any premium and interest on the
offered Debt Securities and the manner of determining the U.S. dollar equivalent
of the principal amount thereof for purposes of the definition of "outstanding",
and, if the principal of or any premium or interest on the offered Debt
Securities is payable, at the election of the Company or the holder thereof, in
one or more currencies other than that or those in which the offered Debt
Securities are stated to be payable, the currency or currencies in which payment
of the principal of and any premium and interest on such offered Debt Securities
is to be made and the periods within which and the terms and conditions upon
which such election is to be made; (xv) any other event or events of default
applicable with respect to the offered Debt Securities in addition to or in lieu
of those described under "Description of Senior Debt Securities-- Events of
Default under the Senior Indenture" and "Description of Subordinated Debt
Securities--Events of Default under the Subordinated Indenture", and any change
in the right of the Trustee or the holders to declare the principal of or any
premium or interest on the offered Debt Securities due and payable; (xvi) if
less than the principal amount thereof, the portion of the principal payable
upon acceleration of such Debt Securities following an Event of Default; (xvii)
whether such Debt Securities are to be issued in
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<PAGE>
whole or in part in the form of one or more Global Securities and, if so, the
identity of the depositary for such Global Security or Securities, and any
circumstances under which any such Global Security may be exchanged for Debt
Securities registered in the name of, and any transfer of such Global Security
may be registered to, a Person other than such depositary or its nominee, if
other than those described in the applicable Indenture (see "--Global
Securities"); (xviii) if applicable, that the offered Debt Securities, in whole
or in any specified part, are not defeasible; (xix) whether, with respect to any
series of Senior Debt Securities, such series will be secured and the type,
amount and other terms of, and provisions relating to, the collateral to be
provided as such security, and any deletions, additions or modifications to the
Senior Indenture to permit the issuance of secured Senior Debt Securities or the
administration thereof; and (xx) any other terms of the offered Debt Securities
not inconsistent with the provisions of the applicable Indenture. (Senior
Indenture Section 301; Subordinated Indenture Section 301)
If the purchase price of any Debt Securities is payable in a currency other
than U.S. dollars or if principal of, or premium, if any, or interest, if any,
on any of the Debt Securities is payable in any currency other than U.S.
dollars, the specific terms and other information with respect to such Debt
Securities and such foreign currency, including any material foreign currency
risks, will be specified in the Prospectus Supplement or Prospectus Supplements
relating thereto.
Under the Indentures, the terms of the Debt Securities of any series may
differ, and the Company, without the consent of the holders of the Debt
Securities of any series, may reopen a previous series of Debt Securities and
issue additional Debt Securities of such series or establish additional terms of
such series.
GLOBAL SECURITIES
The following description will apply to any series of Debt Securities
issued, in whole or in part, in the form of a Global Security or Global
Securities deposited with, or on behalf of, The Depository Trust Company ("DTC")
(each such Debt Security represented by a Global Security being herein referred
to as a "Book-Entry Security").
Upon initial issuance, all Book-Entry Securities of the same series and
bearing interest, if any, at the same rate or pursuant to the same formula and
having the same date of issuance, redemption provisions, if any, repayment
provisions, if any, stated maturity and other terms will be represented by a
single Global Security. Each Global Security representing Book-Entry Securities
will be deposited with, or on behalf of, DTC and will be registered in the name
of DTC or a nominee of DTC. Unless otherwise specified in the applicable Pricing
Supplement, all Book-Entry Securities will be denominated in U. S. dollars.
Upon the issuance of a Global Security, DTC will credit accounts held with
it with the respective principal or face amounts of the Book-Entry Securities
represented by such Global Security. The accounts to be credited shall be
designated initially by the Agent through which the Debt Security was sold or,
to the extent that such Debt Securities are offered and sold directly, by the
Company. Ownership of beneficial interests in a Global Security will be limited
to institutions that have accounts with DTC ("participants") and to persons that
may hold interests through such participants. Ownership of beneficial interests
by participants in a Global Security will be shown on, and the transfer of that
ownership interest will be effected only through, records maintained by DTC for
such Global Security. Ownership of beneficial interests in such Global Security
by persons that hold through participants will be shown on, and the transfer of
that ownership interest within such participant will be effected only through,
records maintained by such participant.
Payment of principal of, premium, if any, and interest, if any, on
Book-Entry Securities represented by any such Global Security will be made to
DTC or its nominee, as the case may be, as the sole registered holder of the
Book-Entry Securities represented thereby for all purposes under the Indentures.
None of the Company, the Trustee, the Paying Agent or any agent of the Company
or the Trustee will have a responsibility or liability for any aspect of DTC's
records relating to or payments made on account of beneficial ownership
interests in a Global Security representing any Book-Entry Securities or any
other aspect of the relationship between DTC and its participants or the
relationship between such participants
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<PAGE>
and the owners of beneficial interests in a Global Security owning through such
participants or for maintaining, supervising or reviewing any of DTC's records
relating to such beneficial ownership interests.
The Company has been advised by DTC that upon receipt of any payment of
principal of, premium, if any, or interest, if any, on any such Global Security,
DTC will immediately credit, on its book-entry registration and transfer system,
the accounts of participants with payments in amounts proportionate to their
respective beneficial interests in the principal amount of such Global Security
as shown on the records of DTC. Payments by participants to owners of beneficial
interests in a Global Security held through such participants will be governed
by standing instructions and customary practices, as is now the case with
securities held by such participants for customer accounts registered in "street
name," and will be the sole responsibility of such participants.
No Global Security may be transferred except as a whole by a nominee of DTC
to DTC or to another nominee of DTC, or by DTC or any such nominee to a
successor of DTC or a nominee of such successor.
A Global Security representing Book-Entry Securities is exchangeable for
certificated Debt Securities of the same series and bearing interest, if any, at
the same rate or pursuant to the same formula, having the same date of issuance,
redemption provisions, if any, repayment provisions, if any, stated maturity and
other terms and of differing authorized denominations aggregating a like amount,
if any, if (x) DTC notifies the Company that it is unwilling or unable to
continue as depositary for such Global Security or if at any time DTC ceases to
be a clearing agency registered under the Exchange Act, (y) the Company in its
sole discretion determines that such Global Security shall be exchangeable for
certificated Debt Securities or (z) there shall have occurred and be continuing
an Event of Default with respect to the Book-Entry Securities. Such certificated
Debt Securities shall be registered in the names of the owners of the beneficial
interests in such Global Security as provided by DTC's relevant participants (as
identified by DTC).
Owners of beneficial interests in a Global Security will not be considered
the registered holders thereof for any purpose under the applicable Indenture,
and no Global Security representing Book-Entry Securities shall be exchangeable
or transferrable. Accordingly, each person owning a beneficial interest in such
a Global Security must rely on the procedures of DTC and, if such person is not
a participant, on the procedures of the participant through which such person
owns its interest, to exercise any rights of a registered holder under the
applicable Indenture. The laws of some jurisdictions require that certain
purchasers of securities take physical delivery of such securities in
certificated form. Such limits and such laws may impair the ability to transfer
beneficial interests in a Global Security.
DTC, as the registered holder of each Global Security, may appoint agents
and otherwise authorize participants to give or take any request, demand,
authorization, direction, notice, consent, waiver or other action which a
registered holder is entitled to give or take under the applicable Indenture.
The Company understands that under existing industry practices, in the event
that the Company requests any action of registered holders or that an owner of a
beneficial interest in such a Global Security desires to give or take any action
which a registered holder is entitled to give or take under such Indenture, DTC
would authorize the participants holding the relevant beneficial interests to
give or take such action, and such participants would authorize beneficial
owners owning through such participants to give or take such action or would
otherwise act upon the instructions of beneficial owners owning through them.
DTC has advised the Company that DTC is a limited-purpose trust company
organized under the laws of the State of New York, a member of the Federal
Reserve System, a "clearing corporation" within the meaning of the New York
Uniform Commercial Code and a "clearing agency" registered under the Exchange
Act. DTC was created to hold the securities of its participants and to
facilitate the clearance and settlement of securities transactions among its
participants in such securities through electronic book-entry changes in
accounts of the participants, thereby eliminating the need for physical movement
of securities certificates. DTC's participants include securities brokers and
dealers, banks (which may include the Trustee), trust companies, clearing
corporations, and certain other organizations some of whom (and/or their
representatives) own DTC. Access to DTC's book-entry system is also available to
others, such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a participant, either directly or
indirectly.
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DESCRIPTION OF SENIOR DEBT SECURITIES
The following description sets for certain specific terms of the Senior Debt
Securities and provisions of the Senior Indenture. Certain general terms of the
Senior Debt Securities are described under "Description of Debt Securities." The
following brief summary of certain provisions of the Senior Debt Securities and
the Senior Indenture, together with the summary description under "Description
of Debt Securities," does not purport to be complete and is subject to, and is
qualified in its entirety by reference to, all of the provisions of the Senior
Indenture, and is further qualified by any description contained in the
applicable Prospectus Supplement or Prospectus Supplements. The definitions of
certain terms used in the following summary are set forth below under "--Certain
Definitions in the Senior Indenture." Certain terms capitalized and not
otherwise defined herein are defined in the Senior Indenture. Wherever
particular sections or defined terms of the Senior Indenture are referred to,
such sections or defined terms are incorporated herein by reference.
REDEMPTION
The Prospectus Supplement relating to any offered Senior Debt Securities or
series thereof will specify the provisions, if any, for redemption of such
Senior Debt Securities or series thereof at the option of the Company.
Except as set forth in the Prospectus Supplement with respect to any offered
Senior Debt Securities or series thereof, the Company is not required to make
mandatory redemption or sinking fund payments with respect to the Senior Debt
Securities. The Prospectus Supplement relating to any offered Senior Debt
Securities or series thereof will specify the provisions, if any, regarding
sinking fund provisions related to such Senior Debt Securities or series
thereof. The Senior Indenture provides that the Company may deliver Outstanding
Senior Debt Securities of like tenor of a series (other than any previously
called for redemption) and may apply as a credit Senior Debt Securities of like
tenor of a series which have been redeemed either at the election of the Company
pursuant to the terms of such Senior Debt Securities or through the application
of permitted optional sinking fund payments pursuant to the terms of such Senior
Debt Securities, in each case in satisfaction of all or any part of any sinking
fund payment with respect to the Senior Debt Securities of like tenor of such
series required to be made pursuant to the terms of such Securities as provided
for by the terms of such series. (Senior Indenture Sections 1102 and 1103)
The Senior Indenture provides that, if less than all of the Senior Debt
Securities of any series are to be redeemed at any time, selection of Senior
Debt Securities for redemption will be made by the Trustee on a pro rata basis
(and in such manner as complies with applicable legal and stock exchange
requirements, if any), or by such other method as the Trustee shall deem fair
and appropriate, and portions of the Senior Debt Securities selected for
redemption shall be in amounts of $1,000 or whole multiples thereof, except that
if all of the Senior Debt Securities of a holder are to be redeemed, the entire
outstanding amount shall be redeemed. Notices of redemption shall be mailed by
first class mail at least 30 but not more than 60 days before the redemption
date to each Holder of Senior Debt Securities to be redeemed at its registered
address. If any Senior Debt Security is to be redeemed in part only, the notice
of redemption that relates to such Senior Debt Security shall state the portion
of the principal amount thereof to be redeemed. A new Senior Debt Security in
principal amount equal to the unredeemed portion thereof will be issued in the
name of the Holder thereof upon cancellation of the original Senior Debt
Security. On and after the redemption date, interest ceases to accrue on Senior
Debt Securities or portions of them called for redemption. (Senior Indenture
Sections 403 and 404)
REPURCHASE AT THE OPTION OF HOLDERS
Except as set forth in the Prospectus Supplement with respect to any offered
Senior Debt Securities or any series thereof, the Senior Indenture does not
contain provisions that permit the Holders of the Senior Debt Securities to
require that the Company repurchase or redeem the Senior Debt Securities in the
event of a sale of assets or a takeover, recapitalization or similar
restructuring, nor does the Senior Indenture contain covenants specifically
designed to protect holders in the event of a highly leveraged transaction
involving the Company. The Senior Indenture provides that, if repurchase rights
are provided for in a
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<PAGE>
Prospectus Supplement and amounts deposited in connection with all such
repurchase rights are insufficient to pay the repurchase price of all Senior
Debt Securities having such repurchase rights, the Trustee shall select Senior
Debt Securities to be repurchased on a pro rata basis among all holders of such
series of Senior Debt Securities having such repurchase rights and exercising
the option to elect repurchase. (Senior Indenture Sections 1201 and 1204)
CERTAIN COVENANTS IN THE SENIOR INDENTURE
MERGER, CONSOLIDATION, OR SALE OF ASSETS. The Senior Indenture provides
that the Company may not consolidate or merge with or into (whether or not the
Company is the surviving corporation), or sell, assign, transfer, lease, convey
or otherwise dispose of all or substantially all of its properties or assets in
one or more related transactions, to another Person unless (i) the Company is
the surviving Person or the Person formed by or surviving any such consolidation
or merger (if other than the Company) or to which such sale, assignment,
transfer, lease, conveyance or other disposition shall have been made is a
corporation organized or existing under the laws of the United States, any state
thereof or the District of Columbia; (ii) the Person formed by or surviving any
such consolidation or merger (if other than the Company) or the Person to which
such sale, assignment, transfer, lease, conveyance or other disposition shall
have been made assumes all the obligations of the Company under the Senior Debt
Securities and the Senior Indenture pursuant to a supplemental indenture in a
form reasonably satisfactory to the Trustee; (iii) immediately after such
transaction no Default or Event of Default exists; (iv) the Company or the
Person formed by or surviving any such consolidation or merger (if other than
the Company), or to which such sale, assignment, transfer, lease, conveyance or
other disposition shall have been made, will have Consolidated Net Worth
immediately after the transaction equal to or greater than the Consolidated Net
Worth of the Company immediately preceding the transaction; and (v) the
applicable rating agencies shall have reaffirmed or raised their ratings with
respect to certain asset-back securities that have been rated in whole or in
part on the basis of the Company's credit. (Senior Indenture Section 601)
REPORTS. The Senior Indenture provides that, whether or not required by the
rules and regulations of the Commission, so long as any Senior Debt Securities
are outstanding, the Company will file with the Trustee and furnish to the
holders of Senior Debt Securities (i) all quarterly and annual financial reports
on Forms 10-Q and 10-K and all proxy statements that the Company is required to
file, including a "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and including, with respect to the annual information
only, a report by the Company's certified independent accountants, and (ii) all
current reports that the Company is required to file with the Commission on Form
8-K. In addition, if the Company is not subject to Section 13 or 15(d) of the
Exchange Act, the Senior Indenture provides that the Company will nevertheless
continue to file a copy of all such information and reports with the Commission
and the Trustee and make such information available to securities analysts and
prospective investors upon request. (Senior Indenture Section 504)
EVENTS OF DEFAULT UNDER THE SENIOR INDENTURE
The Senior Indenture provides that each of the following constitutes an
Event of Default with respect to the Senior Debt Securities of any series issued
pursuant to the Senior Indenture: (i) default for 30 days in the payment when
due of interest on the Senior Debt Securities of that series; (ii) default in
payment when due of the principal of or premium, if any, on the Senior Debt
Securities of that series; (iii) failure to deposit any sinking fund payment,
when and as due, in respect of the Senior Debt Securities of that series; (iv)
failure by the Company to comply with the provisions described under the caption
"Merger, Consolidation or Sale of Assets;" (v) failure by the Company for 60
days after notice from the Trustee or holders of at least 25% of the principal
amount of the Senior Debt Securities of that series to comply with any of its
other agreements in the Senior Indenture or the Senior Debt Securities of that
series; (vi) default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness (as defined in the Senior Indenture) for money borrowed by the
Company or any of its Subsidiaries (or the payment of which is guaranteed by the
Company or any of its Subsidiaries) whether such Indebtedness or guarantee now
exists, or is created after the date of the Senior Indenture, which default (a)
is caused by a failure to pay principal of or premium, if any, or interest on
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such Indebtedness prior to the expiration of the grace period provided in such
Indebtedness on the date of such default (a "Payment Default") or (b) results in
the acceleration of such Indebtedness prior to its express maturity and, in each
case, the principal amount of any such Indebtedness, together with the principal
amount of any other such Indebtedness under which there has been a Payment
Default or the maturity of which has been so accelerated, aggregates $5.0
million or more; (vii) failure by the Company or any of its Subsidiaries to pay
final judgments aggregating in excess of $5.0 million, which judgments are not
paid, discharged or stayed for a period of 60 days; (viii) certain events of
bankruptcy or insolvency with respect to the Company or any of its Subsidiaries
and (ix) any other Event of Default provided with respect to the Senior Debt
Securities of that series. (Senior Indenture Section 701)
If any Event of Default occurs and is continuing with respect to any series
of Senior Debt Securities, the Trustee or the Holders of at least 25% in
aggregate principal amount of the then outstanding Senior Debt Securities of
such series may declare the unpaid principal amount (or, if any of the Senior
Debt Securities of that series are Original Issue Discount Senior Debt
Securities, such lesser portion of the principal amount of such Senior Debt
Securities as may be specified in the terms thereof), premium, if any, and any
accrued and unpaid interest on all the Senior Debt Securities of such series to
be due and payable immediately. Notwithstanding the foregoing, in the case of an
Event of Default arising from certain events of bankruptcy or insolvency, with
respect to the Company or any Subsidiary of the Company, all principal, premium,
if any, and interest on outstanding Senior Debt Securities will become due and
payable without further action or notice. Holders of the Senior Debt Securities
may not enforce the Senior Indenture or the Senior Debt Securities except as
provided in the Senior Indenture. Subject to certain limitations, Holders of a
majority in principal amount of the then outstanding Senior Debt Securities of
any series may direct the Trustee in its exercise of any trust or power with
respect to such series of Senior Debt Securities. The Trustee may withhold from
Holders of the Senior Debt Securities of any series notice of any continuing
Default or Event of Default (except a Default or Event of Default in payment on
any Senior Debt Security or any series or in the payment of any sinking fund
installment with respect to such series) if it determines that withholding
notice is in their interest. (Senior Indenture Sections 702, 705, 706 and 805)
In the case of any Event of Default with respect to the Senior Debt
Securities of any series occurring by reason of any willful action (or inaction)
taken (or not taken) by or on behalf of the Company or any of its Subsidiaries
the primary purpose of which was avoiding payment of the premium, if any, that
the Company would have had to pay with respect to such series if the Company
then had elected to redeem such Senior Debt Securities pursuant to the optional
redemption provisions, if any, established in accordance with the Senior
Indenture, if any, an equivalent premium shall also become and be immediately
due and payable if such Senior Debt Securities were repaid to the extent
permitted by law. (Senior Indenture Section 701)
The Holders of a majority in aggregate principal amount of the Senior Debt
Securities of any series then outstanding by notice to the Trustee may on behalf
of the Holders of all of the Senior Debt Securities of such series waive any
existing Default or Event of Default with respect to such series of Senior Debt
Securities and its consequences under the Senior Indenture except a continuing
Default or Event of Default with respect to such series in the payment of
interest on, or the principal of, or premium, if any, on the Senior Debt
Securities of such series. (Senior Indenture Section 704)
The Holders of a majority in principal amount of the outstanding Senior Debt
Securities of any series will have the right to direct the time, method and
place of conducting any proceeding for exercising any remedy available to the
Trustee, subject to certain exceptions. (Senior Indenture Section 705) The
Senior Indenture provides that in case an Event of Default shall occur and be
continuing, the Trustee will be required, in the exercise of its power, to use
the degree of care of a prudent person in the conduct of his or her own affairs.
Subject to such provisions, the Trustee will be under no obligation to exercise
any of its rights or powers under the Senior Indenture unless the Trustee
receives indemnity satisfactory to it against any loss, liability or expense.
(Senior Indenture Section 801)
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Senior Indenture, and the Company is required upon
becoming aware of any Default or Event of Default with respect to a series of
Senior Debt Securities, or any event of default under any other mortgage,
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indenture or instrument to deliver to the Trustee a statement specifying such
Default or Event of Default and what action the Company is taking or proposes to
take with respect thereto. (Senior Indenture Section 505)
DEFEASANCE PROVISIONS IN THE SENIOR INDENTURE
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Senior Debt Securities of
any series issued pursuant to the Senior Indenture ("Legal Defeasance"), except
for (i) the rights of Holders of outstanding Senior Debt Securities of that
series to receive payments in respect of the principal of, premium, if any, and
interest on the Senior Debt Securities of that series when such payments are due
from the trust referred to below, (ii) the Company's obligations with respect to
the Senior Debt Securities concerning issuing temporary Senior Debt Securities,
registration of Senior Debt Securities, mutilated, destroyed, lost or stolen
Senior Debt Securities and the maintenance of an office or agency for payment
and money for security payments held in trust, (iii) the rights, powers, trusts,
duties and immunities of the Trustee, and the Company's obligations in
connection therewith and (iv) the Legal Defeasance provisions of the Senior
Indenture. In addition, the Company may, at its option and at any time, elect to
have the obligations of the Company released with respect to certain covenants
that are described in the Senior Indenture ("Covenant Defeasance") and
thereafter any omission to comply with such obligations shall not constitute a
Default or Event of Default with respect to the Senior Debt Securities of such
series. In addition, after the Company's election to exercise its option
regarding Covenant Defeasance occurs, certain events (not including non-payment,
bankruptcy, receivership, rehabilitation and insolvency events) described under
"Events of Default" will no longer constitute an Event of Default with respect
to the Senior Debt Securities of such series. (Senior Indenture Sections 902 and
903)
In order to exercise either Legal Defeasance or Covenant Defeasance with
respect to any series of Senior Debt Securities issued pursuant to the Senior
Indenture, (i) the Company must irrevocably deposit with the Trustee, in trust,
for the benefit of the Holders of the Senior Debt Securities of such series,
cash in U.S. dollars, non-callable Government Securities, or a combination
thereof, in such amounts as will be sufficient, in the opinion of a nationally
recognized firm of independent public accountants, to pay (A) the principal of,
premium, if any, and interest on the outstanding Senior Debt Securities of such
series on the stated maturity or on the applicable redemption date, as the case
may be, or (B) any mandatory sinking fund payments or analogous payments
applicable to the Senior Debt Securities of such series on the day on which such
payments are due and payable; (ii) in the case of Legal Defeasance, the Company
shall have delivered to the Trustee an opinion of counsel in the United States
reasonably acceptable to the Trustee confirming that (A) the Company has
received from, or there has been published by, the Internal Revenue Service a
ruling or (B) since the date of the Senior Indenture, there has been a change in
the applicable federal income tax law, in either case to the effect that, and
based thereon such opinion of counsel shall confirm that, the Holders of the
outstanding Senior Debt Securities of such series will not recognize income,
gain or loss for federal income tax purposes as a result of such Legal
Defeasance and will be subject to federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if such Legal
Defeasance had not occurred; (iii) in the case of Covenant Defeasance, the
Company shall have delivered to the Trustee an opinion of counsel in the United
States confirming that the Holders of the outstanding Senior Debt Securities of
such series will not recognize income, gain or loss for federal income tax
purposes as a result of such Covenant Defeasance and will be subject to federal
income tax in the same amount, in the same manner and at the same times as would
have been the case if such Covenant Defeasance had not occurred; (iv) no Default
or Event of Default with respect to such series shall have occurred and be
continuing on the date of such deposit or insofar as Events of Default from
bankruptcy or insolvency events are concerned, at any time in the period ending
on the 91st day after the date of deposit; (v) such Legal Defeasance or Covenant
Defeasance will not result in a breach or violation of, or constitute a default
under the Senior Indenture or any material agreement or instrument to which the
Company or any of its Subsidiaries is a party or by which the Company or any of
its Subsidiaries is bound; (vi) the Company must have delivered to the Trustee
an opinion of counsel to the effect that after the 91st day following the
deposit, the trust funds will not be subject to the effect of any applicable
bankruptcy, insolvency, reorganization or similar laws affecting creditors'
rights generally; (vii) the
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Company must deliver to the Trustee an Officers' Certificate stating that the
deposit was not made by the Company with the intent of preferring the Holders of
Senior Debt Securities of such series over the other creditors of the Company
with the intent of defeating, hindering, delaying or defrauding creditors of the
Company or others; and (viii) the Company must deliver to the Trustee an
Officers' Certificate and an opinion of counsel, each stating that all
conditions precedent provided for relating to the Legal Defeasance or the
Covenant Defeasance have been complied with. (Senior Indenture Section 904)
MODIFICATION AND WAIVER
Modifications and amendments of the Senior Indenture may be made by the
Company and the Trustee with the consent of the holders of not less than a
majority in aggregate principal amount of the outstanding Senior Debt Securities
of all series affected by such modification or amendment (voting as one class);
provided, however, that no such modification or amendment may, without the
consent of the holder of each outstanding Senior Debt Security affected thereby:
(i) change the stated maturity of the principal of, or any installment of
principal of or interest on, any Senior Debt Security, reduce the principal
amount of, or premium or interest on, any Senior Debt Security, reduce the
amount of principal of an Original Issue Discount Senior Debt Security due and
payable upon acceleration of the maturity thereof, change the place of payment
where or coin or currency in which the principal of, or any premium or interest
on, any Debt Security is payable, or impair the right to institute suit for the
enforcement of any payment on or after the stated maturity of any Senior Debt
Security; or (ii) reduce the percentage in principal amount of outstanding
Senior Debt Securities of any series, the consent of the holders of which is
required for modification or amendment of the Senior Indenture or for waiver of
compliance with certain provisions of the Senior Indenture or for waiver of
certain defaults; or (iii) modify any of the various sections relating to
above-described provisions. (Senior Indenture Section 1002)
The holders of not less than a majority in aggregate principal amount of the
outstanding Senior Debt Securities of each series may waive any past Default or
Event of Default under the Senior Indenture with respect to Senior Debt
Securities of that series, except a continuing Default or Event of Default under
the Senior Indenture (i) in the payment of principal of, or any premium or
interest on, any Senior Debt Security of such series held by a nonconsenting
holder, or (ii) in respect of a covenant or provision of the Senior Indenture
which cannot be modified or amended without the consent of the holder of each
outstanding Senior Debt Security of such series affected, as described above.
(Senior Indenture Sections 704 and 1002)
The Senior Indenture provides that, in determining whether the holders of
the requisite principal amount of the "outstanding" Senior Debt Securities have
given any request, demand, authorization, direction, notice, consent or waiver
thereunder or whether a quorum is present at a meeting of holders of Senior Debt
Securities, (i) the principal amount of an Original Issue Discount Senior Debt
Security that will be deemed to be outstanding will be the amount of the
principal thereof that would be due and payable as of the date of such
determination upon acceleration of the maturity thereof to such date, and (ii)
the principal amount of a Senior Debt Security denominated in a foreign currency
or currency unit that will be deemed to be outstanding will be the United States
dollar equivalent, determined as of the date of original issuance of such Senior
Debt Security, of the principal amount of such Senior Debt Security (or, in the
case of an Original Issue Discount Senior Debt Security, the United States
dollar equivalent, determined as of the date of original issuance of such Senior
Debt Security, of the amount determined as provided in (i) above). (Senior
Indenture Section 101)
CERTAIN DEFINITIONS IN THE SENIOR INDENTURE
Set forth below are certain defined terms used in the Senior Indenture.
Reference is made to the Senior Indenture for a full disclosure of all such
terms, as well as any other capitalized terms used herein for which no
definition is provided. (Senior Indenture Section 101)
"CAPITAL STOCK" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership, partnership interests
(whether
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general or limited) and (iv) any other interest or participation that confers on
a Person the right to receive a share of the profits and losses of, or
distributions of assets of, the issuing Person.
"CONSOLIDATED NET WORTH" means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the common stockholders of such Person
and its consolidated Subsidiaries as of such date plus (ii) the respective
amounts reported on such Person's balance sheet as of such date with respect to
any series of preferred stock (other than Disqualified Stock) that by its terms
is not entitled to the payment of dividends unless such dividends may be
declared and paid only out of net earnings in respect of the year of such
declaration and payment, but only to the extent of any cash received by such
Person upon issuance of such preferred stock, plus (iii) with respect to the
Company, without duplication, the respective amounts reported on the Company's
balance sheet as of such date with respect to the Company's 8% Preferred Stock,
less (x) all write-ups (other than write-ups resulting from foreign currency
translations and write-ups of tangible assets of a going concern business made
within 12 months after the acquisition of such business) subsequent to the date
of the Senior Indenture in the book value of any asset owned by such Person or a
consolidated Subsidiary of such Person, and (y) all unamortized debt discount
and expense and unamortized deferred charges as of such date, all of the
foregoing determined in accordance with GAAP.
"DEFAULT" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"DISQUALIFIED STOCK" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at
the option of the holder thereof, in whole or in part, on or prior to the date
that is 91 days after the date on which the Senior Debt Securities mature.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect from time to time.
"GOVERNMENT SECURITIES" means securities issued or directly and fully
guaranteed or insured by the United States government or any agency or
instrumentality thereof.
"ORIGINAL ISSUE DISCOUNT SENIOR DEBT SECURITY" means any Senior Debt
Security which provides for an amount less than the principal amount thereof to
be due and payable upon a declaration of acceleration of the maturity thereof
pursuant to the terms of the Senior Indenture.
"SUBSIDIARY" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a combination
thereof) and (ii) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or (b)
the only general partners of which are such Person or of one or more
Subsidiaries of such Person (or any combination thereof), with certain
exceptions.
DESCRIPTION OF SUBORDINATED DEBT SECURITIES
The following description sets forth certain specific terms of the
Subordinated Debt Securities and provisions of the Subordinated Indenture.
Certain general terms of the Subordinated Debt Securities are described under
"Description of Debt Securities." The following brief summary of certain
provisions of the Subordinated Debt Securities and the Subordinated Indenture,
together with the summary description under "Description of Debt Securities,"
does not purport to be complete and is subject to, and is qualified in its
entirety by reference to, all of the provisions of the Subordinated Indenture,
and is further qualified
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by any description contained in the applicable Prospectus Supplement or
Prospectus Supplements. The definitions of certain terms used in the following
summary are set forth below under "--Certain Definitions in the Subordinated
Indenture." Certain terms capitalized and not otherwise defined herein are
defined in the Subordinated Indenture. Wherever particular sections or defined
terms of the Subordinated Indenture are referred to, such sections or defined
terms are incorporated herein by reference.
The Prospectus Supplement relating to any offered Subordinated Debt
Securities will specify any restrictive covenants applicable to such Securities.
Unless otherwise specified in the applicable Prospectus Supplement, the
Subordinated Debt Securities do not impose any financial or leverage
restrictions on the Company and will not contain provisions that permit the
holders of such Securities to require that the Company repurchase or redeem such
Securities in the event of a takeover, recapitalization or similar
restructuring, nor will the Subordinated Debt Securities contain covenants
specifically designed to protect holders in the event of a highly leveraged
transaction involving the Company.
EVENTS OF DEFAULT UNDER THE SUBORDINATED INDENTURE
The following events are defined in the Subordinated Indenture as "Events of
Default" with respect to the Subordinated Debt Securities of any series issued
pursuant to the Subordinated Indenture: (i) failure to pay any interest on any
Subordinated Debt Security of that series when due and payable, continued for 30
days; (ii) failure to pay principal of or any premium on any Subordinated Debt
Security of that series when due and payable; (iii) failure to deposit any
sinking fund payment, when and as due, in respect of any Subordinated Debt
Security of that series; (iv) failure to perform, or breach of, any other
covenant or warranty of the Company in the Subordinated Indenture or the
Subordinated Debt Securities of such series (other than a covenant or warranty a
default in the performance or breach of which is dealt with elsewhere in the
Subordinated Indenture or which is included in the Subordinated Indenture solely
for the benefit of a series of Subordinated Debt Securities other than that
series), continued for 60 days after written notice as provided in the
Subordinated Indenture; (v) the occurrence and continuation of an event of
default under any indenture or instrument under which the Company or any
Subsidiary shall have outstanding at least $5.0 million aggregate principal
amount of Indebtedness (as defined in the Subordinated Indenture)(other than as
part of a Securitization Transaction), the maturity of which has been
accelerated and such acceleration has not been rescinded or annulled within 60
days; (vi) certain events in bankruptcy, insolvency or reorganization involving
the Company; (vii) the entry against the Company or any Subsidiary of a final
judgment, judicial decree or order for the payment of money in excess of $5.0
million which remains unpaid, unvacated, unbounded or unstayed for a period of
60 days; or (viii) any other event of default provided with respect to
Subordinated Debt Securities of that series. (Subordinated Indenture Section
501)
If an Event of Default with respect to any series of outstanding
Subordinated Debt Securities under the Subordinated Indenture occurs and is
continuing, then either the Trustee or the holders of at least 25% in aggregate
principal amount of the outstanding Subordinated Debt Securities of that series
by notice as provided in the Subordinated Indenture may declare the principal
amount (or, if any of the Subordinated Debt Securities of that series are
Original Issue Discount Subordinated Debt Securities, such lesser portion of the
principal amount of such Subordinated Debt Securities as may be specified in the
terms thereof) of all of the Subordinated Debt Securities of that series to be
due and payable immediately; provided that in the case of certain events of
bankruptcy, insolvency or reorganization involving the Company, the principal
amount of such Subordinated Debt Securities (or specified portion thereof) shall
become due and payable immediately, without such notice. At any time after a
declaration of acceleration with respect to Subordinated Debt Securities of any
series has been made, but before a judgment or decree for payment of money has
been obtained by the Trustee, the holders of a majority in aggregate principal
amount of the outstanding Subordinated Debt Securities of that series may, under
certain circumstances, rescind and annul such acceleration. (Subordinated
Indenture Section 502)
The Subordinated Indenture provides that, subject to the duty of the Trustee
during default to act with the required standard of care, the Trustee will be
under no obligation to exercise any of its rights or powers under the
Subordinated Indenture at the request or direction of any of the holders of
Subordinated Debt Securities, unless such holders shall have offered to the
Trustee reasonable security or indemnity.
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(Subordinated Indenture Sections 601 and 603) Subject to such provisions for the
indemnification of the Trustee and to certain other limitations, the holders of
a majority in aggregate principal amount of the outstanding Subordinated Debt
Securities of any series will have the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Trustee, or
exercising any trust or power conferred on the Trustee, with respect to the
Subordinated Debt Securities of that series. (Subordinated Indenture Section
512)
The Company is required to furnish to the Trustee annually a statement as to
the compliance by the Company with all conditions and covenants under the
Subordinated Indenture. (Subordinated Indenture Section 703)
MODIFICATION AND WAIVER
Modifications and amendments of the Subordinated Indenture may be made by
the Company and the Trustee with the consent of the holders of not less than a
majority in aggregate principal amount of the outstanding Subordinated Debt
Securities of each series affected by such modification or amendment; provided,
however, that no such modification or amendment may, without the consent of the
holder of each outstanding Subordinated Debt Security affected thereby: (i)
change the stated maturity of the principal of, or any installment of principal
of or interest on, any such outstanding Subordinated Debt Security, reduce the
principal amount of, or premium or interest on, any such outstanding
Subordinated Debt Security, reduce the amount of principal of an Original Issue
Discount Subordinated Debt Security due and payable upon acceleration of the
maturity thereof, change the place of payment where or coin or currency in which
the principal of, or any premium or interest on, any such outstanding
Subordinated Debt Security is payable, or impair the right to institute suit for
the enforcement of any payment on or with respect to any such outstanding
Subordinated Debt Security; or (ii) reduce the percentage in principal amount of
outstanding Subordinated Debt Securities of any series, the consent of the
holders of which is required for modification or amendment of the Subordinated
Indenture or for waiver of compliance with certain provisions of the
Subordinated Indenture or for waiver of certain defaults with respect to such
series of Subordinated Debt Securities; or (iii) modify any of the
above-described provisions or any of the provisions relating to waivers of past
defaults and defeasance of certain obligations except for certain stated
modifications. (Subordinated Indenture Section 902)
The holders of not less than a majority in aggregate principal amount of the
outstanding Subordinated Debt Securities of each series may, on behalf of the
holders of all Subordinated Debt Securities of that series, waive, insofar as
that series is concerned, compliance by the Company with certain restrictive
provisions of the Subordinated Indenture. (Subordinated Indenture Section 1006)
The holders of not less than a majority in aggregate principal amount of the
Outstanding Subordinated Debt Securities of each series may, on behalf of the
holders of all Subordinated Debt Securities of that series, waive any past
default under the Subordinated Indenture with respect to Subordinated Debt
Securities of that series, except a default (i) in the payment of principal of,
or any premium or interest on, any Subordinated Debt Security of such series
when due (other than amounts due and payable solely upon acceleration), or (ii)
in respect of a covenant or provision of the Subordinated Indenture which cannot
be modified or amended without the consent of the holder of each outstanding
Subordinated Debt Security of such series affected. (Subordinated Indenture
Section 513) The definition of "Senior Debt" in the Subordinated Indenture may
not be amended or modified in a manner adverse to the holders of then
outstanding Senior Debt without the consent of the holders of all Senior Debt
affected thereby. (Subordinated Indenture Section 908)
The Subordinated Indenture provides that, in determining whether the holders
of the requisite principal amount of the outstanding Subordinated Debt
Securities have given any request, demand, authorization, direction, notice,
consent or waiver thereunder or whether a quorum is present at a meeting of
holders of Subordinated Debt Securities, (i) the principal amount of an original
issue discount Subordinated Debt Security that will be deemed to be Outstanding
will be the amount of the principal thereof that would be due and payable as of
the date of such determination upon acceleration of the maturity thereof, and
(ii) the principal amount of a Subordinated Debt Security denominated in a
foreign currency or currency unit that will be deemed to be outstanding will be
the United States dollar equivalent, determined as of the date of original
issuance of such Subordinated Debt Security, of the principal amount
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of such Subordinated Debt Security (or, in the case of an Original Issue
Discount Subordinated Debt Security, the United States dollar equivalent,
determined as of the date of original issuance of such Subordinated Debt
Security, of the amount determined as provided in (i) above). (Subordinated
Indenture Section 101)
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Subordinated Indenture provides that the Company, without the consent of
the holders of any of the outstanding Subordinated Debt Securities under the
Subordinated Indenture, may consolidate or merge with or into, or convey,
transfer or lease its properties and assets substantially as an entirety to, any
Person which is a corporation, partnership or trust organized and validly
existing under the laws of any domestic jurisdiction, provided that (i) any
successor Person assumes by supplemental indenture the Company's obligations on
the Subordinated Debt Securities and under the Subordinated Indenture and (ii)
after giving effect to the transaction no event of default, and no event which,
after notice or lapse of time, would become an event of default, shall have
occurred and be continuing under the Subordinated Indenture. (Subordinated
Indenture Section 801)
DEFEASANCE PROVISIONS IN THE SUBORDINATED INDENTURE
DEFEASANCE AND DISCHARGE. The Company will be discharged from any and all
obligations in respect of the Subordinated Debt Securities of any series (except
for certain obligations to register the transfer or exchange of Subordinated
Debt Securities, to replace destroyed, stolen, lost or mutilated Subordinated
Debt Securities, to maintain paying agencies and to hold moneys for payment in
trust) on the 91st day after the date of deposit with the Trustee, in trust, of
money, U.S. Government Obligations (defined below) which through the payment of
interest and principal thereof in accordance with their terms will provide
money, or a combination thereof, in an amount sufficient to pay any installment
of principal of (and premium, if any) and interest on and any mandatory sinking
fund payments in respect of the Subordinated Debt Securities of such series on
the dates on which such payments are due and payable in accordance with the
terms of the Subordinated Indenture and such Subordinated Debt Securities. Any
such discharge is also subject to certain other conditions, including the
limitation that such discharge may only occur if there has been a change in
applicable federal law, or the Company has received from, or there has been
published by, the United States Internal Revenue Service a ruling to the effect
that such a discharge will not cause the holders of such series of Subordinated
Debt Securities to recognize income, gain or loss for federal income tax
purposes and that such holders will be subject to federal income tax on the same
amount and in the same manner and at the same times as would have been the case
had such deposit, defeasance and discharge not occurred; and that such discharge
will not cause any outstanding Subordinated Debt Securities then listed on the
New York Stock Exchange or other securities exchange to be de-listed as a result
thereof. (Subordinated Indenture Section 403) The term "U.S. Government
Obligations" is defined to mean direct obligations of the United States of
America, backed by its full faith and credit. (Subordinated Indenture Section
101)
DEFEASANCE OF CERTAIN COVENANTS. The Company may omit to comply with
certain restrictive covenants with respect to the Subordinated Debt Securities
of any series. If the Company elects not to comply with any term, provision or
condition in any such covenant, the Company must deposit with the Trustee money,
U.S. Government Obligations which through the payment of interest and principal
thereof in accordance with their terms will provide money, or a combination
thereof, in an amount sufficient to pay any installment of principal of (and
premium, if any) and interest on and any mandatory sinking fund payments in
respect of the Subordinated Debt Securities of such series on the dates on which
such payments are due and payable in accordance with the terms of the
Subordinated Indenture and such Subordinated Debt Securities. Any such covenant
defeasance is also subject to certain other conditions, including the delivery
to the Trustee of an opinion of counsel to the effect that the deposit and
related covenant defeasance will not cause the holders of the Subordinated Debt
Securities to recognize income, gain or loss for federal income tax purposes and
that such holders will be subject to federal income tax on the same amount and
in the same manner and at the same times as would have been the case had such
deposit and defeasance not occurred. (Subordinated Indenture Section 1005).
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DEFEASANCE AND EVENTS OF DEFAULT. In the event the Company omits compliance
with certain covenants of the Subordinated Indenture and the Subordinated Debt
Securities issued pursuant thereto are declared due and payable because of the
occurrence of any event of default, although the amount of money and U.S.
Government Obligations on deposit with the Trustee will be sufficient to pay
amounts due on the Subordinated Debt Securities at the time of their stated
maturity, it may not be sufficient to pay amounts due on the Subordinated Debt
Securities at the time of the acceleration resulting from such event of default.
In such event, the Company shall remain liable for all such payments.
SUBORDINATION OF SUBORDINATED DEBT SECURITIES
The Subordinated Debt Securities will be subordinate and subject in right of
payment, to the extent and in the manner set forth in the Subordinated
Indenture, to the prior payment in full of all Senior Debt. Upon any
distribution to creditors in a liquidation, dissolution, winding up,
reorganization, assignment for the benefit of creditors, marshaling of assets
and liabilities or any bankruptcy, insolvency or similar proceeding involving
the Company, the holders of Senior Debt will be entitled to receive payment in
full in cash of all Obligations (as defined in the Subordinated Indenture) due
on or to become due on or in respect of all Senior Debt, before the holders of
Subordinated Debt Securities are entitled to receive any payment or distribution
of any kind, whether in cash, property or securities, by set off or otherwise
(including any payment or distribution which may be payable or deliverable by
reason of the payment of any Junior Subordinated Debt) on account of the
principal of (and premium, if any) or interest on the Subordinated Debt
Securities or on account of any purchase, redemption or other acquisition of
Subordinated Debt Securities by the Company, any Subsidiary of the Company, the
Trustee or any Paying Agent or on account of any other obligation of the Company
in respect of any Subordinated Debt Securities (excluding (i) shares of stock or
securities of the Company or another corporation provided for by a plan of
reorganization or readjustment that are subordinated in right of payment to all
then outstanding Senior Debt to substantially the same extent as, or to a
greater extent than, the Subordinated Debt Securities are so subordinated and
(ii) payments of assets from any defeasance trust which have been on deposit for
90 consecutive days without the occurrence of blockage of payment on any such
series of Subordinated Debt Securities as described below) ("Securities
Payments"). Until the Senior Debt is paid in full, any Securities Payment to
which the holders of Subordinated Debt Securities or the Trustee for their
benefit would be entitled, will be paid or delivered by the Company or any
receiver, trustee in bankruptcy, liquidating trustee, agent or other person
making such payment or distribution, directly to the holders of Senior Debt or
their representative or representatives or the trustee or trustees under any
indenture pursuant to which any instruments evidencing any Senior Debt may have
been issued. (Subordinated Indenture Sections 1301 and 1302) The Company may not
make any payments on the account of the Subordinated Debt Securities, or on
account of the purchase or redemption or other acquisition of the Subordinated
Debt Securities, if there has occurred and is continuing a default in the
payment of the principal of (or premium, if any) or interest on any Senior Debt
(a "Senior Payment Default"). (Subordinated Indenture Section 1303)
In the event that the Trustee receives any Securities Payment prohibited by
the subordination provisions of the Subordinated Indenture, such payment will be
held by the Trustee in trust for the benefit of, and will immediately be paid
over upon written request to, the holders of Senior Debt or their representative
or representatives, or the trustee or trustees under any applicable indenture
for application to the payment of Senior Debt. (Subordinated Indenture Section
1304) Such subordination will not prevent the occurrence of any event of default
in respect of the Subordinated Debt Securities.
By reason of such subordination, in the event of the insolvency of the
Company, holders of Senior Debt may receive more, ratably, and holders of the
Subordinated Debt Securities having a claim pursuant to such securities may
receive less, ratably, than the other creditors of the Company. There may also
be interruption of scheduled interest and principal payments resulting from
events of default on Senior Debt.
CERTAIN DEFINITIONS IN THE SUBORDINATED INDENTURE
Set forth below are certain defined terms use in the Subordinated Indenture.
Reference is made to the Subordinated Indenture for a full disclosure of all
such terms, as well as any other capitalized terms used herein for which no
definition is provided. (Subordinated Indenture Section 101)
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"JUNIOR SUBORDINATED DEBT" means the Indebtedness of the Company under its
Subordinated Extendible Notes and Subordinated Fixed-Term Notes issued pursuant
to the indenture dated as of July 1, 1994, as amended and restated as of April
28, 1995, by and between the Company and Norwest Bank Minnesota, National
Association, as Trustee.
"ORIGINAL ISSUE DISCOUNT SUBORDINATED DEBT SECURITY" means any Subordinated
Debt Security which provides for an amount less than the principal amount
thereof to be due and payable upon a declaration of acceleration of the Maturity
thereof pursuant to the Subordinated Indenture.
"SECURITIZATION TRANSACTION" means a public or private transfer of
installment sales contracts, loans, leases or other receivables by which the
Company directly or indirectly securitizes a pool of specified installment sales
contracts, loans, leases or other receivables.
"SENIOR DEBT" means all Indebtedness (as defined in the Subordinated
Indenture) of the Company, except Indebtedness created or evidenced by an
instrument which expressly provides that such Indebtedness is subordinated in
right of payment to any other Indebtedness of the Company. Without limiting the
generality of the foregoing, Senior Debt shall include: (i) the guarantee by the
Company of any Indebtedness of any other Person (including, without limitation,
subordinated Indebtedness of another Person), unless such guarantee is expressly
subordinated to any other Indebtedness of the Company; (ii) Indebtedness of the
Company under its Senior Term Notes due 2000 issued pursuant to the indenture
dated as of April 28, 1995, by and between the Company and Norwest Bank
Minnesota, National Association, as Trustee; and (iii) Indebtedness of the
Company under that certain Amended and Restated Credit Agreement dated as of
August 4, 1995, by and among the Company, First Bank National Association, as
Administrative Bank, and certain other banks party thereto. Without limiting the
generality of the foregoing, Senior Debt shall not include Indebtedness of the
Company under the Subordinated Debt Securities or the Junior Subordinated Debt.
Notwithstanding anything to the contrary in the foregoing, Senior Debt shall not
include (x) any Indebtedness of the Company to any of its Subsidiaries or other
Affiliates and (y) any Indebtedness incurred for the purchase of goods or
materials or for services obtained in the ordinary course of business (other
than with the proceeds of revolving credit borrowings permitted hereby).
"WAREHOUSE FACILITY" means a funding arrangement with one or more financial
institutions or other lenders or purchasers, either directly or through a
special purpose vehicle, exclusively to finance for a period not to exceed six
months the purchase of consumer installment sales contracts, loans, leases or
other receivables pending Securitization Transactions, including, without
limitation, so-called "pool bank" arrangements and repurchase agreements.
DESCRIPTION OF PREFERRED STOCK
The following description of the terms of the Preferred Stock sets forth
certain general terms and provisions of the Preferred Stock to which any
Prospectus Supplement may relate. Certain other terms of any series of the
Preferred Stock offered by any Prospectus Supplement will be described in the
Prospectus Supplement relating to such series of the Preferred Stock. If so
indicated in the Prospectus Supplement, the terms of any such series may differ
from the terms set forth below. The description of certain provisions of the
Preferred Stock set forth below and in any Prospectus Supplement does not
purport to be complete and is subject to and qualified in its entirety by
reference to the Certificate of Designation relating to each series of the
Preferred Stock to be filed as an exhibit to a document incorporated by
reference in this Prospectus.
GENERAL
Pursuant to the Company's articles of incorporation, as amended, the Board
of Directors of the Company has the authority, without further shareholder
action, to issue from time to time shares of preferred stock, $.01 par value
(the "Preferred Stock"), in one or more series and with such terms and at such
times and for such consideration as the Board of Directors of the Company may
determine. The authority of the Board of Directors of the Company includes the
determination or fixing of the following with respect to shares of any series
thereof: (i) the number of shares and designation or title thereof;
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(ii) rights as to dividends; (iii) whether and upon what terms the shares are to
be redeemable; (iv) the rights of the holders upon the dissolution, or upon the
distribution of assets, of the Company; (v) whether and upon what terms the
shares shall have a purchase, retirement or sinking fund; (vi) whether and upon
what terms the shares are to be convertible; (vii) the voting rights, if any,
which shall apply; and (viii) any other preferences and relative, participating,
optional or other special rights, and qualifications, limitations or
restrictions of such series. The Preferred Stock will, when issued, be fully
paid and nonassessable. The Preferred Stock will have no preemptive rights to
subscribe for any additional securities which may be issued by the Company. The
transfer agent and registrar for the Preferred Stock will be specified in the
applicable Prospectus Supplement.
The Preferred Stock shall have the dividend, liquidation, redemption, voting
and conversion rights set forth below unless otherwise provided in the
Prospectus Supplement relating to a particular series of the Preferred Stock.
Reference is made to the Prospectus Supplement relating to the particular series
of the Preferred Stock offered thereby for specific terms, including (i) the
title, stated value and liquidation preference of such Preferred Stock and the
number of shares offered; (ii) the initial public offering price at which such
Preferred Stock will be issued; (iii) the dividend rate or rates (or method of
calculation), the dividend periods, the dates on which dividends shall be
payable and whether such dividends shall be cumulative or noncumulative and, if
cumulative, the dates from which dividends shall commence to cumulate; (iv) any
redemption or sinking fund provisions; (v) any conversion provisions; and (vi)
any additional dividend, liquidation, redemption, sinking fund and other rights,
preferences, privileges, limitations and restrictions.
As described under "Description of Depositary Shares" the Company may, at
its option, elect to offer depositary shares ("Depositary Shares") evidenced by
depositary receipts ("Depositary Receipts"), each representing a fractional
interest (to be specified in the Prospectus Supplement relating to the
particular series of the Preferred Stock) in a share of the particular series of
the Preferred Stock issued and deposited with a Depositary (as defined below).
DIVIDENDS
Subject to the preferential rights as to dividends of holders of any other
capital stock of the Company ranking prior to any series of the Preferred Stock,
the holders of the Preferred Stock of each series will be entitled to receive,
when, as and if declared by the Board of Directors of the Company or a duly
authorized committee thereof, out of funds legally available therefor, cash
dividends at such rates and on such dates as will be set forth in the Prospectus
Supplement relating to such series. Such rates may be fixed or variable or both.
If variable, the formula used for determining the dividend rate for each
dividend period will be set forth in the Prospectus Supplement. Dividends will
be payable to the holders of record as they appear on the stock books of the
Company on such record dates as will be fixed by the Board of Directors of the
Company or a duly authorized committee thereof.
Dividends on any series of the Preferred Stock may be cumulative or
noncumulative, as provided in the applicable Prospectus Supplement. If the Board
of Directors of the Company fails to declare a dividend payable on a dividend
payment date on any series of the Preferred Stock for which dividends are
noncumulative ("Noncumulative Preferred Stock"), then the holders of such series
of the Preferred Stock will have no right to receive a dividend in respect of
the dividend period ending on such dividend payment date, and the Company will
have no obligation to pay the dividend accrued for such period, whether or not
dividends on such series are declared payable on any future dividend payment
dates.
No full dividends will be declared or paid or set apart for payment on any
stock of the Company ranking, as to dividends, on a parity with or junior to the
Preferred Stock for any period unless full dividends on the Preferred Stock of
each series (including any accumulated dividends) have been or contemporaneously
are declared and paid or declared and a sum sufficient for the payment thereof
set apart for such payment. When dividends are not paid in full upon any series
of Preferred Stock and any other Preferred Stock ranking on a parity as to
dividends with the Preferred Stock, all dividends declared or made upon
Preferred Stock of each series and any other Preferred Stock ranking on a parity
as to dividends with the Preferred Stock shall be declared pro rata so that the
amount of dividends declared per
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share on Preferred Stock of each series and such other Preferred Stock shall in
all cases bear to each other the same ratio that accrued dividends per share
(which, in the case of Noncumulative Preferred Stock, shall not include any
accumulation in respect of unpaid dividends for prior dividend periods) on
shares of each series of the Preferred Stock and such other Preferred Stock bear
to each other. Except as provided in the preceding sentence, no dividend (other
than dividends or distributions paid in shares of, or options, warrants or
rights to subscribe for or purchase shares of, Common Stock or any other stock
of the Company ranking junior to the Preferred Stock as to dividends and upon
liquidation) shall be declared or paid or set aside for payment or other
distribution declared or made upon the Common Stock or any other stock of the
Company ranking junior to or on a parity with the Preferred Stock as to
dividends or upon liquidation, dissolution or winding up of the Company, nor may
any Common Stock or any other stock of the Company ranking junior to or on a
parity with the Preferred Stock as to dividends or distributions of assets upon
liquidation, dissolution or winding up of the Company be redeemed, purchased or
otherwise acquired for any consideration (or any moneys be paid to or made
available for a sinking fund for the redemption of any shares of any such stock)
by the Company (except by conversion into or exchange for stock of the Company
ranking junior to the Preferred Stock as to dividends and distributions of
assets upon liquidation, dissolution or winding up of the Company) unless, in
each case, the full dividends on each series of the Preferred Stock shall have
been paid or declared and set aside for payment. No interest, or sum of money in
lieu of interest, shall be payable in respect of any dividend payment or
payments on any series of the Preferred Stock which may be in arrears.
REDEMPTION AND REPURCHASE
A series of the Preferred Stock may be redeemable, in whole or in part, at
the option of the Company, may be subject to mandatory redemption pursuant to a
sinking fund or otherwise, or may be subject to repurchase by the Company at the
option of the holders, in each case upon terms, at the times and at the prices
set forth in the Prospectus Supplement relating to such series. Preferred Stock
redeemed by the Company will be restored to the status of authorized but
unissued Preferred Stock.
The Prospectus Supplement relating to a series of the Preferred Stock which
is subject to mandatory redemption will specify the number of shares of such
series of the Preferred Stock which shall be redeemed by the Company in each
year commencing after a date to be specified, at a redemption price per share to
be specified, together with an amount equal to all accrued and unpaid dividends
thereon to the date of redemption. The redemption price may be payable in cash
or other property, as specified in the Prospectus Supplement relating to such
series of the Preferred Stock. If the redemption price is payable only from the
net proceeds of the issuance of capital stock of the Company, the terms of such
series may provide that, if no such capital stock shall have been issued or to
the extent the net proceeds from any issuance are insufficient to pay in full
the aggregate redemption price then due, the applicable shares of such series of
the Preferred Stock shall automatically and mandatorily be converted into shares
of the applicable capital stock of the Company pursuant to conversion provisions
specified in the Prospectus Supplement relating to such series of the Preferred
Stock.
If fewer than all of the outstanding shares of any series of the Preferred
Stock are to be redeemed, the number of shares to be redeemed will be determined
by the Board of Directors of the Company and such shares shall be redeemed pro
rata from the holders of record of such shares in proportion to the number of
such shares held by such holders (with adjustments to avoid redemption of
fractional shares).
Notwithstanding the foregoing, if any dividends, including any accumulation,
on Preferred Stock of any series are in arrears, no Preferred Stock of such
series shall be redeemed unless all outstanding Preferred Stock of such series
are simultaneously redeemed, and the Company shall not purchase or otherwise
acquire any Preferred Stock of such series; provided, however, that the
foregoing shall not prevent the purchase or acquisition of Preferred Stock of
such series pursuant to a purchase or exchange offer provided such offer is made
on the same terms to all holders of such series of the Preferred Stock.
Notice of redemption shall be given by mailing the same to each record
holder of the shares to be redeemed, not less than 30 nor more than 60 days
prior to the date fixed for redemption thereof, to the respective addresses of
such holders as the same shall appear on the stock books of the Company. Each
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such notice shall state (i) the redemption date; (ii) the number of shares and
series of the Preferred Stock to be redeemed; (iii) the redemption price; (iv)
the place or places where certificates for such Preferred Stock are to be
surrendered for payment of the redemption price; (v) that dividends on the
shares to be redeemed will cease to accrue on such redemption date; and (vi) the
date upon which the holder's conversion rights as to such shares, if any, shall
terminate. If fewer than all shares of any series of the Preferred Stock held by
any holder are to be redeemed, the notice mailed to such holder shall also
specify the number of shares to be redeemed from such holder.
If notice of redemption has been given, from and after the redemption date
for the shares of the series of the Preferred Stock called for redemption
(unless default shall be made by the Company in providing money for the payment
of the redemption price of the shares so called for redemption), dividends on
the Preferred Stock so called for redemption shall cease to accrue and such
shares shall no longer be deemed to be outstanding, and all rights of the
holders thereof as shareholders of the Company (except the right to receive the
redemption price) shall cease. Upon surrender in accordance with such notice of
the certificates representing any shares so redeemed (properly endorsed or
assigned for transfer, if the Board of Directors of the Company shall so require
and the notice shall so state), the redemption price set forth above shall be
paid out of funds provided by the Company. If fewer than all of the shares
represented by any such certificate are redeemed, a new certificate shall be
issued representing the unredeemed shares without cost to the holder thereof.
CONVERSION OR EXCHANGE
The Prospectus Supplement relating to a series of the Preferred Stock which
is convertible or exchangeable will state the terms on which shares of that
series are convertible into or exchangeable for shares of Common Stock, another
series of Preferred Stock or Debt Securities.
RIGHTS UPON LIQUIDATION
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, the holders of shares of each series of the Preferred
Stock and any other Preferred Stock ranking on a parity with such series of
Preferred Stock as to the distribution of assets upon liquidation, dissolution
or winding up of the Company will be entitled to receive out of the assets of
the Company available for distribution to shareholders, before any distribution
of assets is made to holders of the Common Stock or any other class or series of
stock of the Company ranking junior to such series of the Preferred Stock as to
such distribution, liquidation distributions in the amount set forth in the
Prospectus Supplement relating to such series of the Preferred Stock plus an
amount equal to the sum of all accrued and unpaid dividends (whether or not
earned or declared) for the then current dividend period and, if such series of
the Preferred Stock is cumulative, for all dividend periods prior thereto. Such
right shall, however, be subject to the preferential rights, if any, of holders
of any capital stock of the Company ranking prior to such series of the
Preferred Stock as to the distribution of assets upon liquidation, dissolution
or winding up of the Company. Unless otherwise provided in the applicable
Prospectus Supplement, neither the sale of all or substantially all of the
property and assets of the Company, nor the merger or consolidation of the
Company into or with any other corporation nor the merger or consolidation of
any other corporation into or with the Company, shall be deemed to be a
dissolution, liquidation or winding up. If, upon any voluntary or involuntary
liquidation, dissolution or winding up of the Company, the assets of the Company
available for distribution to the holders of the Preferred Stock of any series
and any other shares of stock of the Company ranking as to any such distribution
on a parity with such series of the Preferred Stock shall be insufficient to pay
in full all amounts to which such holders are entitled, no such distribution
shall be made on account of any shares of any other series of the Preferred
Stock or other securities of the Company ranking as to any such distribution on
a parity with the Preferred Stock of such series upon such dissolution,
liquidation or winding up unless proportionate distributive amounts shall be
paid on account of the Preferred Stock of such series, ratably, in proportion to
the full distributive amounts for which holders of all such parity shares are
respectively entitled upon such dissolution, liquidation or winding up. After
payment of the full amount of the liquidation distribution to which they are
entitled, the holders of such series of the Preferred Stock will have no right
or claim to any of the remaining assets of the Company.
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VOTING RIGHTS
Except as indicated below or in the Prospectus Supplement relating to a
particular series of the Preferred Stock, or except as expressly required by the
Minnesota Business Corporation Act, the holders of the Preferred Stock will not
be entitled to vote. In the event the Company issues shares of a series of the
Preferred Stock, unless otherwise indicated in the Prospectus Supplement
relating to such series, each share will be entitled to one vote on matters on
which holders of such series are entitled to vote. However, as more fully
described under "Description of Depositary Shares," if the Company elects to
provide for the issuance of Depositary Shares representing fractional interests
in a share of a series of Preferred Stock, the holders of each such Depositary
Share will, in effect, be entitled through the Depositary to such fraction of a
vote, rather than a full vote. In the case of any series of Preferred Stock
having one vote per share on matters on which holders of such series are
entitled to vote, the voting power of such series, on matters on which holders
of such series and holders of any other series of Preferred Stock are entitled
to vote as a single class, will depend on the number of shares in such series,
not the aggregate stated value, liquidation preference or initial offering price
of the shares of such series of the Preferred Stock.
A series of the Preferred Stock may also have other voting rights -- for
example, upon the occurrence of certain events or relative to the taking of
certain actions. Any such special voting rights will be set forth in the
Prospectus Supplement relating to such series of Preferred Stock.
DESCRIPTION OF DEPOSITARY SHARES
The description set forth below and in any Prospectus Supplement of certain
provisions of the Deposit Agreement (as defined below) and of the Depositary
Shares and Depositary Receipts does not purport to be complete and is subject to
and qualified in its entirety by reference to the Deposit Agreement and
Depositary Receipts relating to each series of the Preferred Stock which will be
filed or incorporated by reference as exhibits to the Registration Statement to
which this Prospectus pertains.
GENERAL
The Company may, at its option, elect to offer fractional interests in
Preferred Stock, rather than full Preferred Stock. In the event such option is
exercised, the Company will provide for the issuance by a Depositary to the
public of Depositary Receipts evidencing Depositary Shares, each of which will
represent a fractional interest (to be set forth in the Prospectus Supplement
relating to a particular series of the Preferred Stock) in a share of a
particular series of the Preferred Stock as described below.
The shares of any series of the Preferred Stock underlying the Depositary
Shares will be deposited under a separate deposit agreement (the "Deposit
Agreement") between the Company and a bank or trust company selected by the
Company having its principal office in the United States and having a combined
capital and surplus of at least $50,000,000 (the "Depositary"). The Prospectus
Supplement relating to a series of Depositary Shares will set forth the name and
address of the Depositary. Subject to the terms of the Deposit Agreement, each
owner of a Depositary Share will be entitled, in proportion to the applicable
fractional interest in a Preferred Share underlying such Depositary Share, to
all the rights and preferences of the Preferred Stock underlying such Depositary
Share (including dividend, voting, redemption, conversion and liquidation
rights).
Pending the preparation of definitive Depositary Receipts, the Depositary
may, upon the written order of the Company, issue temporary Depositary Receipts
substantially identical to (and entitling the holders thereof to all the rights
pertaining to) the definitive Depositary Receipts but not in definitive form.
Definitive Depositary Receipts will be prepared thereafter without unreasonable
delay, and temporary Depositary Receipts will be exchangeable for definitive
Depositary Receipts at the Company's expense.
WITHDRAWAL OF PREFERRED STOCK
Upon surrender of the Depositary Receipts at the principal corporate trust
office of the Depositary (unless the related Depositary Shares have previously
been called for redemption), the owner of the Depositary Shares evidenced
thereby is entitled to delivery at such office, to or upon his order, of the
number of Preferred Stock and any money or other property represented by such
Depositary Shares.
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Partial Preferred Stock will not be issued. If the Depositary Receipts delivered
by the holder evidence a number of Depositary Shares in excess of the number of
Depositary Shares representing the number of whole Preferred Stock to be
withdrawn, the Depositary will deliver to such holder at the same time a new
Depositary Receipt evidencing such excess number of Depositary Shares. Holders
of Preferred Stock thus withdrawn will not thereafter be entitled to deposit
such shares under the Deposit Agreement or to receive Depositary Shares
therefor. No assurance can be given that a market will exist for the withdrawn
Preferred Stock.
DIVIDENDS AND OTHER DISTRIBUTIONS
The Depositary will distribute all cash dividends or other cash
distributions received in respect of the Preferred Stock. less any taxes
required to be withheld therefrom, to the record holders of Depositary Shares
relating to such Preferred Stock in proportion to the numbers of such Depositary
Shares owned by such holders on the relevant record date. The Depositary shall
distribute only such amount, however, as can be distributed without attributing
to any holder of Depositary Shares a fraction of one cent, and any balance not
so distributed shall be added to and treated as part of the next sum received by
the Depositary for distribution to record holders of Depositary Shares.
In the event of a distribution other than in cash, the Depositary will
distribute property received by it to the record holders of Depositary Shares
entitled thereto, unless the Depositary determines that it is not feasible to
make such distribution, in which case the Depositary may, with the approval of
the Company, sell such property and distribute the net proceeds from such sale
to such holders.
The Deposit Agreement will also contain provisions relating to the manner in
which any subscription or similar rights offered by the Company to holders of
the Preferred Stock shall be made available to holders of Depositary Shares.
REDEMPTION AND REPURCHASE OF DEPOSITED PREFERRED STOCK
If a series of the Preferred Stock underlying the Depositary Shares is
subject to redemption at the option of the Company, the Depositary Shares will
be redeemed from the proceeds received by the Depositary resulting from the
redemption, in whole or in part, of such series of the Preferred Stock held by
the Depositary. The Depositary shall mail notice of redemption not less than 30
and not more than 60 days prior to the date fixed for redemption to the record
holders of the Depositary Shares to be so redeemed at their respective addresses
appearing in the Depositary's books. The redemption price per Depositary Share
will be equal to the applicable fraction of the redemption price per share
payable with respect to such series of the Preferred Stock. Whenever the Company
redeems Preferred Stock held by the Depositary, the Depositary will redeem as of
the same redemption date the number of Depositary Shares relating to the
Preferred Stock so redeemed. If less than all the Depositary Shares are to be
redeemed, the Depositary Shares to be redeemed will be selected by lot or pro
rata as may be determined by the Company.
After the date fixed for redemption, the Depositary Shares so called for
redemption will no longer be deemed to be outstanding and all rights of the
holders of the Depositary Shares will cease, except the right to receive the
moneys payable upon such redemption and any money or other property to which the
holders of such Depositary Shares were entitled upon such redemption upon
surrender to the Depositary of the Depositary Receipts evidencing such
Depositary Shares.
Depositary Shares, as such, are not subject to repurchase by the Company at
the option of the holders. Nevertheless, if the Preferred Stock represented by
Depositary Shares are subject to repurchase at the option of the holders, the
related Depositary Receipts may be surrendered by the holders thereof to the
Depositary with written instructions to the Depositary to instruct the Company
to repurchase the Preferred Stock represented by the Depositary Shares evidenced
by such Depositary Receipts at the applicable repurchase price specified in the
related Prospectus Supplement. The Company, upon receipt of such instructions
and subject to the Company having funds legally available therefor, will
repurchase the requisite whole number of such Preferred Stock from the
Depositary, who in turn will repurchase such
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Depositary Receipts. Notwithstanding the foregoing, holders shall only be
entitled to request the repurchase of Depositary Shares representing one or more
whole shares of the related Preferred Stock. The repurchase price per Depositary
Share will be equal to the repurchase price and any other amounts per share
payable with respect to the Preferred Stock multiplied by the fraction of a
Preferred Share represented by one Depositary Share. If the Depositary Shares
evidenced by a Depositary Receipt are to be repurchased in part only, one or
more new Depositary Receipts will be issued for any Depositary Shares not to be
repurchased.
VOTING OF DEPOSITED PREFERRED STOCK
Upon receipt of notice of any meeting at which the holders of the Preferred
Stock are entitled to vote, the Depositary will mail the information contained
in such notice of meeting to the record holders of the Depositary Shares
relating to such Preferred Stock. Each record holder of such Depositary Shares
on the record date (which will be the same date as the record date for the
Preferred Stock) will be entitled to instruct the Depositary as to the exercise
of the voting rights pertaining to the number of shares of Preferred Stock
underlying such holder's Depositary Shares. The Depositary will endeavor,
insofar as practicable, to vote the number of Preferred Stock underlying such
Depositary Shares in accordance with such instructions, and the Company will
agree to take all action which may be deemed necessary by the Depositary in
order to enable the Depositary to do so. The Depositary will abstain from voting
Preferred Stock to the extent it does not receive specific instructions from the
holders of Depositary Shares relating to such Preferred Stock.
CONVERSION AND EXCHANGE OF DEPOSITED PREFERRED STOCK
If the Preferred Stock represented by Depositary Shares are exchangeable at
the option of the Company for other Securities, then, whenever the Company
exercises its option to exchange all or a portion of such Preferred Stock held
by the Depositary, the Depositary will exchange as of the same exchange date a
number of such Depositary Shares representing the Preferred Stock so exchanged,
provided the Company shall have issued and deposited with the Depositary the
Securities for which such Preferred Stock are to be exchanged. The exchange rate
per Depositary Share shall be equal to the exchange rate per Preferred Share
multiplied by the fraction of a Preferred Share represented by one Depositary
Share. If less than all of the Depositary Shares are to be exchanged, the
Depositary Shares to be exchanged will be selected by the Depositary by lot or
pro rata or other equitable method, in each case as may be determined by the
Company. If the Depositary Shares evidenced by a Depositary Receipt are to be
exchanged in part only, a new Depositary Receipt or Receipts will be issued for
any Depositary Shares not to be exchanged.
Depositary Shares, as such, are not convertible or exchangeable at the
option of the holders into other Securities or property. Nevertheless, if the
Preferred Stock represented by Depositary Shares are convertible into or
exchangeable for other Securities at the option of the holders, the related
Depositary Receipts may be surrendered by holders thereof to the Depositary with
written instructions to the Depositary to instruct the Company to cause
conversion or exchange, as the case may be, of the Preferred Stock represented
by the Depositary Shares evidenced by such Depositary Receipts into a whole
number of shares of Common Stock or Preferred Stock, a whole number of Common
Stock Warrants or Debt Securities in authorized denominations, as specified in
the related Prospectus Supplement. The Company, upon receipt of such
instructions, will cause the conversion or exchange, as the case may be, and
delivery to the holders such number of whole shares of Common Stock or Preferred
Stock, whole number of Common Stock Warrants, or principal amount of Debt
Securities in authorized denominations (and cash in lieu of any fractional
Security). The exchange or conversion rate per Depositary Share shall be equal
to the exchange or conversion rate per Preferred Share multiplied by the
fraction of a Preferred Share represented by one Depositary Share. If the
Depositary Shares evidenced by a Depositary Receipt are to be converted or
exchanged in part only, a new Depositary Receipt or Receipts will be issued for
any Depositary Shares not to be converted or exchanged.
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TAXATION
Owners of Depositary Shares will be treated for federal income tax purposes
as if they were owners of the Preferred Stock represented by such Depositary
Shares and, accordingly, will be entitled to take into account for federal
income tax purposes income and deductions to which they would be entitled if
they were holders of such Preferred Stock. In addition, (i) no gain or loss will
be recognized for federal income tax purposes upon the withdrawal of Preferred
Stock in exchange for Depositary Shares as provided in the Deposit Agreement,
(ii) the tax basis of each Preferred Share to an exchanging owner of Depositary
Shares will, upon such exchange, be the same as the aggregate tax basis of the
Depositary Shares exchanged therefor, and (iii) the holding period for the
Preferred Stock in the hands of an exchanging owner of Depositary Shares who
held such Depositary Shares as a capital asset at the time of the exchange
thereof for Preferred Stock will include the period during which such person
owned such Depositary Shares.
AMENDMENT AND TERMINATION OF THE DEPOSITARY AGREEMENT
The form of Depositary Receipt evidencing the Depositary Shares and any
provision of the Deposit Agreement may at any time be amended by agreement
between the Company and the Depositary. However, any amendment which materially
and adversely alters the rights of the existing holders of Depositary Shares
will not be effective unless such amendment has been approved by the record
holders of at least a majority of the Depositary Shares then outstanding. A
Deposit Agreement may be terminated by the Company or the Depositary only if (i)
all outstanding Depositary Shares relating thereto have been redeemed or (ii)
there has been a final distribution in respect of the Preferred Stock of the
relevant series in connection with any liquidation, dissolution or winding up of
the Company and such distribution has been distributed to the holders of the
related Depositary Shares.
CHARGES OF DEPOSITARY
The Company will pay all transfer and other taxes and governmental charges
arising solely from the existence of the depositary arrangements. The Company
will pay charges of the Depositary in connection with the initial deposit of the
Preferred Stock and any redemption of the Preferred Stock. Holders of Depositary
Shares will pay other transfer and other taxes and governmental charges and such
other charges as are expressly provided in the Deposit Agreement to be for their
accounts.
MISCELLANEOUS
The Depositary will forward to the holders of Depositary Shares all reports
and communications from the Company which are delivered to the Depositary and
which the Company is required to furnish to the holders of the Preferred Stock.
Neither the Depositary nor the Company will be liable if it is prevented or
delayed by law or any circumstance beyond its control in performing its
obligations under the Deposit Agreement. The obligations of the Company and the
Depositary under the Deposit Agreement will be limited to performance in good
faith of their duties thereunder and they will not be obligated to prosecute or
defend any legal proceeding in respect of any Depositary Shares or Preferred
Stock unless satisfactory indemnity is furnished. They may rely upon written
advice of counsel or accountants, or information provided by persons presenting
Preferred Stock for deposit, holders of Depositary Shares or other persons
believed to be competent and on documents believed to be genuine.
RESIGNATION AND REMOVAL OF DEPOSITARY
The Depositary may resign at any time by delivering to the Company notice of
its election to do so, and the Company may at any time remove the Depositary,
any such resignation or removal to take effect upon the appointment of a
successor Depositary and its acceptance of such appointment. Such successor
Depositary must be appointed within 60 days after delivery of the notice of
resignation or removal and must be a bank or trust company having its principal
office in the United States and having a combined capital and surplus of at
least $50,000,000.
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DESCRIPTION OF COMMON STOCK
GENERAL
As of September 30, 1996, 33,003,889 shares of Common Stock were
outstanding. An aggregate of 65,846,111 undesignated shares, $.01 par value,
remain authorized and unissued. Such shares may be issued as Common Stock or may
be issued as such other class (including as Preferred Stock, as described above)
or series and with such other rights and preferences as the Board of Directors
may determine. As of September 30, 1996, an aggregate of 9,369,665 of such
authorized, unissued shares have been reserved for issuance as Common Stock upon
the exercise of stock options, warrants or other rights granted, including
shares reserved for issuance as Common Stock upon conversion of the 8% Preferred
Stock, all of which was converted or redeemed on or before December 2, 1996.
Subject to any prior rights of any Preferred Stock then outstanding, holders of
the Common Stock are entitled to receive such dividends as are declared by the
Board of Directors of the Company out of funds legally available therefor.
Subject to the rights, if any, of any Preferred Stock then outstanding, all
voting rights are vested in the holders of Common Stock, each share being
entitled to one vote. Subject to any prior rights of any such Preferred Stock,
in the event of liquidation, dissolution or winding up of the Company, holders
of shares of Common Stock are entitled to receive pro rata any assets
distributable to stockholders in respect of shares held by them. Holders of
shares of Common Stock do not have any preemptive right to subscribe for any
additional securities which may be issued by the Company. The outstanding shares
of Common Stock are fully paid and nonassessable. The transfer agent and
registrar for the Common Stock is Norwest Bank Minnesota, National Association,
South St. Paul, Minnesota.
SHAREHOLDER RIGHTS PLAN
Each share of Common Stock has one Preferred Stock Purchase Right ("Right")
attached. Each whole Right entitles the holder to buy one one-hundredth of a
share of the Company's Class A Preferred Stock at an initial per share price of
$90 (subject to adjustment). The Rights will only become exercisable ten days
after a person or group becomes an "Acquiring Person" by acquiring beneficial
ownership of 15% or more of the outstanding Common Stock or announcing a tender
or exchange offer for 15% or more of the Common Stock, subject to certain
exceptions. If the Rights become exercisable, a holder will generally be
entitled to acquire Common Stock having a value equal to twice the Right's
exercise price. If the Company is acquired in a merger or other business
combination transaction, or 50% or more of its assets or earning power is sold,
mortgaged or transferred, each Right will entitle its holder to purchase, at the
Right's exercise price, that number of shares of the acquiring company's common
stock having a then current market value of twice the Right's exercise price.
Until a Right is exercised, the holder thereof, as such, will have no rights as
a shareholder of the Company, including, without limitation, the right to vote
or to receive dividends.
At any time after the Rights become exercisable, the Board of Directors may
exchange the Rights, in whole or in part, at an exchange ratio of one share of
Common Stock per Right, subject to adjustment. In addition, after the
acquisition by an "Acquiring Person" of 15% or more of the outstanding Common
Stock but prior to the tenth day following the acquisition, the Board of
Directors will be entitled to redeem the Rights, upon approval of a majority of
the "Continuing Directors" of the Company, at $.01 per Right. The Rights will
expire at the close of business on October 28, 2006 if not previously redeemed
or exercised.
The Rights have certain anti-takover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire the Company
unless the offer is conditional on a substantial number of Rights being
acquired. The Rights, however, should not affect any prospective offeror willing
to make an offer at an equitable price and which is otherwise in the best
interests of the Company and its shareholders, as determined by the Board of
Directors. The Rights should not interfere with any merger or other business
combination approved by the Board of Directors since the Board of Directors may,
at its option, redeem the Rights at any time prior to the tenth day following an
"Acquiring Person's" acquisition of 15% or more of the outstanding Common Stock.
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The foregoing summary of certain terms of the Rights is qualified in its
entirety by reference to the Rights Agreement, a copy of which is incorporated
by reference as an exhibit to the Registration Statement.
MINNESOTA ANTI-TAKEOVER LAWS
The Company is governed by the provisions of Sections 302A.671 and 302A.673
of the Minnesota Business Corporation Act, which provisions may operate to
discourage a negotiated acquisition or unsolicited takeover of the Company and
thereby deprive the then current shareholders of the ability to sell their
shares at a premium over the market price. In general, Section 302A.671 provides
that the shares of a corporation acquired in a "control share acquisition" have
no voting rights unless voting rights are approved in a prescribed manner. A
"control share acquisition" is an acquisition, directly or indirectly, of
beneficial ownership of shares that would, when added to all other shares
beneficially owned by the acquiring person, entitle the acquiring person to have
voting power of 20% or more in the election of directors. In general, Section
302A.673 prohibits a public Minnesota corporation from engaging in a "business
combination" with an "interested shareholder" for a period of four years after
the date of the transaction in which the person became an interested
shareholder, unless the business combination is approved in a prescribed manner.
"Business combination" includes mergers, asset sales and other transactions
resulting in a financial benefit to the interested shareholder. An "interested
shareholder" is a person who is the beneficial owner, directly or indirectly, of
10% or more of the corporation's voting stock or who is an affiliate or
associate of the corporation and at any time within four years prior to the date
in question was the beneficial owner, directly or indirectly, of 10% or more of
the corporation's voting stock.
In the event of certain tender offers for stock of the Company, Section
302A.675 of the Minnesota Business Corporation Act precludes the tender offeror
from acquiring additional shares of stock (including acquisitions pursuant to
mergers, consolidations or statutory share exchanges) within two years following
the completion of such an offer unless the selling shareholders are given the
opportunity to sell the shares on terms that are substantially equivalent to
those contained in the earlier tender offer. The section does not apply if a
committee of the Board consisting of all of its disinterested directors
(excluding present and former officers of the corporation) approves the
subsequent acquisition before shares are acquired pursuant to the earlier tender
offer.
DESCRIPTION OF SECURITIES WARRANTS
The Company may issue Securities Warrants for the purchase of Debt
Securities, Preferred Stock or Common Shares. Securities Warrants may be issued
independently or together with other Securities offered by any Prospectus
Supplement and may be attached to or separate from such other Securities. Each
series of Securities Warrants will be issued under a separate warrant agreement
(a "Securities Warrant Agreement") to be entered into between the Company and a
bank or trust company, as Securities Warrant Agent, all as set forth in the
Prospectus Supplement relating to the particular issue of offered Securities
Warrants. The Securities Warrant Agent will act solely as an agent of the
Company in connection with the Securities Warrant Certificates and will not
assume any obligation or relationship of agency or trust for or with any holders
of Securities Warrant Certificates or beneficial owners of Securities Warrants.
Copies of the forms of Securities Warrant Agreements, including the forms of
Securities Warrant Certificates representing the Securities Warrants, will be
filed or incorporated by reference as exhibits to the Registration Statement to
which this Prospectus pertains. The following summaries of certain provisions of
the forms of Securities Warrant Agreements and Securities Warrant Certificates
do not purport to be complete and are subject to, and are qualified in their
entirety by reference to, all the provisions of the Securities Warrant
Agreements and the Securities Warrant Certificates.
GENERAL
If Securities Warrants are offered, the applicable Prospectus Supplement
will describe the terms of such Securities Warrants, including, in the case of
Securities Warrants for the purchase of Debt Securities, the following where
applicable: (i) the offering price; (ii) the Currencies in which such Securities
Warrants are being offered; (iii) the designation, aggregate principal amount,
Currencies, denominations and terms
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of the series of Debt Securities purchasable upon exercise of such Securities
Warrants; (iv) the designation and terms of any series of Securities with which
such Securities Warrants are being offered and the number of such Securities
Warrants being offered with each such Security; (v) the date on and after which
such Securities Warrants and the related series of Securities will be
transferable separately; (vi) the principal amount of the series of Debt
Securities purchasable upon exercise of each such Securities Warrant and the
price at which and Currencies in which such principal amount of Debt Securities
of such series may be purchased upon such exercise; (vii) the date on which the
right to exercise such Securities Warrants shall commence and the date (the
"Expiration Date") on which such right shall expire; (viii) whether the
Securities Warrants will be issued in registered or bearer form; (ix) a
discussion of any material United States federal income tax consequences; and
(x) any other terms of such Securities Warrants.
In the case of Securities Warrants for the purchase of Preferred Stock or
Common Stock, the applicable Prospectus Supplement will describe the terms of
such Securities Warrants, including the following where applicable: (i) the
offering price; (ii) the aggregate number of shares purchasable upon exercise of
such Securities Warrants and, in the case of Securities Warrants for Preferred
Stock, the designation, aggregate number and terms of the series of Preferred
Stock purchasable upon exercise of such Securities Warrants; (iii) the
designation and terms of the series of Securities with which such Securities
Warrants are being offered and the number of such Securities Warrants being
offered with each such Security; (iv) the date on and after which such
Securities Warrants and the related series of Securities will be transferable
separately; (v) the number of Preferred Stock or shares of Common Stock
purchasable upon exercise of each such Securities Warrant and the price at which
such number of Preferred Stock or shares of Common Stock may be purchased upon
each exercise; (vi) the date on which the right to exercise such Securities
Warrants shall commence and the expiration date thereof; (vii) a discussion of
any material United States federal income tax consequences; and (viii) any other
terms of such Securities Warrants. Securities Warrants for the purchase of
Preferred Stock or Common Stock will be offered and exercisable for U.S. dollars
only and will be in registered form only.
Securities Warrant Certificates may be exchanged for new Securities Warrant
Certificates of different denominations, may (if in registered form) be
presented for registration of transfer and may be exercised at the corporate
trust office of the Securities Warrant Agent or any other office indicated in
the applicable Prospectus Supplement. Prior to the exercise of any Securities
Warrant to purchase Debt Securities, holders of such Securities Warrants will
not have any of the rights of holders of the Debt Securities purchasable upon
such exercise, including the right to receive payments of principal of, premium,
if any, or interest, if any, on the Debt Securities purchasable upon such
exercise or to enforce covenants in the applicable indenture. Prior to the
exercise of any Securities Warrants to purchase Preferred Stock or Common Stock,
holders of such Securities Warrants will not have any rights of holders of the
Preferred Stock or Common Stock purchasable upon such exercise, including the
right to receive payments of dividends, if any, on the Preferred Stock,
Depositary Shares or Common Stock purchasable upon such exercise or to exercise
any applicable right to vote.
EXERCISE OF SECURITIES WARRANTS
Each Securities Warrant will entitle the holder thereof to purchase such
principal amount of Debt Securities or number of Preferred Stock or shares of
Common Stock, as the case may be, at such exercise price as shall in each case
be set forth in, or calculable from, the Prospectus Supplement relating to the
offered Securities Warrants. After the close of business on the Expiration Date
(or such later date to which such Expiration Date may be extended by the
Company), unexercised Securities Warrants will become void.
Securities Warrants may be exercised by delivering to the Securities Warrant
Agent payment as provided in the applicable Prospectus Supplement of the amount
required to purchase the Debt Securities, Preferred Stock or Common Stock, as
the case may be, purchasable upon such exercise together with certain
information set forth on the reverse side of the Securities Warrant Certificate.
Securities Warrants will be deemed to have been exercised upon receipt of
payment of the exercise price, subject to the receipt of the Securities Warrant
Certificate evidencing such Securities Warrants. Upon receipt of such payment
and the Securities Warrant Certificate properly completed and duly executed at
the corporate trust office
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of the Securities Warrant Agent or any other office indicated in the applicable
Prospectus Supplement, the Company will, as soon as practicable, issue and
deliver the Debt Securities, Preferred Stock or Common Stock, as the case may
be, purchasable upon exercise. If fewer than all of the Securities Warrants
represented by such Securities Warrant Certificate are exercised, a new
Securities Warrant Certificate will be issued for the remaining amount of
Securities Warrants.
AMENDMENTS AND SUPPLEMENTS TO SECURITIES WARRANT AGREEMENTS
The Securities Warrant Agreements may be amended or supplemented without the
consent of the holders of the Securities Warrants issued thereunder to effect
changes that are not inconsistent with the provisions of the Securities Warrants
and that do not adversely affect the interests of the holders of the Securities
Warrants.
COMMON STOCK WARRANT ADJUSTMENTS
The exercise price of, and the number of shares of Common Stock covered by,
a Common Stock Warrant are subject to adjustment in certain events, including
(i) the issuance of capital stock as a dividend or distribution on the Common
Stock; (ii) subdivisions and combinations of the Common Stock; (iii) the
issuance to all holders of Common Stock of certain rights or warrants entitling
them to subscribe for or purchase Common Stock within 45 days after the date
fixed for the determination of the stockholders entitled to receive such rights
or warrants, at less than the current market price (as defined in the Warrant
Agreement for such series of Common Stock Warrants); (iv) the distribution to
all holders of Common Stock of evidences of indebtedness or assets of the
Company (excluding certain cash dividends and distributions described below) or
rights or warrants (excluding those referred to above). In the event that the
Company shall distribute any rights or warrants to acquire capital stock
pursuant to clause (iv) above (the "Capital Stock Rights"), pursuant to which
separate certificates representing such Capital Stock Rights will be distributed
subsequent to the initial distribution of such Capital Stock Rights (whether or
not such distribution shall have occurred prior to the date of the issuance of a
series of Common Stock Warrants), such subsequent distribution shall be deemed
to be the distribution of such Capital Stock Rights; provided that the Company
may, in lieu of making any adjustment in the exercise price of and the number of
shares of Common Stock covered by a Common Stock Warrant upon a distribution of
separate certificates representing such Capital Stock Rights, make proper
provision so that each holder of such a Common Stock Warrant who exercises such
Common Stock Warrant (or any portion thereof) (a) before the record date for
such distribution of separate certificates shall be entitled to receive upon
such exercise shares of Common Stock issued with Capital Stock Rights and (b)
after such record date and prior to the expiration, redemption or termination of
such Capital Stock Rights shall be entitled to receive upon such exercise, in
addition to the shares of Common Stock issuable upon such exercise, the same
number of such Capital Stock Rights as would a holder of the number of shares of
Common Stock that such Common Stock Warrant so exercised would have entitled the
holder thereof to acquire in accordance with the terms and provisions applicable
to the Capital Stock Rights if such Common Stock Warrant was exercised
immediately prior to the record date for such distribution. Common Stock owned
by or held for the account of the Company or any majority owned subsidiary shall
not be deemed outstanding for the purpose of any adjustment.
No adjustment in the exercise price of and the number of shares of Common
Stock covered by a Common Stock Warrant will be made for regular quarterly or
other periodic or recurring cash dividends or distributions or for cash
dividends or distributions to the extent paid from retained earnings. No
adjustment will be required unless such adjustment would require a change of at
least 1% in the exercise price then in effect; provided that any such adjustment
not so made will be carried forward and taken into account in any subsequent
adjustment; and provided further that any such adjustment not so made shall be
made no later than three years after the occurrence of the event requiring such
adjustment to be made or carried forward. Except as stated above, the exercise
price of and the number of shares of Common Stock covered by a Common Stock
Warrant will not be adjusted for the issuance of Common Stock or any securities
convertible into or exchangeable for Common Stock, or securities carrying the
right to purchase any of the foregoing.
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In the case of (i) a reclassification of or change to the Common Stock,
other than changes in par value, (ii) a consolidation or merger involving the
Company, other than where the Company is the continuing corporation and
reclassification or change, as described in (i) above, is involved or (iii) a
sale or conveyance to another corporation of the property and assets of the
Company as an entirety or substantially as an entirety, the holders of the
Common Stock Warrants then outstanding will be entitled thereafter to convert
such Common Stock Warrants into the kind and amount of shares of stock and other
securities or property which they would have received upon such
reclassification, change, consolidation, merger, sale or conveyance had such
Common Stock Warrants been exercised immediately prior to such reclassification,
change, consolidation, merger, sale or conveyance.
PLAN OF DISTRIBUTION
The Company may offer and sell the Securities in any of three ways: (i)
through agents (ii) through underwriters or dealers, or (iii) directly to one or
more purchasers. The Prospectus Supplement or Prospectus Supplements with
respect to any of the Securities offered thereby will set forth the terms of the
offering of such Securities, including the name or names of any underwriters or
agents, the purchase price of such Securities, the proceeds to the Company from
such sale, any underwriting discounts or agency fees and other items
constituting underwriters' or agents' compensation, the initial public offering
price, any discounts or concessions allowed or reallowed or paid to dealers, and
any securities exchanges on which such Securities may be listed.
The distribution of the Securities may be effected from time to time in one
or more transactions at a fixed price or prices, which may be changed, at market
prices prevailing at the time of sale, at prices related to such prevailing
market prices or at negotiated prices.
If so indicated in the Prospectus Supplement relating to any Securities
offered thereby, the Company will authorize underwriters, dealers and agents to
solicit offers by certain specified institutions to purchase such Securities
from the Company at the public offering price set forth in such Prospectus
Supplement pursuant to delayed delivery contracts providing for payment and
delivery on a specified date in the future. Such contracts will be subject only
to those conditions set forth in such Prospectus Supplement, and such Prospectus
Supplement will set forth the commission payable for solicitation of such
contracts.
Any underwriter, dealer or agent participating in the distribution of an
offering of Securities may be deemed to be an underwriter, and any discounts or
commissions received by it on the sale or resale of Securities may be deemed to
be underwriting discounts and commissions under the Securities Act.
Underwriters, dealers and agents may be entitled, under agreements entered into
with the Company, to indemnification by the Company against certain civil
liabilities, including liabilities under the Securities Act, or to contributions
with respect to payments which the underwriters or agents may be required to
make in respect thereof. Underwriters and agents, and affiliates thereof, may be
customers of, engage in transactions with, or perform services for the Company
and its affiliates in the ordinary course of business.
Unless otherwise indicated in the applicable Prospectus Supplement, all
Securities (other than the Common Stock) will be new issues of securities with
no established trading market. Any underwriters to whom Securities are sold by
the Company for public offering and sale may make a market in such Securities,
but such underwriters will not be obligated to do so and may discontinue any
market making at any time without notice. No assurance can be given concerning
the liquidity of the trading market for any Securities.
VALIDITY OF SECURITIES
The validity of the Securities will be passed upon for the Company by Dorsey
& Whitney LLP, Minneapolis, Minnesota.
EXPERTS
The consolidated financial statements of the Company appearing in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996 have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon included therein and incorporated herein by reference. Such
consolidated financial statements are incorporated herein by reference in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
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NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS
SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO BUY TO ANY PERSON IN ANY JURISDICTION WHERE SUCH OFFER OR
SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT NOR
THE ACCOMPANYING PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
--------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Supplement Summary............................... S-3
Risk Factors................................................ S-12
Use of Proceeds............................................. S-21
Capitalization.............................................. S-21
Selected Consolidated Financial Information................. S-22
Business.................................................... S-24
Description of Notes........................................ S-39
Certain Federal Income Tax Consequences..................... S-64
Description of Other Senior Debt............................ S-66
Underwriting................................................ S-67
Legal Matters............................................... S-68
Experts..................................................... S-68
PROSPECTUS
Available Information....................................... 2
Incorporation of Certain Documents by Reference............. 2
The Company................................................. 4
Risk Factors................................................ 5
Use of Proceeds............................................. 11
Ratios of Earnings to Fixed Charges and to Combined Fixed
Charges and Preferred Stock Dividends...................... 11
Description of Debt Securities.............................. 12
Description of Senior Debt Securities....................... 16
Description of Subordinated Debt Securities................. 21
Description of Preferred Stock.............................. 26
Description of Depositary Shares............................ 30
Description of Common Stock................................. 34
Description of Securities Warrants.......................... 35
Plan of Distribution........................................ 38
Validity of Securities...................................... 38
Experts..................................................... 38
</TABLE>
$50,000,000
[LOGO]
11 1/2% SENIOR NOTES
DUE 2007
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PROSPECTUS SUPPLEMENT
------------------------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
J.P. MORGAN & CO.
, 1997
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