<PAGE>
Filed pursuant to 424(b)(2)
File no. 333-60531
Prospectus
$100,000,000
PRINCIPAL AMOUNT
[LOGO]
30, 60, 90 AND 180-DAY AND ONE-YEAR SUBORDINATED EXTENDIBLE NOTES
ONE, TWO, THREE, FOUR, FIVE AND TEN-YEAR SUBORDINATED FIXED-TERM NOTES
------------------
The Notes offered hereby are unsecured, general obligations of Arcadia Financial
Ltd. (the "Company") and are subordinated to all existing and future Senior
Indebtedness (as defined) of the Company (of which $434.4 million in principal
amount was outstanding at June 30, 1998). All of the Company's finance income
receivable is held by special purpose subsidiaries of the Company. Any right of
the Company to receive assets of its subsidiaries upon their 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 as proceeds from any such liquidation or
reorganization will first be applied to satisfy obligations of such subsidiaries
owing to creditors of such subsidiaries before such proceeds may be available
for distribution to the Company. At June 30, 1998, the amount of the
indebtedness of such subsidiaries not included in the Senior Indebtedness of the
Company was approximately $29.1 million. The Notes ranked PARI PASSU in right of
payment with Notes outstanding of approximately $19.7 at June 30, 1998.
The interest rates of the Notes offered by the Company are expected to change
from time to time. Interest rates will be set forth in Prospectus Supplements.
See "Description of Notes--Interest."
Changes in interest rates will not affect the rates on outstanding Fixed-Term
Notes. Interest rates on outstanding Extendible Notes will be adjusted (upon
notice to the holder) every 30, 60, 90, 180 or 365 days, depending on the series
to which the Extendible Notes belongs (each such date is called a "Roll-Over
Date"). On or within 10 days after any Roll-Over Date, Extendible Notes are
redeemable at the election of the holder. The Company may redeem the Extendible
Notes and One, Two, Three and Four Year Fixed-Term Notes at any time, in whole
or in part. Five and Ten Year Fixed-Term Notes may not be redeemed by the
Company at any time during the first two years. See "Description of Notes."
The Notes will be sold directly by officers and employees of the Company and, at
the election of the Company, through one or more broker-dealers without a firm
underwriting commitment. The minimum investment is $1,000. The Notes are being
offered on a continuous basis. There is no public market for the Notes. The
Company reserves the right to reject any subscription in whole or in part. See
"Plan of Distribution."
The Notes offered hereby are not deposits or accounts with a bank, savings and
loan association or other financial institution regulated by federal or state
banking authorities and the Notes are not entitled to any of the regulatory
protections applicable to deposits or accounts with such regulated financial
institutions, including deposit insurance or governmental guarantees.
See "Risk Factors" beginning on page 8 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 COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
Underwriting
Price to Commissions and Proceeds to
Public Discount Company
<S> <C> <C> <C>
Per Note 100% .25% to 5.0%(1) (2)(3)
Total $100,000,000 .25% to 5.0%(1) (2)(3)
</TABLE>
(1) No commissions will be paid on Notes sold directly by the Company.
Commissions from .25% to 5.0% may be paid by the Company to broker-dealers
who are members of the National Association of Securities Dealers, Inc., who
may act as nonexclusive selling agents of the Company. See "Plan of
Distribution."
(2) Proceeds to the Company from Notes sold directly by the Company will be 100%
of the principal amount. Proceeds to the Company on Notes sold by
broker-dealers will range from 95.0% to 99.75% of the principal amount.
(3) Before deducting estimated offering expenses of $150,000 payable by the
Company.
The date of this Prospectus is August 14, 1998.
<PAGE>
[LOGO]
The Company purchases its consumer automobile loans through 18 regional
buying centers located in 15 states, supplemented by a network of dealer
development representatives which develop and maintain relationships with car
dealers operating within each "hub's" immediate market area or in surrounding
market areas referred to as "spokes." Credit approval and loan processing are
generally performed at the "hub" or at the Company's headquarters in
Minneapolis, Minnesota. The Company acts as the servicer of all loans originated
and securitized by it in return for a monthly servicing fee. To perform its
servicing responsibilities the Company operates a national customer service
center in Minneapolis, Minnesota, and four regional collection centers located
in Charlotte, North Carolina; Dallas, Texas; Denver, Colorado; and Minneapolis,
Minnesota.
"Premier" and "Classic" are proprietary trademarks of the Company.
------------------------
INFORMATION CONTAINED OR INCORPORATED BY REFERENCE IN THIS 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. THE MATTERS SET FORTH UNDER THE CAPTION "RISK
FACTORS" IN THIS 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 AND THE REGISTRATION STATEMENT TO WHICH IT
RELATES TO THE EXTENT THAT A STATEMENT CONTAINED IN THIS PROSPECTUS 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 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, 1998, SHALL BE DEEMED TO
SUPERSEDE ANY STATEMENTS RELATING TO THE SAME SUBJECT MATTER CONTAINED IN THE
COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1998,
WHICH IS INCORPORATED BY REFERENCE HEREIN.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Available Information...................................................................................... 4
Incorporation of Certain Documents by Reference............................................................ 4
Prospectus Summary......................................................................................... 5
Risk Factors............................................................................................... 8
Use of Proceeds............................................................................................ 17
Ratios of Earnings to Fixed Charges and to Combined Fixed Charges and Preferred Stock Dividends............ 17
Description of Notes....................................................................................... 18
Certain Federal Income Tax Consequences.................................................................... 24
Plan of Distribution....................................................................................... 25
Legal Matters.............................................................................................. 26
Experts.................................................................................................... 26
</TABLE>
3
<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 Commission's regional offices located at
Seven World Trade Center, Suite 1300, New York, New York 10048 and at 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material 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 may also be inspected at
the offices of the New York Stock Exchange, 20 Broad Street, New York, New York
10005. The Commission also maintains a Web site at http://www.sec.gov that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission.
The Company has filed with the Commission a registration statement on Form
S-3 (the "Registration Statement") under the Securities Act of 1933, as amended
(the "Securities Act") with respect to the Notes. This Prospectus, which
constitutes a part of the Registration Statement, does not contain all the
information set forth in the Registration Statement, certain items of which are
contained in schedules and exhibits to the Registration Statement as permitted
by the rules and regulations of the Commission. Such Registration Statement,
including exhibits and schedules, 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. Statements made
in the Prospectus concerning the contents of any documents referred to herein
are not necessarily complete. With respect to each such document filed with the
Commission as an exhibit to the Registration Statement, reference is made to the
exhibit for a more complete description, and each such statement shall be deemed
qualified in its entirety by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 10-K for the year ended December 31,
1997, filed March 10, 1998, and amended on March 30, 1998, the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1998, filed May
14, 1998, the Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 1998, filed August 10, 1998, and the Company's Current Report on Form 8-K
dated January 8, 1998, filed January 20, 1998, are hereby incorporated by
reference.
All documents filed by the Company pursuant to Section 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 Notes shall be deemed to be incorporated
by reference in this Prospectus and to be a part hereof from the respective
dates 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.
The Company will provide without charge to each person to whom this
Prospectus is delivered, on the written or oral request of any such person, a
copy of any or all of the documents incorporated herein by reference (other than
exhibits to such documents which are not specifically incorporated by reference
in such documents). Written requests for such copies should be directed to the
Company, 7825 Washington Avenue South, Minneapolis, Minnesota 55439-2435,
Attention: Secretary. Telephone requests may be directed to the office of the
Secretary of the Company at (612) 942-9880.
4
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS AND BY THE INFORMATION AND
FINANCIAL STATEMENTS APPEARING IN THE DOCUMENTS INCORPORATED BY REFERENCE
HEREIN. SEE "RISK FACTORS" FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE
CONSIDERED BY PROSPECTIVE PURCHASERS OF THE NOTES OFFERED HEREBY. TERMS NOT
DEFINED IN THIS SUMMARY ARE DEFINED ELSEWHERE IN THIS PROSPECTUS.
THE COMPANY
The Company purchases, securitizes and services consumer automobile loans
originated primarily by car dealers affiliated with major foreign and domestic
manufacturers. Loans are purchased through 18 regional buying centers located in
15 states, supplemented by a network of dealer development representatives
("DDRs") which develop and maintain relationships with car dealers operating
within each "hub's" immediate market area or in surrounding market areas
referred to as "spokes." Credit approval and loan processing are generally
performed at the "hub" or at the Company's headquarters in Minneapolis,
Minnesota. The Company acts as the servicer of all loans originated and
securitized by it in return for a monthly servicing fee. To perform its
servicing responsibilities the Company operates a national customer service
center in Minneapolis, Minnesota, and four regional collection centers located
in Charlotte, North Carolina; Dallas, Texas; Denver, Colorado; and Minneapolis,
Minnesota.
The Company purchases each loan in accordance with its underwriting
procedures, which focus on a borrower's credit characteristics and collateral
value. The Company's underwriting criteria do not distinguish between new and
used vehicles, which represented approximately 16% and 84%, respectively, of the
Company's loan purchases in 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. The Company has been expanding the level of loan purchases
under its Classic program primarily to increase gross interest rate spreads. In
the first six months of 1998, 71% of the principal amount of loans purchased by
the Company were purchased under the Classic program compared with 55% in 1997,
36% in 1996 and 17% in 1995. 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 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 under the Premier program than under the Classic program.
The Company primarily uses warehouse facilities to fund its 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
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
Financial Security Assurance Inc. ("FSA"). All of the Company's securitization
trusts and one of the
5
<PAGE>
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.
The Company is a Minnesota corporation, incorporated on March 8, 1990. Its
principal executive offices are located at 7825 Washington Avenue South,
Minneapolis, Minnesota 55439-2435, and its telephone number is (612) 942-9880.
THE OFFERING
<TABLE>
<S> <C>
Securities Offered................ The Company is offering up to $100.0 million in
principal amount of its unsecured subordinated notes
(the "Notes") in minimum denominations of $1,000. The
Notes include extendible notes having maturities of 30,
60, 90 and 180 days and one year after the date of issue
("Extendible Notes") and fixed-term notes having
maturities of one, two, three, four, five and ten years
after the date of issue ("Fixed-Term Notes").
Subordination..................... The Notes are unsecured general obligations of the
Company and are subordinated in right of payment to all
existing and future Senior Indebtedness (as defined in
the Indenture), $434.4 million of which was outstanding
at June 30, 1998. See "Description of
Notes--Subordination."
Interest Rates and Payment........ Interest rates are set forth in the Prospectus
Supplement accompanying this Prospectus. Interest on the
Notes accrues from the date of issuance, which is deemed
to be the business day on which the Company receives
funds in payment for the Note purchased. On Two, Three,
Four, Five and Ten Year Fixed-Term Notes, interest
compounds quarterly. Interest on all other Notes is not
compounded.
Interest on 30, 60, 90 and 180 Day Extendible Notes will
be paid at maturity only. Interest on Fixed-Term Notes
and One-Year Extendible Notes will be paid, at the
election of the original purchaser, monthly, quarterly,
semi-annually, annually or at maturity.
The interest rate of an Extendible Note may be adjusted
every 30, 60, 90, 180 or 365 days (the "Roll-Over
Date"), depending upon the series to which the
Extendible Note belongs, unless the Extendible Note is
redeemed by the holder or the Company. The interest rate
of a Fixed-Term Note will not adjust prior to maturity.
Automatic Extension............... If the Company does not redeem an Extendible Note prior
to a Roll-Over Date, the Company will mail to each
holder of an Extendible Note a notice on or within five
days after each Roll-Over Date setting forth the current
interest rate applicable to the Extendible Note. If not
presented by the holder for redemption on or within 10
days after such Roll-Over Date, the Extendible Note will
extend automatically for a period equal to its original
term. An Extendible Note is extended at the interest
rate being
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
offered on newly issued Notes of like tenor, term and
denomination on its Roll-Over Date. If similar
Extendible Notes are not then being offered, absent
instructions from the holder selecting a Note with a
term currently being offered, the maturing Extendible
Note will be redeemed.
Redemption by Company............. The Notes are redeemable at the election of the Company,
in whole or part, at any time except for Five and Ten
Year Fixed-Term Notes, which may not be redeemed by the
Company at any time during the first two years after
issuance. See "Description of Notes--Redemption by the
Company."
Redemption by Holder.............. The Extendible Notes and the Fixed-Term Notes may be re-
deemed prior to Roll-Over or maturity (i) by holders
(other than holders of 30 and 60 day Extendible Notes)
upon written request at the principal amount plus
accrued interest to the redemption date less a specified
interest penalty (such redemptions not to exceed $2.0
million in any fiscal quarter), (ii) by the holder's
estate after death, at the principal amount (not to
exceed $25,000) plus accrued interest to the redemption
date or (iii) as provided under "Automatic Extension".
See "Description of Notes--Redemption by the Holder."
Modification, Termination or
Extension of Offering............ The Company reserves the right to modify at any time the
terms of the offering or the Notes. Any modification
will apply only to Notes offered after the date of the
modification, except as described under "Description of
Notes." The Company reserves the right to terminate the
offering at any time. From time to time, the Company may
issue additional debt securities in private placements
or through additional registered public offerings.
Trustee........................... The Notes are to be issued under the terms of an
Indenture dated as of July 1, 1994, as amended and
restated by a First Amendment and Restatement dated as
of April 28, 1995, between the Company and Norwest Bank
Minnesota, National Association ("Norwest"), as further
amended and supplemented by an Instrument of
Resignation, Appointment and Acceptance dated as of
August 13, 1998, among the Company, Norwest and Marine
Midland Bank and a First Supplemental Indenture dated as
of August 13, 1998 between the Company and Marine
Midland Bank, as Trustee (as so restated and amended,
the "Indenture").
</TABLE>
7
<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 OR IN ANY APPLICABLE
PROSPECTUS SUPPLEMENT. INFORMATION CONTAINED OR INCORPORATED BY REFERENCE IN
THIS PROSPECTUS OR IN ANY APPLICABLE 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," "SHOULD" 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. 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 on a negative operating cash flow basis and
expects to continue to do so in the near future. The Company has historically
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 may require additional capital in the future to
fund continued negative cash flows, although there can be no assurance that the
Company will have access to the capital markets in the future or that financing
will be available to satisfy the Company's operating and debt service
requirements or to fund its future growth. 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 "--Liquidity and Access to Capital
Resources--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 June 30,
1998, the Company had $875.0 million of warehouse facilities through various
financial institutions and institutional lenders, of which $821.0 million was
available. One of the facilities, with a capacity of $175.0 million, was
terminated by the Company in July 1998. The remaining facilities expire in
October 1998 and July 1999, subject to renewal or extension at the lenders'
option. There can be no assurance that such financing will continue to 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, including the Notes offered hereby.
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
8
<PAGE>
facilities and to purchase new loans from dealers. Since inception, the Company
has securitized approximately $9.9 billion of automobile loans. At June 30,
1998, approximately $5.1 billion of these loans were outstanding. 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. 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 a 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 based on
the Company's historical experience, externally-generated industry information,
market conditions and expectations of future performance and present value
discount rates that the Company believes would be requested by an unrelated
purchaser of a similar 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 and related finance income receivable was recorded.
However, the actual rates of default and/or prepayment and/or net loss on such
loans may exceed those estimated for future valuation of 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, adjusts the balance of finance income receivable.
The Company has made two significant adjustments to its finance income
receivable, one at June 30, 1998 and one at March 31, 1997, both after
completing such reviews. These adjustments resulted in reductions to finance
income receivable of $114.5 million and $98.0 million, respectively. The June
1998 adjustment was due to a change in accounting estimate related to expected
charge off, recovery and prepayment rates. The March 1997 adjustment was the
result of revisions to management's estimate of future recovery rates on the
sale of repossessed inventory. The Company's business, financial condition,
results of operations and liquidity could be materially adversely affected by
additional 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 and/or cash flows from the related trust. Thereafter,
during each month, excess cash flow due to Arcadia Receivables Finance Corp.
("ARFC") from all insured securitization trusts is first used to replenish any
spread account deficiencies and is then distributed to ARFC and from ARFC to the
Company. The timing and amount of distributions of excess cash from
securitization trusts
9
<PAGE>
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, a build-up in
repossession inventory, the anticipated increase in the proportion of
repossession inventory sold in the wholesale auction markets resulting from the
Company's decision to discontinue its retail resale of repossession inventory,
or an increase in the proportion of loans in their first and second years, would
reduce excess cash available to the Company. At June 30, 1998, the Company had
an aggregate of $266.7 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 offered hereby.
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, have exceeded portfolio performance tests
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 for use 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, 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 offered hereby. Certain of the Company's securitization trusts have
exceeded such insurance agreement thresholds and continue to exceed such
thresholds and the Company has 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.
10
<PAGE>
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. Excess cash flow has been interrupted in the past, and 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 offered hereby. 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. 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 the Company's historical
portfolio growth has resulted 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.
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 consistently increased the amount of loans
purchased under its Classic program, which involves 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.
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, 55% in 1997
and 71% in the first six months of 1998. 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 Company loan
performance experience and industry experience on loans with similar credit
characteristics. During the second quarter of 1998, the Company implemented
refinements to its method for estimating future delinquency, repossession and
loss experience, which resulted in a significant downward adjustment to finance
income receivable at June 30, 1998. See "--Loan Performance Risks--Potential
Negative Effects on Financial Condition, Results of Operations and Liquidity"
above. However, there can be no assurance that its loans will perform under
varying economic conditions in the manner currently estimated by the Company.
Any increase in delinquency, repossession and loss
11
<PAGE>
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 expected may continue to have an impact on the Company's overall loan
performance, even after being discontinued or modified, until such loans are
repaid or have defaulted. 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,
but the loans generated under this program have continued to impact the
performance of those securitization pools containing them.
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 3.3% of the
servicing portfolio per month in 1997, 2.7% 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 3.0% per
month for the first six months of 1998, compared to 3.5% per month for the first
six months of 1997. The Company believes that one reason for the increase in
extensions and amendments as a percentage of the servicing portfolio during 1997
was the slower rate of growth in the size of the Company's portfolio, which
resulted 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 FINANCING
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 from the securitization trust spread accounts to ARFC (and
thus to the Company). See "--Loan Performance Risks-- Possible Restrictions On
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 Net Loss
Ratio (as defined) exceeds 6.0%, the Delinquency Ratio (as defined) exceeds
4.5%, the Net Pledged Receivable Loss Ratio for Pledged Receivables (as defined)
exceeds 1.0%, or the Average Excess Spread Percentage (as defined) is less than
5.5% (which level is subject to increase if the Portfolio Net Loss Ratio is
higher 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 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 Net Loss Ratio covenants in the future.
RESALE AND FINANCING OF REPOSSESSIONS In addition to wholesale distribution
channels, the Company has regularly disposed of repossessed vehicles through
retail markets, primarily retail used car consignment lots. In July 1998 the
Company announced that it has decided to discontinue its retail disposition of
repossessed vehicles and anticipates having eliminated this program by the end
of 1998. The Company's adjustments to finance income receivable at June 30, 1998
and March 31, 1997 both included amounts
12
<PAGE>
related to a reduction in the estimated recovery rates on then current
repossessed inventory and anticipated future inventory arising from then
existing securitization transactions. During the first six months of 1998,
approximately 26% of repossessed vehicles sold were liquidated through retail
markets, compared with 55% in the first six months of 1997 and 46% in all of
1997.
The Company's repossession inventory has generally increased as a percentage
of its servicing portfolio due in part to the period repossessions have been
held pending retail resale, which is typically a longer period of time than for
wholesale auctions, and also to the increase in the rate of loan defaults and
changes in the number and type of dealers used for retail repossession sales. At
June 30, 1998, the Company had $28.9 million of repossessed inventory, compared
to $55.3 million at December 31 1997, $64.9 million at December 31, 1996, and
$17.7 million at December 31, 1995. The decrease in inventory at June 30, 1998
was primarily the result of the Company's increased use of wholesale
distribution channels during 1998 and the resulting increase in inventory
turnover. There can be no assurance that any further softening of used car
markets or other factors will not cause the Company's recovery rate on
repossessed vehicles to decline further, which could require additional
adjustments to estimated recovery rates and finance income receivable.
In connection with its retail dispositions of repossessions, the Company has
offered to finance the purchase of the resold automobile by a new buyer.
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.
POTENTIAL NEGATIVE IMPACT OF INCREASE IN PERSONAL BANKRUPTCIES. Recent
media reports have suggested an increase in the number of personal bankruptcy
filings and during most of 1997 and the first half of 1998 the Company
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 Notes 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 Notes, except to
the extent proceeds are used to repay outstanding indebtedness. The Company is
also subject to restrictive covenants under its outstanding debt securities and
its other debt financing agreements, including covenants that may significantly
restrict the Company's ability to incur additional indebtedness or to issued
preferred stock. If the Company should require, but be unable to obtain, any
cure, modification or waiver of noncompliance with these or any other covenants
in the future, default could occur with respect to the relevant indebtedness
and, under cross-default provisions, other indebtedness of the Company. There
can be no assurance that the Company would be able to repay or refinance such
obligations in such circumstances, and any such failure would have a material
adverse effect on the Company's financial condition and its ability to repay the
Notes offered hereby.
SUBORDINATION OF THE NOTES
CONTRACTUAL SUBORDINATION OF THE NOTES. The payment of principal of or
interest or premium on the Notes is subordinated in right of payment to all
Senior Indebtedness, as defined in the Indenture. As a result, in the event of a
default in payment on the Company's Senior Indebtedness, or in the event of a
nonpayment default with respect to Senior Indebtedness which permits the holders
thereof to accelerate the maturity of such Senior Indebtedness, or 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 Notes
would not receive payment until the holders of Senior Indebtedness were paid in
full.
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 Notes to participate in
13
<PAGE>
those assets) will be effectively subordinated to the claims of creditors of
such subsidiaries before such proceeds will be available for distribution to the
Company. Substantially all of the Company's securitizations through June 30,
1998 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 and restricted cash
in spread accounts at June 30, 1998 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--Possible Restrictions on
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. The increased proportion of loans
generated under the Company's Classic program has increased the Company's
sensitivity to changes in economic conditions. 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.
Moreover, 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 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. Any such event might have an adverse effect on loan loss
levels, and on the Company's financial condition, results of operations and
liquidity. In addition, the Company has channeled a portion of its repossession
inventory through retail resale markets instead of wholesale markets, including
the financing of such retail sales, which has had the effect of reducing the
Company's loan losses while increasing repossession inventory and delaying cash
flow recovered from inventory turnover. In July 1998 the Company announced that
it has decided to discontinue its retail disposition of repossessed vehicles and
anticipates having eliminated this program by the end of 1998.
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
14
<PAGE>
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.
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 those various matters
currently pending will not result in any material adverse effect on the
Company's financial condition, results of operations or liquidity.
MANAGEMENT OF GROWTH
The historical growth of the Company's servicing portfolio and the greater
proportion of Classic loans contained in that portfolio have resulted in
increased demands on the Company's personnel and systems. The Company's ability
to support, manage and control 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 its key
initiatives. Since 1996 the Company has opened four regional collection centers
and 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.
15
<PAGE>
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 are
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.
NO FINANCIAL COVENANTS; ABSENCE OF SINKING FUND
The Notes do not have the benefit of covenants imposing restrictions on the
Company's ability to create Senior Indebtedness, pay dividends or make other
payments. 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 restructuring, and the
Indenture does not contain covenants designed to protect holders of the Notes in
the event of adverse changes in the Company's financial condition or results of
operations or a highly leveraged transaction involving the Company. In addition,
the Notes will not have the benefit of sinking fund payments by the Company. See
"Description of the Notes."
RISK OF REDEMPTION AT THE OPTION OF THE COMPANY
The Company, subject to requirements of Senior Indebtedness, may at any time
redeem, in whole or in part, any or all of the outstanding Notes of any type
selected by interest rate or maturity, except for Five and Ten Year Fixed-Term
Notes, which may not be redeemed by the Company at any time during the first two
years after the date of issuance. If the Company redeems less than all of the
outstanding Notes selected for redemption, the Company will redeem the Notes
ratably or by lot. The Notes will be redeemed at 100% of the principal amount
plus accrued but unpaid interest to the redemption date. Any such redemption may
have the effect of reducing the overall return that any investor may receive on
an investment in the Notes by reducing the term of the investment. In addition,
no assurance can be given that an investor in the Notes will be able to reinvest
the proceeds of any such redemption for the remainder of the original term of
the Notes at an interest rate comparable to the rate paid on the Notes. See
"Description of Notes--Redemption by the Company."
ABSENCE OF PUBLIC MARKET
There is 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 Company
does not intend to apply for listing of the Notes on any securities exchange.
16
<PAGE>
RISK OF REPURCHASE OBLIGATIONS WITH 11 1/2% SENIOR NOTES DUE 2007
In certain circumstances, including a change of control of the Company,
certain sales of assets by the Company and certain adverse loss experiences with
respect to the Company's securitization trusts, holders of the Company's
outstanding 11 1/2% Senior Notes due 2007 may require the Company to repurchase
all or a portion of such 11 1/2% Senior Notes. Funds used to repurchase the
11 1/2% Senior Notes would not be available to pay principal or interest on the
Notes offered hereby, and there can be no assurance that the Company would have
other funds available for that purpose. Moreover, there can be no assurance that
the Company will have sufficient funds available to effect such repurchases and,
if such funds are not sufficient, the inability of the Company to effect such
repurchases could cause defaults under, and acceleration of, the 11 1/2% Senior
Notes, and, under cross-default provisions, other indebtedness of the Company.
There can be no assurance that the Company would be able to repay or refinance
such obligations in such circumstances, and any such failure would have a
material adverse effect on the Company's financial condition and its ability to
repay the Notes offered hereby.
TAX TREATMENT
In certain circumstances, cash basis taxpayers may be required to include
accrued interest payable on the Notes in their ordinary gross income for federal
income tax purposes for a tax year prior to the year in which the taxpayer
receives the related cash payment from the Company. See "Certain Federal Income
Tax Consequences--Interest Income on the Notes."
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 Notes 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>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1997 1998
(Dollars in thousands) --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of earnings to fixed charges................ 1.72x 2.06x 3.75x 4.64x -- -- --
Deficiency in earnings to fixed charges........... -- -- -- -- 67,820 86,834 108,566
Ratio of earnings to combined fixed charges and
preferred stock dividends........................ 1.57x 1.31x 3.10x 4.34x -- -- --
Deficiency in earnings to combined fixed charges
and preferred stock dividends.................... -- -- -- -- 67,820 86,834 108,566
</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 (all of which was converted or redeemed on or
before December 2, 1996).
17
<PAGE>
DESCRIPTION OF NOTES
GENERAL
The Notes are general unsecured obligations of the Company issued under the
terms of an Indenture dated as of July 1, 1994, as amended and restated by a
First Amendment and Restatement dated as of April 28, 1995, between the Company
and Norwest Bank Minnesota, National Association ("Norwest"), as further amended
and supplemented by an Instrument of Resignation, Appointment and Acceptance
dated as of August 13, 1998, among the Company, Norwest and Marine Midland Bank,
and a First Supplemental Indenture dated as of August 13, 1998 between the
Company and Marine Midland Bank, as trustee (the "Trustee") (as so restated and
amended, the "Indenture"). The Indenture provides that an unlimited principal
amount of Notes may be issued pursuant thereto. The Notes may be issued in one
or more series having various maturities, interest rates, principal amounts,
redemption provisions and other features as the Company may establish. This
Prospectus relates to Subordinated Extendible Notes having maturities of 30, 60,
90 and 180 days and one year after the date of issue, and Subordinated
Fixed-Term Notes having maturities of one, two, three, four, five and ten years
after the date of issue. There is no limitation on the respective amounts of
each series of Notes that may be outstanding.
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 (the
"Act") as in effect on the date of the Indenture. The Notes are subject to all
such terms, and holders of the Notes are referred to the Indenture and the Act
for a statement thereof. This summary contains a description of the provisions
of the Indenture material to a purchaser of the Notes. All references to
"Section" or "Article" in this section refer to the applicable Section or
Article of the Indenture. A copy of the Indenture is filed as an exhibit to the
Registration Statement and is available for inspection at the principal
executive offices of the Company.
The Notes will be issued in registered form, without coupons, in any amount
of $1,000 or more. The Notes may be offered and issued in such denominations as
may be designated from time to time by the Company. The Company intends
initially to issue the Notes in uncertificated form. (Section 2.01.) In the past
the Company has issued certain Notes in certificated form. Payment of any
certificated Note requires surrender of the Note. If the Note is lost, the
holder will be required to provide an affidavit of loss and a surety bond,
available through the Company at a cost equal to the greater of 2% of the
principal amount of the Note or $50.
The Notes are unsecured general obligations of the Company, subordinated to
all existing and future Senior Indebtedness. There is no sinking fund or other
provision for payment of the Notes at maturity. Notes that mature will be paid
from general funds of the Company, which may include the sale of new Notes. See
"Description of Notes--Subordination."
INTEREST
The interest rates of the Notes offered by the Company are expected to
change from time to time. Interest rates will be set forth in Prospectus
Supplements. The initial interest rates payable on any unsold Notes will be
subject to change by the Company from time to time based on market conditions
and the Company's financial requirements, but no such change will affect the
interest rate on any Note sold prior to the effective date of such change,
except as described below with respect to Extendible Notes. Interest payable on
the Notes accrues from the date of issuance and is calculated based on a 365-day
year.
Interest on the Two, Three, Four, Five and Ten Year Notes compounds
quarterly. Interest on all other Notes is not compounded. Interest on 30, 60, 90
and 180 Day Extendible Notes will be paid at maturity only. Interest on
Fixed-Term Notes and One Year Extendible Notes will be paid, at the election of
the original purchaser, monthly, quarterly, semi-annually, annually, or at
maturity. This election may be changed one time by the holder during the term of
the Note.
18
<PAGE>
The interest rate of an Extendible Note may be adjusted every 30, 60, 90,
180 or 365 days (a Roll-Over Date), depending upon the series to which the
Extendible Note belongs, unless the Extendible Note is redeemed by the holder or
the Company. The interest rate of a Fixed-Term Note will not adjust prior to
maturity. (Section 2.02.)
AUTOMATIC EXTENSION
If the Company does not redeem an Extendible Note prior to a Roll-Over Date,
the Company will mail to each holder of an Extendible Note a notice on or within
five days after each Roll-Over Date setting forth the current interest rate
applicable to the Extendible Note. If not presented by the holder for redemption
on or within 10 days after such Roll-Over Date, the Note will be extended
automatically for the same term, and will be deemed to have been renewed by the
holder as of the Roll-Over Date. The Extendible Notes will continue to renew as
described herein, absent some permitted action by either the holder or the
Company. Interest will continue to accrue from the first day of such renewed
term. An Extendible Note, as renewed, will continue in all its provisions,
including provisions relating to payment, except that the interest rate payable
during any renewed term will be the interest rate which is being offered by the
Company on similar Extendible Notes as of the Roll-Over Date. If similar
Extendible Notes are not then being offered, the Extendible Note will not renew,
and, absent instructions from the holder selecting a Note with a term that is
currently being offered, the maturing Extendible Note will be redeemed. If a
holder submits a written request for redemption within ten days after its
maturity date, the Company will redeem such Note, but no interest will accrue
after its maturity date. Notice is deemed given when deposited in the mail.
(Section 2.02.)
The Fixed-Term Notes will not automatically extend, but will be paid at
maturity. Payment of a certificated Note requires surrender of the Note.
Uncertified Fixed-Term Notes will be automatically paid at maturity.
REDEMPTION BY THE COMPANY
If permitted under the restrictions and covenants pertaining to Senior
Indebtedness, the Company may elect to redeem Notes prior to maturity on at
least 30 days' but not more than 60 days' notice to each holder of Notes to be
redeemed at his, her or its registered address at a price of 100% of the
principal amount of the Notes, plus accrued interest to the redemption date.
Five and Ten Year Fixed-Term Notes may not be redeemed by the Company at any
time during the first two years after the date of issuance. The Company may
select for redemption of the Notes a single class, interest rate or maturity. In
the event of redemption of less than all of a series or class of Notes selected
for redemption by the Company, the Notes will be chosen for redemption by the
Trustee as provided in the Indenture, generally pro rata or by lot. On and after
the redemption date, interest ceases to accrue on Notes or portions of them
called for redemption. (Article 3).
REDEMPTION BY THE HOLDER
Within 30 calendar days following the receipt of a 90 or 180 Day or One Year
Extendible or a Fixed-Term Note accompanied by a written request for redemption
by the holder, the Company shall, subject to the subordination limitations
contained in the Indenture, repay the principal amount of the Note, together
with interest accrued to the redemption date, less a penalty calculated
according to the following formula. The penalty shall equal the higher of (a) 90
days' interest at the actual rate of interest borne by the Note, plus an amount
equal to the difference, if any, between the interest actually earned on the
Note from the Date of Issue to the redemption date and the interest that would
have been earned on the Note for such period at an interest rate of 5% per
annum, if 5% is lower than the rate borne by the Note or (b) the interest that
would be earned from the date of redemption to the next Roll-Over Date or
Maturity, as the case may be, calculated at a rate per annum equal to the
difference between the interest rate borne by the Note and the interest rate
currently being offered by the Company on Notes having like or similar terms as
the Note being redeemed. The Company will not be obligated to redeem more than
$2,000,000 in original principal amount of Notes in any calendar quarter at the
request of holders. If more than $2,000,000 in original principal
19
<PAGE>
amount of Notes are presented for redemption in a calendar quarter, the Company
will select, in such manner as in its sole discretion it shall deem appropriate
and fair, the Notes or portions thereof to be redeemed. (Section 3.08)
In the event of the death of a holder and upon written notice from the
estate of such holder, the Company will, subject to the limitations contained in
the subordination provisions of the Indenture, repay the principal amount of the
Note, together with interest accrued to the redemption date, within 30 days
following such notice. The Company will not be obligated to redeem more than a
principal amount of $25,000 for all of the Notes of such deceased person,
including any trust or other entity of which such deceased person may be a
beneficiary or owner. If two or more persons are joint record holders of a Note,
the election to redeem will not apply until all record holders are deceased,
except that if the joint holders are husband and wife, the election may be made
after the death of either spouse. The person electing such redemption must
provide such evidence to the Company as it may reasonably require to establish
death. The decision of the Company in respect to determining death will be
conclusive and binding. (Section 3.08)
Upon redemption of a Note and as a condition of the holder's right of
redemption, the holder may be required, at the Company's request, to supply
written evidence, satisfactory in form and substance to the Company and the
Trustee of the discharge of the Company's obligation to the holder represented
by the Note.
INTEREST ACCRUAL DATE
Interest on the Notes accrues from the date of issuance, which is deemed to
be the business day on which the Company receives funds in payment for the Notes
purchased. For this purpose, the Company's business day will be deemed to be
Monday through Friday, except for national bank holidays.
INTEREST WITHHOLDING
With respect to those investors who do not provide the Company with a fully
executed Form W-8 or Form W-9, the Company will withhold 31% of any interest
paid. Otherwise, no interest will be withheld.
ADDITIONAL INTEREST
In addition to the interest rates payable as set forth above, the Company
may make such additional payments of interest, premiums or other benefits
("Additional Interest") on such of the Notes, in such amounts, in such form, on
such terms and at such times as the Company may determine from time to time.
Such Additional Interest payments may be modified or discontinued at any time.
For example, such Additional Interest payments may be limited to new investors,
to investors purchasing Notes for IRA, SEP or Keogh accounts or to current
investors increasing or renewing their investments in the Notes. Also, such
Additional Interest payments may be limited to current or new investors residing
in particular states or localities where the Company is authorized to sell the
Notes. (Section 2.02)
SUBORDINATION
The Notes are subordinated in right of payment to the prior payment in full
of all Senior Indebtedness. The Company and each Noteholder by accepting a Note
agrees to the subordination and authorizes the Trustee to give it effect. Senior
Indebtedness means all Indebtedness (as defined below) of the Company except (a)
Indebtedness evidenced by the Notes or any extension or refunding thereof and
(b) Indebtedness that is expressly made equal in right of payment to the Notes.
Senior Indebtedness includes, without limitation, Indebtedness pursuant to the
following, and as the same may be amended, renewed or extended from time to
time: (i) the Company's outstanding 11 1/2% Senior Notes due 2007, (ii) debt
incurred pursuant to any "warehousing" facilities to finance the Company's
purchase of automobile receivables in the ordinary course of business, whether
such facilities are structured as loans or as sales of receivables subject to a
right of repurchase and (iii) the Company's Subordinated Notes, Series 1996-A
due 2001. To the extent provided
20
<PAGE>
in the Indenture, Senior Indebtedness must be paid before the Notes may be paid
or redeemed. "Indebtedness" of any person on any date includes (i) all
indebtedness for money borrowed of such person or evidenced by notes, bonds,
debentures or similar evidences of indebtedness of such person, (ii)
indebtedness of such person under leases which are capitalized under generally
accepted accounting principles ("GAAP"), (iii) indebtedness of such person
representing the deferred and unpaid purchase price of any property or business
(excluding trade and service payables incurred in the ordinary course of
business and constituting current liabilities), (iv) all guarantees by such
person of indebtedness of others (including repurchase arrangements and
financial condition or liquidity or capital maintenance arrangements), (v) all
obligations of such person in respect of interest rate protection agreements and
foreign currency hedging arrangements and (vi) all obligations of such person as
an account party in respect of letters of credit (other than documentary letters
of credit) and in respect of banker's acceptances, in the case of each of the
foregoing clauses, in the principal amount that such indebtedness would be shown
on a balance sheet of such person prepared as of such date in accordance with
GAAP. (Article 10)
Upon the maturity of any Senior Indebtedness by lapse of time, acceleration
or otherwise, all such Senior Indebtedness must first be paid in full before any
payment is made by the Company or any person acting on behalf of the Company on
account of the Notes. The Company may not pay (including by redemption or
otherwise) any amounts in respect of the Notes, designate or set aside any
amount for such payment, or acquire any Notes for cash or property, other than
capital stock of the Company, (a) if the Company is then in default in the
payment of any obligation due with respect to Senior Indebtedness or (b) if a
default on Senior Indebtedness occurs and is continuing that permits holders of
such Senior Indebtedness to accelerate its maturity (other than a payment
default) and the Company receives a notice of the default. The Company may
resume payments on the Notes and may acquire them when the default is cured or
waived or, in the case of a default described in clause (b) in the preceding
sentence, 180 days pass after the notice is given, if the Indenture otherwise
permits the payment or acquisition at that time.
During any period in which the Company is prohibited from making any
payments on the Notes (i) neither the Trustee nor any Noteholders may initiate
any Insolvency Proceeding (as defined below) unless an Insolvency Proceeding has
been initiated by another person or (ii) collect on or seek to enforce any
judgment or otherwise receive any payment from the Company with respect to the
Notes. If payments are made to Noteholders contrary to the subordination
provisions of the Indenture, the Noteholders are required to pay over such
amounts on demand to the trustee under the indenture or other agreement (if any)
pursuant to which Senior Indebtedness may have been issued. (Article 10)
Upon any distribution to creditors of the Company in an Insolvency
Proceeding, holders of Senior Indebtedness will be entitled to receive payment
in full in cash of all obligations due in respect of Senior Indebtedness before
Noteholders will be entitled to receive any payment of principal of or interest
on Notes. Until the Senior Indebtedness is paid in full in cash, any
distribution to which Noteholders would have been entitled will be made to
holders of Senior Indebtedness.
"Insolvency Proceeding" means any bankruptcy, liquidation, winding-up,
dissolution, insolvency, general assignment (including an assignment for the
benefit of creditors) or the appointment of a receiver, liquidator, custodian,
trustee, sequestrator or similar official, or any similar proceeding or
creditor's remedy occurring with respect to the Company or any of its
subsidiaries or any substantial part of their respective assets.
MODIFICATION OF INDENTURE
The Indenture may be modified by the Company and the Trustee at any time
with the consent of the holders of not less than a majority in principal amount
of Notes then outstanding, but no modification of the Indenture may be made
which will affect the terms of payment or the principal or interest on any Note
or which reduces the percentage of holders whose consent to modification is
required, unless each affected holder gives consent. Without the consent of
Noteholders, the Company and the Trustee may amend the
21
<PAGE>
Indenture or the Notes to cure any ambiguity, defect or inconsistency; to comply
with Section 5.01 of the Indenture in the event of a merger or sale of
substantially all of the Company's assets; or to make any change that does not
adversely affect the legal rights of any Noteholder. (Article 9) Article 10 of
the Indenture, which contains provisions subordinating the right of Noteholders
to Senior Indebtedness, may not be amended or modified without the consent of
the holders of Senior Indebtedness as may be required in any documentation
governing such Senior Indebtedness. (Section 10.14)
PLACE, METHOD AND TIME OF PAYMENT
Principal and interest upon the Notes will be payable at the principal
executive office of the Company, as it may be established from time to time, or
at such other place as the Company may designate for that purpose on the
applicable payment date; provided, however, that payments may be made at the
option of the Company by check or draft mailed on the applicable payment date
or, in the event of maturity, the business day following the date of maturity,
to the person entitled thereto at his, her or its address appearing in the
register which the Company maintains for that purpose. Any payment of principal
or interest that is due on a non-business day will be payable by the Company on
the next business day immediately following such non-business day. (Sections
2.02 and 11.07)
EVENTS OF DEFAULT AND REMEDIES
An "Event of Default" with respect to the Notes occurs if: (a) the Company
fails to pay all or any part of interest on any Note when the same becomes due
and payable and such failure continues for a period of 30 days; (b) the Company
fails to pay all or any part of the principal of any Note when the same becomes
due and payable at maturity, whether upon redemption or otherwise; (c) the
Company fails to comply with any of its other agreements or covenants in, or
provisions of, the Notes or the Indenture and the default continues for the
period and after the notice specified below; (d) the Company pursuant to or
within the meaning of any bankruptcy law: (1) commences a voluntary proceeding
under any such bankruptcy law, (2) consents to the entry of an order for relief
against it in an involuntary bankruptcy proceeding, (3) consents to the
appointment of a custodian of it or for all or substantially all of its
property, (4) makes a general assignment for the benefit of its creditors, or
(5) generally is unable to pay its debts as the same become due; (e) a court of
competent jurisdiction enters an order or decree under any bankruptcy law that:
(1) is for relief against the Company in an involuntary bankruptcy proceeding,
(2) appoints a custodian of the Company or for all or substantially all of its
property, or (3) orders the liquidation of the Company, and the order or decree
remains unstayed and in effect for 60 days; or (f) the maturity of any Senior
Indebtedness in an aggregate amount exceeding $5,000,000 is accelerated under
the terms of the instrument under which such Senior Indebtedness is outstanding,
if such acceleration is not rescinded within 30 days after written notice.
(Article 6)
A default under clause (c) of the preceding paragraph is not an Event of
Default until the Trustee or the holders of at least 25% in principal amount of
the then outstanding Notes notify the Company of the default and the Company
does not cure the default within 60 days after receipt of the notice. The notice
must specify the default, demand that it be remedied and state that the notice
is a "Notice of Default." Noteholders may not enforce the Indenture or the Notes
except as provided in the Indenture. The Trustee may require indemnity
satisfactory to it before it enforces the Indenture or the Notes. 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 Noteholders notice of any continuing default
(except a default in payment of principal or interest) if it determines that
withholding notice is in their interests. The Company must furnish an annual
compliance certificate to the Trustee.
If an Event of Default occurs and is continuing, and subject to the
limitation on exercising remedies contained in the subordination provisions of
the Indenture, the Trustee by notice to the Company, or the holders of at least
25% in principal amount of the then outstanding Notes by notice to the Company
and the Trustee, may declare the principal of and accrued interest on all the
Notes to be due and payable. Upon such
22
<PAGE>
declaration the principal and interest owing on the then outstanding Notes will
be due and payable immediately. The holders of a majority in principal amount of
the then outstanding Notes by notice to the Trustee may rescind an acceleration
and its consequences if the rescission would not conflict with any judgment or
decree and if all existing Events of Default have been cured or waived except
nonpayment of principal or interest that has become due solely because of the
acceleration. The holders of a majority in principal amount of the then
outstanding Notes may 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 it. However, the Trustee may refuse to follow any direction
that conflicts with law or the Indenture, is unduly prejudicial to the rights of
other Noteholders, or would involve the Trustee in personal liability. A
Noteholder may pursue a remedy with respect to the Indenture or the Notes only
if: (a) the holder gives to the Trustee notice of a continuing Event of Default;
(b) the holders of at least 25% in principal amount of the then outstanding
Notes make a request to the Trustee to pursue the remedy; (c) such holder or
holders offer to the Trustee indemnity satisfactory to the Trustee against any
loss, liability or expense; (d) the Trustee does not comply with the request
within 60 days after receipt of the request and the offer of indemnity; and (e)
during such 60-day period the holders of a majority in principal amount of the
then outstanding Notes do not give the Trustee a direction inconsistent with the
request. A Noteholder may not use the Indenture to prejudice the rights of
another Noteholder or to obtain a preference or priority over another
Noteholder.
CERTAIN COVENANTS
The Company has undertaken certain covenants under the Indenture, including
a covenant to pay the principal of and interest on the Notes in accordance with
their terms. (Section 4.01) In addition, it will not consolidate or merge with
or into any other corporation, unless the other corporation expressly assumes
the obligations of the Company under the Indenture. The Indenture contains no
covenants or other provisions to afford protection to Noteholders in the event
of a highly leveraged transaction or a change in the control of the Company.
(Article 5)
EXCHANGES
The Company, in its discretion, may offer or accept outstanding Notes in
exchange for other Notes issued under the Indenture.
TRANSFER AND EXCHANGE
A holder may transfer or exchange Notes in accordance with the Indenture.
The Company or other registrar under the Indenture may require a holder, among
other things, to furnish appropriate endorsements and transfer documents, and to
pay any taxes and fees required by law or permitted by the Indenture. The
Company is not required to transfer or exchange any Notes selected for
redemption, beginning at the opening of business 15 days before the day notice
of redemption is mailed by the Company. Also, the Company is not required to
transfer or exchange any Note for a period of 15 days before the Roll-Over Date
of an Extendible Note or the maturity of a Fixed-Term Note. (Section 2.07)
CONCERNING THE TRUSTEE
In case an Event of Default occurs, and is continuing, the Trustee is
required to exercise its rights and powers under the Indenture, including its
right to accelerate the Notes or pursue other remedies to collect principal and
interest. In exercising such rights and powers, the Trustee is required to use
the same degree of care and skill as a prudent person would exercise or use
under the circumstances in the conduct of his or her own affairs. The holders of
a majority in principal amount of the then outstanding Notes issued under the
Indenture have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee. The Trustee will
be under no obligation to exercise any of its rights or powers under the
Indenture at the request of any of the holders of Notes, unless they have
offered the Trustee security and indemnity satisfactory to it.
23
<PAGE>
The Indenture contains certain limitations on the right of the Trustee, if
it becomes a creditor of the Company, to obtain payment of claims in certain
cases, or to realize on certain property with respect to any such claim as
security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest and if the Notes
are in default, it must eliminate such conflict or resign. The Trustee may
resign or be removed, effective upon the appointment of a successor trustee.
(Article 7)
SATISFACTION AND DISCHARGE OF INDENTURE
The Indenture may be discharged upon the payment of all Notes outstanding
thereunder or upon deposit in trust of funds sufficient therefor, plus
compliance with certain formal procedures. (Article 8)
REPORTS
The Company publishes annual reports containing audited financial statements
and quarterly reports containing unaudited financial information for the first
three quarters of each fiscal year. Copies of such reports will be sent to any
Noteholder upon oral or written request.
SERVICE CHARGES
The Company reserves the right to assess service charges for services such
as changing the registration of any Note when such change is occasioned by a
change in name of the holder or a transfer (whether by operation of law or
otherwise) of a Note by the holder to another person.
VARIATIONS IN TERMS AND CONDITIONS
The Company may elect to offer only certain of the series of Notes described
in this Prospectus, depending on the Company's financial requirements and market
conditions. The Company reserves the right from time to time to offer securities
different from the Notes and to vary the terms and conditions of the offering
depending upon various factors, including the state or locality where the
purchaser resides, the purchaser's tenure as an investor with the Company,
whether an investor is increasing or renewing his or her investment in the
Company's securities, or purchasing Notes for an IRA, SEP or Keogh account. In
addition, the Company may vary certain terms and conditions of the Notes for its
employees and the employees of its subsidiaries.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of certain federal income tax
consequences relating to the purchase, ownership and disposition of the Notes.
The discussion is based upon the current provisions of the Internal Revenue Code
of 1986, as amended (the "Code"), the Treasury regulations promulgated
thereunder and judicial or ruling authority, all of which are subject to change,
which change may be retroactive. The discussion assumes that the Notes are held
as capital assets and does not purport to deal with federal income tax
consequences applicable to all categories of investors, some of which may be
subject to special rules. Investors should consult their own tax advisors to
determine the federal, state, local and any other tax consequences of the
purchase, ownership and disposition of the Notes.
INTEREST INCOME ON THE NOTES
A cash basis holder of a 30, 60, 90 or 180 Day Extendible Note generally
will be required to include interest on the Note in ordinary gross income on
each Roll-Over Date, even though interest on such Note may be paid only at
redemption. A cash basis holder of a One Year Extendible Note or a Fixed Term
Note generally will be required to include interest on the Note in ordinary
gross income on a daily basis, even though interest on such Notes may be paid
less frequently. As a result, a cash basis holder of a Note may have
24
<PAGE>
taxable interest income with respect to a Note before any cash payment is
received with respect to such Note. An accrual basis holder of a Note will be
required to include interest on the Note in ordinary gross income as it accrues
without regard to when such interest is paid.
SALE, EXCHANGE OR RETIREMENT
Upon the sale, exchange or retirement of a Note, the holder will recognize
gain or loss in an amount equal to the difference between the amount realized on
the sale, exchange or retirement and the holder's adjusted tax basis in the
Note. The adjusted tax basis of a Note to a particular holder generally will
equal the holder's cost for the Note, increased by any accrued but unpaid
interest previously included by such Holder in income with respect to the Note
and decreased by principal payments previously received by such Holder with
respect to the Note. Any such gain or loss will be capital gain or loss, except
for gain representing accrued interest not previously included in income. Any
such capital gain or loss will be short-term or long-term capital gain or loss,
depending on whether the Note had been held for more or less than 12 months.
FOREIGN HOLDERS
Generally, interest paid to a holder of a Note who is a nonresident alien
individual or a foreign corporation and who does not hold the Note in connection
with a United States trade or business will be treated as "portfolio interest"
and therefore will be exempt from the 30% withholding tax. Such a holder will be
entitled to receive interest payments on the Notes free of United States federal
income tax provided that such holder periodically provides the Company with a
statement certifying under penalty of perjury that such holder is not a United
States person and providing the name and address of such holder. Such a holder
will not be subject to federal income tax on gain from the disposition of a Note
unless the holder is an individual who is present in the United States for 183
days or more during the taxable year in which the disposition takes place and
certain other requirements are met.
REPORTING AND BACKUP WITHHOLDING
The Company will report annually to the Internal Revenue Service and to
holders of record that are not excepted from the reporting requirements such
information as may be required with respect to interest on the Notes. Under
certain circumstances, a holder of a Note may be subject to "backup withholding"
at a 31% rate. Backup withholding may apply to a holder who is a United States
person if the holder, among other circumstances, fails to furnish his Social
Security number or other taxpayer identification number to the Company. Backup
withholding may apply, under certain circumstances, to a holder of a Note who is
a foreign person if the holder fails to provide the Company with the statement
necessary to establish the exemption from federal income and withholding tax on
interest on the Note. Backup withholding, however, does not apply to payments on
a Note made to certain exempt recipients, such as corporations and tax-exempt
organizations, and to certain foreign persons.
PLAN OF DISTRIBUTION
The Notes are being offered on a continuous basis. The Notes will be sold
directly by officers and other employees of the Company, without an underwriter
or selling agent. The Company may elect to sell Notes through one or more
registered broker-dealers ("Brokers") who will act as selling agents for the
Company without a firm underwriting commitment. In no event will the terms and
conditions of Notes sold directly to the public by the Company differ from Notes
sold by a Broker.
From time to time, the Company may limit the volume of Notes or series of
Notes sold. The Company may vary the terms and conditions of the offering by
state, locality or as otherwise described under "Description of
Notes--Variations in Terms and Conditions." Further, the Company may offer
different securities at different times depending on such factors as the
Company's liquidity requirements, the interest rate environment and other
economic conditions.
25
<PAGE>
The Company intends to enter into non-exclusive selling agreements (the
"Agreements") with any Brokers who act as selling agents for Notes. Pursuant to
the terms of the Agreements, Brokers will sell Notes to the public and will be
paid commissions by the Company. Commissions will range from .25% to 5.0% of the
principal amount of Notes sold. The commission rate will vary according to the
principal amount and term of the Notes. An Agreement may be terminated
immediately upon written notice by either the Company or a Broker. The Company
will agree to indemnify the Brokers for losses arising out of certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
LEGAL MATTERS
The validity of the Notes offered hereby 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, 1997 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.
26
