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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A-1
______________________________
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from . . . . . . . to . . . . . . . .
Commission File Number 0-26410
JAYHAWK ACCEPTANCE CORPORATION
(Exact name of registrant as specified in its charter)
TEXAS 75-2486444
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
BRYAN TOWER
2001 BRYAN STREET, SUITE 600
DALLAS, TEXAS 75201
(Address of principal executive offices)
Registrant's telephone number, including area code: (214) 754-1000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, par value $.01 per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ________
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
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As of April 10, 1997, the aggregate market value of the shares of the
registrant's common stock, $.01 par value (based upon the closing sale price of
these shares on the Nasdaq National Market System on such date), held by
nonaffiliates was $23 million.
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No _____
-----
At April 10, 1997, there were 23,929,771 shares of Common Stock, $.01 par value,
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE.
None.
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See Exhibit Index on Page 66.
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JAYHAWK ACCEPTANCE CORPORATION
INDEX TO
ANNUAL REPORT ON FORM 10-K
PART I
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Item 1. Business........................................................ 1
Item 2. Properties...................................................... 9
Item 3. Legal Proceedings............................................... 9
Item 4. Submission Of Matters To A Vote Of Security-Holders............. 10
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters............................................. 11
Item 6. Selected Financial Data......................................... 12
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 13
Item 8. Financial Statements and Supplementary Data..................... 25
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................ 43
PART III
Item 10. Directors and Executive Officers of the Registrant............. 44
Item 11. Executive Compensation......................................... 47
Item 12. Security Ownership of Certain Beneficial Owners and Management. 54
Item 13. Certain Relationships and Related Transactions................. 56
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.. 59
Signature Page............................................................. 64
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PART I
ITEM 1. BUSINESS
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Jayhawk Acceptance Corporation (the "Company") was founded in June 1993 and
its principal executive offices are located at Bryan Tower, 2001 Bryan Street,
Suite 600, Dallas, Texas.
CHAPTER 11 PROCEEDING
In the fourth quarter of 1996, the Company reevaluated the overall
profitability and credit quality of its existing pools of automobile installment
sale contracts ("Contracts" or "Installment Contracts") purchased from
participating automobile dealers ("Dealers") and determined to terminate its
relationship with a number of its participating Dealers and to change the basis
on which it was willing to purchase Contracts from others. As a result of these
actions and because a continuing business relationship is an important factor in
the Company's determination of the recoverability of Acquisition Payments
(hereinafter defined) made to Dealers, on January 30, 1997 the Company announced
a special charge in the fourth quarter of 1996 to increase its allowance for
credit losses. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations--Recent Developments; Chapter 11
Proceeding."
The fourth quarter special charge caused the Company to be in noncompliance
with a financial covenant under its primary revolving credit facility.
Additionally, the Company's planned additional financings in January 1997 failed
to materialize. The Company commenced discussions with its revolving lender (the
"Revolving Lender") regarding the covenant violation and its cash needs in light
of the failure to consummate the additional financings. The Company and its
Revolving Lender were unable to agree on a method by which cash collections on
the Company's Contracts could be used by the Company for purposes other than to
repay revolving credit indebtedness. As advances under the facility exceeded the
borrowing base on one of two borrowing base calculations, the Revolving Lender
did not make requested additional advances under the facility and informed the
Company that it intended to deliver to the Company a notice of default and a
notice of acceleration under the credit facility. On February 7, 1997, the
Company filed a voluntary petition for reorganization under Chapter 11 of the
Federal Bankruptcy Code (the "Chapter 11 Petition") in the Northern District of
Texas (the "Chapter 11 Proceeding"). The Company is managing its business
subject to the supervision and control of the Federal Bankruptcy Court for the
Northern District of Texas (the "Bankruptcy Court"). JMAC was not included in
the Chapter 11 Petition, although it has been affected by the Company's filing
of the Chapter 11 Petition. See "Item 3. Legal Proceedings" and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Recent Developments; Chapter 11 Proceeding."
Since the filing of the Chapter 11 Petition, the Company has been managing
its business as a debtor-in-possession subject to the control and supervision of
the Bankruptcy Court. As substantially all of the Company's assets are pledged
to secure its lenders, the Company is required to obtain Bankruptcy Court
authorization for its use of such lenders' collateral, including cash
collateral. Although the Company has received authorization to use a portion of
its Revolving Lender's cash collateral through April 30, 1997, such
authorization has been limited to the payment of expenses and purchase of
Contracts in accordance with a court approved budget. See "Item 3. Legal
Proceedings." As a result of these limitations and the lack of available
borrowings, the Company has implemented a number of cost-saving measures. Among
other things, since the filing of the Chapter 11 Petition, the Company has (i)
tightened the criteria under which it is willing to purchase Contracts, (ii)
changed the focus of its sales and marketing efforts from enrolling new Dealers
into the Company's program to purchasing Contracts from existing Dealers whose
pools are among the better performing pools owned by the Company, (iii)
received significantly fewer Contracts from its participating Dealers for
purchase consideration, (iv) purchased a materially lower volume of Contracts
from its Dealers (819 and 326 Contracts during the months of February and March
1997, respectively, as compared with 5,929 and 8,405 Contracts during the months
of February and March 1996, respectively), and (v) reduced its workforce by
approximately 200 employees.
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The measures taken by the Company in connection with the Chapter 11
Proceeding and the decreased number of Contracts being submitted to the Company
have caused the Company to recognize that it will not in the near future be
doing the same level of business with its Dealers as it was doing prior to the
filing of the Chapter 11 Petition. Because a continuing level of Contract
purchases is an important factor in the Company's determination of the
recoverability of Acquisition Payments made to Dealers, the Company reevaluated
the adequacy of its allowance for credit losses. As a result of the
reevaluation, the Company increased the previously-announced fourth quarter
special charge to $66.5 million to increase its allowance for credit losses.
The Company has been holding discussions with its primary lenders and Carl
H. Westcott, the Company's Chairman, Chief Executive Officer and principal
shareholder, regarding the basis upon which they would support a plan of
reorganization being prepared by the Company (the "Proposed Plan of
Reorganization"). The Company has reached an agreement with Mr. Westcott on the
terms on which he would support the Company's Proposed Plan of Reorganization
and has reached an agreement with its Revolving Lender, the Company's largest
creditor, regarding the use of such lender's cash collateral after April 30,
1997 and the terms under which such lender would support the Proposed Plan of
Reorganization. Pursuant to this agreement, the Company, its Revolving Lender
and Mr. Westcott entered into a Settlement Agreement (herein so called) pursuant
to which, among other things, the Company and its Revolving Lender agreed to
support and seek Bankruptcy Court approval of a proposed final cash collateral
order (the "Proposed Final Cash Collateral Order"), and, subject to certain
conditions, Mr. Westcott and the Revolving Lender agreed to support and vote in
favor of the Proposed Plan of Reorganization. See Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations--Recent
Developments; Chapter 11 Proceeding."
There can be no assurance that the Proposed Final Cash Collateral Order
will be approved or that the Proposed Plan of Reorganization will be confirmed.
Among other things, neither the Bankruptcy Court nor the creditors' committee
appointed by the Bankruptcy Court has approved the terms of either the Proposed
Final Cash Collateral Order or the Proposed Plan of Reorganization.
GENERAL
The Company is a specialized financial services company that has
principally been engaged in the business of serving Dealers by providing an
indirect financing source to buyers of used vehicles with limited access to
traditional sources of consumer credit. The Company believes that its program
benefits participating Dealers by increasing their sales of used vehicles,
reducing the financing constraints typically associated with extending credit to
buyers with sub-prime credit histories and eliminating the burdens of
receivables management and collection. The Company believes that its program
also benefits the buyers of the vehicles by increasing their ability to purchase
a vehicle and by providing an opportunity to establish or reestablish their
credit standing.
The Company's business involves purchasing Contracts from Dealers, secured
by low-priced used vehicles that typically have been purchased by consumers with
sub-standard credit histories--commonly referred to as "D credits." The Company
has adopted a business model that mitigates the credit risk associated with its
purchase of these Contracts by effectively cross-collateralizing Contracts
purchased from a particular Dealer. The Company generally requires a Dealer to
pay a nonrefundable fee (currently $4,500 for franchised new car Dealers and
$2,500 for independent Dealers) at the time it executes the Dealer Agreement
and, commencing with 1997, an annual fee of $1,000 for participation in the
Company's program. Upon its purchase of an Installment Contract from a
participating Dealer, the Company pays the Dealer an amount that generally
approximates 50% (averaging 55% for Contracts purchased in 1996) of the
principal amount of the Contract (an "Acquisition Payment"), although the actual
amount of the Acquisition Payment will vary based upon the Company's assessment
of the credit quality of the Dealer and the Contract and other factors. The
Installment Contract then becomes part of a pool (a "Pool") of Installment
Contracts purchased from the Dealer.
The Company retains 100% of the principal and interest collected on
Contracts included within the Pool ("Pool Receipts") until the Company has
eliminated its credit risk related to the Pool. This was originally
accomplished by the Company always retaining an amount equal to 20% of the Pool
Receipts and retaining the remaining portion of the Pool Receipts until the
Company recovered all Acquisition Payments to the Dealer for the Contracts
included within the Pool
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and recouped 80% of the out-of-pocket collection costs relating to all Contracts
included within the Pool. Thereafter, the Dealer was entitled to receive an
amount equal to 80% of the Pool Receipts. In January 1997, the Company
implemented refinements to its business model designed to increase the yield on
its installments contracts receivable. Under the refined model, which applies to
Contracts purchased on or after January 1, 1997, the Company always retains 100%
of the interest collected on Contracts as its finance charge, and retains all of
the principal collected on Contracts included within a Pool until the Company
recovers all Acquisition Payments, collection costs and fees (currently
generally 10% of the principal amount of the Contract) charged by the Company to
the Dealer with respect to the Contracts included within the Pool. Once this
threshold has been met, the Dealer is entitled to receive an amount equal to the
principal collected on the Contracts within that Pool (a "Pool Distribution
Payment"), while the Company continues to retain all interest collected on the
Contracts. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations--General" and "--Liquidity and Capital
Resources."
As a result of this business model, the performing Contracts within a Pool
effectively secure the Company's recovery of Acquisition Payments paid with
respect to any non-performing Contracts within the Pool. Because the
Acquisition Payment generally approximates 50% (averaging 55% for Contracts
purchased in 1996) of the principal amount of the Contract, the credit risk
associated with the Company's purchase of Contracts is mitigated. Additionally,
by tying the amount of the Pool Distribution Payment to the performance of a
Pool purchased from the Dealer, the Company's program aims to align the
interests of the Dealer and the Company in maximizing the quality of, and
therefore the collections on, Contracts included within the Pool. However, risk
does exist that Acquisition Payments made to a Dealer may not be fully recouped
from the collections related to that Dealer's Pool(s) since the default rate on
any individual Pool could be, and in cases has been, so extreme that collections
are not sufficient to recover all Acquisition Payments paid by the Company with
respect to the Contracts included within such Pool. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations--
General" and "--Liquidity and Capital Resources."
In August 1996, the Company, through its wholly-owned subsidiary Jayhawk
Medical Acceptance Corporation ("JMAC"), expanded its business into the elective
health care market by offering an indirect financing source for elective health
care procedures. As expenditures for elective surgery in 1994 are estimated to
have been in excess of $10 billion with individual procedures in many cases
exceeding $4,000, the Company believes that the elective health care market
provides it with significant opportunities. As of March 31, 1997, the Company
had enrolled 1,473 physicians into its elective health care program, purchased
3,381 loans and financed in excess of $12.3 million of elective surgery
procedures. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations--General."
AUTOMOTIVE FINANCE
The Company's principal business has traditionally involved purchasing
Installment Contracts, from Dealers, secured by low-priced used vehicles that
typically have been purchased by consumers with sub-standard credit histories--
commonly referred to as "D credits."
USED VEHICLE INDUSTRY
The U.S. used vehicle market is highly fragmented with sales being made by
individuals, on a private basis, the used vehicle departments of franchised new
automobile dealerships and independent used vehicle dealers. It is estimated
that retail sales of used vehicles by franchised new car dealers and independent
dealers increased from approximately $141.0 billion in 1987 to $289.2 billion in
1994. In 1996, it is estimated that there were over 20,000 franchised new car
dealerships and, the Company believes, over 50,000 used car dealers.
Despite significant opportunities, many financial entities, such as banks,
savings and loans, credit unions and captive automobile finance companies, do
not consistently provide financing to the sub-prime consumer finance market. The
Company believes these traditional lenders avoid this market because of its high
credit risk and the associated necessary collection efforts. As a result, the "D
credit" segment of the sub-prime automobile finance market is primarily
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served by smaller finance companies and Dealers that provide financing when and
as their capital resources permit. See "--Competition."
OPERATIONS
Sales and Marketing
Prior to the filing of the Chapter 11 Petition, the Company focused
substantial sales and marketing efforts on enrolling new Dealers into the
Company's program and increasing the number of Contracts such Dealers sold to
the Company. Between December 31, 1993 and December 31, 1996, the number of
Dealers participating in the Company's program increased from 92 to 3,648, and
the Company's installment contracts receivable increased from $1,763,000 to
$373,740,000.
Since December 31, 1996 the Company has terminated its relationship with a
significant number of its Dealers and changed the basis upon which it is willing
to purchase Contracts from a number of others. Additionally, due to measures
taken by the Company in connection with the Chapter 11 Proceeding and the
decreased number of Contracts being submitted to the Company since January 30,
1997, the Company has purchased a materially lower volume of Contracts from its
participating Dealers and suspended its sales and marketing efforts on enrolling
new Dealers into the Company's program. The Company currently is focusing its
sales and marketing efforts on purchasing Contracts from a limited number of
Dealers whose Pools are among the better performing Pools owned by the Company.
See "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Dealer Due Diligence and Acceptance
Prior to accepting a Dealer in the Company's program, the Company performs
certain procedures designed to verify that the Dealer has obtained necessary
licenses related to the origination and sale of Contracts and will operate
within the Company's guidelines. These procedures include: (i) reviewing copies
of necessary licenses related to the origination and sale of Contracts; (ii)
performing a background investigation, which may include obtaining credit
reports, accessing certain public data repositories and talking with local and
state governmental agencies and the Better Business Bureau; (iii) generally
requiring the Dealer to pay a non-refundable fee (currently $4,500 for
franchised new car Dealers and $2,500 for independent Dealers); (iv) in most
cases, requiring the Dealer to attend a one-day training seminar; and (v)
requiring the Dealer to enter into a Dealer Agreement.
Under the Dealer Agreement, a participating Dealer represents that it will
only submit Contracts to the Company that satisfy criteria established by the
Company, meet certain conditions with respect to the binding nature and the
status of the security interest in the purchased vehicle and comply with
applicable federal and state laws. Participating Dealers generally receive a
monthly report from the Company detailing all transactions on Contracts
purchased from that Dealer, and, when applicable, a check from the Company for
any payments to which the Dealer is entitled under the Dealer Agreement.
The Dealer Agreement may be terminated for any reason by the Company or by
the Dealer upon 30 days' prior written notice, or the Company may terminate the
Dealer Agreement immediately upon an event of default by the Dealer. Events of
default include: (i) assignment by the Dealer of its rights or duties under the
Dealer Agreement, or any change in control of the Dealer without the prior
consent of the Company; (ii) failure by the Dealer to remit to the Company on a
timely basis payments with respect to Contracts purchased by the Company; (iii)
failure to perform or observe covenants in the Dealer Agreement; (iv) breach by
the Dealer of a representation in the Dealer Agreement; and (v)
misrepresentation by the Dealer of any facts or circumstances related to
Contracts submitted to the Company or a related vehicle or purchaser. Upon the
Company's termination of a Dealer Agreement as a result of the Dealer's
misrepresentation, the Company may require the Dealer to repurchase any Contract
as to which a misrepresentation has been made. Otherwise, if the Dealer
Agreement is terminated, the Company will not purchase any additional Contracts
from the Dealer, but is generally required to continue making Pool Distribution
Payments to the Dealer with respect to such Dealer's Pools.
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Contract Underwriting
Facsimile Submittal. Contracts are originated by a participating Dealer at
the time a vehicle is purchased. The purchaser of the vehicle enters into a
Contract with the Dealer on a standardized retail installment contract form
generally supplied by the Company. As the Company is not obligated to purchase
Contracts originated by the Dealer, the closing of the vehicle sale and its
delivery are generally coordinated to occur concurrently with the Company's
preliminary purchase approval of the Contract. For preliminary purchase
approval, the Dealers must submit to the Company, via facsimile, selected
transaction and credit information. This information includes a completed,
signed credit application which lists the applicant's residence, income, credit
and employment history and certain other personal information, and a purchase
order listing the financial details of the sales transaction. The information
is then entered into the Company's computerized loan application system, which
is used to determine whether the Contract will qualify for an Acquisition
Payment and the amount thereof. A credit analyst then determines whether to
approve an Acquisition Payment as submitted, decline an Acquisition Payment or
conditionally approve it. Conditional approval of an Acquisition Payment may
involve suggesting revised terms for the Contract in order for it to qualify for
the Acquisition Payment that may have been requested by the Dealer, offering the
Dealer a lower Acquisition Payment or requiring additional information about the
customer and/or the vehicle being purchased. The Company will generally respond
to all preliminary purchase approval requests within one hour of submission by
the Dealer.
Receipt of Contract Documents. Upon receipt of the original Contract and
related documentation, the Company's loan operations personnel perform
procedures to determine if the Contract meets the Company's requirements. The
loan operations personnel verify that the Contract is mathematically correct and
complies with certain provisions of Truth in Lending, Regulation Z and similar
federal and state laws. The loan operations personnel also verify that all
required loan documentation is present, including the documentation assigning to
the Company a security interest in the purchased vehicle, proof of the
applicant's physical residence and proof of the applicant's income.
If the review process discloses errors or missing documents, the loan
operations personnel will either book the Contract and hold the Acquisition
Payment until the missing documentation is received or return the documentation
to the Dealer for correction. The Acquisition Payment generally is remitted to
the Dealer within 48 hours of the Company's receipt and verification of a
complete and correct set of the Contract documentation.
Information Systems
The Company has invested significant resources into infrastructure and
technology designed to support its operations and yield continuing benefits.
The following summarizes the Company's current use of technology:
Dealer Development and Support. The Company's proprietary computer system
enables it to monitor the status of all transactions submitted by
participating Dealers. Accordingly, Company personnel can determine the
status of any Contract without leaving their workstations.
Dealer Reporting. At month-end the Company's computer system generates
dealer reports that provide each Dealer and the Company with summary
information regarding all of the Contracts purchased from the Dealer.
Contract Purchasing. The Company's computerized application processing
system enables its underwriting personnel to evaluate the proposed
transaction based upon a number of criteria, including: (i) the amount of
the customer's down payment; (ii) the sales price of the vehicle in
relation to its loan value; (iii) the creditworthiness of the customer;
(iv) the make and model of the vehicle; and (v) the past performance of the
subject Dealer's Pool; and generally respond to a Dealer's request for
preliminary purchase approval of a Contract within one hour of the Dealer's
submission of the required credit information.
Contract Sales and Support. The Company's proprietary system evaluates the
quality and quantity of business generated by Dealers. Based on such
information, the system establishes monthly production targets for each
Dealer, which are then used to establish production targets for the
Company's dealer development personnel.
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Contract Documentation and Review. The Company's proprietary system
enables the Company's Contract documentation personnel to process, review
and book a high volume of Contracts as a result of the system's automation.
The account information is entered at the time the Contract is purchased by
the Company.
Contract Accounting. The Company's automated Contract accounting system
enables it to administer and process high volumes of transactions with high
levels of system integrity.
Collection, Repossession and Loss Recovery. The Company utilizes a mini-
computer system that is specifically designed for extensive collection
activities on sub-prime receivables. The system: (i) assigns accounts to
specific user-defined work queues based on delinquency; (ii) adjusts
collection letter content based on account status and events which are
triggered by dates; (iii) records letters and customer service notations,
as well as complete payment history information, for each account; and (iv)
provides data that allows the Company to continually monitor and refine its
collection techniques.
Predictive Dialer. The system is interfaced with a predictive dialing and
tracking system designed specifically for the collection industry. The
predictive dialer is a combination of hardware and software that dials
multiple telephone numbers simultaneously, based on parameters defined by
management, for each customer service representative waiting to make
contact with an account debtor. When a telephone connection is made, the
account information is displayed on the customer service representative's
terminal and the call is automatically passed to the customer service
representative's headset. This process is instrumental in maintaining an
efficient means of collecting delinquent accounts.
The Company has adopted procedures designed to minimize the effect of systems
failures and other types of disasters, including routine backup and offsite
storage of computer tapes and redundancy and "mirroring" of certain computer
processes.
Installment Contract Portfolio
As of December 31, 1996, the Company's portfolio of Installment Contracts
contained loans with an original term generally ranging from six to 36 months
and with an average original term of approximately 28 months. The following
table sets forth the volume, number and average size of Contracts purchased by
the Company in each of the specified periods, the Company's installment
contracts receivable at the end of each of such periods and the yield on the
Company's installment contracts receivable during such period. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" for a summary of the Company's operations after December 31, 1996.
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FOR THE SEVEN FOR THE YEAR ENDED
MONTHS ENDED DECEMBER 31,
DECEMBER 31, --------------------------------------
1993 1994 1995 1996
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Contracts purchased (in thousands).................... $ 2,353 $ 52,997 $ 219,605 $ 441,605
Number of Contracts purchased......................... 476 12,674 44,495 77,117
Average size of gross contract receivable purchased... $ 4,943 $ 4,182 $ 4,935 $ 5,726
Installment contracts receivable at period
end (in thousands).................................. $ 1,763 $ 35,114 $ 167,491 $ 373,740
Yield on installment contracts receivable/(1)/........ ---/(2)/ 25.5% 17.5% 15.5%
</TABLE>
_________________
/(1)/ Represents finance charge revenue for the period as a percentage of
average installment contracts receivable for the period (derived by
dividing the sum of installment contracts receivable as of the beginning
and end of such period by two). See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations."
/(2)/ Not meaningful.
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Servicing and Collections
Customer service representatives monitor and manage the collection of their
assigned Contracts supported by a computerized priority system and typically
take action on Contracts within six days of a delinquency. The Company's
computer system provides personnel with immediate access to all information
contained in the customer's Contract and application, including the amount of
the Contract, maturity, interest rate, vehicle and reference information and
payment history. The Company's policy is to work with the delinquent customer
to permit the customer to keep the vehicle and continue making payments.
However, if the Company believes a delinquent customer will be unable to service
the Contract in an acceptable manner or is dealing in bad faith, the Company
typically will cause an outside agent to repossess the vehicle. Between its
inception in June 1993 and December 31, 1996, the Company purchased an aggregate
of 134,762 Contracts and repossessed and sold an aggregate of approximately
24,000 vehicles. The Company anticipates that as the average age of the
Contracts included in its portfolio increases, the aggregate number of vehicles
repossessed and sold by the Company as a percentage of the aggregate number of
Contracts purchased will increase significantly. Repossessed vehicles are sold,
after the expiration of the applicable redemption period, at wholesale auctions
conducted by unaffiliated auctioneers or, in limited cases, through consignment
to Dealers. The amount realized by the Company upon the sale of a repossessed
vehicle is typically less than the amount owed under the related Contract. If
after repossession and subsequent sale a material deficiency balance exists, the
Company will generally pursue the customer for this amount either directly or
through agents. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations."
COMPETITION
The sub-prime consumer automobile finance market is highly competitive and
fragmented. Although the Company does not believe that it currently competes
with commercial banks, savings and loans, credit unions and captive automobile
finance companies, it does face competition from a number of companies
providing, or capable of providing, financing programs through Dealers to
individual purchasers that cannot qualify for traditional financing. In part,
this competition takes the form of Dealers operating their own "buy here, pay
here" programs, although these Dealers are also part of the Company's target
market. The Company believes that currently its primary competitor is Credit
Acceptance Corporation, a publicly traded financial services company, which the
Company believes currently services the greatest number of Contracts originated
by "D credit" consumers. The Company also competes with numerous relatively
small, regional consumer finance companies. Many of these competitors or
potential competitors, including Credit Acceptance Corporation, have
significantly greater resources than the Company and have pre-existing
relationships with established Dealer networks. To the extent that any of such
lenders significantly expand their activities in this market, the Company could
be materially adversely affected. The Company believes that it competes
primarily on the basis of the price paid for Contracts and service to its
participating Dealers. The Company believes that its ability to compete has
been adversely impacted by the Chapter 11 Proceeding. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
CUSTOMERS AND CONCENTRATION OF BUSINESS
The Company purchases Installment Contracts from participating Dealers located
throughout the United States. No single state accounted for more than 14% of the
total number of Contracts purchased by the Company between December 31, 1995 and
December 31, 1996 or between December 31, 1996 and March 31, 1997. Similarly,
for the same periods, the top 10 states were geographically dispersed and
accounted for less than 60% of the total number of Contracts purchased by the
Company during such periods.
No single Dealer accounted for more than 1% of the total number of Contracts
purchased by the Company between December 31, 1995 and December 31, 1996 or
between December 31, 1996 and March 31, 1997, and the groups of 25 Dealers that
sold the greatest number of Contracts to the Company during such periods
accounted for less than 11% of the total number of Contracts purchased by the
Company during such periods.
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ELECTIVE HEALTH CARE FINANCE
In August 1996, the Company, through its wholly-owned subsidiary JMAC,
expanded its business into the elective health care market by offering an
indirect financing source for elective health care procedures. The Company's
elective health care program is based on the business model used by the Company
in its automotive finance business, although the Company has and will continue
to make changes to its elective health care model. Currently, each
participating physician pays the Company an annual fee (generally $1,500) to
participate in the program. Upon the Company's purchase of a loan from a
participating physician, it pays the physician an amount that generally
approximates 60% of the principal amount of the loan. This percentage is higher
than that paid Dealers, in part, because the obligors thereunder generally are
"A," "B," and "C" credits as opposed to the "D credits" that generally
participate in the Company's automotive finance program. Each loan then becomes
part of a pool of loans purchased from the physician. The Company retains 100%
of the principal and interest collected on loans included within the pool until
the Company has eliminated its credit risk related to the pool. The Company is
obligated to make a payment out of a pool if, at the end of any month, the
cumulative total of all collections received by the Company on all loans in a
pool exceeds the sum of (i) the cumulative total of all amounts paid by the
Company to the physician for all loans in that pool, plus (ii) an amount equal
to 15% of the aggregate total of the amount financed by all loans in the pool.
As expenditures for elective surgery in 1994 are estimated to have been in
excess of $10 billion with individual procedures in many cases exceeding $4,000,
the Company believes that the elective health care market provides it with
significant opportunities. As of March 31, 1997, the Company had enrolled 1,473
physicians into its elective health care program, purchased 3,381 loans and
financed in excess of $12.3 million of elective surgery procedures. The
Company's elective health care program incurred losses of approximately $1.0
million in the fourth quarter of 1996, and the Company anticipates that the
program will continue to incur significant losses at least through the second
quarter of 1997. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations--General."
Although the Company does not believe that JMAC currently directly competes
with commercial banks, savings and loans, and credit unions, it does face
competition from a number of companies capable of providing financing to
individuals for elective health care procedures. To the extent that any of such
lenders significantly expand their activities in this market, the Company could
be materially adversely affected. Additionally, since the Company's elective
health care program is based on the business model used by the Company in its
automotive finance business, it is subject to many of the same risks affecting
the Company's automotive finance business, including the risk that collections
on loans purchased by the Company will not be sufficient to recover the amounts
paid by the Company for such loans. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations."
REGULATION
The Company's operations are subject to federal and state laws and
regulations. Consumer lending laws generally require licensing of the lender
and purchasers of consumer loans (including Contracts) and adequate disclosure
of loan terms and impose limitations on the terms of consumer loans and on
collection policies and creditor remedies. Federal consumer credit statutes
primarily require disclosures of credit terms in consumer finance transactions.
In general, the Company's business is conducted under licenses issued by
individual states and is also subject to the provisions of the federal Consumer
Credit Protection Act and its related regulations. The Company maintains an
internal compliance staff to stay informed of changes in applicable law.
Due to the consumer-oriented nature of the industry in which the Company
operates and uncertainties with respect to the application of various laws and
regulations in certain circumstances, industry participants are named from time
to time as defendants in litigation, including class action suits, involving
alleged violations of federal and state consumer lending or other similar laws
and regulations. See "Item 3. Legal Proceedings." A significant judgment
against the Company in connection with any litigation could have a material
adverse affect on the Company's financial condition and results of operations.
In addition, if it were determined that a material number of Contracts or loans
purchased by
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<PAGE>
the Company involved violations of applicable lending laws by the Dealers or
physicians, the Company's financial condition and results of operations could be
materially adversely affected.
EMPLOYEES
As of March 31, 1997, the Company had approximately 350 full time employees.
None of the Company's employees are represented by a union. As a result of cash
flow constraints, between the filing of the Chapter 11 Petition and March 31,
1997, the Company reduced its work force by approximately 200 employees.
ITEM 2. PROPERTIES
----------
The Company has two leases for an aggregate of approximately 57,380 square
feet that it uses for its corporate offices in Dallas, Texas. Both leases are
for a term ending June 30, 1997 and provide for aggregate monthly rent of
approximately $53,000. Management believes that its current facilities are
sufficient to meet its current needs and that alternative or additional space,
as necessary, will be available on reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
-----------------
On February 7, 1997, the Company filed a voluntary petition for reorganization
under Chapter 11 of the Federal Bankruptcy Code in the Northern District of
Texas. The Company is managing its business as a debtor-in-possession subject
to the control and supervision of the Bankruptcy Court. See "Item 1. Business-
- -Chapter 11 Proceeding" and "Item 7. Management's Discussion and Analysis of
Financial Condition and Result of Operations--Recent Developments; Chapter 11
Proceeding."
The discussion below sets forth various aspects of the Chapter 11 Proceeding,
but is not intended to be an exhaustive summary. For additional information
regarding the effect on the Company of the Chapter 11 Proceeding, reference
should be made to the Bankruptcy Code.
Under Chapter 11, the Company, as a debtor-in-possession, is authorized to
continue to operate its businesses; however, it may not engage in transactions
outside the ordinary course of business without first complying with the notice
and hearing provisions of the Bankruptcy Code and obtaining Bankruptcy Court
approval where and when necessary.
As substantially all of the Company's assets are pledged to secure its
lenders, the Company is required to obtain Bankruptcy Court authorization for
its use of such lenders' collateral, including cash collateral. On February 11,
1997, the Bankruptcy Court entered an interim order authorizing the Company's
limited use of its Revolving Lender's cash collateral for the period from
February 7, 1997 through February 28, 1997 and providing adequate protection for
the Revolving Lender in the form of replacement liens in new Installment
Contracts. On March 6, 1997, the Bankruptcy Court entered an interim order
authorizing the Company's limited use of Prudential Securities Credit
Corporation's ("Prudential's") cash collateral for the period of March 1, 1997
through May 31, 1997. The order further provided that the Company was to make
payments to Prudential in an amount not less than $1.0 million dollars per month
payable on March 15, April 15, and May 15, 1997. On March 14, 1997, the
Bankruptcy Court entered a second interim order authorizing the Company's
continued use of the Revolving Lender's cash collateral for the period from
March 1, 1997 through March 31, 1997 and the Company's use of residual funds
after payment of expenses to either purchase new Contracts or make additional
loan repayments to the Revolving Lender. The order further provided that the
Company was to make payments to the Revolving Lender in the amount of $4.0
million to reduce the principal amount of the Company's loan obligations to the
Revolving Lender. On March 25, 1997, the Bankruptcy Court entered a third
interim order authorizing the Company's continued use of the Revolving Lender's
cash collateral for the period from April 1, 1997 through April 30, 1997 and the
Company's use of residual funds after payment of expenses to either purchase new
Contracts or make additional loan repayments to the Revolving Lender. The order
further provided that the Company was to make payments to the Revolving Lender
in the additional amount of $4.0 million to reduce the principal amount
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<PAGE>
of the Company's loan obligations to the Revolving Lender. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Recent Developments; Chapter 11 Proceeding."
Under Chapter 11, all litigation and claims against the Company at the date of
the filing have been stayed while the Company continues business operations as a
debtor-in-possession. The Bankruptcy Code prohibits creditors who are subject
to the jurisdiction of the Bankruptcy Court from suing the Company, either by
commencement or continuation of a lawsuit or otherwise, unless the Bankruptcy
Court terminates or modifies the automatic stay of litigation or otherwise
authorizes payments by the Company.
Under Chapter 11, an official committee of unsecured creditors is appointed
and such committee has the right to review and object to certain business
transactions and can participate in the formulation of any plan of
reorganization. On March 18, 1997, an official committee of unsecured creditors
(the "Creditors' Committee") was appointed pursuant to section 1102(a)(1) of the
Bankruptcy Code. The Creditors' Committee is entitled to retain counsel and
other professionals, in each case at the expense of the Company, if they are
retained pursuant to an order of the Bankruptcy Court.
As a debtor-in-possession, the Company has the right, subject to Bankruptcy
Court approval and certain other limitations, to assume or reject certain
executory contracts and unexpired leases. In this context, "assumption" means
that the Company agrees to perform its obligations under the contract or lease,
and "rejection" means that the Company is relieved of its obligations to perform
further under the contract or lease and is subject only to a claim for damages
resulting from the breach thereof. Any such damage claims are treated as
general unsecured claims in the reorganization proceedings. The Company is
studying executory contracts and unexpired leases to determine whether
assumption or rejection is appropriate.
Under the Bankruptcy Code, a creditor's claim is treated as secured only to
the extent of the value of such creditor's collateral, and the balance of such
creditor's claim is treated as unsecured. Claims which were contingent or
unliquidated at the commencement of the Chapter 11 Proceeding are generally
allowable against the Company.
In the normal course of its business, the Company is named as defendant in
legal proceedings. These legal proceedings, which are prevented from proceeding
because of the automatic stay provisions of the Bankruptcy Code, include claims
for alleged truth-in-lending violations, nondisclosures, misrepresentations and
deceptive trade practices, among other things. The relief requested by
plaintiffs varies, but often includes requests for compensatory, statutory and
punitive damages. One proceeding in which the Company is a defendant has been
brought as a putative class action and is pending in Federal District Court in
Illinois. A class has yet to be certified in this case and the Company's motion
to dismiss is presently pending. In the opinion of management, resolution of
these matters will not have a material adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
---------------------------------------------------
No matter was submitted to a vote of the Company's security-holders during the
quarter ended December 31, 1996.
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<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
---------------------------------------------------------------------
The Company's outstanding common stock, par value $.01 per share (the "Common
Stock") was quoted on the Nasdaq National Market under the trading symbol "JACC"
from the Company's initial public offering in August 1995 at $10.00 per share
until the Chapter 11 Proceeding. Since the Chapter 11 Proceeding, the Common
Stock has been quoted on the Nasdaq National Market under the trading symbol
"JACC(Q)." The following table sets forth, for the periods indicated, the high
and low closing sale prices as reported by the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
Calendar 1995:
Third Quarter (since August 1) 15 3/8 12 3/4
Fourth Quarter 14 5/8 8 5/8
Calendar 1996:
First Quarter 12 3/4 8
Second Quarter 15 1/4 11 7/8
Third Quarter 14 1/4 9 5/8
Fourth Quarter 15 3/4 10 1/8
Calendar 1997:
First Quarter 11 15/16 1/2
Second Quarter (through April 10, 1997) 2 7/16 2
</TABLE>
On April 10, 1997, the closing price for the Common Stock was $2 per share.
As of March 31, 1997, the Common Stock was held by 175 holders of record. The
Company believes that as of March 31, 1997, there were approximately 1,855
holders of Common Stock of record or through nominee or street name accounts
with brokers.
Since inception, the Company has not paid any dividends. The Company has no
present plans to pay any cash dividends on its Common Stock and currently
intends to retain its earnings to finance the growth and development of its
business. In addition, the Company's revolving credit facility prohibits the
payment of cash dividends without the lender's consent.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
The selected historical financial data presented below as of and for the seven
months ended December 31, 1993 and the years ended December 31, 1994, 1995 and
1996 are derived from the Company's audited financial statements. The data set
forth below should be read in conjunction with the financial statements of the
Company and the notes thereto and "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations" appearing elsewhere herein.
<TABLE>
<CAPTION>
FOR THE SEVEN FOR THE
MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
-------------- ----------------------------------------------
STATEMENT OF OPERATIONS DATA: 1993 1994 1995 1996
-------------- -------------- -------------- --------------
Revenues: (dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Finance charges....................................... $ 45 $ 4,695 $ 17,693 $ 41,905
Dealer fees........................................... 43 1,084 4,095 8,455
Service Contracts..................................... -- -- -- 3,206
-------------- -------------- -------------- --------------
Total revenue.................................... 88 5,779 21,788 53,566
Costs and expenses:
Sales and marketing................................... 814 2,808 4,730 9,198
Operating............................................. 720 4,622 7,408 16,654
Provision for credit losses........................... 7 526 2,243 71,062
Provision for service contract claims................. --- --- --- 1,310
Interest.............................................. 51 305 1,320 6,268
-------------- -------------- -------------- --------------
Total costs and expenses......................... 1,592 8,261 15,701 104,492
-------------- -------------- -------------- --------------
Income (loss) before income taxes....................... (1,504) (2,482) 6,087 (50,926)
Income taxes (benefit).................................. --- --- 1,187 (1,187)
-------------- -------------- -------------- --------------
Net income (loss)....................................... $ (1,504) $ (2,482) $ 4,900 $ (49,739)
============== ============== ============== ==============
Net income (loss) per common and equivalent share..... $ (.11) $ (.16) $ .26 $ (2.17)
Weighted average number of common and equivalent...... 14,216 15,345 18,732 22,931
shares outstanding (in thousands)
CASH FLOW DATA:
(Used in) provided by operating activities.............. $ (827) $ (2,015) $ 6,093 $ 8,194
Used in investing activities............................ (1,159) (13,217) (68,854) (125,665)
Provided by financing activities........................ 3,020 20,322 56,557 117,604
Net increase (decrease) in cash and cash equivalents.... 1,034 5,090 (6,004) 133
<CAPTION>
1993 1994 1995 1996
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Installment contracts receivable........................ $ 1,763 $ 35,114 $ 167,491 $ 373,740
Allowance for credit losses............................. (7) (533) (2,308) (73,635)
-------------- -------------- -------------- --------------
Installment contracts receivable, net................... 1,756 34,581 165,183 300,105
All other assets........................................ 1,562 7,738 8,190 22,462
-------------- -------------- -------------- --------------
Total assets..................................... $ 3,318 $ 42,319 $ 173,373 $ 322,567
============== ============== ============== ==============
Dealer holdbacks, net................................... $ 1,038 $ 20,239 $ 82,373 $ 159,075
Total debt.............................................. 2,900 7,500 32,386 108,647
Other liabilities....................................... 764 2,571 10,034 14,661
Shareholders' equity (deficit).......................... (1,384) 12,009 48,580 40,184
-------------- -------------- -------------- --------------
Total liabilities and shareholders' equity....... $ 3,318 $ 42,319 $ 173,373 $ 322,567
============== ============== ============== ==============
</TABLE>
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
RECENT DEVELOPMENTS; CHAPTER 11 PROCEEDING
GENERAL. In the fourth quarter of 1996, the Company reevaluated the
overall profitability and credit quality of existing Dealers' pools and
determined to terminate its relationship with a number of Dealers and to change
the basis on which it was willing to purchase Contracts from others. As a
result of these actions and because a continuing business relationship is an
important factor in the Company's determination of the recoverability of
Acquisition Payments made to Dealers, on January 30, 1997 the Company announced
a special charge of $15.5 million in the fourth quarter of 1996 to increase its
allowance for credit losses.
The fourth quarter special charge caused the Company to be in
noncompliance with a financial covenant under its primary revolving credit
facility. Additionally, the Company's planned additional financings in January
1997 failed to materialize. The Company commenced discussions with its
Revolving Lender regarding the covenant violation and its cash needs in light of
the failure to consummate the additional financings. The Company and its
Revolving Lender were unable to agree on a method by which cash collections on
the Company's Contracts could be used by the Company for purposes other than to
repay revolving credit indebtedness. As advances under the facility exceeded
the borrowing base on one of two borrowing base calculations, its Revolving
Lender did not make requested additional advances under the facility and
informed the Company that it intended to deliver to the Company a notice of
default and a notice of acceleration under the credit facility. On February 7,
1997, the Company filed for protection under Chapter 11 of the Bankruptcy Code.
Neither JMAC nor any other subsidiary of the Company was included in the Chapter
11 Petition.
Since the filing of the Chapter 11 Petition, the Company has been managing
its business as a debtor-in-possession subject to the control and supervision of
the Bankruptcy Court. As substantially all of the Company's assets are pledged
to secure its lenders, the Company is required to obtain Bankruptcy Court
authorization for its use of such lenders' collateral, including cash
collateral. Although the Company has received authorization to use a portion of
its Revolving Lender's cash collateral through April 30, 1997, such
authorization has been limited to the payment of expenses and purchase of
Contracts in accordance with a court approved budget. See "Item 1. Business--
Chapter 11 Proceeding" and "Item 3. Legal Proceedings." As a result of these
limitations and the lack of available borrowings, the Company has implemented a
number of cost-saving measures. Among other things, since the filing of the
Chapter 11 Petition, the Company has (i) tightened the criteria under which it
is willing to purchase Contracts, (ii) changed the focus of its sales and
marketing efforts from enrolling new Dealers into the Company's program to
purchasing Contracts from existing Dealers whose pools are among the better
performing Pools owned by the Company, (iii) received significantly fewer
Contracts from its participating Dealers for purchase consideration, (iv)
purchased a materially lower volume of Contracts from its Dealers (819 and 326
Contracts during the months of February and March 1997, respectively, as
compared with 5,929 and 8,405 Contracts during the months of February and March
1996, respectively), and (v) reduced its workforce by approximately 200
employees.
The measures taken by the Company in connection with the Chapter 11
Proceeding and the decreased number of Contracts being submitted to the Company
have caused the Company to recognize that it will not in the near future be
doing the same level of business with its Dealers as it was doing prior to the
filing of the Chapter 11 Petition. Because a continuing level of Contract
purchases is an important factor in the Company's determination of the
recoverability of Acquisition Payments made to Dealers, the Company reevaluated
the adequacy of its allowance for credit losses. As a result of this
reevaluation, the Company increased the previously-announced fourth quarter
special charge to $66.5 million to increase its allowance for credit losses.
However, the Company believes collections from its prepetition Contracts
and from Contracts purchased subsequent to such filing will provide sufficient
cash to consummate its Proposed Plan of Reorganization.
JMAC. JMAC was formed in August 1996 to provide an indirect source of
financing for elective health care procedures. As of March 31, 1997, JMAC had
enrolled 1,473 physicians into its elective health care program, purchased 3,381
loans and financed in excess of $12.3 million of elective surgery procedures.
JMAC incurred losses of
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<PAGE>
approximately $1.0 million in the fourth quarter of 1996, and the Company
anticipates that JMAC will continue to incur losses at least through the second
quarter of 1997.
Although JMAC was not a party to the Company's Chapter 11 Petition, the
Company's filing of the Chapter 11 Petition has affected JMAC. JMAC had loaned
approximately $7.1 million to the Company (the "JMAC Claim") prior to the
Company's filing of the Chapter 11 Petition, and the Bankruptcy Court has
prohibited the Company from providing JMAC with any cash to finance its
operations, including any repayment of the JMAC Claim. Additionally, after the
Company filed its Chapter 11 Petition, JMAC's revolving credit lender refused to
make any further advances under JMAC's revolving credit facility. To fund
JMAC's operations, between January 30, 1997 and April 11, 1997, Mr. Westcott,
the Company's Chairman of the Board, Chief Executive Officer and principal
shareholder, made seven loans to JMAC in the aggregate principal amount of
$6,950,000 (the "Westcott Loans"). Additionally, at the request of JMAC's
revolving credit lender, on February 28, 1997, Mr. Westcott purchased the
revolving credit promissory note evidencing the $13.5 million principal amount
of indebtedness outstanding under the facility (together with the Westcott
Loans, the "Westcott Indebtedness"). On April 14, 1997, Mr. Westcott and JMAC
entered into a Preferred Stock Purchase Agreement (herein so called), pursuant
to which Mr. Westcott purchased from JMAC 20,000 shares of JMAC's Series A
Redeemable, Convertible Preferred Stock (the "JMAC Preferred Stock") in exchange
for $2.0 million of the Westcott Indebtedness and, subject to certain
limitations, committed to purchase up to an additional 30,000 shares of JMAC
Preferred Stock for $100 per share. See "Item 13. Certain Relationships and
Related Transactions."
Pursuant to the Preferred Stock Purchase Agreement, Mr. Westcott also
agreed to support and vote in favor of the Company's plan of reorganization if
the plan is confirmed by the Bankruptcy Court no later than October 2, 1997 and
contains the following provisions (the "Westcott Designated Provisions") (or, in
lieu of any of the Westcott Designated Provisions, such other provisions
substantially similar to the Westcott Designated Provisions as are reasonably
acceptable to Mr. Westcott): (i) payment in full by the Company within six
months following confirmation of the plan of reorganization of the JMAC Claim in
accordance with an amortization schedule reasonably acceptable to Mr. Westcott
(which payments have been assigned to Mr. Westcott and are to be used to repay a
portion of the Westcott Indebtedness) and (ii) the exchange, as soon as
practicable after the plan of reorganization is confirmed, of the JMAC Preferred
Stock for that number of shares of the Company's common stock equal to the
amount derived by dividing the redemption price of the JMAC Preferred Stock at
the confirmation date by an amount equal to 75% of the average of the last
reported daily sale price per share of the Company's common stock on the Nasdaq
National Market during the period commencing with the twentieth trading day
preceding the date the plan of reorganization is confirmed and continuing for a
period ending on the twentieth trading day following the date the plan of
reorganization is confirmed. Mr. Westcott's support of the Proposed Plan of
Reorganization is required because it provides that he will personally guarantee
$10.0 million of the Revolving Lender's post-Chapter 11 Petition indebtedness.
Each outstanding share of JMAC Preferred Stock (i) has a liquidation value
equal to the sum of $100 plus $1.50 for each calendar month or portion thereof
that then has elapsed from and including April 1997 (the sum of such amounts
being referred to as the "Liquidation Value"), (ii) except as required by law,
entitles the holder thereof to one vote per share voting with the holders of
JMAC's common stock (which results in Mr. Westcott having voting control of JMAC
as long as he owns the JMAC Preferred Stock), (iii) is redeemable at any time
prior to conversion at a redemption price equal to the Liquidation Value,
provided that at the time of such redemption all indebtedness owing by JMAC to
Mr. Westcott and certain affiliated parties (including without limitation the
Westcott Indebtedness) has been paid in full, and (iv) is convertible at any
time after the earlier of April 15, 1998, 30 days after any person or entity,
other than Mr. Westcott or certain of his affiliates, becomes the beneficial
owner of 25% or more of the combined voting power of all outstanding securities
of the Company with the intention of changing or influencing control of the
Company, or the occurrence of certain other specified events, into that number
of shares of JMAC's common stock as shall be equal to the quotient of the number
of shares of JMAC's common stock, which after issuance, would be equal to 95% of
all shares of JMAC's common stock outstanding on the date the first share of
JMAC Preferred Stock is converted divided by the number of shares of JMAC
Preferred Stock authorized for issuance (currently 50,000), subject to
adjustment. See "--Proposed Plan of Reorganization," "Item 1. Business--Chapter
11 Proceeding" and "Item 13. Certain Relationships and Related Transactions."
Page 14
<PAGE>
PROPOSED PLAN OF REORGANIZATION. The Company has been holding discussions
with its primary lenders and Mr. Westcott regarding the basis upon which they
would support the Proposed Plan of Reorganization being prepared by the Company.
The Company has reached an agreement with Mr. Westcott on the terms on which he
would support the Company's Proposed Plan of Reorganization (see "--JMAC" above)
and has reached an agreement with its Revolving Lender, the Company's largest
creditor, regarding the use of such lender's cash collateral after April 30,
1997 and the terms under which such lender would support the Proposed Plan of
Reorganization. Pursuant to this agreement, the Company, its Revolving Lender
and Mr. Westcott entered into a Settlement Agreement pursuant to which, among
other things, the Company and its Revolving Lender agreed to support and seek
Bankruptcy Court approval of the Proposed Final Cash Collateral Order and,
subject to certain conditions, the Company, Mr. Westcott and the Revolving
Lender agreed to support and vote in favor of the Proposed Plan of
Reorganization.
Under the Proposed Final Cash Collateral Order, subject to certain
conditions, the Company generally would be authorized to continue using its
Revolving Lender's cash collateral after April 30, 1997 for the payment of
expenses, the purchase of new Contracts and additional loan repayments to its
Revolving Lender, in each case in accordance with a budget to be approved by its
Revolving Lender and the Bankruptcy Court. The Proposed Final Cash Collateral
Order would also generally require the Company to (i) repay the Company's
indebtedness to its Revolving Lender (approximately $55.4 million principal
amount as of April 11, 1997) in monthly installments of principal ranging from
$4.0 million in May 1997 to $3.0 million in August 1998, with the balance being
due in full in September 1998, in each case together with accrued interest, and
(ii) make certain additional principal payments to its Revolving Lender to the
extent actual collections with respect to certain Contracts exceed the
Company's projected collections on such Contracts or are less than 85% of the
Company's projected collections on such Contracts. To safeguard the Revolving
Lender against diminution in the value of its pre-Chapter 11 Petition
collateral, under the Proposed Final Cash Collateral Order the Revolving Lender
would receive replacement liens on all Contracts purchased by the Company;
provided that if the Proposed Plan of Reorganization does not become effective
on or before July 31, 1997, the Company would be deemed to have granted to its
Revolving Lender a replacement lien on the Company's ownership interest in
Jayhawk Funding Trust I (herein so called), a special purpose Delaware business
trust wholly owned by the Company and formed for the purpose of effecting the
Company's securitization transactions (see Note 6 of the Notes to Consolidated
Financial Statements), and the Revolving Lender would generally be obligated to
release its liens on all Contracts purchased by the Company after March 1, 1997
and certain other assets.
The Proposed Plan of Reorganization would provide for full payment to all
creditors and include seven classes of claims and one class of equity interests,
in addition to administrative expense claims, comprised of Other Priority Claims
(Class 1), which consist of claims, other than administrative expense claims and
priority tax claims, entitled to priority in right of payment under section
507(a) of the Bankruptcy Code; the Secured Revolving Lender Claim (Class 2),
which consists of claims and liens arising under or related to the Company's
pre-petition revolving credit agreement, including $55.4 million principal
amount of indebtedness at April 11, 1997; the Secured Prudential Claim (Class
3), which consists of claims and liens arising under or related to the Trust
Shares Pledge Agreement between the Company and Prudential dated December 23
1996, including $4.0 million principal amount of indebtedness at April 11, 1997;
Other Secured Claims (Class 4), of which the Company believes there are none;
Unsecured Claims (Class 5), which consist of any claim that is not an
administrative expense claim, priority tax claim, Other Priority Claim, Secured
Revolving Lender Claim, Secured Prudential Claim, Other Secured Claim, Dealer
Claim or JMAC Claim and are estimated by the Company to be approximately $3.0
million at April 11, 1997; Dealer Claims (Class 6), which consist of those
claims arising under Dealer Agreements between the Company and Dealers; and the
JMAC Claim (Class 7). In addition, the Proposed Plan of Reorganization will
include the Designated Provisions and will require that Mr. Westcott guaranty
$10.0 million principal amount of the Secured Revolving Lender Claim. See "--
JMAC."
The Proposed Plan of Reorganization would provide for distributions
substantially as follows: (i) administrative expense claims (provided that
administrative expense claims relating to obligations incurred in the ordinary
course of business during the pendency of the Chapter 11 Proceeding or assumed
by the Company will be paid in accordance with the terms and conditions of the
transactions or agreements relating thereto), priority tax claims, Other
Priority Claims, Other Secured Claims (provided that, in the alternative, the
Company would be entitled to elect, at its sole option, to reinstate the Other
Secured Claims or return the collateral securing such claims to the holders of
Other
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<PAGE>
Secured Claims), and Dealer Claims (Dealer Claims would be paid, within twenty
days of the effective date of the Proposed Plan of Reorganization (the
"Effective Date"), amounts to which the Dealers are entitled under the Dealer
Agreements as of the Effective Date and any additional payments would be made as
they become due; provided that a Dealer may elect to accept a lesser amount
payable in a lump sum, as provided in the Proposed Plan of Reorganization, in
full satisfaction of any payments that the Dealer is, or may become, entitled to
under the Dealer Agreement) will receive payment, in full, in cash, as of the
Effective Date or as soon thereafter as is practicable, to the extent that such
claims are claims allowed by the Bankruptcy Court; (ii) the Secured Revolving
Lender Claim would be paid in substantially the same manner as in the Proposed
Final Cash Collateral Order and would be secured by the same assets as would
secure such claim under the Proposed Final Cash Collateral Order after July 31,
1997, (iii) the Secured Prudential Claim would be paid in full and would
continue to be secured by the Company's ownership interest in Jayhawk Funding
Trust I; (iv) the JMAC Claim and Unsecured Claims would each be paid in two
equal installments, including interest; and (v) all holders of the Company's
common stock would retain such stock.
There can be no assurance that the Proposed Final Cash Collateral Order
will be approved or that the Proposed Plan of Reorganization will be confirmed
on substantially the same terms as described above. Among other things, neither
the Bankruptcy Court nor the Creditors' Committee has approved the terms of
either the Proposed Final Cash Collateral Order or the Proposed Plan of
Reorganization.
GENERAL
The Company is a specialized financial services company that has
principally been engaged in the business of serving Dealers by providing an
indirect financing source to buyers of used vehicles with limited access to
traditional sources of consumer credit. See "--Recent Developments; Chapter 11
Proceeding" and --Liquidity and Capital Resources." The Company believes that
its program benefits participating Dealers by increasing their sales of used
vehicles, reducing the financing constraints typically associated with extending
credit to buyers with sub-prime credit histories and eliminating the burdens of
receivables management and collection. The Company believes that its program
also benefits the buyers of the vehicles by increasing their ability to purchase
a vehicle and by providing an opportunity to establish or reestablish their
credit standing.
The Company's business involves purchasing Installment Contracts, from
Dealers, secured by low-priced used vehicles that typically have been purchased
by consumers with sub-standard credit histories--commonly referred to as "D
credits." The Company has adopted a business model that mitigates the credit
risk associated with its purchase of these Contracts by effectively cross-
collateralizing Contracts purchased from a particular Dealer. The Company
generally requires a Dealer to pay a nonrefundable fee (currently $4,500 for
franchised new car Dealers and $2,500 for independent Dealers) at the time it
executes the Dealer Agreement and, commencing with 1997, an annual fee of $1,000
for participation in the Company's program. Upon its purchase of an Installment
Contract from a participating Dealer, the Company pays the Dealer an amount that
generally approximates 50% (averaging 55% for Contracts purchased in 1996) of
the principal amount of the Contract, although the actual amount of the
Acquisition Payment will vary based upon the Company's assessment of the credit
quality of the Dealer and the Contract and other factors. The Installment
Contract then becomes part of a Pool of Installment Contracts purchased from the
Dealer.
The Company retains 100% of the principal and interest collected on
Contracts included within the Pool ("Pool Receipts") until the Company has
eliminated its credit risk related to the Pool. This was originally
accomplished by the Company always retaining an amount equal to 20% of the Pool
Receipts and retaining the remaining portion of the Pool Receipts until the
Company recovered all Acquisition Payments to the Dealer for the Contracts
included within the Pool and recouped 80% of the out-of-pocket collection costs
relating to all Contracts included within the Pool. Thereafter, the Dealer was
entitled to receive an amount equal to 80% of the Pool Receipts. In January
1997, the Company implemented refinements to its business model designed to
increase the yield on its installments contracts receivable. Under the refined
model, which applies to Contracts purchased on or after January 1, 1997, the
Company always retains 100% of the interest collected on Contracts as its
finance charge, and retains all of the principal collected on Contracts included
within a Pool until the Company recovers all Acquisition Payments, collection
costs and fees (currently generally 10% of the principal amount of the Contract)
charged by the Company to the Dealer with respect to the
Page 16
<PAGE>
Contracts included within the Pool. Once this threshold has been met, the Dealer
is entitled to receive a Pool Distribution Payment equal to the principal
collected on the Contracts within that Pool, while the Company continues to
retain all interest collected on the Contracts.
As a result of the Company's business model, the performing Contracts
within a Pool effectively secure the Company's recovery of Acquisition Payments
paid with respect to any non-performing Contracts within the Pool. Because the
Acquisition Payment generally approximates 50% (averaging 55% for Contracts
purchased in 1996) of the principal amount of the Contract, the credit risk
associated with the Company's purchase of Contracts is mitigated. Additionally,
by tying the Pool Distribution Payment to the performance of a Pool purchased
from the Dealer, the Company's program aims to align the interests of the Dealer
and the Company in maximizing the quality of, and therefore the collections on,
Contracts included within the Pool. However, risk does exist that Acquisition
Payments made to a Dealer may not be fully recouped from the collections related
to that Dealer's Pool(s) since the default rate on any individual Pool could be,
and in cases has been, so extreme that collections are not sufficient to recover
all Acquisition Payments paid by the Company for such Contracts. See "--Recent
Developments; Chapter 11 Proceeding."
Historically, the Company permitted a Dealer to "close" an existing Pool
and establish a "new" Pool each time the Dealer had sold at least 100 Contracts
to the Company by paying a fee to the Company (generally $2,500). Thereafter,
any Contracts purchased by the Company from the Dealer would be included in the
Dealer's "new" Pool. Since January 1, 1997, the Company will generally
automatically and without charge "close" an existing Pool and establishes a
"new" Pool upon the anniversary of a Dealer Agreement if at least 25 Contracts
have been purchased by the Company from that Dealer and each time the Dealer has
sold at least 100 Contracts to the Company. Since a Dealer is entitled to Pool
Distribution Payments from a Pool only after the Company recovers all
Acquisition Payments paid to the Dealer in connection with Contracts included
within the Pool, the "closing" of a Dealer's Pool and inclusion of all Contracts
subsequently purchased from the Dealer in a "new" Pool result in the Dealer
receiving Pool Distribution Payments sooner than would otherwise be the case.
However, notwithstanding a Dealer's establishment of "new" Pools, the Dealer
Agreement provides that if Pool Receipts with respect to any Pool of a Dealer
are insufficient to recover the Acquisition Payments paid for Contracts within
that Pool, the Company may recover such Acquisition Payments from Pool Receipts
to any other Pool of such Dealer, which effectively cross-collateralizes
Contracts within and among a Dealer's Pools.
With respect to Contracts purchased prior to 1997, upon the Company's
purchase of a Contract, the Company recorded the gross amount of the Contract as
a gross contract receivable. At that time, the Company also recorded an amount
equal to 20% of the gross contract receivable as its unearned finance charges
and an amount equal to 80% of the gross contract receivable as a dealer
holdback. For balance sheet presentation purposes, the unearned finance charges
were subtracted from the gross contract receivable. Similarly, for balance
sheet presentation purposes, dealer holdbacks were shown net of Acquisition
Payments made by the Company to the Dealer. With respect to Contracts purchased
on or after January 1, 1997, upon the Company's purchase of a Contract, the
Company records the gross amount of the Contract as a gross contract receivable
and records the finance charge which has not been earned as unearned finance
charge. For balance sheet presentation purposes, the unearned finance charge is
subtracted from the gross contract receivable. The Company also records an
amount equal to the principal amount of the gross contract receivable as a
dealer holdback, which is shown net of Acquisition Payments. See Notes 1, 3,
and 5 of the Notes to Consolidated Financial Statements.
The Company's program is designed to cause a Dealer to charge an interest
rate on Contracts equal to the lesser of 20% per annum and the highest lawful
rate. As the Company believes that "D credit" consumers will have few if any
credit alternatives offering interest rates below such rate, it does not believe
that its revenues will be adversely impacted by changes in interest rates. The
Company's Contracts are (i) secured by the related vehicle; (ii) short-term in
duration (generally six to 36 months with an average original term of
approximately 28 months for Contracts purchased in 1996) and (iii) cross-
collateralized within and among a Dealer's Pool(s).
In August 1996, the Company, through its wholly owned subsidiary JMAC,
expanded its business into the elective health care market by offering an
indirect financing source for elective health care procedures. As expenditures
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<PAGE>
for elective surgery in 1994 are estimated to have been in excess of $10 billion
with individual procedures in many cases exceeding $4,000, the Company believes
that the elective health care market provides it with significant opportunities.
As of March 31, 1997, the Company had enrolled 1,473 physicians into its
elective health care program, purchased 3,381 loans and financed in excess of
$12.3 million of elective surgery procedures. The Company's elective health
care program incurred losses of approximately $1.0 million in the fourth quarter
of 1996, and the Company anticipates that the program will continue to incur
losses at least through the second quarter of 1997.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship of certain items
to total revenue for the periods indicated.
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL REVENUE
-----------------------------------------------------
FOR THE SEVEN FOR THE
MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
--------------------------------------
1993 1994 1995 1996
------------ -------- ---------- -----------
<S> <C> <C> <C> <C>
Revenues:
Finance charges............................. 51.1% 81.2% 81.2% 78.2%
Dealer fees................................. 48.9 18.8 18.8 15.8
Service Contracts........................... --- --- --- 6.0
------------ -------- ---------- -----------
Total revenue............................... 100.0 100.0 100.0 100.0
Costs and expenses:
Sales and marketing......................... 925.0 48.6 21.7 17.2
Operating................................... 818.2 80.0 34.0 31.1
Provision for credit losses................. 8.0 9.1 10.3 132.7
Provision for service contract
claims................................... --- --- --- 2.4
Interest.................................... 58.0 5.3 6.1 11.7
------------ -------- ---------- -----------
Total costs and expenses.................... 1,809.2 143.0 72.1 195.1
------------ -------- ---------- -----------
Income (loss) before income taxes........... (1,709.2) (43.0) 27.9 (95.1)
Income taxes................................ --- --- 5.4 (2.3)
------------ -------- ---------- -----------
Net income (loss)........................... (1,709.2)% (43.0)% 22.5% (92.9)%
============ ======== ========== ===========
</TABLE>
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Total Revenue. Total revenue increased from $21.8 million for the year
ended December 31, 1995 to $53.6 million for the same period in 1996, an
increase of $31.8 million or 145.9%. The increase was primarily due to increased
finance charges resulting from the increased number of Installment Contracts
held in the Company's portfolio. Finance charges increased from $17.7 million
for the year ended December 31, 1995 to $41.9 million for the same period in
1996, an increase of $24.2 million or 136.7%. The Company purchased 77,117
Installment Contracts during the year ended December 31, 1996, an increase of
73.3% over the same period in 1995. The Company's installment contracts
receivable increased from $167.5 million as of December 31, 1995, to $373.7
million as of December 31, 1996, an increase of $206.2 million or 123.1%. Dealer
fees also contributed to the increase in total revenue. Dealer fees increased
from $4.1 million for the year ended December 31, 1995 to $8.5 million for the
same period in 1996, an increase of $4.4 million or 106.5%. Service contract
revenue was $3.2 million for the year ended December 31, 1996. The Company
recognized no service contract revenue during the year ended December 31, 1995,
as the Company did not offer the service contract program to its Dealers at that
time. As a result of changes in the way Dealers are compensated for selling
service contracts, the Company expects service contract revenue to decrease
significantly in the future. Revenue from the Company's elective health care
program for the year ended December 31, 1996 was $.4 million. The average
annualized yield on the Company's installment contract portfolio decreased from
17.5% to 15.5% for the years ended December 31, 1995 and December 31, 1996,
respectively. The decrease in the average annualized yield is primarily
Page 18
<PAGE>
attributable to the longer average original term of Contracts purchased in 1996
when compared with 1995 and, to a lesser extent, the higher percentage of non-
accrual contracts as a percentage of the total number of Contracts included
within the Company's portfolio during 1996 when compared with 1995. The average
original term of Contracts purchased in 1996 was 28 months as compared with 21
months in 1995, an increase of 7 months or 33.3%. Non-accrual contracts as a
percentage of the total number of Contracts included within the Company's
portfolio increased from 19.7% at December 31, 1995 to 31.4% at December 31,
1996. Due to the current and expected future reduced level of Contract
purchases, the Company anticipates that the average age of the Contracts
included within its portfolio will increase, which will result in a significant
increase in non-accrual contracts as a percentage of the total number of
Contracts included within the Company's portfolio.
As a result of measures taken by the Company in connection with the Chapter
11 Proceeding and the decreased number of Contracts being submitted to the
Company, the Company anticipates reporting materially lower volumes of Contract
purchases in the foreseeable future, which will result in decreased finance
charges, dealer fees and service contract revenue. See "--Recent Developments;
Chapter 11 Proceeding."
Sales and Marketing. Sales and marketing expenses increased from $4.7
million for the year ended December 31, 1995 to $9.2 million for the same period
in 1996, but decreased as a percentage of total revenue from 21.7% for the year
ended December 31, 1995 to 17.2% for the year ended December 31, 1996. The
dollar increase in sales and marketing expenses is primarily a result of the
effort by the Company to expand the number of Dealers participating in the
Company's program and $0.8 million of expenses related to the launch of the
Company's elective health care program. The decrease in sales and marketing
expenses as a percentage of total revenue was primarily the result of economies
of scale associated with increased total revenue.
Operating Expenses. Operating expenses increased from $7.4 million for the
year ended December 31, 1995 to $16.7 million for the same period in 1996, an
increase of $9.3 million or 125.7%, and decreased as a percentage of total
revenue from 34.0% for the year ended December 31, 1995 to 31.1% for the year
ended December 31, 1996. The dollar increase in operating expenses is primarily
a result of the overall expansion in the Company's operations, including $1.1
million of expenses related to the launch of the Company's elective health care
program. The decrease in operating expenses as a percentage of total revenue
was primarily the result of economies of scale associated with increased total
revenue. As a result of the anticipated decline in revenues, the Company
believes that it is likely that its operating expenses as a percentage of
revenues will increase in the future. See "--Recent Developments; Chapter 11
Proceeding."
Provision for Credit Losses. The amount provided for credit losses
increased from $2.2 million for the year ended December 31, 1995 to $71.1
million for the same period in 1996. The increase in provision for credit losses
was primarily attributable to a special charge of $66.5 million taken in the
fourth quarter of 1996. See "--Recent Developments; Chapter 11 Proceeding" and
"--Credit Loss Policy."
Provision for Service Contract Claims. The Company provided $1.3 million
for service contract claims for the year ended December 31, 1996. No amount was
provided for the year ended December 31, 1995, as the Company did not offer the
service contract program at that time.
Interest Expense. Interest expense increased from $1.3 million during the
year ended 1995 to $6.3 million during the same period in 1996. This increase
was due to higher average borrowings used to fund operations and the purchase of
Contracts.
Income Taxes. The Company's effective income tax rate was (2.3)% for the
year ended December 31, 1996, as compared with an effective income tax rate of
19.5% for the same period in 1995. See Note 9 of the Notes to Consolidated
Financial Statements.
Page 19
<PAGE>
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Total Revenue. Total revenue increased from $5.8 million for the year
ended December 31, 1994 to $21.8 million for the year ended December 31, 1995,
an increase of approximately $16.0 million or 275.9%. The increase was primarily
due to increased finance charges resulting from the increased number of
Installment Contracts held in the Company's portfolio and, to a lesser extent, a
$688 (19.3%) increase in the average Contract size. Finance charges increased
from $4.7 million for the year ended December 31, 1994 to $17.7 million for the
year ended December 31, 1995, an increase of approximately $13.0 million or
276.6%. The Company purchased 44,496 Installment Contracts during 1995, an
increase of 251.1% over 1994, and the Company's installment contracts receivable
increased from $35.1 million as of December 31, 1994 to $167.5 million as of
December 31, 1995, an increase of $132.4 million or 377.2%. Dealer fees also
contributed to the increase in total revenue. Dealer fees increased from $1.1
million for the year ended December 31, 1994 to $4.1 million for the year ended
December 31, 1995, an increase of $3.0 million or 272.7%. The number of Dealers
enrolled in the Company's program increased from 661 as of December 31, 1994 to
1,962 as of December 31, 1995, an increase of 1,301 Dealers or 196.8%. The
average annualized yield on the Company's portfolio decreased from 25.5% to
17.5% for the years ended December 31, 1994 and December 31, 1995, respectively.
The decrease in the average annualized yield is primarily attributable to the
longer average original term of Contracts purchased in 1995 when compared with
1994 and, to a lesser extent, the higher percentage of non-accrual contracts as
a percentage of the total number of Contracts included within the Company's
portfolio during 1995 when compared with 1994. The average original term of
Contracts purchased in 1995 was 21 months as compared with 18 months in 1994, an
increase of three months or 16.7%. Non-accrual contracts as a percentage of the
total number of Contracts included within the Company's portfolio increased from
12.5% at December 31, 1994 to 19.7% at December 31, 1995. This increase was due
in part to an increase in the average age of the Contracts included within the
portfolio between the respective periods. See "--Credit Loss Policy."
Sales and Marketing. Sales and marketing expenses increased from $2.8
million for the year ended December 31, 1994 to $4.7 million for the year ended
December 31, 1995, but decreased as a percentage of total revenue from 48.6% for
the year ended December 31, 1994 to 21.7% for the year ended December 31, 1995.
The dollar increase in sales and marketing expenses was primarily a result of
the continued effort by the Company to expand the number of Dealers
participating in the Company's program. The decrease in sales and marketing
expenses as a percentage of total revenue was primarily the result of economies
of scale associated with increased total revenue.
Operating Expenses. Operating expenses increased from $4.6 million for the
year ended December 31, 1994 to $7.4 million for the year ended December 31,
1995, an increase of $2.8 million or 60.9%, but decreased as a percentage of
total revenue from 80.0% for 1994 to 34.0% for 1995. The dollar increase in
operating expenses is primarily a result of the overall expansion in the
Company's operations. The decrease in operating expenses as a percentage of
total revenue was primarily the result of economies of scale associated with
increased total revenue.
Provision for Credit Losses. The amount provided for credit losses
increased from $526,000 for the year ended December 31, 1994 to $2.2 million for
the year ended December 31, 1995, an increase of $1.7 million or 323.2%, and
increased as a percentage of total revenue from 9.1% for 1994 to 10.3% for 1995.
The increase in the amount provided for credit losses as a percentage of total
revenue was primarily the result of the increase in the Company's installments
contracts receivable between 1994 and 1995 and an increase in the number of non-
accrual contracts within the Company's portfolio between 1994 and 1995. The
amount provided for credit losses as a percentage of installment contracts
receivable outstanding at the end of the applicable period decreased from 1.5%
for 1994 to 1.3% for 1995. See "--Credit Loss Policy."
Interest Expense. Interest expense increased from $305,000 for the year
ended December 31, 1994 to $1.3 million for the year ended December 31, 1995.
The increase was due to higher average borrowings used to fund operations and
the purchase of Contracts.
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<PAGE>
Income Taxes. The Company's effective income tax rate was 19.5% for the
year ended December 31, 1995, as compared with an effective income tax rate of
0% for the same period in 1994. See Note 9 of the Notes to Consolidated
Financial Statements.
CREDIT LOSS POLICY
The level of related dealer holdbacks and the possible impact of economic
conditions on the creditworthiness of obligors are given major consideration in
determining the adequacy of the allowance. Credit loss experience, changes in
the character, size and age of particular Pools and the Company's overall
installment contracts receivable portfolio and management's judgment are other
factors used in assessing the overall adequacy of the allowance and the
resulting provision for credit losses. Ultimate losses may vary from current
estimates and the amount of the provision, which is a current expense, may be
either greater or less than actual charge-offs.
Revenue on installment contracts receivable is recognized under the
interest method of accounting until the underlying obligation is 120 days
contractually past due or the collateral securing the Contract is repossessed,
whichever occurs first. At such time, the Company suspends the accrual of
revenue and provides for possible losses in uncollected finance charges
previously reported in earnings.
The dollar amount of Contracts in non-accrual status as a percentage of
gross installment contracts receivable were approximately 31.4% and 19.7% as of
December 31, 1996 and December 31, 1995, respectively. Due to the current and
expected future reduced level of Contract purchases, the Company anticipates
that the average age of the Contracts included within its portfolio will
increase, which will result in a significant increase in non-accrual contracts
as a percentage of the total number of Contracts included within the Company's
portfolio.
Contract balances on which no material payment has been received for a
significant period of time (in no event greater than one year) are charged-off
against the related dealer holdback and, if insufficient, the allowance for
credit losses. Because any remaining outstanding Installment Contracts in the
applicable Dealer Pool are available to recover Acquisition Payments paid upon
the Company's purchase of Contracts included within such Pool and as the
Acquisition Payment generally approximates 50% (averaging 55% for Contracts
purchased in 1996) of the principal amount of the Contract, the risk of loss to
the Company is mitigated. However, risk does exist that Acquisition Payments
made to a Dealer may not be fully recouped from the collections related to that
Dealer's Pool(s) since the default rate on any individual Pool could be, and in
cases has been, so extreme that collections are not sufficient to recover all
Acquisition Payments paid by the Company for such Contracts. See "--Recent
Developments; Chapter 11 Proceeding" and Notes 1, 3 and 4 of the Notes to
Consolidated Financial Statements.
The following tables set forth certain information regarding charge-offs,
the provision for credit losses, the allowance for credit losses and dealer
holdbacks for the periods indicated.
Page 21
<PAGE>
<TABLE>
<CAPTION>
FOR THE SEVEN FOR THE YEAR
MONTHS ENDED ENDED DECEMBER 31,
---------------------------------------------------------------
DECEMBER 31, DOLLARS IN THOUSANDS
1993 1994 1995 1996
--------------- ------------------- --------------------- ---------------------
$ %/(1)/ $ %/(1)/ $ %/(1)/ $ %/(1)/
------- ------- -------- --------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gross installment contracts
receivable charged-off........................ $ -- --- $ 20.6 100.0% $11,147 100.0% $74,573 100.0
Charged against dealer holdbacks.............. --- --- 16.5 80.1 8,918 80.0 59,658 80.0
Charged against unearned finance charges...... --- --- 4.1 19.9 1,761 15.8 11,290 15.1
Charged against allowance for credit losses... --- --- --- --- 468 4.2 3,625 4.9
Provision for credit losses................... --- ---/(2)/ 526.0 ---/(2)/ 2,243 ---/(2)/ 71,062 ---/(2)/
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------
1993 1994 1995 1996
------------ ------------ ------------- ----------
<S> <C> <C> <C> <C>
As a % of gross installment contracts receivable:
Dealer Holdbacks............................................ 80.1% 80.0% 80.0% 80.0%
Allowance for credit losses................................. 0.3 1.3 1.2 16.8
As a % of installment contracts receivable:
Allowance for credit losses................................. 0.4 1.5 1.4 19.7
Net charge-offs against allowance for credit losses......... --- --- .3 1.0
</TABLE>
__________________________________
(1) As a percent of gross installment contracts receivable charged-off.
(2) Not meaningful.
LIQUIDITY AND CAPITAL RESOURCES
Since the filing of the Chapter 11 Petition, the Company has been managing
its business as a debtor-in-possession subject to the control and supervision of
the Bankruptcy Court. As substantially all of the Company's assets are pledged
to secure its lenders, the Company is required to obtain Bankruptcy Court
authorization for its use of such lenders' collateral, including cash
collateral. Although the Company has received authorization to use a portion of
its Revolving Lender's cash collateral through April 30, 1997, such
authorization has been limited to the payment of expenses and purchases of
Contracts in accordance with a court approved budget.
The Company has been holding discussions with its Revolving Lender and Mr.
Westcott regarding the basis upon which they would support a plan of
reorganization being prepared by the Company. The Company has reached an
agreement with the Revolving Lender and Mr. Westcott on the terms on which they
would support the Company's Proposed Plan of Reorganization. See "--Recent
Developments; Chapter 11 Proceeding" and "Item 3. Legal Proceedings."
Additionally, although JMAC was not a party to the Company's Chapter 11
Petition, the Company's filing of the Chapter 11 Petition has affected JMAC.
JMAC had loaned approximately $7.1 million to the Company prior to the Company's
filing of the Chapter 11 Petition, and the Bankruptcy Court has prohibited the
Company from providing
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JMAC with any cash to finance its activities, including any repayment of such
loan. Additionally, after the Company filed its Chapter 11 Petition, JMAC's
revolving credit lender refused to make any further advances under JMAC's
revolving credit facility. To fund JMAC's operations, Mr. Westcott has provided
in excess of $6.9 million of financing to JMAC since January 30, 1997 and,
subject to certain limitations, committed to provide JMAC with up to $3 million
of additional financing. See "--Recent Developments; Chapter 11 Proceeding--
JMAC." However, Mr. Westcott is not obligated to provide JMAC with any
additional financing and the failure of JMAC to receive additional financing
from the Company or Mr. Westcott or otherwise would have a material adverse
effect on JMAC. Additionally, the majority of the financing provided by Mr.
Westcott to JMAC has been in the form of demand notes secured by all of the
assets of JMAC. Neither JMAC nor the Company currently has the financial
resources with which to repay such notes. See "--Recent Developments; Chapter 11
Proceeding."
Under the Company's Proposed Plan of Reorganization, the Company's
liquidity would largely be a function of collections on its existing Contracts,
and at projected levels of collections, the funds available for the purchase of
Contracts would restrict such purchases to a materially lower level than that
which prevailed before the filing of the Chapter 11 Petition. Additionally,
although the Company believes the projected levels of collections on its
Contracts are obtainable, there can be no assurance that such projections will
ultimately be realized. The failure of the Company to realize such projected
levels of collections on its Contracts could have a material adverse effect on
the Company. Furthermore, depending on the quality of the automotive contracts
available for purchase by the Company versus the quality of the medical
receivables available for purchase by JMAC as well as the Company's overall
assessment of the opportunities in such markets, some or all of such funds may
be used to purchase medical receivables.
Upon confirmation of the Proposed Plan of Reorganization, the Company
intends to seek new sources of financing to supplement the cash available from
collections of its Contracts to fund its and JMAC's operations. There can be no
assurance that the such additional financing will be available on terms which
are acceptable to the Company, nor can there be any assurance that the Proposed
Final Cash Collateral Order will be approved or that the Proposed Plan of
Reorganization will be confirmed on substantially the same terms as described
above. See "--Recent Developments; Chapter 11 Proceeding."
SEASONALITY
The Company's operations are affected by higher delinquency rates during
certain holiday periods, as well as higher sales of used vehicles during the
annual period at the beginning of the calendar year when many persons are
receiving state and federal tax refunds.
IMPACT OF INFLATION
Increases in the inflation rate generally result in increased interest
rates. Because a significant portion of the Company's outstanding indebtedness
bears interest at variable interest rates, any increase in interest rates will
increase the borrowing costs of the Company.
STATEMENT REGARDING FORWARD LOOKING STATEMENTS
Except for the historical information contained herein, the matters
discussed in Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations or elsewhere in this annual report on Form 10-K,
including the matters relating to the Proposed Final Cash Collateral Order and
the Proposed Plan of Reorganization and any beliefs with respect thereto and
financial projections, are forward looking statements that are dependent upon a
number of risks and uncertainties that could cause actual results to differ
materially from those in the forward looking statements. These risks and
uncertainties include the recoverability of Acquisition Payments and amounts
paid for loans under the Company's medical finance program, the delinquency and
default rates with respect to the Contracts and loans included in the Company's
portfolio, the impact of competitive services and products, changes in market
conditions, JMAC's limited operating history, the impact of changes in
regulation or litigation, the management of growth and the other risks described
herein. The Company does not intend to provide updated information about the
matters referred
Page 23
<PAGE>
to in these forward looking statements, other than in the context of
management's discussion and analysis in the Company's quarterly and annual
reports on Form 10-Q and 10-K.
Page 24
<PAGE>
PART II
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
Description Page No.
----------- --------
REPORT OF INDEPENDENT AUDITORS.......................................... 26
FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of December 31, 1996 and 1995....... 27
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994................................ 28
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1996, 1995 and 1994................................ 29
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994................................ 30
Notes to Consolidated Financial Statements......................... 31
No financial statement schedules required by this Item are listed in
response to Item 14 of this report on Form 10-K as required information is
included in the footnotes to the consolidated financial statements.
25
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Jayhawk Acceptance Corporation
We have audited the accompanying consolidated balance sheets of Jayhawk
Acceptance Corporation and subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Jayhawk
Acceptance Corporation and subsidiaries at December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that Jayhawk Acceptance Corporation will continue as a going concern.
As discussed in Note 2 to the consolidated financial statements, the Company
experienced a significant net loss in 1996, is currently in default on all of
its debt agreements, and in addition the Company filed a voluntary petition for
reorganization under Chapter 11 of the Federal Bankruptcy Code. These matters
raise substantial doubt about the Company's ability to continue as a going
concern. The consolidated financial statements do not include any adjustments to
reflect the possible future effects on the recoverability or classification of
assets or the amounts and classification of liabilities that may result from the
outcome of this uncertainty.
ERNST & YOUNG LLP
Dallas, Texas
April 17, 1997
26
<PAGE>
JAYHAWK ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31, DECEMBER 31,
1996 1995
----------------- ------------------
<S> <C> <C>
Cash and cash equivalents................................................. $ 253 $ 120
Restricted cash........................................................... 6,352 --
Installment contracts receivable.......................................... 373,740 167,491
Allowance for credit losses............................................... (73,635) (2,308)
----------------- ------------------
Installment contracts receivable, net..................................... 300,105 165,183
Furniture, fixtures and equipment, net.................................... 10,545 5,004
Deferred income taxes..................................................... -- 2,088
Income taxes receivable................................................... 1,122 --
Other assets.............................................................. 4,190 978
----------------- ------------------
Total assets.............................................................. $ 322,567 $ 173,373
================= ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued liabilities.............................. $ 8,878 $ 7,982
Deferred dealer fees, net............................................. 2,841 2,052
Dealer holdbacks, net................................................. 159,075 82,373
Unearned service contract fees........................................ 2,942 --
Notes payable......................................................... 108,647 32,386
----------------- ------------------
Total liabilities......................................................... 282,383 124,793
Commitments and Contingencies
Shareholders' Equity:
Preferred stock, $.01 par value; 10,000,000 shares authorized; no
shares issued and outstanding....................................... -- --
Common stock, $.01 par value; 40,000,000 shares authorized;
23,917,771 and 20,486,046 shares issued and outstanding at
December 31, 1996 and December 31, 1995, respectively............... 239 205
Additional paid-in capital............................................ 88,770 47,461
Retained earnings (accumulated deficit)............................... (48,825) 914
----------------- ------------------
Total shareholders' equity................................................ 40,184 48,580
----------------- ------------------
Total liabilities and shareholders' equity................................ $ 322,567 $ 173,373
================= ==================
</TABLE>
See notes to consolidated financial statements.
27
<PAGE>
JAYHAWK ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------------------------------------------
1996 1995 1994
--------------- --------------- ---------------
<S> <C> <C> <C>
Revenues:
Finance charges.................................. $ 41,905 $ 17,693 $ 4,695
Dealer fees..... ................................ 8,455 4,095 1,084
Service contracts................................ 3,206 -- --
--------------- --------------- ---------------
53,566 21,788 5,779
Costs and expenses:
Sales and marketing.............................. 9,198 4,730 2,808
Operating........................................ 16,654 7,408 4,622
Provision for credit losses...................... 71,062 2,243 526
Provision for service contract claims............ 1,310 -- --
Interest......................................... 6,268 1,320 305
--------------- --------------- ---------------
104,492 15,701 8,261
--------------- --------------- ---------------
Income (loss) before income taxes.................. (50,926) 6,087 (2,482)
Income tax expense (benefit)....................... (1,187) 1,187 --
--------------- --------------- ---------------
Net income (loss).................................. $ (49,739) $ 4,900 $ (2,482)
=============== =============== ===============
Net income (loss) per share........................ $ (2.17) $ .26 $ (.16)
=============== =============== ===============
Weighted average number of shares outstanding...... 22,931 18,732 15,345
=============== =============== ===============
</TABLE>
See notes to consolidated financial statements.
28
<PAGE>
JAYHAWK ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PREFERRED ADDITIONAL RETAINED
STOCK COMMON PAID-IN EARNINGS
SERIES A STOCK CAPITAL (DEFICIT) TOTAL
------------- ----------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1994......................... $ - $ 120 $ - $ (1,504) $ (1,384)
Issuance of 60,000 shares of
Series A preferred stock.................... 1 - 5,974 - 5,975
Issuance of 2,250,005 shares of
common stock................................ - 23 9,877 - 9,900
Net loss...................................... - - - (2,482) (2,482)
------------- ----------- ------------ ------------- ------------
Balance at December 31, 1994....................... 1 143 15,851 (3,986) 12,009
Issuance of 3,450,000 shares in
connection with initial public offering..... - 35 31,541 - 31,576
Conversion of 60,000 shares of Series.A
convertible preferred stock to 2,733,041
shares of common stock...................... (1) 27 (26) - -
Issuance of 23,000 shares of common
stock upon exercise of stock options........ - - 95 - 95
Net income.................................... - - - 4,900 4,900
------------- ----------- ------------ ------------- ------------
Balance at December 31, 1995....................... - 205 47,461 914 48,580
Issuance of 3,350,000 shares of
common stock................................ - 34 40,757 - 40,791
Issuance of 81,725 shares of common
stock upon exercise of stock options
and employee stock plan purchases........... - - 552 - 552
Net loss...................................... - - - (49,739) (49,739)
------------- ----------- ------------ ------------- ------------
Balance at December 31, 1996....................... $ - $ 239 $ 88,770 $ (48,825) $ 40,184
============= =========== ============ ============= ============
</TABLE>
See notes to consolidated financial statements.
29
<PAGE>
JAYHAWK ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
----------- ----------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................................... $(49,739) $ 4,900 $ (2,482)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization......................... 2,510 975 367
Provision for credit losses........................... 71,062 2,243 526
Deferred income taxes................................. 2,088 (2,088) -
Changes in operating assets and liabilities:
Installment contracts receivable................. (13,768) (6,544) (2,205)
Income taxes receivable.......................... (1,122) - -
Other assets..................................... (3,212) (681) (181)
Accounts payable and accrued liabilities......... (414) 5,437 1,207
Deferred dealer fees, net........................ 789 1,851 753
----------- ----------- ----------
Net cash provided by (used in) operating activities.................. 8,194 6,093 (2,015)
Cash flows from investing activities:
Payments to dealers............................................. (200,728) (101,404) (21,731)
Collections of installment contracts receivable................. 89,466 37,400 9,778
Capital expenditures............................................ (8,051) (4,650) (1,264)
Increase in restricted cash..................................... (6,352) - -
----------- ----------- ----------
Net cash used in investing activities................................ (125,665) (68,654) (13,217)
Cash flows from financing activities:
Net borrowings under revolving credit facilities................ 33,767 24,886 7,500
Proceeds from the issuance of secured notes payable............. 95,164 - -
Principal payments on secured notes payable..................... (57,657) - -
Proceeds from issuance of notes payable......................... 4,987 - -
Proceeds from issuance of notes payable to related party........ - - 1,000
Proceeds from the sale of preferred stock....................... - - 3,075
Proceeds from sales of common stock, net........................ 41,343 31,671 8,747
----------- ----------- ----------
Net cash provided by financing activities............................ 117,604 56,557 20,322
----------- ----------- ----------
Net increase (decrease) in cash and cash equivalents................. 133 (6,004) 5,090
Cash and cash equivalents at the beginning of the period............. 120 6,124 1,034
----------- ----------- ----------
Cash and cash equivalents at the end of period....................... $ 253 $ 120 $ 6,124
=========== =========== ==========
Supplemental disclosure of cash flow information:
Cash paid for interest.......................................... $ 6,015 $ 1,043 $ 310
=========== =========== ==========
Cash paid for income taxes...................................... $ 1,950 $ 2,347 $ -
=========== =========== ==========
Noncash financing transactions:
Conversion of borrowings and accrued interest to
preferred stock............................................ $ - $ - $ 4,053
=========== =========== ==========
Conversion of preferred stock to common stock
Preferred stock............................................ $ - $ (1) $ -
Common stock............................................... - 27 -
Additional paid-in capital................................. - (26) -
----------- ----------- ----------
$ - $ - $ -
=========== =========== ==========
</TABLE>
See notes to consolidated financial statements.
30
<PAGE>
JAYHAWK ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of the business - Jayhawk Acceptance Corporation (the
"Company") was incorporated in Texas on June 2, 1993, and is a specialized
financial services company that has traditionally served automobile dealers
("Dealers") by providing an indirect financing source to buyers of used vehicles
with limited access to traditional sources of consumer credit.
The Company's business involves purchasing installment sales contracts
("Contracts" or "Installment Contracts"), from Dealers, secured by low-priced
used vehicles that typically have been purchased by consumers with sub-standard
credit histories--commonly referred to as "D credits." The Company has adopted a
business model that mitigates the credit risk associated with its purchase of
these Contracts by effectively cross-collateralizing Contracts purchased from a
particular Dealer. Upon its purchase of an Installment Contract from a
participating Dealer, the Company pays the Dealer an amount that generally
approximates 50% (averaging 55% for Contracts purchased in 1996) of the
principal amount of the Contract (an "Acquisition Payment"), although the actual
amount of the Acquisition Payment will vary based upon the Company's assessment
of the credit quality of the Dealer and the Contract and other factors. The
Installment Contract then becomes part of a pool of Installment Contracts
purchased from the Dealer (a "Pool").
The Company retains 100% of the principal and interest collected on
Contracts included within the Pool ("Pool Receipts") until the Company has
eliminated its credit risk related to the Pool. This was originally accomplished
by the Company always retaining an amount equal to 20% of the Pool Receipts and
retaining the remaining portion of the Pool Receipts until the Company recovered
all Acquisition Payments to the Dealer for the Contracts included within the
Pool and recouped 80% of the out-of-pocket collection costs relating to all
Contracts included within the Pool. Thereafter, the Dealer was entitled to
receive an amount equal to 80% of the Pool Receipts. In January 1997, the
Company implemented refinements to its business model designed to increase the
yield on its installments contracts receivable. Under the refined model, which
applies to Contracts purchased on or after January 1, 1997, the Company always
retains 100% of the interest collected on Contracts as its finance charge, and
retains all of the principal collected on Contracts included within a Pool until
the Company recovers all Acquisition Payments, collection costs and fees
(effective January 1, 1997, generally 10% of the principal amount of the
Contract) charged by the Company to the Dealer with respect to the Contracts
included within the Pool. Once this threshold has been met, the Dealer is
entitled to receive a payment (a "Pool Distribution Payment") equal to the
principal collected on the Contracts within that Pool, while the Company
continues to retain all interest collected on the Contracts.
With respect to Contracts purchased prior to 1997, upon the Company's
purchase of a Contract, the Company recorded the gross amount of the Contract as
a gross contract receivable. At that time, the Company also recorded an amount
equal to 20% of the gross contract receivable as its unearned finance charges
and an amount equal to 80% of the gross contract receivable as a dealer
holdback. For balance sheet presentation purposes, the unearned finance charges
were subtracted from the gross contract receivable. Similarly, for balance
sheet presentation purposes, dealer holdbacks were shown net of Acquisition
Payments made by the Company to the Dealer. With respect to Contracts purchased
on or after January 1, 1997, upon the Company's purchase of a Contract, the
Company records the gross amount of the Contract as a gross contract receivable
and records the finance charge which has not been earned as unearned finance
charge. For balance sheet presentation purposes, the unearned finance charge is
subtracted from the gross contract receivable. The Company also records an
amount equal to the principal amount of the gross contract receivable as a
dealer holdback, which is shown net of Acquisition Payments.
31
<PAGE>
JAYHAWK ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In August 1996, the Company, through its wholly owned subsidiary Jayhawk
Medical Acceptance Corporation ("JMAC"), expanded its business into the elective
health care market by offering an indirect financing source for elective health
care procedures. The Company's elective health care program incurred losses of
approximately $1.0 million in the fourth quarter of 1996, and the Company
anticipates that the program will continue to incur losses at least through the
second quarter of 1997.
Principles of consolidation - The accompanying consolidated financial
statements include the accounts of the Company and its wholly-owned
subsidiaries, Jayhawk Services, Inc., Jayhawk Funding Trust I ("Funding Trust")
and Jayhawk Medical Acceptance Corporation. All significant intercompany
balances and transactions have been eliminated upon consolidation.
Finance charges - Finance charges on installment contracts receivable are
recognized under the interest method of accounting until the underlying
obligation is 120 days contractually past due or the collateral securing the
contract is repossessed, whichever occurs first. At such time, the Company
suspends the accrual of revenue and provides an allowance for possible losses on
uncollected finance charges previously reported in earnings.
Dealer fees - At the time a Dealer executes the Dealer Agreement, the
Dealer pays the Company a nonrefundable fee for attendance at a training seminar
generally required for personnel of new Dealers and related training materials
and supplies and advertising materials. The nonrefundable fee and the related
direct incremental costs are deferred and amortized on a straight-line basis
over the anticipated period of recovery of the Acquisition Payments made by the
Company to the Dealer (approximately 20 months).
Cash and cash equivalents - Cash and cash equivalents consist of highly
liquid investments with original maturities of three months or less.
Allowance for credit losses - The level of related dealer holdbacks and the
possible impact of economic conditions on the creditworthiness of obligors are
given major consideration in determining the adequacy of the allowance. Credit
loss experience, changes in the character, size and age of particular Pools and
the Company's overall installment contracts receivable portfolio and
management's judgment are other factors used in assessing the overall adequacy
of the allowance and the resulting provision for credit losses. Ultimate losses
may vary from current estimates and the amount of the provision, which is a
current expense, may be either greater or less than actual charge-offs. In the
opinion of management, the allowance for credit losses adequately reserves
against potential future losses relating to earned but uncollected revenue and
Acquisition Payments to Dealers not expected to be recovered through collections
on the related installment contract receivable portfolio.
Principal balances on which no material payment has been received for a
significant period of time (in no event greater than one year) are charged-off
against the related dealer holdback and, if insufficient, the allowance for
credit losses. Because any remaining outstanding Installment Contracts in the
applicable Dealer Pool are available to recover Acquisition Payments paid upon
the Company's purchase of Contracts included within such Pool, the risk of loss
to the Company is mitigated.
Service Contracts - Amounts collected on vehicle service contracts are
deferred and amortized on a straight-line basis over the terms of the contracts.
The Company records a liability for the estimated reported and unreported claims
to be paid on the contracts. Increases to this liability are reported as
provision for service contracts. The estimate for claims on service contracts is
continuously updated as new information becomes known and changes to such
estimate are reported in current earnings.
32
<PAGE>
JAYHAWK ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Concentration of credit risk - Installment contracts receivable are from
consumers living throughout the United States who typically would not be
expected to qualify for traditional financing. All such contracts are
collateralized by the related vehicles. The dealer holdback mitigates the
economic risk associated with Acquisition Payments not recoverable through
collections or the sale of the related vehicle.
Furniture, fixtures, and equipment - Furniture, fixtures, and equipment
(including capitalized software) are recorded at cost. Depreciation is provided
using the straight-line method over the estimated useful lives (primarily 3 to 7
years) of the related assets. The Company capitalizes all direct external costs
and direct internal payroll costs associated with the development of software
for internal use.
Income taxes - The Company accounts for income taxes using the liability
method of accounting for income taxes. Under the liability method, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in the period that includes the enactment
date. If the Company determines that it is more likely than not that some
portion of the deferred tax assets will not be realized, the deferred tax asset
is reduced by a valuation allowance.
Net income (loss) per share - Net income (loss) per share was computed
based on the weighted average number of common and dilutive common equivalent
shares outstanding for each period presented. The weighted average shares
outstanding for 1995 and 1994 include dilutive common equivalent shares
attributable to convertible preferred stock (1,610,919 shares in 1995 and
2,694,915 shares in 1994) and outstanding stock options (311,716 shares in 1995
and 241,549 shares in 1994) using the treasury stock method.
Use of estimates - The preparation of the financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from these
estimates.
Accounting for stock-based compensation - The Company grants stock options
for a fixed number of shares to employees and non-employees with an exercise
price equal to the fair value of the shares at grant date. The Company accounts
for stock option grants in accordance with APB Opinion No. 25, Accounting for
Stock Issued to Employees, and accordingly, recognizes no compensation expense
for the stock option grants.
Reclassifications - Certain amounts in the 1995 and 1994 financial
statements have been reclassified to conform with the 1996 presentation.
NOTE 2 - SIGNIFICANT EVENTS
In the fourth quarter of 1996, the Company reevaluated the overall
profitability and credit quality of its existing pools of Contracts purchased
from participating automobile Dealers and determined to terminate its
relationship with a number of its participating Dealers and to change the basis
on which it was willing to purchase Contracts from others. As a result of these
actions and because a continuing business relationship is an important factor in
the Company's determination of the recoverability of Acquisition Payments
made to Dealers, on January 30, 1997 the Company announced a special charge of
$15.5 million in the fourth quarter of 1996 to increase its allowance for credit
losses.
33
<PAGE>
JAYHAWK ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fourth quarter special charge caused the Company to be in noncompliance
with a financial covenant under its primary revolving credit facility.
Additionally, the Company's planned additional financings in January 1997 failed
to materialize. The Company commenced discussions with its revolving lender (the
"Revolving Lender") regarding the covenant violation and its cash needs in light
of the failure to consummate the additional financings. The Company and its
Revolving Lender were unable to agree on a method by which cash collections on
the Company's Contracts could be used by the Company for purposes other than to
repay revolving credit indebtedness. As advances under the facility exceeded the
borrowing base on one of two borrowing base calculations, the Revolving Lender
did not make requested additional advances under the facility and informed the
Company that it intended to deliver to the Company a notice of default and a
notice of acceleration under the credit facility. On February 7, 1997, the
Company filed a voluntary petition for reorganization under Chapter 11 of the
Federal Bankruptcy Code (the "Chapter 11 Petition") in the Northern District of
Texas (the "Chapter 11 Proceeding"). The Company is managing its business
subject to the supervision and control of the Federal Bankruptcy Court for the
Northern District of Texas (the "Bankruptcy Court").
Since the filing of the Chapter 11 Petition, the Company has been managing
its business as a debtor-in-possession subject to the control and supervision of
the Bankruptcy Court. As substantially all of the Company's assets are pledged
to secure its lenders, the Company is required to obtain Bankruptcy Court
authorization for its use of such lenders' collateral, including cash
collateral. Although the Company has received authorization to use a portion of
its Revolving Lender's cash collateral through April 30, 1997, such
authorization has been limited to the payment of expenses and purchase of
Contracts in accordance with a court approved budget. As a result of these
limitations and the lack of available borrowings, the Company has implemented a
number of cost-saving measures. Among other things, since the filing of the
Chapter 11 Petition, the Company has (i) tightened the criteria under which it
is willing to purchase Contracts, (ii) changed the focus of its sales and
marketing efforts from enrolling new Dealers into the Company's program to
purchasing Contracts from existing Dealers whose pools are among the better
performing pools owned by the Company, (iii) received significantly fewer
Contracts from its participating Dealers for purchase consideration, (iv)
purchased a materially lower volume of Contracts from its Dealers (819 and 326
Contracts during the months of February and March 1997, respectively, as
compared with 5,929 and 8,405 Contracts during the months of February and March
1996, respectively), and (v) reduced its workforce by approximately 200
employees.
The measures taken by the Company in connection with the Chapter 11
Proceeding and the decreased number of Contracts being submitted to the Company
have caused the Company to recognize that it will not in the near future be
doing the same level of business with its Dealers as it was doing prior to the
filing of the Chapter 11 Petition. Because a continuing level of Contract
purchases is an important factor in the Company's determination of the
recoverability of Acquisition Payments made to Dealers, the Company reevaluated
the adequacy of its allowance for credit losses. As a result of this
reevaluation the Company increased the previously-announced fourth quarter
special charge to $66.5 million to increase its allowance for credit losses
resulting in a $49.7 million net loss for 1996.
The Company has been holding discussions with its primary lenders and
its principal shareholder, regarding the basis upon which they would support a
plan of reorganization being prepared by the Company (the "Proposed Plan of
Reorganization"). The Company has reached an agreement with its principal
shareholder on the terms on which he would support the Company's Proposed Plan
of Reorganization and has reached an agreement with its Revolving Lender, the
Company's largest creditor, regarding the use of such lender's cash collateral
after April 30, 1997 and the terms under which such lender would support the
Proposed Plan of Reorganization. Pursuant to this agreement, the Company, its
Revolving Lender and the principal shareholder entered into a Settlement
Agreement (herein so called) pursuant to which, among other things, the Company
and its Revolving Lender agreed to support and seek Bankruptcy Court
34
<PAGE>
JAYHAWK ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
approval of a proposed final cash collateral order (the "Proposed Final Cash
Collateral Order"), and, subject to certain conditions, the principal
shareholder and the Revolving Lender agree to support and vote in favor of the
Proposed Plan of Reorganization.
Under the Proposed Final Cash Collateral Order, subject to certain
conditions, the Company generally would be authorized to continue using its
Revolving Lender's cash collateral after April 30, 1997 for the payment of
expenses, the purchase of new Contracts and additional loan repayments to its
Revolving Lender, in each case in accordance with a budget to be approved by its
Revolving Lender and the Bankruptcy Court. The Proposed Final Cash Collateral
Order would also generally require the Company to (i) repay the Company's
indebtedness to its Revolving Lender (approximately $55.4 million principal
amount as of April 11, 1997) in monthly installments of principal ranging from
$4.0 million in May 1997 to $3.0 million in August 1998, with the balance being
due in full in September 1998, in each case together with accrued interest, and
(ii) make certain additional principal payments to its Revolving Lender to the
extent actual collections with respect to certain Contracts exceed the Company's
projected collections on such Contracts or are less than 85% of the Company's
projected collections on such Contracts. To safeguard the Revolving Lender
against diminution in the value of its pre-Chapter 11 Petition collateral, under
the Proposed Final Cash Collateral Order the Revolving Lender would receive
replacement liens on all Contracts purchased by the Company; provided that if
the Proposed Plan of Reorganization does not become effective on or before July
31, 1997, the Company would be deemed to have granted to its Revolving Lender a
replacement lien on the Company's ownership interest in Jayhawk Funding Trust I,
and the Revolving Lender would generally be obligated to release its liens on
all Contracts purchased by the Company after March 1, 1997 and certain other
assets.
The Proposed Plan of Reorganization would provide for full payment to all
creditors. In addition, the Proposed Plan of Reorganization would require that
the primary shareholder guaranty $10.0 million principal amount of the Revolving
Lender claim.
There can be no assurance that additional financing will be available on
terms acceptable to the Company nor can there be assurance that the Proposed
Final Cash Collateral Order will be approved or that the Proposed Plan of
Reorganization will be confirmed on substantially the same terms as described
above. Among other things, neither the Bankruptcy Court nor the Creditors'
Committee has approved the terms of either the Proposed Final Cash Collateral
Order or the Proposed Plan of Reorganization.
NOTE 3 - INSTALLMENT CONTRACTS RECEIVABLE
Installment Contracts generally have initial terms ranging from 6 to 36
months and are collateralized by the related vehicles. The average initial term
of an Installment Contract was approximately 28 months and 21 months in 1996 and
1995, respectively. The dollar amount of loans in non-accrual status as a
percentage of gross installment contracts receivable was approximately 31.4% and
19.7% as of December 31, 1996 and 1995, respectively.
35
<PAGE>
JAYHAWK ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Installment contracts receivable consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------
1996 1995
--------------- ----------------
<S> <C> <C>
Gross installment contracts receivable - beginning.......... $ 198,397 $ 41,106
Additions through acquisition of contracts................ 441,605 219,605
Reductions from collections on contracts.................. (126,431) (51,167)
Charge-offs............................................... (74,573) (11,147)
--------------- ----------------
Gross installment contracts receivable - ending........... 438,998 198,397
Unearned finance charge revenue............................. (65,258) (30,906)
--------------- ----------------
Installment contracts receivable............................ $ 373,740 $ 167,491
=============== ================
A summary of the changes in the allowance for credit losses is as follows (in thousands):
<CAPTION>
DECEMBER 31,
---------------------------------------
1996 1995
--------------- ----------------
<S> <C> <C>
Balance - beginning of year................................. $ 2,308 $ 533
Provision for credit losses............................... 71,062 2,243
Acquisition discounts allocated to allowance
for credit losses........................................ 3,890 --
Installment contracts receivable charged-off
against allowance for credit losses...................... (3,625) (468)
--------------- ----------------
Balance - end of year....................................... $ 73,635 $ 2,308
=============== ================
NOTE 4 - DEALER HOLDBACKS
A summary of the changes in dealer holdbacks and the composition of dealer holdbacks, net, is as
follows (in thousands):
<CAPTION>
DECEMBER 31,
---------------------------------------
1996 1995
--------------- ----------------
<S> <C> <C>
Dealer holdbacks - beginning of year.............................. $ 158,746 $ 32,868
Additions through acquisition of contracts...................... 353,284 175,684
Reductions from collections on contracts........................ (100,823) (40,888)
Installment contracts receivable charged-off
against dealer holdbacks........................................ (59,658) (8,918)
--------------- ----------------
Dealer holdbacks - end of year.................................... 351,549 158,746
Unrecovered acquisition payments.................................. (192,474) (76,373)
--------------- ----------------
Dealer holdbacks, net............................................. $ 159,075 $ 82,373
=============== ================
</TABLE>
36
<PAGE>
JAYHAWK ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - FURNITURE, FIXTURES, AND EQUIPMENT
Furniture, fixtures, and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
1996 1995
----------------- -----------------
<S> <C> <C>
Data processing equipment and software............. $ 10,047 $ 4,169
Office furniture and equipment..................... 3,525 1,959
Leasehold improvements............................. 738 223
----------------- -----------------
14,310 6,351
Accumulated depreciation and amortization.......... (3,765) (1,347)
----------------- -----------------
$ 10,545 $ 5,004
================= =================
</TABLE>
NOTE 6 - NOTES PAYABLE
Notes payable consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
1996 1995
----------------- -----------------
<S> <C> <C>
Revolving credit facilities....................... $ 66,153 $ 32,386
Secured notes payable............................. 37,507 --
Other note payable................................ 4,987 --
----------------- -----------------
$ 108,647 $ 32,386
================= =================
</TABLE>
In May 1994, the Company entered into a loan agreement with Texas Commerce
Bank, N.A. which provided for borrowing up to $5 million. The agreement was
subsequently amended to provide a revolving line of credit of $10 million
("Revolver"), secured by Installment Contracts receivable and all collateral
securing the installment contracts, and an additional revolving line of credit,
which is secured by the Company's investments held by the bank, of up to $9
million ("Investment Revolver"). Borrowings were first made against the
Investment Revolver and interest was computed at the bank's 90-Day Jumbo
Certificate of Deposit rate plus .75%. Interest on the Revolver was computed at
prime. The weighted average interest rate under this agreement was 6.97% for
the year ended December 31, 1994.
In April 1995, the Company entered into a new two-year revolving credit
facility ("New Revolver") with Fleet Capital Corporation (formerly Shawmut
Capital Corporation) pursuant to which the Company could borrow up to $25
million, based on defined levels of qualified Installment Contracts receivable.
The New Revolver was subsequently amended to permit borrowings of up to $65
million and extended the expiration date of the facility to June 30, 1998.
Borrowings under the amended credit facility bear interest at the rate of
interest announced from time to time by Fleet National Bank of Connecticut at
its base rate for commercial loans plus 1.0% (10.0% at December 31, 1995)
through April 1996 at which time the rate was renegotiated to the base rate for
commercial loans (8.25% at December 31, 1996). This facility is secured by all
of the Company's assets except those assets contributed to Jayhawk Funding Trust
and the Company's investment in the common stock of Jayhawk Medical Acceptance
Corporation. Among other things, the amended credit facility prohibits the
payment of cash dividends, restricts the incurrence of indebtedness and requires
the maintenance of a minimum adjusted tangible net worth of $11.5 million at
December 31, 1995, increasing to $45 million at March 31, 1996 and increasing
thereafter by 50% of positive net earnings for each subsequent quarter, a ratio
of total debt to net worth of no more than 7 to 1 and a ratio of earnings before
interest, taxes, and depreciation to fixed charges of no less than 1 to 1.
Outstanding borrowings on the New Revolver were $55,839,000 at December 31,
1996.
37
<PAGE>
JAYHAWK ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In October 1996, the Company entered into a one year revolving credit
facility to fund its elective surgery lending activities ("Medical Revolver").
The Medical Revolver permitted borrowings up to $15 million and bore interest
at LIBOR plus 1.5% (8.0 % at December 31, 1996). Outstanding borrowings on this
Medical Revolver were $10,314,000 at December 31, 1996. Subsequent to December
31, 1996, the principal shareholder of the Company purchased the note from the
Bank. The facility is secured by all the assets of Jayhawk Medical Acceptance
Corporation.
In March 1996, the Company completed an asset securitization of its motor
vehicle installment sales contracts. Pursuant to this transaction, the Company
contributed Installment Contracts having an aggregate principal balance of
approximately $65 million and approximately $5 million in cash to Funding Trust
and Funding Trust sold approximately $41.8 million principal amount of notes
("Series 1996A") in a private placement to institutional investors. The Series
1996A notes bore interest at 5.925%. Aggregate unpaid note balance of the Series
1996A notes was $5,403,000 at December 31, 1996; These Notes were paid
subsequent to that date. Contracts with an aggregate unpaid principal balance of
$27,408,000 at December 31, 1996 are the only assets securing the Series 1996A
notes.
In August 1996, the Company completed an asset securitization of its motor
vehicle installment sale contracts. Pursuant to this transaction, the Company
contributed Installment Contracts having an aggregate principal balance of $72.7
million to Funding Trust and Funding Trust sold two classes of notes ("Series
1996B"), a senior class ("Class A") and a senior subordinated class ("Class B"),
in a private placement to institutional investors. Approximately $42.9 million
Class A and $5.0 million Class B notes were sold in this transaction. The Class
A notes bear interest at a fixed rate of 6.64% per annum and have a stated
maturity of March 15, 2000. The aggregate unpaid note balance on the Class A
notes was $27,110,000 at December 31, 1996. The Class B notes bear interest at
a rate of 11.57% per annum and have a stated maturity of March 15, 2000. The
timing and amount of principal repayments on the Class B notes is contingent on
the collection experience of the underlying Contracts. No principal repayments
are made on the Class B notes until outstanding principal on the Class A notes
is reduced to 32.5% of its original balance. At that time principal repayments
will be made on the Class B notes to the extent that collections on the
underlying Contracts exceed the amount required to make interest payments on the
Class A and Class B notes and scheduled principal payments on the Class A notes.
As of March 21, 1997, there have been no principal payments on the Class B
notes. Contracts with an aggregate unpaid principal balance of $66,137,000 at
December 31, 1996 are the only assets securing the Series 1996B notes.
Cash balances of $6,352,000 at December 31, 1996, are restricted under the
terms of the Series 1996A and Series 1996B indentures.
In December 1996, the Company entered into a loan agreement with Prudential
Securities Credit Corporation which provided for borrowings based upon a
specified percentage of the outstanding principal balances of contracts securing
the Series 1996A secured notes payable ($4,987,000 at December 31, 1996). The
loan bears interest at LIBOR plus 2.50% (8.0% at December 31, 1996) and is
secured by 100% of the Company's interest in Funding Trust. The loan was due and
payable on February 28, 1997. Under the terms of the interim order dated March
6, 1997 and the Proposed Final Cash Collateral Order (see Note 2), which is
subject to Bankruptcy Court approval, the Company is required to pay a minimum
of $1.0 million per month for the months of March through and including July,
1997. Any balance remaining at July 31, 1997 would be payable under the terms of
the Proposed Plan of Reorganization.
The Company failed to meet certain financial covenants in the New Revolver
as a result of an increase in the allowance for credit losses in the fourth
quarter of 1996. In February 1997, the Company filed a voluntary petition for
reorganization under Chapter 11 of the Federal Bankruptcy Code. See Note 2.
Bankruptcy is an event of default under all of the Company's notes payable.
These defaults have not been waived.
38
<PAGE>
JAYHAWK ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - SHAREHOLDER'S EQUITY
In February and March 1994, the Company sold 60,000 shares of Series A
convertible preferred stock for $100 per share ("Preferred Stock"). The Company
exchanged $2,900,000 of notes payable to the principal shareholder and received
$3,075,000 in cash. The Preferred Stock shareholders participated equally with
common stock shareholders on a noncumulative basis in the dividends and
distributions. The Preferred Stock had no voting rights. The holders of the
Preferred Stock had the right at any time to convert such stock into common
shares at the initial conversion price of $2.36 per common share (subject to
adjustments for dilution). The Preferred Stock was converted at the close of
the Offering at the initial conversion price of $2.36 per common share.
From August through December 1994, the Company issued 2,225,005 shares of
Common Stock for cash of $8,747,000 and the exchange of $1,153,000 of notes
payable and accrued interest due to the principal shareholder.
In August 1995, the Company issued 3,450,000 shares of Common Stock, in
connection with its initial public offering, for $31,576,000. In April 1996,
the Company issued 3,350,000 shares of common stock in connection with a public
offering, for $40,791,000.
On April 14, 1997, the principal shareholder purchased from JMAC 20,000
shares of JMAC Preferred Stock in exchange for $2.0 million of indebtedness to
the principal shareholder and, subject to certain limitations, committed to
purchase up to an additional 30,000 shares of JMAC Preferred Stock for $100 per
share. Each outstanding share of JMAC Preferred Stock (i) has a liquidation
value equal to the sum of $100 plus $1.50 for each calendar month or portion
thereof that then has elapsed from and including April 1997 (the sum of such
amounts being referred to as the "Liquidation Value"), (ii) except as required
by law, entitles the holder thereof to one vote per share voting with the
holders of JMAC's common stock (which results in the principal shareholder
having voting control of JMAC as long as he owns the JMAC Preferred Stock), and
(iii) is redeemable at any time prior to conversion at a redemption price equal
to the Liquidation Value, provided that at the time of such redemption all
indebtedness owing by JMAC to the principal shareholder and certain affiliated
parties has been paid in full. Each share of JMAC Preferred Stock, unless
previously redeemed, is convertible at the option of the principal shareholder
into that number of shares of JMAC Common Stock as shall be equal to the
quotient of that number of shares of JMAC Common Stock, which after issuance,
would be equal to 95% of all shares of JMAC Common Stock outstanding on the date
the first share of JMAC Preferred Stock is converted divided by the number of
shares of JMAC Preferred Stock authorized for issuance (currently 50,000) at any
time after the earlier of (i) April 15, 1998, (ii) thirty days after any person,
entity or group (other than the principal shareholder or certain of his
affiliates) becomes the beneficial owner of 25% or more of the combined voting
power of the Company with the intention of changing or influencing control of
the Company, (iii) the date of appointment of a trustee or receiver of the
Company in the Chapter 11 Proceeding or the conversion of the Chapter 11
Proceeding to a Chapter 7 proceeding, (iv) the first date following termination
or suspension of the Company's right to use cash collateral in the Chapter 11
Proceeding for a period of more than fifteen calendar days, (v) the date that
the stay is lifted enabling the Revolving Lender (or another debtor-in-
possession lender that the Company owes in excess of $5.0 million) to foreclose
on its respective lien on the Company's assets, (vi) the date that any of the
security agreements securing any of the aforementioned indebtedness to the
principal shareholder shall cease to be legal, valid, binding and enforceable
agreements or shall in any way be terminated or become or be declared
ineffective or inoperative or cease to provide the first priority liens intended
to be created thereby or if JMAC or any of its shareholders or creditors or any
other person shall institute any legal action that, if successful, would have
such effect, or (vii) the date, after confirmation of the Plan, that the Company
defaults on any other material indebtedness or the maturity of such indebtedness
is accelerated. No dividends shall accrue on the JMAC Preferred Stock prior to
April 15, 1998, after which dividends shall be if and when declared by the Board
of Directors of JMAC.
The Company sponsors a stock option plan for selected employees of the
Company ("Employee Plan"). The term of each option issued under the Employee
Plan is 7 years and options generally vest over a period of two to five years.
A total of 1,500,000 shares of Common Stock are reserved for issuance under the
Employee Plan, 202,625 of which are available for grant.
The changes in stock options outstanding issued under the Employee Plan for
the years ended December 31, 1996, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
----------------- ----------------
<S> <C> <C>
Options outstanding at January 1, 1994................ -- $ --
Options granted...................................... 406,500 4.01
Options cancelled.................................... (56,500) 4.22
----------------- ----------------
Options outstanding at December 31, 1994.............. 350,000 3.98
Options granted...................................... 473,500 10.28
Options exercised.................................... (23,000) 4.34
Options cancelled.................................... (68,500) 8.74
----------------- ----------------
Options outstanding at December 31, 1995............... 732,000 7.66
Options granted...................................... 644,500 12.74
Options exercised.................................... (69,425) 6.14
Options cancelled.................................... (102,125) 11.14
----------------- ----------------
Options outstanding at December 31, 1996.............. 1,204,950 10.17
Options exercisable at December 31, 1996.............. 339,325 $ $7.53
</TABLE>
The Company also sponsors a stock option plan for selected individuals not
employed by the Company ("Non-Employee Plan"). The Non-Employee Plan provides
for the grant of options to directors of the Company and other persons rendering
critical services to the Company who are not full-time employees of the Company.
The term of each option issued under the Non-Employee Plan is 10 years and
39
<PAGE>
JAYHAWK ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
options vest over a three-year period. A total of 450,000 shares of Common Stock
are reserved for issuance under the Non-Employee Plan, 290,000 of which are
available for grant.
The changes in the stock options issued under the Non-Employee Plan
outstanding for the years ended December 31, 1996, 1995 and 1994 were as
follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
----------- ----------
<S> <C> <C>
Options outstanding at January 1, 1994............... - $ -
Options granted..................................... 40,000 0.01
----------- ----------
Options outstanding at December 31, 1994............. 40,000 0.01
Options granted..................................... 60,000 7.18
----------- ----------
Options outstanding at December 31, 1995............. 100,000 4.31
Options granted..................................... 60,000 12.81
----------- ----------
Options outstanding at December 31, 1996............. 160,000 7.50
Options exercisable at December 31, 1996............. 72,500 $ 5.47
</TABLE>
The number, weighted average exercise price and weighted average remaining
contractual life of options outstanding at December 31, 1996, within specified
ranges of exercise prices, are as follows:
<TABLE>
<CAPTION>
OPTIONS WEIGHTED AVERAGE WEIGHTED AVERAGE
EXERCISE PRICE OUTSTANDING EXERCISE PRICE REMAINING LIFE
- ------------------ ------------- ------------------ -------------------
<S> <C> <C> <C>
$ 0.01 - 4.00 70,950 $ 1.04 5.9
4.01 - 8.00 324,500 4.49 5.1
8.01 + 969,500 12.31 6.5
</TABLE>
The Company adopted its Employee Stock Purchase Plan (the "Stock Purchase
Plan") in April 1995 and it became effective on January 1, 1996. A total of
150,000 shares of Common Stock are reserved for issuance under the Stock
Purchase Plan, 12,300 of which have been offered or sold at December 31, 1996.
The Stock Purchase Plan is intended to qualify under Section 423 of the Internal
Revenue Code of 1986, as amended. The term of the Stock Purchase Plan is ten
years commencing on its effective date. All full-time employees, except
directors, five percent shareholders and key executives are eligible to
participate in the Stock Purchase Plan if they have been continuously employed
by the Company for 180 days. These employees may contribute up to 10% of their
salary, up to an annual maximum of $25,000.
The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees ("Opinion 25"), and related
Interpretations in accounting for its employee stock options because, in
management's belief, the alternative fair value accounting provided for under
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("Statement 123") requires use of option valuation models that were
not developed for use in valuing employee stock options. Under Opinion 25,
because the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.
40
<PAGE>
JAYHAWK ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pro forma information regarding the impact on net income (loss) and
earnings per share as required by Statement 123, determined as if the Company
had accounted for its employee stock options under the fair value method of that
statement, is not materially different from reported amounts.
The effects of applying Statement 123 for providing pro forma disclosures
in 1995 and 1996 are not likely to be representative of the effects of that
statement for future years. The 1995 disclosure reflects expense for only one
year's vesting (1995 grants) and the 1996 disclosure reflects expense for two
years' vesting (1995 grants and 1996 grants).
NOTE 8 - RELATED PARTY TRANSACTIONS
In 1993, the principal shareholder periodically loaned funds to the Company
under demand promissory notes. The maximum amount outstanding during 1994 was
$3,900,000. At the time of the Company's sale of Preferred Stock, $2,900,000 of
the note was exchanged for shares of the Preferred Stock at the rate of one
share of Preferred Stock for each $100 of indebtedness.
The Company regularly accepted Installment Contracts originated by a Dealer
formerly owned by the principal shareholder. Installment Contracts accepted from
and Acquisition Payments made to the affiliated Dealer were approximately
$6,453,000 and $2,654,000, respectively, in 1995 and approximately $3,055,000
and $1,181,000, respectively, in 1994. In addition, the Company made Pool
Distribution Payments to this dealer of $656,000 in 1995. In 1996 the principal
shareholder sold his ownership in this Dealer to an unrelated third party. The
Company has continued its relationship with this Dealer.
Service contracts are administered by an entity affiliated to the Company
through common ownership by the principal stockholder. The Company paid $614,000
during 1996 to this affiliate for administrative services.
In 1996, the Company entered into an agreement with an entity wholly owned
by the principal shareholder to develop and produce advertisements and execute
media buys for the Company. The Company paid $242,000 for these services in
1996.
41
<PAGE>
JAYHAWK ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the net deferred tax asset are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
--------- -------
<S> <C> <C>
Deferred tax liabilities:
Furniture, fixtures and equipment......................................... $ (1,074) $ (229)
Prepaid expenses and other................................................ (572) (263)
--------- -------
(1,646) (492)
--------- -------
Deferred tax assets:
Revenue recognition on installment contracts receivable................... 11,189 1,240
Accrued liabilities....................................................... -- 59
Net operating loss carryforward........................................... 4,801 --
Unearned service contract fees and service contract
liabilities.............................................................. 1,203 --
Deferred dealer fees, net................................................. 1,316 1,061
Other..................................................................... 167 220
--------- -------
18,676 2,580
--------- -------
Net deferred tax asset before valuation allowance......................... 17,030 --
Valuation allowance on deferred tax assets................................ (17,030) --
--------- -------
Net deferred tax assets................................................... $ -- $2,088
========= =======
</TABLE>
The Company has net operating loss carryforwards of $52,000 and $13,663,000
which originated in 1993 and 1996, respectively.
The differences, expressed as a percentage of pretax income (loss), between
statutory and effective federal income tax rates are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------------------------
1996 1995 1994
--------- -------- ---------
<S> <C> <C> <C>
Statutory tax rate........................... (35.0)% 35.0% (34.0%)
Change in valuation allowance................ 33.4 (20.0) --
Unrecordable net operating loss.............. -- -- 34.0
Other........................................ (0.7) 4.5 --
--------- -------- ---------
Effective tax rate........................... (2.3)% 19.5% $ --
========= ======== =========
</TABLE>
42
<PAGE>
JAYHAWK ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------------------------
1996 1995 1994
----------- ---------- ----------
<S> <C> <C> <C>
Current $ (3,275) $ 3,275 $ --
Deferred 2,088 (2,088) --
----------- ---------- ----------
$ (1,187) $ 1,187 $ --
=========== ========== ==========
</TABLE>
NOTE 10 - COMMITMENTS AND CONTINGENCIES
Lease Commitments - The Company leases office space for its corporate
office with a lease term of under one year. The Company also leases office space
for its collections operations and office equipment with an initial term of more
than one year.
The Company incurred lease expense of approximately $998,000 in 1996,
$480,000 in 1995, and $239,000 in 1994 associated with a noncancelable operating
lease for its corporate office. Future minimum lease payments under operating
leases are approximately $731,000 in 1997 and $37,000 in 1998.
Self-Insurance - The Company is self-insured for medical and dental claims
up to $35,000 per occurrence, with no annual aggregate. The Company has provided
a liability for estimated known and unknown claims related to these risks of
$102,000 and $114,000 at December 31, 1996 and 1995, respectively, which is
included in accrued liabilities in the accompanying balance sheet.
In the normal course of its business, the Company is named as defendant in
legal proceedings. These cases, which are prevented from proceeding because of
the automatic stay provisions of the Bankruptcy Code, include claims for alleged
truth-in-lending violations, nondisclosures, misrepresentations and deceptive
trade practices, among other things. The relief requested by plaintiffs varies,
but often includes requests for compensatory, statutory and punitive damages.
One proceeding in which the Company is a defendant has been brought as a
putative class action and is pending in Federal District Court in Illinois. A
class has yet to be certified in this case and the Company's motion to dismiss
is currently pending. In the opinion of management, resolution of these matters
will not have a material adverse effect on the Company.
NOTE 11 - DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents and installment contracts
receivable, net, less the associated dealer holdbacks, net, approximate fair
value because of the actual or expected short maturity of these instruments. The
carrying amount of the notes payable approximates fair value because the
interest rate on the notes payable either change with market interest rates or
approximate market rates.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE.
---------------------
None.
43
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
The following sets forth certain information regarding the Company's Board
of Directors and executive officers:
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------- ------ -----------------------------------------------------------
<S> <C> <C>
Carl H. Westcott............ 57 Chairman of the Board, Chief Executive Officer and Director
Jack T. Smith............... 44 President, Chief Operating Officer and Director
C. Fred Jackson............. 44 Senior Vice President and Chief Financial Officer
Robert J. Kelly............. 33 Vice President and Controller
Dan W. Cook III............. 62 Director
John D. Curtis.............. 56 Director
C. Gregory Earls............ 52 Director
Regina T. Montoya........... 43 Director
Joe J. Pollard, III......... 57 Director
John C. Tolleson............ 48 Director
</TABLE>
Carl H. Westcott has served as the Chairman of the Board and Chief
Executive Officer of the Company since February 1997 and as a director of the
Company since its inception in June 1993. He provided a substantial portion of
the initial capital to the Company and is the principal shareholder of the
Company. Mr. Westcott has extensive experience with corporations in the
automobile sales and automobile dealership support industries and, until its
sale in January 1996, was the sole director and shareholder of Atlanta Toyota,
Inc. Atlanta Toyota, Inc. is one of the largest Toyota dealerships in the
United States. From 1986 until its acquisition by K-III Communications
Corporation in June 1996, Mr. Westcott was Chairman of the Board, Chief
Executive Officer and a director of Westcott Communications, Inc. Westcott
Communications, Inc. is a Dallas-based communications company producing
information programming for subscribers in the automotive and other industries
and was affiliated with Mr. Westcott until its acquisition by K-III
Communications Corporation. Since May 1994, Mr. Westcott has also served as a
member of the Board of Directors of First USA, Inc.
Jack T. Smith has served as President and Chief Operating Officer of the
Company since March 1997 and as a director of the Company since its inception.
From September 1996 to March 1997, Mr. Smith served as a consultant to the
Company. From June 1996 until March 1997, he was employed by Westcott LLC, a
consulting and private investment company. From 1989 until its acquisition by
K-III Communications Corporation in June 1996, Mr. Smith was President and Chief
Operating Officer of Westcott Communications, Inc.
C. Fred Jackson has served as Senior Vice President and Chief Financial
Officer of the Company since August 1996. Mr. Jackson served as Vice President
of Finance for The Money Store Inc., a financial services company
Page 44
<PAGE>
specializing in non-prime home equity and automobile loans, from October 1991
until he joined the Company. Prior to October 1991, Mr. Jackson worked for
National Westminster Bank USA for ten years, where he served as Vice President
and Department Head for its Finance and Insurance Companies Department from 1985
to 1991.
Robert J. Kelly has served as Vice President and Controller of the Company
since September 1993. From July 1986 until joining the Company, Mr. Kelly was
an accountant with Ernst & Young LLP, where he served as Audit Manager
immediately prior to joining the Company.
Dan W. Cook III has served on the Board of Directors of the Company since
October 1995. Mr. Cook is a limited partner with the investment banking firm of
Goldman, Sachs & Co., where he was employed for more than 30 years, and serves
on the Board of Directors of Centex Corporation. In addition to Mr. Cook's
business activities, he has served in various professional and charitable
organizations including: Vice-Chairman of the Executive Board: The Edwin L. Cox
School of Business, Southern Methodist University, Trustee of SMU and Vice
Chairman of SMU's Investment Committee and Director and Member of Investment
Committee, University of Nebraska Foundation.
John D. Curtis has served as a consultant to the Company since September
1996 and as a director of the Company since October 1995. Mr. Curtis has also
served as President of First Extended Service Corporation since November 1995
and a director of Farah Incorporated since June 1996. From November 1992 until
joining First Extended Service Corporation, Mr. Curtis was a partner in the law
firm of Baker & McKenzie. Prior to November 1992, he was a partner in the law
firm of Johnson & Gibbs, P.C.
C. Gregory Earls has served on the Board of Directors of the Company since
its inception. Mr. Earls is President and a director of Equitable Production
Funding of Canada, Inc., a film licensing company; U.S. Viewing Corporation, a
management company; and National Networks, Inc., a private investment company.
Mr. Earls has held these positions since June 1981, March 1985 and January 1993,
respectively. Mr. Earls was President and a director of Health and Sciences
Television Network, a subsidiary of Westcott Communications, Inc., from November
1991 until its acquisition by K-III Communications Corporation in June 1996.
Regina T. Montoya has served on the Board of Directors of the Company since
February 1994. Ms. Montoya has also served as a member of the Board of
Directors of the Student Loan Marketing Association (Sallie Mae) since March
1994. Since August 1995, Ms. Montoya has served as a political analyst for
KDFW-TV in Dallas, Texas, and since September 1995 she has also served as a
Visiting Professor at the University of Texas in Dallas, Texas, and as a
consultant. From December 1993 to April 1997, she served as a member of the
Board of Directors of Trammell Crow Company. From June 1995 until December
1996, she served as a member of the Board of Directors of Integrated
Communications Network, Inc. Between January 1994 and August 1995, Ms. Montoya
served as a Vice President of Westcott Communications, Inc. From September 1993
to December 1993, Ms. Montoya was self-employed as a consultant. Ms. Montoya
served as an Assistant to President Clinton and Director of the Office of
Intergovernmental Affairs from January to August of 1993. Ms. Montoya is an
attorney who previously was in the private practice of law with the law firms
Godwin & Carlton from September 1990 to January 1993 and Akin, Gump, Strauss,
Hauer & Feld from September 1980 to September 1990.
Joe J. Pollard, III has served on the Board of Directors of the Company
since September 1994 and since March 1997 has served as Director of Vehicle
Remarketing of the Company. From September 1994 until his resignation in
January 1996, Mr. Pollard served as President and Chief Operating Officer for
the Company. Between January 1996 and March 1997, Mr. Pollard was self-
employed as a private investor. From August 1993 to September 1994, Mr. Pollard
served as President and General Manager of Atlanta Toyota, Inc., an Atlanta-
based automobile dealership formerly owned by Mr. Westcott. Atlanta Toyota,
Inc. is one of the ten largest Toyota dealerships in the U.S. From April 1990
to July 1993, Mr. Pollard was self-employed as a private investor. Mr. Pollard
has 30 years of experience
Page 45
<PAGE>
in the automotive industry, 22 of which were spent at the Eagle Companies, one
of the largest dealership groups in the country, where he rose to the position
of Executive Vice President.
John C. Tolleson has served on the Board of Directors of the Company since
its inception. He has served as Chairman of the Board and Chief Executive
Officer of First USA, Inc. and a director of First USA Bank since August 1989.
Additionally, Mr. Tolleson has served as a director of Capstead Mortgage Corp.
since July 1994 and as a director of First USA Paymentech, Inc. since January
1996. First USA, Inc. and its related companies are financial services
companies, which are major issuers of credit cards and providers of merchant
processing services.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than ten percent of a
registered class of equity securities, to file with the Securities and Exchange
Commission (the "SEC") initial reports of ownership and reports of changes in
ownership of Common Stock and other equity securities of the Company.
Directors, executive officers and greater than ten-percent shareholders are
required by SEC regulations to furnish the Company with copies of all Section
16(a) forms they file.
Based solely on its review of the copies of such forms received by it with
respect to fiscal 1996 and written representations from certain reporting
persons, the Company believes that all filing requirements applicable to its
directors, executive officers and persons who own more than 10% of a registered
class of the Company's equity securities have been complied with by such
persons.
Page 46
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ITEM 11. EXECUTIVE COMPENSATION
----------------------
The Summary Compensation Table below provides certain summary information
concerning compensation paid or accrued by the Company to or on behalf of the
Company's Chief Executive Officer during 1996 and each of the other persons
serving as executive officers of the Company during 1996 whose compensation in
1996 exceeded $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------------------------- ------------------------
NAME AND FISCAL OTHER ANNUAL AWARDS
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS/SARS
- ----------------------------------------------- ------ ------------ -------------- ------------ -----------------------
<S> <C> <C> <C> <C> <C>
Michael I. Smartt, 1996 $259,422 --- --- 50,000/(1)/
Chairman of the Board, Chief Executive 1995 178,464 --- --- 100,000/(2)/
Officer and Director /(3)/ 1994 137,215 --- --- 150,000/(4)/
Richard B. Hoffmann, 1996 232,051 $200,000/(5)/ $ 53,681/(6)/ 150,000/(7)/
President and Chief Operating Officer /(8)/ 1995 --- --- --- ---
1994 --- --- --- ---
C. Fred Jackson, 1996 52,500 50,000/(9)/ 3,013/(10)/ 80,000/(11)/
Senior Vice President and Chief Financial 1995 --- --- --- ---
Officer/(12)/ 1994 --- --- --- ---
Oney A. Hervey, 1996 150,000 ---- --- 5,000/(13)/
Senior Vice President-Operations/(14)/ 1995 75,448 15,000 --- 75,000/(15)/
1994 --- --- --- ---
Jerry W. Bayless/(16)/ 1996 144,308 --- --- ---
1995 127,964 --- --- 35,000/(17)/
1994 127,841 --- --- ---
John A. Blessing, III/(18)/ 1996 135,124 15,000 --- ---
1995 102,680 10,000 17,943/(19)/ 25,000/(20)/
1994 --- --- --- ---
</TABLE>
_____________________
/(1)/ Options granted September 27, 1996, as part of a total grant of 378,000
options to certain officers and key employees pursuant to the Company's
1994 Stock Option Plan (as hereinafter defined).
/(2)/ Options granted July 10, 1995, as part of a total grant of 157,500 options
to certain officers and key employees pursuant to the Company's 1994 Stock
Option Plan.
/(3)/ Mr. Smartt served as the Company's Chairman of the Board and Chief
Executive Officer until February 1997. Mr. Westcott has succeeded Mr.
Smartt as Chairman of the Board and Chief Executive Officer of the
Company. Mr. Westcott serves in such capacities without compensation.
/(4)/ Options granted August 24, 1994 as part of a total grant of 265,000
options to certain officers and key employees pursuant to the Company's
1994 Stock Option Plan.
/(5)/ Bonus paid for fiscal year 1996 pursuant to the terms of Mr. Hoffmann's
employment agreement. See "--Employment Contracts."
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<PAGE>
/(6)/ Reimbursement for moving expenses incurred in connection with Mr.
Hoffmann's relocation to Dallas, Texas. See "--Employment Contracts."
/(7)/ Options granted January 25, 1996 and September 27, 1996, as part of grants
totaling 406,500 options to certain officers and key employees pursuant to
the Company's 1994 Stock Option Plan.
/(8)/ Mr. Hoffmann became President and Chief Operating Officer of the Company
in January 1996. He served in such capacities until February 1997. Mr.
Smith has succeeded Mr. Hoffmann as President and Chief Operating Officer
of the Company. Mr. Smith is paid $10,000 per month for his services.
/(9)/ Bonus paid for fiscal year 1996 pursuant to the terms of Mr. Jackson's
employment agreement. See "--Employment Contracts."
/(10)/Reimbursement for moving expenses incurred in connection with Mr.
Jackson's relocation to Dallas, Texas. See "--Employment Contracts."
/(11)/Options granted August 19, 1996 and September 27, 1996, as part of grants
totaling 428,000 options to certain officers and key employees pursuant to
the Company's 1994 Stock Option Plan.
/(12)/Mr. Jackson became Senior Vice President and Chief Financial Officer of
the Company in August 1996.
/(13)/Options granted September 27, 1996 as part of a total grant of 378,000
options to certain officers and key employees pursuant to the Company's
1994 Stock Option Plan.
/(14)/Mr. Hervey served as Senior Vice President-Operations until February
1997.
/(15)/Options granted July 10, 1995, August 14, 1995 and October 24, 1995 as
part of grants totaling 336,000 options to certain officers and key
employees pursuant to the Company's 1994 Stock Option Plan.
/(16)/Mr. Bayless served as an executive officer of the Company until August
1996. The table shows compensation paid to Mr. Bayless, who would have
been one of the four most highly compensated executive officers of the
Company other than the Chief Executive Officer except for the fact that he
was not serving as an executive officer at December 31, 1996.
/(17)/Options granted August 14, 1995 as part of a total grant of 130,500
options to certain officers and key employees pursuant to the Company's
1994 Stock Option Plan.
/(18)/Mr. Blessing served as an executive officer of the Company until December
1996. The table shows compensation paid to Mr. Blessing, who would have
been one of the four most highly compensated executive officers of the
Company other than the Chief Executive Officer except for the fact that he
was not serving as an executive officer at December 31, 1996.
/(19)/Reimbursement for moving expenses incurred in connection with Mr.
Blessing's relocation to Dallas, Texas.
/(20)/Options granted February 28, 1995 and August 14, 1995 as part of grants
totaling 187,000 options to certain officers and key employees pursuant to
the Company's 1994 Stock Option Plan.
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<PAGE>
GRANTS OF STOCK OPTIONS AND STOCK APPRECIATION RIGHTS
The following table provides information with respect to the individuals
listed in the Summary Compensation Table above concerning the grant of options
to acquire Common Stock in 1996. No SARs were granted in 1996.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------------------
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION GRANT DATE
NAME GRANTED (#) FISCAL YEAR ($/SHARE) DATE PRESENT VALUE
---- -------------- ---------------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Michael I. Smartt 50,000 7.10% $ 14.1250 9/27/03 $ 335,395
Richard B. Hoffmann(1) 100,000 14.19% 10.3750 1/25/03 559,480
50,000 7.10% 14.1250 9/27/03 335,395
C. Fred Jackson 50,000 7.10% 10.1375 8/19/03 251,395
30,000 4.26% 14.1250 9/27/03 201,237
Oney A. Hervey(1) 5,000 0.71% 14.1250 9/27/03 33,540
Jerry W. Bayless --- --- --- --- ---
John A. Blessing --- --- --- --- ---
</TABLE>
(1) Mr. Hoffmann and Mr. Hervey resigned from all their positions with the
Company in February 1997. Mr. Hervey's options have been terminated and Mr.
Hoffmann's options will terminate on April 27, 1997 unless exercised. Since
the Company filed the Chapter 11 Petition, the exercise price of these
options has been greater than the market price of the Common Stock.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions: risk-free interest rates ranging from 5.38% to 7.59% for 1995 and
5.32% to 6.91% for 1996; dividend yields of 0%; volatility factors of the
expected market price of the Company's Common Stock of .43; and a weighted-
average expected life of the option of 5.5 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion the existing models do not necessarily provide a reliable
single measure of the fair value of the stock options on their respective grant
dates.
Page 49
<PAGE>
STOCK OPTION EXERCISES AND HOLDINGS
The following table provides information with respect to the individuals
listed in the Summary Compensation Table above concerning the value of
unexercised options to acquire Common Stock held as of December 31, 1996. No
SARs have been granted under any incentive plan.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES OPTIONS/SARS AT OPTIONS/SARS AT
ACQUIRED ON VALUE FISCAL YEAR END (#) FISCAL YEAR END ($)
NAME EXERCISE REALIZED ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE/(1)/
---- ----------- ------------ -------------------------- -------------------------------
<S> <C> <C> <C> <C>
Michael I. Smartt --- $ --- 85,000 / 215,000 $449,275 / $725,475
Richard B. Hoffmann/(2)/ --- --- 20,000 / 130,000 20,000 / 80,000
C. Fred Jackson --- --- 20,000 / 60,000 18,750 / 28,125
Oney A. Hervey/(2)/ --- --- 18,750 / 61,250 3,437 / 10,312
Jerry W. Bayless 8,750 16,344 ---/ --- ---/ ---
John A. Blessing 6,250 27,500 ---/ --- ---/ ---
</TABLE>
(1) The options were valued using the Common Stock closing price on December
31, 1996, which was $11.25. On April 10, 1997, the closing sale price of
the Common Stock was $2.
(2) Mr. Hoffmann and Mr. Hervey resigned from all their positions with the
Company in February 1997. Mr. Hervey's options have been terminated and Mr.
Hoffmann's options will terminate on April 27, 1997 unless exercised. Since
the Company filed the Chapter 11 Petition, the exercise price of these
options has been greater than the market price of the Common Stock.
STOCK OPTION PLAN
The Company adopted its 1994 Stock Option and Restricted Stock Plan in
February 1994, which was amended and restated in its entirety in July 1995 and
again amended in May 1996 (as so amended and restated, the "1994 Stock Option
Plan"). An aggregate of 1,500,000 shares of Common Stock are reserved for
issuance under the 1994 Stock Option Plan.
The 1994 Stock Option Plan is administered by a committee (the "Committee")
of non-employee directors of the Company. The Committee may delegate to one or
more officers or managers of the Company the authority to administer the 1994
Stock Option Plan with respect to participants who are not officers or directors
for purposes of Section 16 of the Securities Exchange Act of 1934 (the "Exchange
Act"). Participants in the 1994 Stock Option Plan are those key employees of, or
consultants to, the Company as the Committee may select from time to time. The
Company may grant options to purchase shares of Common Stock and awards of
shares of Common Stock containing certain restrictions ("restricted stock")
under the 1994 Stock Option Plan. As of March 21, 1997, options to purchase
25,700 shares, 267,000 shares, 12,000 shares, 140,000 shares, 15,250 shares,
100,000 shares, 15,000 shares, 16,000 shares, 26,500 shares, 29,000 shares,
50,000 shares, and 347,500 shares of Common Stock at respective exercise prices
per share of $2.36, $4.46, $5.00, $10.00, $10.125, $10.375, $11.00, $12.625,
$12.75, $10.625, $10.4375, and $14.125 were outstanding under the 1994 Stock
Option Plan. No shares of restricted stock have been issued under the 1994 Stock
Option Plan.
Page 50
<PAGE>
Options granted under the 1994 Stock Option Plan may be incentive stock
options ("ISOs") meeting the requirements of Section 422 of the Internal Revenue
Code (the "Code") or may be nonstatutory options. The exercise price of an
option shall be such price as is determined by the Committee in its sole
discretion; provided, however, that in the case of an ISO, the exercise price
shall not be less than 100% of the fair market value of the shares subject to
such option on the date of grant (or 110% in the case of an option granted to a
participant who is a ten percent shareholder on the date of grant). The
aggregate fair market value of the Common Stock on the date of grant for which
any participant may be granted ISOs first exercisable in any year may not exceed
$100,000. The exercise price is required to be paid in full at the time of
exercise in cash or, upon approval of the Committee, in shares of Common Stock.
The term of each option granted under the 1994 Stock Option Plan is ten years
from the date of grant or such shorter term as may be determined by the
Committee; provided, however, in the case of an ISO granted to a ten percent
shareholder, the term of such ISO shall be five years from the date of grant, or
such shorter time as may be determined by the Committee, and, unless otherwise
provided in the stock option agreement relating to a particular option, will
terminate upon the participant ceasing to be an employee or consultant to the
extent not then exercisable. Options that have become exercisable on or prior
to the date the participant ceases to be an employee or consultant terminate at
the earlier of: (i) the expiration date of the option; (ii) unless extended by
the Committee, (y) in the case of an ISO, 90 days after the date the participant
ceases to be an employee or consultant and (z) in the case of a nonstatutory
option, six months after the date the participant ceases to be an employee or
consultant (or in each case, such shorter period as may be provided in the stock
option agreement evidencing the option); or (iii) where such termination occurs
as a result of death or disability, one year after the participant ceases to be
an employee or consultant. Options granted under the 1994 Stock Option Plan are
not transferable by the grantee other than by will and the laws of descent and
distribution.
Under the 1994 Stock Option Plan, restricted stock may be granted by the
Committee separately or in combination with options as provided for by the
Committee; provided, however, each grant of restricted stock shall require the
participant to remain an employee of (or otherwise provide services to) the
Company for at least six months from the date of grant. Restricted stock shall
be granted to participants for services rendered to the Company, and at no
additional cost to the participant. The terms, conditions and restrictions of
the restricted stock are determined by the Committee on the date of grant. The
restricted stock may not be sold, assigned, transferred, redeemed, pledged or
otherwise encumbered during the period in which the terms, conditions and
restrictions apply. More than one grant of restricted stock may be outstanding
at any one time, and the restricted periods may be of different lengths. At the
time of each grant of restricted stock, the Committee in its sole discretion may
establish certain criteria to determine the times at which restrictions placed
on restricted stock shall lapse. The restricted stock criteria may vary among
grants of restricted stock. On the date the restriction period terminates, the
restricted stock shall vest in the participant, who may then require the Company
to issue certificates evidencing the restricted stock. Generally, if a
participant ceases to be an employee or otherwise ceases to provide services to
the Company for any reason, all grants of restricted stock are forfeited;
provided, however, if a participant ceases to be an employee of or otherwise
provide services to the Company, or dies or suffers from permanent disability,
the vesting or forfeiture of any grant shall be determined by the Committee in
its sole discretion. The Committee may provide from time to time that amounts
equivalent to dividends paid with respect to Common Stock be payable with
respect to the restricted stock. Such amounts shall be credited to the
participant's restricted stock account but shall be payable to the participant
only when the restrictions lapse.
NON-EMPLOYEE PLAN
The Company adopted its Non-Employee Stock Option Plan in February 1994,
and it was amended and restated in its entirety in July 1995 (as so amended and
restated, the "Non-Employee Plan"). A total of 450,000 shares of Common Stock
are reserved for issuance upon exercise of options granted under the Non-
Employee Plan. The Non-Employee Plan provides for the grant of options to
directors of the Company and its subsidiaries and other persons rendering
critical services to the Company or its subsidiaries who are not full-time
employees of the Company or any of its subsidiaries and on the date of grant do
not own more than ten percent of the outstanding Common Stock ("Eligible
Individuals"). As of December 31, 1996, options to purchase 30,000, 40,000,
20,000 and 60,000 shares of
Page 51
<PAGE>
Common Stock at exercise prices of $.01 per share, $4.46 per share, $12.625 and
$12.8125 per share, respectively, were outstanding under the Non-Employee Plan.
The Non-Employee Plan provides that immediately following the initial
election or appointment of an Eligible Individual to the Company's Board of
Directors, such individual shall automatically receive an option to purchase
10,000 shares of Common Stock at a price per share equal to the fair market
value of such stock on the date of such election. Thereafter, upon the
reelection of any Eligible Individual to the Board of Directors, such individual
shall automatically be granted an option to purchase an additional 10,000 shares
of Common Stock at a price per share equal to the fair market value of such
stock on the date of such reelection; provided that no Eligible Individual shall
receive an option upon reelection if such option, together with all unexercised
options previously granted under the Non-Employee Plan to such director, exceed
options to purchase 50,000 shares of Common Stock. Twenty-five percent of any
such option shall vest on each of the six month, one year, two year, and three
year anniversaries of the date of grant and no such option shall be exercisable
after the date which is ten years from the date of grant.
The Non-Employee Plan is administered by the Committee and permits the
grant of options to such Eligible Individuals as the Committee may determine
from time to time, which options will be subject to such terms and conditions as
the Committee may determine. In addition, the Committee may grant cash awards
payable in connection with the exercise of an option. The exercise price of any
such option shall be such price as is determined by the Committee; provided that
the exercise price shall not be less than 85% of the fair market value of the
shares subject to such option on the date of grant. Except as otherwise provided
in the agreement evidencing the option, if a holder of an option ceases to be a
director of, or otherwise render the service for which the option was granted
to, the Company or its subsidiaries, the unexercised portion of such option
shall terminate, if a holder of any option ceases by reason of disability to be
a director of the Company or any of its subsidiaries or to otherwise render the
service for which the option was granted, the unexercised portion of such option
shall terminate 90 days thereafter, and if a holder of an option dies, the
unexercised portion of such option shall terminate one year thereafter.
EMPLOYEE STOCK PURCHASE PLAN
The Company adopted its Employee Stock Purchase Plan (the "Stock Purchase
Plan") in April 1995 and it became effective on January 1, 1996. A total of
150,000 shares of Common Stock are reserved for issuance under the Stock
Purchase Plan. As of December 31, 1996, 12,300 shares of Common Stock have been
issued pursuant to the Stock Purchase Plan. The Stock Purchase Plan is intended
to qualify under Section 423 of the Internal Revenue Code of 1986, as amended.
The term of the Stock Purchase Plan is ten years commencing on its effective
date. The Stock Purchase Plan will be interpreted and administered by the
Committee. All full-time employees, except directors, five percent shareholders
and key executives which the Committee determines to be ineligible, will be
eligible to participate in the Stock Purchase Plan if they have been
continuously employed by the Company for 180 days. On each Investment Date (as
defined in the Stock Purchase Plan), eligible employees will be permitted to
purchase Common Stock with amounts accumulated through payroll deductions, which
are limited to a maximum of ten percent of an employee's monthly salary, at 85%
of the fair market value of the Common Stock on the applicable Investment Date.
The Investment Dates will be the third Friday of each March, June, September and
December during the term of the Stock Purchase Plan. An employee may end his
participation in the Plan at any time by withdrawing all funds accumulated in
his payroll deduction account, and participation ends automatically on
termination of full-time employment with the Company.
EMPLOYMENT CONTRACTS
C. Fred Jackson. On August 16, 1996, the Company entered into an agreement
with C. Fred Jackson, providing that he will be employed as the Company's Chief
Financial Officer and receive a base salary of $180,000 per year and a bonus of
$50,000 for the year ending December 31, 1996. In accordance with the
agreement, Mr. Jackson was also granted options to purchase 20,000 shares of
Common Stock at an exercise price of $10.4375 per share, vesting
Page 52
<PAGE>
immediately upon the commencement of his employment with the Company.
Additionally, Mr. Jackson was granted options to purchase 30,000 shares of
Common Stock at an exercise price of $10.4375 per share, vesting at a rate of
20% per year from the date of the commencement of his employment with the
Company. The agreement provides further that Mr. Jackson will be granted options
to purchase 20,000 shares of Common Stock in 1997, vesting at a rate of 20% per
year from the date of the commencement of his employment with the Company.
Pursuant to this agreement, the Company also agreed to reimburse Mr. Jackson for
certain costs associated with his relocation to Dallas, Texas. The agreement
provides that if, during the first two years of Mr. Jackson's employment, the
Company terminates Mr. Jackson's employment without cause, or if Mr. Jackson is
asked to take a reduction in wages or his position is eliminated or
significantly down-graded, he will receive 12 months of base salary.
Furthermore, the agreement provides that if the Company experiences a change in
control resulting in a material change to his job function, he will receive 12
months total compensation and if his employment is terminated as a result of
such change in control, all his unvested stock options will vest immediately. In
September 1996, Mr. Jackson was granted options to purchase 20,000 shares of
Common Stock at an exercise price of $14.125 per share, vesting at a rate of 25%
per year commencing on September 27, 1997, in lieu of the scheduled grant of
options in 1997 under his employment contract.
Richard B. Hoffmann. On January 2, 1996, the Company entered into an
agreement with Richard B. Hoffmann, who subsequently resigned from all his
positions with the Company in February 1997. The agreement provided that he
would be employed as the Company's President and receive a base salary of
$250,000 per year and a bonus of $200,000 for the year ending December 31, 1996.
The agreement also provided that Mr. Hoffmann's bonus plan for calendar year
1997 would have a bonus target of $200,000 and would be based on mutually agreed
upon personal and Company objectives. In accordance with the agreement, Mr.
Hoffmann was also granted options to purchase 100,000 shares of Common Stock at
an exercise price of $10.375 per share, vesting at a rate of 20% per year with
20% vesting immediately upon the commencement of his employment with the
Company. The agreement further provided that Mr. Hoffmann would have been
granted options to purchase 50,000 shares of Common Stock in each of 1997 and
1998 with a similar vesting schedule. Pursuant to this agreement, the Company
also agreed to reimburse Mr. Hoffmann for certain costs associated with his
relocation to work for the Company. The agreement provided that if during 1997
Mr. Hoffmann's employment is terminated by the Company without cause, or if Mr.
Hoffmann is asked to take a reduction in wages or his position is eliminated or
significantly down-graded, he will receive 12 months of base salary.
Furthermore, the agreement provided that if the Company experiences a change in
control resulting in a material change to his job function, he will receive 18
months total compensation and if his employment is terminated as a result of
such change in control, all his unvested stock options will vest immediately.
In September 1996, Mr. Hoffmann was granted options to purchase 50,000 shares of
Common Stock at an exercise price of $14.125 per share, vesting at a rate of 25%
per year commencing on September 27, 1997, in lieu of the scheduled grant of
options in 1997 under his employment contract. On February 21, 1997 Mr.
Hoffmann tendered his resignation subject to the condition, among others, that
he receive two months compensation. The Company accepted his resignation.
David C. Carrithers. On December 4, 1996, the Company entered into an
agreement with David C. Carrithers, who subsequently resigned from all his
positions with the Company in February 1997. The agreement also provided that
he will be employed as the Company's Vice President of Marketing and Sales and
receive a base salary of $130,000 per year and a bonus of $45,000 for the year
ending December 31, 1997. The agreement further provided for a bonus of $30,000
for the year ending December 31, 1998, assuming the Company has not adopted a
formal incentive program to supersede such bonus. Mr. Carrithers was also to be
granted options to purchase 25,000 shares of Common Stock vesting at a rate of
25% per year from the date of his employment with the Company. Pursuant to this
agreement, the Company also agreed to reimburse Mr. Carrithers for $30,000 of
the costs associated with his relocation to Dallas, Texas. The agreement
provided that if during the first year of Mr. Carrithers' employment with the
Company, his employment is terminated by the Company without cause, or if Mr.
Carrithers is asked to take a reduction in wages or his position is eliminated
or significantly down-graded, he will receive 12 months of base salary.
Furthermore, the agreement provided that if the Company experiences a change in
control during the first year of Mr. Carrithers' employment resulting in a
material change to his job function, he will receive 12 months total
compensation and if his employment is terminated as a result of such change in
control, all his unvested stock options will vest immediately. On February 10,
1997 Mr. Carrithers tendered his resignation.
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<PAGE>
COMPENSATION OF DIRECTORS
The Company pays non-employee directors an annual retainer of $4,000 and a
fee of $1,000 for each Board of Directors or committee meeting attended;
provided that the Board of Directors has suspended such payments during the
pendency of the Chapter 11 Proceeding. The Company also reimburses out-of-pocket
expenses related to the director's attendance at such meetings. See "--Non-
Employee Stock Option Plan."
On September 5, 1996, the Company entered into a consulting agreement with
Jack T. Smith, a member of the Company's Board of Directors pursuant to which
Mr. Smith agreed to provide business, financial and management consulting
services to the Company. In accordance with the consulting agreement, the
Company granted Mr. Smith an option to purchase 100,000 shares of Common Stock
at an exercise price of $14.125 per share exercisable in increments of 25,000
shares, with the first 25,000 shares becoming immediately exercisable on the
date of grant and each subsequent increment becoming exercisable on each of the
next three anniversaries of the date of grant. Unvested options automatically
terminate upon termination of the consulting agreement, which can be terminated
by either party on 30 days' notice. In March 1997, Mr. Smith was appointed
President and Chief Operating Officer of the Company. Such agreement was
terminated upon Mr. Smith being appointed President and Chief Operating Officer
of the Company.
On September 27, 1996, the Company also entered into a consulting agreement
with John D. Curtis, a member of the Company's Board of Directors, pursuant to
which Mr. Curtis agreed to provide legal and business consulting services to the
Company. In accordance with the consulting agreement, the Company granted Mr.
Curtis an option to purchase 20,000 shares of Common Stock at an exercise price
of $14.125 per share exercisable in increments of 5,000 shares, with the first
5,000 shares becoming immediately exercisable on the date of grant and each
subsequent increment becoming exercisable on each of the next three
anniversaries of the date of grant. Unvested options automatically terminate
upon termination of the consulting agreement, which can be terminated by either
party on 30 days' notice.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of March 31, 1997 by: (i) each person known by
the Company to own beneficially five percent or more of the outstanding Common
Stock; (ii) each of the Company's directors; (iii) each of the persons named in
the Summary Compensation Table; and (iv) all directors and executive officers of
the Company as a group.
Page 54
<PAGE>
<TABLE>
<CAPTION>
NUMBER
OF SHARES
BENEFICIALLY PERCENTAGE OF
OWNED/(1)/ OUTSTANDING SHARES
------------ -------------------
<S> <C> <C>
Michael I. Smartt/(2)/...................................................... 337,025 1.5%
Richard B. Hoffmann/(3)/.................................................... 40,000 *
C. Fred Jackson/(4)/........................................................ 20,000 *
Oney A. Hervey /(5)/........................................................ --- *
Dan W. Cook III/(6)/........................................................ 128,333 *
John D. Curtis/(7)/......................................................... 2,352,743 9.8%
C. Gregory Earls/(8)/....................................................... 676,714 2.8%
Regina T. Montoya/(9)/...................................................... 31,787 *
Joe J. Pollard, III/(10)/................................................... 233,025 1.1%
Jack T. Smith/(11)/......................................................... 103,633 *
John C. Tolleson/(12)/...................................................... 530,805 2.2%
Carl H. Westcott/(13)/...................................................... 8,272,713 34.6%
Jerry W. Bayless/(14)/...................................................... 283,984 1.2%
John A. Blessing/(15)/...................................................... --- *
All directors and executive officers as a group (10 persons)/(16)/.......... 12,632,903 52.8%
</TABLE>
____________________
* Represents less than 1.0% of the outstanding Common Stock.
/(1)/ Except as indicated in the footnotes to this table, the persons named in
the table have sole voting and investment power with respect to the shares
of Common Stock shown as beneficially owned by them, subject to community
property laws where applicable.
/(2)/ Includes 85,000 shares of Common Stock issuable upon exercise of options
granted under the 1994 Stock Option Plan and exercisable within 60 days.
/(3)/ Mr. Hoffmann is no longer employed by the Company. Consists of shares of
Common Stock issuable upon exercise of options granted under the 1994
Stock Option Plan. These options will terminate on April 22, 1997 unless
exercised. The number of shares reported as beneficially owned by him is
based on his last Form 4 which was filed for the month of September 1996.
/(4)/ Consists of 20,000 shares of Common Stock issuable upon exercise of
options granted under the 1994 Stock Option Plan and exercisable within 60
days.
/(5)/ Mr. Hervey is no longer employed by the Company. The number of shares
reported as beneficially owned by him is based on his last Form 4 which
was filed for the month of February 1997.
/(6)/ Includes 10,000 shares issuable upon exercise of options granted under the
Non Employee Plan and exercisable within 60 days. Includes 80,434 shares
of Common Stock held by Mr. Cook as Custodian for his children under the
Uniform Gift To Minors Act, as to which Mr. Cook disclaims beneficial
ownership.
/(7)/ Includes 10,500 shares issuable upon exercise of options granted under the
Non Employee Plan and exercisable within 60 days, and 1,149,000 and
1,149,000 shares of Common Stock held by Mr. Curtis as trustee of the
Court Hilton Westcott 1987 Trust and Chart Hampton Westcott 1987 Trust,
respectively, as to which Mr. Curtis disclaims beneficial ownership.
/(8)/ Includes 665,064 and 1,050 shares of Common Stock held by Mr. Earls as
trustee under the Earls' Children Irrevocable Educational Trust Agreement
and by members of his family, respectively, as to which Mr. Earls
disclaims beneficial ownership, and 10,000 shares of Common Stock issuable
upon exercise of options granted under the Non-Employee Plan and
exercisable within 60 days.
/(9)/ Includes 22,500 shares of Common Stock issuable upon the exercise of
options granted under the Non-Employee Plan and exercisable within 60
days.
/(10)/Includes 100,000 shares of Common Stock issuable upon exercise of options
granted under the 1994 Stock Option Plan and exercisable within 60 days.
/(11)/Includes 20,000 shares of Common Stock issuable upon exercise of options
granted under the Non-Employee Plan and exercisable within 60 days.
/(12)/ Includes 45,000 shares of Common Stock held by Mr. Tolleson as trustee of
the Tolleson 1994 Descendants Trust, as to which Mr. Tolleson disclaims
beneficial ownership, and 22,500 shares of Common Stock issuable upon
exercise of options granted under the Non-Employee Plan and exercisable
within 60 days.
/(13)/The principal business address of Mr. Westcott is 2001 Bryan Street,
Suite 600, Dallas, Texas 75201.
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/(14)/Mr. Bayless is no longer employed by the Company. The number of shares
reported as beneficially owned by him is based on his last Form 4 which
was filed for the month of August 1995.
/(15)/Mr. Blessing is no longer employed by the Company. The number of shares
reported as beneficially owned by him is based on his last Form 4 which
was filed for the month of November 1996.
/(16)/Includes 112,500 shares of Common Stock issuable upon exercise of options
granted under the Non-Employee Plan and exercisable within 60 days and
120,000 shares of Common Stock issuable upon exercise of options granted
under the 1994 Stock Option Plan and exercisable within 60 days.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
During 1996 the Company maintained business relationships and engaged in
certain transactions with affiliated companies and parties as described below.
It is the policy of the Company to engage in transactions with related parties
on terms, in the opinion of the Company, no less favorable to the Company than
could be obtained from unrelated parties.
In the normal course of its business, the Company regularly purchased
Installment Contracts originated by Atlanta Toyota, Inc., all of the outstanding
stock of which was owned by Mr. Westcott prior to January 17, 1996. Gross
installment contracts receivable purchased by the Company from Atlanta Toyota,
Inc. were approximately $271,000 for the sixteen days ended January 16, 1996.
See Note 8 of the Notes to Consolidated Financial Statements.
From time to time, the Company leases a jet aircraft from a corporation
wholly owned by Mr. Westcott on terms the Company believes to be no less
favorable to the Company than could be obtained for similar services from
unrelated parties. The Company paid approximately $109,000 in 1996 for its use
of the aircraft. The Company's primary use of the aircraft has been for travel
in connection with its financing activities.
On November 15, 1995, the Company entered into an agreement with First
Extended Service Corporation pursuant to which First Extended Service
Corporation performs certain claims administration services on behalf of the
Company with respect to an extended service agreement program the Company offers
to its Dealers. Under the extended service agreement program, a Dealer can sell
a vehicle service product to a customer whose Contract is purchased by the
Company, which reimburses the customer for certain repairs made to the vehicle
securing the Contract. The amounts payable by the Company to First Extended
Service Corporation under the agreement are directly related to the number of
such vehicle service products sold by the Company's Dealers and are on terms no
less favorable to the Company than could be obtained for similar services from
unrelated parties. The Company paid approximately $614,000 in 1996 to First
Extended Service Corporation pursuant to this agreement. First Extended Service
Corporation is a wholly owned subsidiary of a corporation of which Mr. Westcott
is the principal shareholder. Mr. Curtis is an executive officer of First
Extended Service Corporation.
In late 1996, the Company entered into an agreement with Cougar
Advertising, Inc. pursuant to which Cougar Advertising, Inc. agreed to develop
and produce commercials and execute media buys for the Company on terms the
Company believes are no less favorable to the Company than could be obtained for
similar services from unrelated parties. The Company paid approximately $242,000
for these services in 1996. Mr. Westcott is the sole shareholder of Cougar
Advertising, Inc.
On November 7, 1996, the Company entered into a build-to-suit agreement
with Cougar Real Estate, Ltd. pursuant to which Cougar Real Estate, Ltd. agreed
to construct a 102,400 square foot office building in accordance with
specifications mutually agreed upon by the parties and subsequently lease the
office building to the Company pursuant to a triple net lease. As a result of
the Chapter 11 Proceeding and the Company's reduced level of operations, the
Page 56
<PAGE>
Company elected to reject the agreement in connection with the Chapter 11
Proceeding and Cougar Real Estate, Ltd. agreed to assert no claim for damages as
a result of such rejection. The agreement provided for a lease term of 15 years.
On October 1, 1996 JMAC executed a revolving credit promissory note (the
"NationsBank Note") in the face amount of $15,000,000 payable to NationsBank.
The NationsBank Note is due October 1, 1997 and bears interest at the prime rate
of interest. Mr. Westcott unconditionally guaranteed payment of the NationsBank
Note. In January 1997, as a condition to Mr. Westcott guaranteeing any future
advances under the NationsBank Note or otherwise, JMAC granted him a security
interest in all the assets of JMAC to secure payment of any and all claims
arising pursuant to Mr. Westcott's guaranty. After the Company filed the Chapter
11 Petition, NationsBank refused to make any further advances under the
NationsBank Note. To fund JMAC's operations, between January 30, 1997 and April
11, 1997, Mr. Westcott made the Westcott Loans to JMAC in the aggregate
principal amount of $6,950,000. Additionally, at the request of NationsBank, on
February 28, 1997, Mr. Westcott purchased the NationsBank Note. The Westcott
Loans and NationsBank Note are secured by a lien on all the assets of JMAC.
On April 14, 1997, in a transaction approved by a committee of
disinterested directors of the Company after obtaining the advice of an
unaffiliated financial advisor, JMAC entered into the Preferred Stock Purchase
Agreement with Mr. Westcott, pursuant to which Mr. Westcott purchased from JMAC
20,000 shares of JMAC Preferred Stock in exchange for $2.0 million of the
Westcott Indebtedness and, subject to certain limitations, committed to purchase
up to an additional 30,000 shares of JMAC Preferred Stock for $100 per share.
Each outstanding share of JMAC Preferred Stock (i) has a liquidation value equal
to the sum of $100 plus $1.50 for each calendar month or portion thereof that
then has elapsed from and including April 1997 (the sum of such amounts being
referred to as the "Liquidation Value"), (ii) except as required by law,
entitles the holder thereof to one vote per share voting with the holders of
JMAC's common stock (which results in Mr. Westcott having voting control of JMAC
as long as he owns the JMAC Preferred Stock), and (iii) is redeemable at any
time prior to conversion at a redemption price equal to the Liquidation Value,
provided that at the time of such redemption all indebtedness owing by JMAC to
Mr. Westcott and certain affiliated parties (including without limitation the
Westcott Indebtedness) has been paid in full. Each share of JMAC Preferred
Stock, unless previously redeemed, is convertible at the option of Mr. Westcott
into that number of shares of JMAC Common Stock as shall be equal to the
quotient of that number of shares of JMAC Common Stock, which after issuance,
would be equal to 95% of all shares of JMAC Common Stock outstanding on the date
the first share of JMAC Preferred Stock is converted divided by the number of
shares of JMAC Preferred Stock authorized for issuance (currently 50,000) at any
time after the earlier of (i) April 15, 1998, (ii) thirty days after any person,
entity or group (other than Mr. Westcott or certain of his affiliates) becomes
the beneficial owner of 25% or more of the combined voting power of the Company
with the intention of changing or influencing control of the Company, (iii) the
date of appointment of a trustee or receiver of the Company in the Chapter 11
Proceeding or the conversion of the Chapter 11 Proceeding to a Chapter 7
proceeding, (iv) the first date following termination or suspension of the
Company's right to use cash collateral in the Chapter 11 Proceeding for a period
of more than fifteen calendar days, (v) the date that the stay is lifted
enabling the Revolving Lender (or another debtor-in-possession lender that the
Company owes in excess of $5.0 million) to foreclose on its respective lien on
the Company's assets, (vi) the date that any of the security agreements securing
any of the Westcott Indebtedness shall cease to be legal, valid, binding and
enforceable agreements or shall in any way be terminated or become or be
declared ineffective or inoperative or cease to provide the first priority liens
intended to be created thereby or if JMAC or any of its shareholders or
creditors or any other person shall institute any legal action that, if
successful, would have such effect, or (vii) the date, after confirmation of the
Plan, that the Company defaults on any other material indebtedness or the
maturity of such indebtedness is accelerated. No dividends shall accrue on the
JMAC Preferred Stock prior to April 15, 1998, after which dividends shall be if
and when declared by the Board of Directors of JMAC. See "Item 1. Business--
Chapter 11 Proceeding," "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations--Recent Developments; Chapter 11
Proceedings--JMAC" and "--Proposed Plan of Reorganization."
Pursuant to the Preferred Stock Purchase Agreement, Mr. Westcott also
agreed to support and vote in favor of the Company's plan of reorganization if
the Plan is confirmed by the Bankruptcy Court no later than October 2, 1997 and
contains the following provisions (the"Westcott Designated Provisions") (or, in
lieu of any of the Westcott Designated Provisions, such other provisions
substantially similar to the Westcott Designated Provisions as are reasonably
acceptable to Mr. Westcott): (i) payment in full by the Company within six
months following confirmation of the plan
Page 57
<PAGE>
of reorganization of the JMAC Claim in accordance with an amortization schedule
reasonably acceptable to Mr. Westcott (which payments have been assigned to and
are to be used to repay a portion of the Westcott Indebtedness) and (ii) the
exchange, as soon as practicable after the plan of reorganization is confirmed,
of the JMAC Preferred Stock for that number of shares of the Company's common
stock equal to the amount derived by dividing the redemption price of the JMAC
Preferred Stock at the confirmation date by an amount equal to 75% of the
average of the last reported daily sale price per share of the Company's common
stock on the Nasdaq National Market during the period commencing with the
twentieth trading day preceding the date the plan of reorganization is confirmed
and continuing for a period ending on the twentieth trading day following the
date the plan of reorganization is confirmed. Mr. Westcott's support of the
Proposed Plan of Reorganization is required because it provides that he will
personally guarantee $10.0 million of the Revolving Lender's post-Chapter 11
Petition indebtedness. See "Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Recent Developments; Chapter 11
Proceeding."
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<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
---------------------------------------------------------------
(a) Financial Statements and Financial Statement Schedules:
The following documents are filed as part of this report:
REPORT OF INDEPENDENT AUDITORS
FINANCIAL STATEMENTS:
Balance Sheets as of December 31, 1996 and 1995
Statements of Operations for the years ended
December 31, 1996, 1995 and 1994
Statements of Shareholders' Equity for the years ended
December 31, 1996, 1995 and 1994
Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994
Notes to Financial Statements
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended December 31, 1996.
(c) Exhibits:
Exhibit Number Description
- -------------- -----------
3.1 Amended and Restated Articles of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement No. 33-92646 on Form S-1, originally filed
with the SEC on May 24, 1995)
3.2 Amended and Restated Bylaws of the Company (incorporated by
reference to Exhibit 3.2 to the Company's Registration Statement
No. 33-92646 on Form S-1, originally filed with the SEC on May
24, 1995)
4.1 Form of certificate for Common Stock of the Company (incorporated
by reference to Exhibit 4.1 to Amendment No. 1 to the Company's
Registration Statement No. 33-92646 on Form S-1 filed with the
SEC on July 12, 1995)
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<PAGE>
4.2 Indenture dated March 15, 1996 between Jayhawk Funding Trust I,
as Issuer, and Norwest Bank Texas, N.A., as Trustee (incorporated
by reference to Exhibit 4.2 to Amendment No. 1 to the Company's
Registration Statement No. 333-02150 on Form S-1, originally
filed with the SEC on March 19, 1996)
4.3 Series 1996A Supplement dated March 15, 1996 between Jayhawk
Funding Trust I, as Issuer, and Norwest Bank Texas, N.A., as
Trustee (incorporated by reference to Exhibit 4.3 to Amendment
No. 1 to the Company's Registration Statement No. 333-02150 on
Form S-1, originally filed with the SEC on March 19, 1996)
4.4 Indenture dated August 7, 1996 between Jayhawk Funding Trust I as
Issuer, and Norwest Bank Minnesota, N.A., as Trustee
(incorporated by reference to Exhibit 4.1 to the Company's
Quarterly Report on Form 10-Q for the three months ended June 30,
1996)
4.5 Series 1996B Supplement dated August 7, 1996 between Jayhawk
Funding Trust I, as Issuer, and Norwest Bank Minnesota, N.A., as
Trustee (incorporated by reference to Exhibit 4.2 to the
Company's Quarterly Report on Form 10-Q for the three months
ended June 30, 1996)
4.6 Articles of Amendment to the Articles of Incorporation of Jayhawk
Medical Acceptance Corporation filed April 14, 1997
4.7 Statement of Resolution Establishing Series of Preferred Stock of
Jayhawk Medical Acceptance Corporation filed April 14, 1997
10.1 Loan and Security Agreement dated April 4, 1995 between the
Company and Shawmut Capital Corporation (incorporated by
reference to Exhibit 10.1 to the Company's Registration Statement
No. 33-92646 on Form S-1, originally filed with the SEC on May
24, 1995)
10.2 Amended and Restated 1994 Stock Option and Restricted Stock Plan
(incorporated by reference from Exhibit 10.2 to the Company's
Registration Statement on Form S-1 No. 33-92646, originally filed
with the SEC on May 24, 1995)
10.3 Amended and Restated Non-Employee Stock Option Plan (incorporated
by reference to Exhibit 10.3 to Amendment No. 1 to the Company's
Registration Statement No. 33-92646 on Form S-1, filed with the
SEC on July 12, 1995)
10.4 Employee Stock Purchase Plan (incorporated by reference to
Exhibit 10.4 to the Company's Registration Statement No. 33-92646
on Form S-1, originally filed with the SEC on May 24, 1995)
10.5 Stock Purchase Agreement dated February 18, 1994 between the
Company and each of Carl H. Westcott, C. Gregory Earls, as
Trustee under the Earls' Children Irrevocable Educational Trust
Agreement, and John C. Tolleson (incorporated by reference to
Exhibit 10.6 to the Company's Registration Statement No. 33-92646
on Form S-1, originally filed with the SEC on May 24, 1995)
10.6 Shareholders Agreement dated February 18, 1994 between Carl H.
Westcott, C. Gregory Earls, as Trustee under the Earls' Children
Irrevocable Educational Trust Agreement, and John C. Tolleson
(incorporated by reference to Exhibit 10.7 to the Company's
Registration Statement No. 33-92646 on Form S-1, originally filed
with the SEC on May 24, 1995)
10.7 Form of Dealer Agreement
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10.8 First Amendment dated July 10, 1995 to Loan and Security
Agreement dated April 4, 1995 between the Company and Shawmut
Capital Corporation (incorporated by reference to Exhibit 10.11
to Amendment No. 1 to the Company's Registration Statement No.
33-92646 on Form S-1, filed with the SEC on July 12, 1995)
10.9 Second Amendment dated December 29, 1995 to Loan and Security
Agreement dated April 4, 1995 between the Company and Fleet
Capital Corporation (formerly Shawmut Capital Corporation)
(incorporated by reference to Exhibit 10.12 to the Company's
Registration Statement No. 333-02150 on Form S-1, filed with the
SEC on March 8, 1996)
10.10 Third Amendment dated January 25, 1996 to Loan and Security
Agreement dated April 4, 1995 between the Company and Fleet
Capital Corporation (formerly Shawmut Capital Corporation)
(incorporated by reference to Exhibit 10.13 to the Company's
Registration Statement No. 333-02150 on Form S-1, filed with the
SEC on March 8, 1996)
10.11 Fourth Amendment to Loan and Security Agreement dated March 7,
1996 between the Company and Fleet Capital Corporation (formerly
Shawmut Capital Corporation) (incorporated by reference to
Exhibit 10.14 to the Company's Registration Statement No. 333-
02150 on Form S-1, filed with the SEC on March 8, 1996)
10.12 Contribution and Servicing Agreement dated March 15, 1996 between
the Company, individually and as Servicer, Jayhawk Funding Trust
I, as Issuer, Norwest Bank Texas, N.A., as Trustee, and Norwest
Bank Minnesota, National Association, as Backup Servicer
(incorporated by reference to Exhibit 10.18 to Amendment No. 1 to
the Company's Registration Statement No. 333-02150 on Form S-1,
filed with the SEC on March 19, 1996)
10.13 Fifth Amendment dated March 15, 1996 to Loan and Security
Agreement dated April 4, 1995 between the Company and Fleet
Capital Corporation (formerly Shawmut Capital Corporation)
(incorporated by reference to Exhibit 10.19 to Amendment No. 1 to
the Company's Registration Statement No. 333-02150 on Form S-1,
filed with the SEC on March 19, 1996)
10.14 Collateral Assignment of Rights to Payment under Contribution and
Servicing Agreement dated March 15, 1996 between the Company, as
Assignor, and Fleet Capital Corporation, as Assignee
(incorporated by reference to Exhibit 10.20 to Amendment No. 1 to
the Company's Registration Statement No. 333-02150 on Form S-1,
filed with the SEC on March 19, 1996)
10.15 Pledge and Security Agreement dated March 15, 1996 between the
Company, as Pledgor, and Fleet Capital Corporation, as Pledgee
(incorporated by reference to Exhibit 10.21 to Amendment No. 1 to
the Company's Registration Statement No. 333-02150 on Form S-1,
filed with the SEC on March 19, 1996)
10.16 Insurance and Indemnity Agreement dated March 15, 1996 between
MBIA Insurance Corporation, as Insurer, the Company, in its
individual capacity and as Servicer, Jayhawk Funding Trust I, as
Issuer, Norwest Bank Texas, N.A., as Trustee, and Norwest Bank
Minnesota, National Association, as Backup Servicer (incorporated
by reference to Exhibit 10.22 to Amendment No. 1 to the Company's
Registration Statement No. 333-02150 on Form S-1, filed with the
SEC on March 19, 1996)
10.17 Sixth Amendment dated April 25, 1996 to Loan and Security
Agreement dated April 4, 1995, between the Company and Fleet
Capital Corporation (incorporated by reference to Exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q for the three months
ended March 31, 1996)
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<PAGE>
10.18 Subsequent Transfer Agreement dated April 30, 1996 between the
Company, individually and as Servicer, Jayhawk Funding Trust I,
as issuer, Norwest Bank Texas, N.A., as Trustee, and Norwest Bank
Minnesota, National Association, as Backup Servicer (incorporated
by reference to Exhibit 10.2 to the Company's Quarterly Report on
Form 10-Q for the three months ended March 31, 1996)
10.19 Contribution and Servicing Agreement dated August 7, 1996 between
the Registrant, individually and as Servicer, Jayhawk Funding
Trust I, as Issuer, and Norwest Bank Minnesota, N.A., as Trustee
and Backup Servicer (incorporated by reference to Exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q for the three months
ended June 30, 1996)
10.20 Letter Agreement dated August 15, 1996 between the Company and C.
Fred Jackson (incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the three months
ended September 30, 1996)
10.21 Lease Agreement dated October 29, 1996 between the Company, as
Tenant, and Two Galleria Tower Limited, as Landlord (incorporated
by reference to Exhibit 10.2 to the Company's Quarterly Report on
Form 10-Q for the three months ended September 30, 1996)
10.22 Letter Agreement dated September 5, 1996 between the Company and
Jack T. Smith
10.23 Lease Agreement dated September 17, 1996 between the Company, as
Tenant, and Equitable-Crow Tower 2001, Ltd., as Landlord
(incorporated by reference to Exhibit 10.3 to the Company's
Quarterly Report on Form 10-Q for the three months ended
September 30, 1996)
10.24 Letter Agreement dated September 27, 1996 between the Company and
John D. Curtis
10.25 Promissory Note dated October 1, 1996 between Jayhawk Medical
Acceptance Corporation, as borrower, and Carl H. Westcott as
successor to NationsBank of Texas, N.A., as lender (incorporated
by reference to Exhibit 10.4 to the Company's Quarterly Report on
Form 10-Q for the three months ended September 30, 1996)
10.26 Guaranty dated October 1, 1996 between Jayhawk Medical Acceptance
Corporation, as borrower, Carl H. Westcott as successor to
NationsBank of Texas, N.A., as lender, and Carl H. Westcott, as
guarantor (incorporated by reference to Exhibit 10.5 to the
Company's Quarterly Report on Form 10-Q for the three months
ended September 30, 1996)
10.27 Negative Pledge dated October 1, 1996 between Jayhawk Medical
Acceptance Corporation, as borrower, and NationsBank of Texas,
N.A., as lender (incorporated by reference to Exhibit 10.6 to the
Company's Quarterly Report on Form 10-Q for the three months
ended September 30, 1996)
10.28 Letter Agreement dated December 2, 1996 between the Company and
David C. Carrithers regarding compensation arrangements
10.29 Seventh Amendment dated January 7, 1997 to Loan and Security
Agreement dated April 4, 1995 between the Company and Fleet
Capital Corporation
10.30 Security Agreement dated January 13, 1997 between Jayhawk Medical
Acceptance Corporation and Carl H. Westcott
10.31 Promissory Note dated February 11, 1997 between Jayhawk Medical
Acceptance Corporation, as borrower, and Carl H. Westcott, as
lender
Page 62
<PAGE>
10.32 Promissory Note dated February 18, 1997 between Jayhawk Medical
Acceptance Corporation, as borrower, and Carl H. Westcott, as
lender
10.33 Promissory Note dated February 26, 1997 between Jayhawk Medical
Acceptance Corporation, as borrower, and Carl H. Westcott, as
lender
10.34 Promissory Note dated March 4, 1997 between Jayhawk Medical
Acceptance Corporation, as borrower, and Carl H. Westcott, as
lender
10.35 Security Agreement dated March 6, 1997 between Jayhawk Medical
Acceptance Corporation and Carl H. Westcott
10.36 Promissory Note dated March 10, 1997 between Jayhawk Medical
Acceptance Corporation, as borrower, and Carl H. Westcott, as
lender
10.37 Promissory Note dated March 31, 1997 between Jayhawk Medical
Acceptance Corporation, as borrower, and Carl H. Westcott, as
lender
10.38 Promissory Note dated April 11, 1997 between Jayhawk Medical
Acceptance Corporation, as borrower, and Carl H. Westcott, as
lender
10.39 Amendment No. 1 to the Company's 1994 Amended and Restated Stock
Option Plan effective as of March 6, 1996
10.40 Amendment of Lease Agreement dated November 14, 1996 between
Jayhawk Acceptance Corporation, as Tenant, and Equitable Crow
Tower 2001, Ltd., as Landlord
10.41 Subsequent Transfer Agreement dated August 11, 1996 between the
Company, individually and as Servicer, Jayhawk Funding Trust I,
as issuer, Norwest Bank Texas, N.A., as Trustee, and Norwest Bank
Minnesota, National Association, as Backup Servicer
10.42 Preferred Stock Purchase Agreement dated April 11, 1997 between
Jayhawk Medical Acceptance Corporation and Carl H. Westcott
10.43 Settlement Agreement dated April 17, 1997 by and among the
Company, Fleet Capital Corporation and Carl H. Westcott
11 Statement re computation of per share earnings
21 Subsidiaries of the Company
23.1 Consent of Ernst & Young LLP
27 Financial Data Schedule
Page 63
<PAGE>
SIGNATURES
-----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
JAYHAWK ACCEPTANCE CORPORATION
(Registrant)
Date: April 21, 1997 /s/ C. FRED JACKSON
--------------------------------------------------
C. Fred Jackson
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
- -------------
SEQUENTIALLY
NUMBERED
EXHIBIT DESCRIPTION
<S> <C>
3.1 Amended and Restated Articles of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 to the Company's Registration
Statement No. 33-92646 on Form S-1, originally filed with the SEC on May
24, 1995)
3.2 Amended and Restated Bylaws of the Company (incorporated by reference
to Exhibit 3.2 to the Company's Registration Statement No. 33-92646 on
Form S-1, originally filed with the SEC on May 24, 1995)
4.1 Form of certificate for Common Stock of the Company (incorporated by
reference to Exhibit 4.1 to Amendment No. 1 to the Company's Registration
Statement No. 33-92646 on Form S-1 filed with the SEC on July 12, 1995)
4.2 Indenture dated March 15, 1996 between Jayhawk Funding Trust I, as
Issuer, and Norwest Bank Texas, N.A., as Trustee (incorporated by
reference to Exhibit 4.2 to Amendment No. 1 to the Company's
Registration Statement No. 333-02150 on Form S-1, originally filed with the
SEC on March 19, 1996)
4.3 Series 1996A Supplement dated March 15, 1996 between Jayhawk Funding
Trust I, as Issuer, and Norwest Bank Texas, N.A., as Trustee (incorporated
by reference to Exhibit 4.3 to Amendment No. 1 to the Company's
Registration Statement No. 333-02150 on Form S-1, originally filed with the
SEC on March 19, 1996)
4.4 Indenture dated August 7, 1996 between Jayhawk Funding Trust I as Issuer,
and Norwest Bank Minnesota, N.A., as Trustee (incorporated by reference
to Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the
three months ended June 30, 1996)
4.5 Series 1996B Supplement dated August 7, 1996 between Jayhawk Funding
Trust I, as Issuer, and Norwest Bank Minnesota, N.A., as Trustee
(incorporated by reference to Exhibit 4.2 to the Company's Quarterly Report
on Form 10-Q for the three months ended June 30, 1996)
4.6 Articles of Amendment to the Articles of Incorporation of Jayhawk Medical
Acceptance Corporation filed April 14, 1997 (filed herewith)
4.7 Statement of Resolution Establishing Series of Preferred Stock of Jayhawk
Medical Acceptance Corporation filed April 14, 1997 (filed herewith)
10.1 Loan and Security Agreement dated April 4, 1995 between the Company
and Shawmut Capital Corporation (incorporated by reference to Exhibit
10.1 to the Company's Registration Statement No. 33-92646 on Form S-1,
originally filed with the SEC on May 24, 1995)
</TABLE>
Page 66
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT DESCRIPTION
<S> <C>
10.2 Amended and Restated 1994 Stock Option and Restricted Stock Plan
(incorporated by reference from Exhibit 10.2 to the Company's Registration
Statement on Form S-1 No. 33-92646, originally filed with the SEC on May
24, 1995)
10.3 Amended and Restated Non-Employee Stock Option Plan (incorporated by
reference to Exhibit 10.3 to Amendment No. 1 to the Company's
Registration Statement No. 33-92646 on Form S-1, filed with the SEC on
July 12, 1995)
10.4 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.4 to
the Company's Registration Statement No. 33-92646 on Form S-1,
originally filed with the SEC on May 24, 1995)
10.5 Stock Purchase Agreement dated February 18, 1994 between the Company
and each of Carl H. Westcott, C. Gregory Earls, as Trustee under the Earls'
Children Irrevocable Educational Trust Agreement, and John C. Tolleson
(incorporated by reference to Exhibit 10.6 to the Company's Registration
Statement No. 33-92646 on Form S-1, originally filed with the SEC on May
24, 1995)
10.6 Shareholders Agreement dated February 18, 1994 between Carl H.
Westcott, C. Gregory Earls, as Trustee under the Earls' Children Irrevocable
Educational Trust Agreement, and John C. Tolleson (incorporated by
reference to Exhibit 10.7 to the Company's Registration Statement No. 33-
92646 on Form S-1, originally filed with the SEC on May 24, 1995)
10.7 Form of Dealer Agreement (filed herewith)
10.8 First Amendment dated July 10, 1995 to Loan and Security Agreement
dated April 4, 1995 between the Company and Shawmut Capital
Corporation (incorporated by reference to Exhibit 10.11 to Amendment No.
1 to the Company's Registration Statement No. 33-92646 on Form S-1, filed
with the SEC on July 12, 1995)
10.9 Second Amendment dated December 29, 1995 to Loan and Security
Agreement dated April 4, 1995 between the Company and Fleet Capital
Corporation (formerly Shawmut Capital Corporation) (incorporated by
reference to Exhibit 10.12 to the Company's Registration Statement No.
333-02150 on Form S-1, filed with the SEC on March 8, 1996)
10.10 Third Amendment dated January 25, 1996 to Loan and Security Agreement
dated April 4, 1995 between the Company and Fleet Capital Corporation
(formerly Shawmut Capital Corporation) (incorporated by reference to
Exhibit 10.13 to the Company's Registration Statement No. 333-02150 on
Form S-1, filed with the SEC on March 8, 1996)
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT DESCRIPTION
<S> <C>
10.11 Fourth Amendment to Loan and Security Agreement dated March 7, 1996
between the Company and Fleet Capital Corporation (formerly Shawmut
Capital Corporation) (incorporated by reference to Exhibit 10.14 to the
Company's Registration Statement No. 333-02150 on Form S-1, filed with
the SEC on March 8, 1996)
10.12 Contribution and Servicing Agreement dated March 15, 1996 between the
Company, individually and as Servicer, Jayhawk Funding Trust I, as Issuer,
Norwest Bank Texas, N.A., as Trustee, and Norwest Bank Minnesota,
National Association, as Backup Servicer (incorporated by reference to
Exhibit 10.18 to Amendment No. 1 to the Company's Registration
Statement No. 333-02150 on Form S-1, filed with the SEC on March 19,
1996)
10.13 Fifth Amendment dated March 15, 1996 to Loan and Security Agreement
dated April 4, 1995 between the Company and Fleet Capital Corporation
(formerly Shawmut Capital Corporation) (incorporated by reference to
Exhibit 10.19 to Amendment No. 1 to the Company's Registration
Statement No. 333-02150 on Form S-1, filed with the SEC on March 19,
1996)
10.14 Collateral Assignment of Rights to Payment under Contribution and
Servicing Agreement dated March 15, 1996 between the Company, as
Assignor, and Fleet Capital Corporation, as Assignee (incorporated by
reference to Exhibit 10.20 to Amendment No. 1 to the Company's
Registration Statement No. 333-02150 on Form S-1, filed with the SEC on
March 19, 1996)
10.15 Pledge and Security Agreement dated March 15, 1996 between the
Company, as Pledgor, and Fleet Capital Corporation, as Pledgee
(incorporated by reference to Exhibit 10.21 to Amendment No. 1 to the
Company's Registration Statement No. 333-02150 on Form S-1, filed with
the SEC on March 19, 1996)
10.16 Insurance and Indemnity Agreement dated March 15, 1996 between MBIA
Insurance Corporation, as Insurer, the Company, in its individual capacity
and as Servicer, Jayhawk Funding Trust I, as Issuer, Norwest Bank Texas,
N.A., as Trustee, and Norwest Bank Minnesota, National Association, as
Backup Servicer (incorporated by reference to Exhibit 10.22 to Amendment
No. 1 to the Company's Registration Statement No. 333-02150 on Form
S-1, filed with the SEC on March 19, 1996)
10.17 Sixth Amendment dated April 25, 1996 to Loan and Security Agreement
dated April 4, 1995, between the Company and Fleet Capital Corporation
(incorporated by reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the three months ended March 31, 1996)
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT DESCRIPTION
<S> <C>
10.18 Subsequent Transfer Agreement dated April 30, 1996 between the
Company, individually and as Servicer, Jayhawk Funding Trust I, as issuer,
Norwest Bank Texas, N.A., as Trustee, and Norwest Bank Minnesota,
National Association, as Backup Servicer (incorporated by reference to
Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the three
months ended March 31, 1996)
10.19 Contribution and Servicing Agreement dated August 7, 1996 between the
Registrant, individually and as Servicer, Jayhawk Funding Trust I, as Issuer,
and Norwest Bank Minnesota, N.A., as Trustee and Backup Servicer
(incorporated by reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the three months ended June 30, 1996)
10.20 Letter Agreement dated August 15, 1996 between the Company and C. Fred
Jackson (incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the three months ended September 30,
1996)
10.21 Lease Agreement dated October 29, 1996 between the Company, as Tenant,
and Two Galleria Tower Limited, as Landlord (incorporated by reference to
Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the three
months ended September 30, 1996)
10.22 Letter Agreement dated September 5, 1996 between the Company and Jack
T. Smith (filed herewith)
10.23 Lease Agreement dated September 17, 1996 between the Company, as
Tenant, and Equitable-Crow Tower 2001, Ltd., as Landlord (incorporated
by reference to Exhibit 10.3 to the Company's Quarterly Report on Form
10-Q for the three months ended September 30, 1996)
10.24 Letter Agreement dated September 27, 1996 between the Company and
John D. Curtis (filed herewith)
10.25 Promissory Note dated October 1, 1996 between Jayhawk Medical
Acceptance Corporation, as borrower, and Carl H. Westcott as successor to
NationsBank of Texas, N.A., as lender (incorporated by reference to Exhibit
10.4 to the Company's Quarterly Report on Form 10-Q for the three months
ended September 30, 1996)
10.26 Guaranty dated October 1, 1996 between Jayhawk Medical Acceptance
Corporation, as borrower, Carl H. Westcott as successor to NationsBank of
Texas, N.A., as lender, and Carl H. Westcott, as guarantor (incorporated by
reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q
for the three months ended September 30, 1996)
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT DESCRIPTION
<S> <C>
10.27 Negative Pledge dated October 1, 1996 between Jayhawk Medical
Acceptance Corporation, as borrower, and NationsBank of Texas, N.A., as
lender (incorporated by reference to Exhibit 10.6 to the Company's
Quarterly Report on Form 10-Q for the three months ended September 30,
1996)
10.28 Letter Agreement dated December 2, 1996 between the Company and David
C. Carrithers regarding compensation arrangements (filed herewith)
10.29 Seventh Amendment dated January 7, 1997 to Loan and Security
Agreement dated April 4, 1995 between the Company and Fleet Capital
Corporation (filed herewith)
10.30 Security Agreement dated January 13, 1997 between Jayhawk Medical
Acceptance Corporation and Carl H. Westcott (filed herewith)
10.31 Promissory Note dated February 11, 1997 between Jayhawk Medical
Acceptance Corporation, as borrower, and Carl H. Westcott, as lender (filed herewith)
10.32 Promissory Note dated February 18, 1997 between Jayhawk Medical
Acceptance Corporation, as borrower, and Carl H. Westcott, as lender (filed herewith)
10.33 Promissory Note dated February 26, 1997 between Jayhawk Medical
Acceptance Corporation, as borrower, and Carl H. Westcott, as lender (filed herewith)
10.34 Promissory Note dated March 4, 1997 between Jayhawk Medical
Acceptance Corporation, as borrower, and Carl H. Westcott, as lender (filed herewith)
10.35 Security Agreement dated March 6, 1997 between Jayhawk Medical
Acceptance Corporation and Carl H. Westcott (filed herewith)
10.36 Promissory Note dated March 10, 1997 between Jayhawk Medical
Acceptance Corporation, as borrower, and Carl H. Westcott, as lender (filed herewith)
10.37 Promissory Note dated March 31, 1997 between Jayhawk Medical
Acceptance Corporation, as borrower, and Carl H. Westcott, as lender (filed herewith)
10.38 Promissory Note dated April 11, 1997 between Jayhawk Medical
Acceptance Corporation, as borrower, and Carl H. Westcott, as lender (filed herewith)
10.39 Amendment No. 1 to the Company's 1994 Amended and Restated Stock
Option Plan effective as of March 6, 1996 (filed herewith)
10.40 Amendment of Lease Agreement dated November 14, 1996 between
Jayhawk Acceptance Corporation, as Tenant, and Equitable Crow Tower
2001, Ltd., as Landlord (filed herewith)
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT DESCRIPTION
<S> <C>
10.41 Subsequent Transfer Agreement dated August 11, 1996 between the
Company, individually and as Servicer, Jayhawk Funding Trust I, as issuer,
Norwest Bank Texas, N.A., as Trustee, and Norwest Bank Minnesota,
National Association, as Backup Servicer (filed herewith)
10.42 Preferred Stock Purchase Agreement dated April 11, 1997 between Jayhawk
Medical Acceptance Corporation and Carl H. Westcott (filed herewith)
10.43 Settlement Agreement dated April 17, 1997 by and among the Company,
Fleet Capital Corporation and Carl H. Westcott (filed herewith)
11 Statement re computation of per share earning (filed herewith)
21 Subsidiaries of the Company (filed herewith)
23.1 Consent of Ernst & Young LLP (filed herewith)
27 Financial Data Schedule (filed herewith)
</TABLE>
Page 71
<PAGE>
EXHIBIT 4.6
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
OF
JAYHAWK MEDICAL ACCEPTANCE CORPORATION
Pursuant to the provisions of Article 4.04 of the Texas Business
Corporation Act, the undersigned corporation adopts the following Articles of
Amendment to its Articles of Incorporation:
ARTICLE ONE
The name of the corporation is Jayhawk Medical Acceptance Corporation.
ARTICLE TWO
The following amendment to the Articles of Incorporation was adopted by the
shareholders of the corporation on April 11, 1997. Article 4 of the Articles of
Incorporation of the corporation is hereby amended so as to read in its entirety
as follows:
"ARTICLE FOUR
The total number of shares of all classes of capital stock which
the Corporation shall have authority to issue is two hundred thousand
(200,000), of which (a) one hundred thousand (100,000) shares shall be
designated as Common Stock, par value $.01 per share, and (b) one
hundred thousand (100,000) shares shall be designated as Preferred
Stock, par value $.01 per share.
The following is a statement of the designations, prefer ences,
limitations, and relative rights, including voting rights, in respect
of the classes of stock of the Corporation and of the authority with
respect thereto expressly vested in the Board of Directors of the
Corporation:
COMMON STOCK
(1) Each share of Common Stock of the Corporation shall have
identical rights and privileges in every respect. The holders of
shares of Common Stock shall be entitled to vote upon all matters
submitted to a vote of the shareholders of the Corporation and shall
be entitled to one vote for each share of Common Stock held.
(2) Subject to the prior rights and preferences, if any, applicable
to shares of the Preferred Stock or any series thereof, the
<PAGE>
holders of shares of the Common Stock shall be entitled to receive
such dividends (payable in cash, stock, or otherwise) as may be
declared thereon by the Board of Directors at any time and from time
to time out of any funds of the Corporation legally available
therefor.
(3) In the event of any voluntary or involuntary liquidation,
dissolution, or winding-up of the Corporation, after distribution in
full of the preferential amounts, if any, to be distributed to the
holders of shares of the Preferred Stock or any series thereof, the
holders of shares of the Common Stock shall be entitled to receive all
of the remaining assets of the Corporation available for distribution
to its shareholders, ratably in proportion to the number of shares of
the Common Stock held by them. A liquidation, dissolution, or winding-
up of the Corporation, as such terms are used in this Paragraph (3),
shall not be deemed to be occasioned by or to include any merger of
the Corporation with or into one or more corporations or other
entities, any acquisition or exchange of the outstanding shares of one
or more classes or series of the Corporation, or any sale, lease,
exchange, or other disposition of all or a part of the assets of the
Corporation.
PREFERRED STOCK
(4) Shares of the Preferred Stock may be issued from time to time
in one or more series, the shares of each series to have such
designations, preferences, limitations, and relative rights, including
voting rights, as shall be stated and expressed herein or in a
resolution or resolutions providing for the issue of such series
adopted by the Board of Directors of the Corporation. Each such series
of Preferred Stock shall be designated so as to distinguish the shares
thereof from the shares of all other series and classes. The Board of
Directors of the Corporation is hereby expressly authorized, subject
to the limitations provided by law, to establish and designate series
of the Preferred Stock, to fix the number of shares constituting each
series, and to fix the designations and the preferences, limitations,
and relative rights, including voting rights, of the shares of each
series and the variations of the relative rights and preferences as
between series, and to increase and to decrease the number of shares
constituting each series, provided that the Board of Directors may not
decrease the number of shares within a series to less than the number
of shares within such series that are then issued. The relative
powers, rights, preferences, and limitations may vary between and
among series of Preferred Stock in any and all respects so long as all
shares of the same series are identical
2
<PAGE>
in all respects, except that shares of any such series issued at
different times may have different dates from which dividends thereon
cumulate. The authority of the Board of Directors of the Corporation
with respect to each series shall include, but shall not be limited
to, the authority to determine the following:
(a) The designation of such series;
(b) The number of shares initially constituting such
series;
(c) The rate or rates and the times at which dividends on
the shares of such series shall be paid, the periods in respect
of which dividends are payable, the conditions upon such
dividends, the relationship and preferences, if any, of such
dividends to dividends payable on any other class or series of
shares, whether or not such dividends shall be cumulative,
partially cumulative, or noncumulative, if such dividends shall
be cumulative or partially cumulative, the date or dates from and
after which, and the amounts in which, they shall accumulate,
whether such dividends shall be share dividends, cash or other
dividends, or any combination thereof and if such dividends shall
include share dividends, whether such share dividends shall be
payable in shares of the same or any other class or series of
shares of the Corporation (whether now or hereafter authorized),
or any combination thereof and the other terms and conditions, if
any, applicable to dividends on shares of such series;
(d) Whether or not the shares of such series shall be
redeemable or subject to repurchase at the option of the
Corporation or the holder thereof or upon the happening of a
specified event, if such shares shall be redeemable, the terms
and conditions of such redemption, including but not limited to
the date or dates upon or after which such shares shall be
redeemable, the amount per share which shall be payable upon such
redemption, which amount may vary under different conditions and
at different redemption dates, and whether such amount shall be
payable in cash, property, or rights, including securities of the
Corporation or another corporation;
(e) The rights of the holders of shares of such series
(which may vary depending upon the circumstances or
3
<PAGE>
nature of such liquidation, dissolution, or winding up) in the
event of the voluntary or involuntary liquidation, dissolu tion,
or winding up of the Corporation and the relationship or
preference, if any, of such rights to rights of holders of stock
of any other class or series. A liquidation, dissolu tion, or
winding up of the Corporation, as such terms are used in this
subparagraph (e), shall not be deemed to be occasioned by or to
include any merger of the Corporation with or into one or more
corporations or other entities, any acquisition or exchange of
the outstanding shares of one or more classes or series of the
Corporation, or any sale, lease, exchange, or other disposition
of all or a part of the assets of the Corporation;
(f) Whether or not the shares of such series shall have
voting powers and, if such shares shall have such voting powers,
the terms and conditions thereof, including, but not limited to,
the right of the holders of such shares to vote as a separate
class either alone or with the holders of shares of one or more
other classes or series of stock and the right to have more (or
less) than one vote per share; provided, however, that the right
to cumulate votes for the election of directors is expressly
denied and prohibited;
(g) Whether or not a sinking fund shall be provided for
the redemption of the shares of such series and, if such a
sinking fund shall be provided, the terms and conditions thereof;
(h) Whether or not a purchase fund shall be provided for
the shares of such series and, if such a purchase fund shall be
provided, the terms and conditions thereof;
(i) Whether or not the shares of such series, at the
option of either the Corporation or the holder or upon the
happening of a specified event, shall be convertible into stock
of any other class or series and, if such shares shall be so
convertible, the terms and conditions of conversion, including,
but not limited to, any provision for the adjustment of the
conversion rate or the conversion price;
(j) Whether or not the shares of such series, at the
option of either the Corporation or the holder or upon the
happening of a specified event, shall be exchangeable for
securities, indebtedness, or property of the Corporation and,
4
<PAGE>
if such shares shall be so exchangeable, the terms and conditions
of exchange, including, but not limited to, any provision for the
adjustment of the exchange rate or the exchange price; and
(k) Any other preferences, limitations, and relative
rights as shall not be inconsistent with the provisions of this
Article Four or the limitations provided by law.
(5) Except as otherwise required by law or in any resolution
of the Board of Directors creating any series of Preferred Stock,
the holders of shares of Preferred Stock and all series thereof
who are entitled to vote shall vote together with the holders of
shares of Common Stock, and not separately by class.
GENERAL
(6) The Board of Directors of the Corporation is hereby
expressly empowered, subject to the limitations provided by law,
to authorize the Corporation to pay share dividends on any class
or series of capital stock of the Corporation (whether now or
hereafter authorized) payable in shares of the same or any other
class or series of capital stock of the Corporation (whether now
or hereafter authorized) or any combination thereof."
ARTICLE THREE
The number of shares of the corporation outstanding at the time of such
adoption was 1,000; and the number of shares entitled to vote thereon was 1,000.
5
<PAGE>
ARTICLE FOUR
The amendment was approved by written consent of the sole shareholder of
the corporation in accordance with Article 9.10 of the Texas Business
Corporation Act.
Dated: April 11, 1997
JAYHAWK MEDICAL ACCEPTANCE CORPORATION
By: /s/ DOUGLAS THEODORE
------------------------------------
Douglas Theodore
Vice President
6
<PAGE>
EXHIBIT 4.7
STATEMENT OF RESOLUTION
ESTABLISHING SERIES OF PREFERRED STOCK
To the Secretary of State of the State of Texas:
Pursuant to the provisions of Article 2.13 of the Texas Business
Corporation Act, the undersigned corporation submits the following statement for
the purposes of establishing and designating a series of shares and fixing and
determining the preferences, limitations and relative rights thereof:
1. The name of the corporation (the "Corporation") is Jayhawk Medical
Acceptance Corporation.
2. The following resolution, establishing and designating a series of
shares and fixing and determining the preferences, limitations and relative
rights thereof, was duly adopted by the Board of Directors of the Corporation on
April 11, 1997.
WHEREAS, pursuant to Article Four of the Articles of Incorporation of
the Corporation, the Board of Directors has the authority to designate and
provide for the issuance of a series of preferred stock of the Corporation.
NOW, THEREFORE, BE IT RESOLVED, the Board of Directors hereby
authorizes the issuance of a series of preferred stock which shall consist
of fifty thousand (50,000) of the one hundred thousand (100,000) shares of
preferred stock which the Corporation has authority to issue, and the Board
of Directors hereby fixes the preferences, limitations and relative rights
thereof as follows:
The designation of said series of preferred stock shall be Series A
Redeemable Convertible Preferred Stock (the "Series A Preferred Stock"). The
number of shares of Series A Preferred Stock shall be fifty thousand (50,000)
(the "Authorized Number of Shares of Series A Preferred Stock"), which number
may not be increased without the consent of the holders of the outstanding
shares of Series A Preferred Stock.
1. Relative Seniority. The Series A Preferred Stock shall, in respect of
------------------
the right to participate in distributions or payments in the event of any
liquidation, dissolution or winding up of the Corporation, rank (a) senior and
prior to the Common Stock of the Corporation and to any other class or series of
stock issued by the Corporation not designated as ranking senior to or pari
----
passu with the Series A Preferred Stock in respect of the right to participate
- -----
in distributions or payments in the event of any liquidation, dissolution or
winding up of the Corporation (collectively, the "Junior Stock"); (b) pari passu
---- -----
with any other class or series of stock of the Corporation, the terms of which
specifically provide that such class or series shall rank pari passu with the
---- -----
Series A Preferred Stock in respect of the right to participate in distributions
or payments in the event of any liquidation, dissolution or winding up of the
corporation (the "Parity Stock"); and (c) junior to any other class or series
of stock of the Corporation, the terms of which specifically provide that such
class or series shall rank senior to the Series A Preferred Stock in
1
<PAGE>
respect of the right to participate in distributions or payments in the event of
any liquidation, dissolution or winding up of the Corporation (the "Senior
Stock"). Notwithstanding the foregoing, the Corporation shall not issue any
Senior Stock or Parity Stock or Junior Stock (other than pursuant to the
conversion of shares of Series A Preferred Stock) without having received the
written consent of the holders of a majority of the outstanding shares of Series
A Preferred Stock.
2. Dividends. No dividends shall accrue on shares of Series A Preferred
---------
Stock prior to April 15, 1998, after which the holders of the shares of Series A
Preferred Stock shall only be entitled to receive dividends when, as and if
declared by the Board of Directors, out of funds legally available therefore.
3. Liquidation Preference.
----------------------
(a) In the event of any liquidation, dissolution or winding up of the
affairs of the Corporation, either voluntary or involuntary, after payment
or provision for payment of the debts and other liabilities of the
Corporation, including obligations with respect to any Senior Stock, if
any, the holders of shares of Series A Preferred Stock shall be entitled to
receive out of the assets of the Corporation, whether from capital, surplus
or earnings, before any payment or distribution shall be made on Junior
Stock, for each share of Series A Preferred Stock then held, cash in an
amount equal to the sum of (i) $100.00 plus (ii) $1.50 for each calendar
month or portion thereof that then has elapsed from and including April
1997 (the sum of such amounts being the "Liquidation Value"). If, upon any
liquidation, dissolution or winding up of the affairs of the Corporation,
the assets of the Corporation distributable to the holders of Series A
Preferred Stock and Parity Stock shall be insufficient to pay in full the
liquidation payments payable to the holders of Series A Preferred Stock and
Parity Stock, then such assets shall be distributed ratably among such
holders of Series A Preferred Stock and Parity Stock in proportion to the
full respective amounts to which they are entitled.
(b) For purposes of this Section 3, neither the voluntary sale, lease,
conveyance, exchange or transfer (for cash, shares of stock, securities or
other consideration) of all or substantially all of the property or assets
of the Corporation, nor the consolidation or merger of the Corporation with
or into one or more other corporations, shall be deemed to be a
liquidation, dissolution or winding up of the affairs of the Corporation,
unless such voluntary sale, lease, conveyance, exchange or transfer shall
be in connection with a plan of liquidation, dissolution or winding up of
the affairs of the Corporation.
4. Voting Rights. Each share of Series A Preferred Stock shall entitle
-------------
the holder thereof to one vote per share. Except as required by law, the
holders of Series A Preferred Stock shall vote with the holders of the
outstanding Common Stock.
2
<PAGE>
5. Conversion Rights.
-----------------
(a) A holder of shares of Series A Preferred Stock may convert such
shares into Common Stock at any time after the Trigger Date (as hereinafter
defined) and prior to the third business day prior to the date such shares
are to be redeemed in accordance with Section 6. The number of shares of
Common Stock issuable upon conversion of one share of Series A Preferred
Stock shall be equal to the quotient of (i) that number of shares of Common
Stock which, after issuance, would be equal to 95% of all shares of Common
Stock outstanding (after giving effect to the assumed exercise and
conversion of all exercisable and convertible securities and instruments,
other than the Series A Preferred Stock, if any, issued by the Corporation)
on the date the first share of Series A Preferred Stock is converted and
(ii) the Authorized Number of Shares of Series A Preferred Stock. No
fractional shares of Common Stock shall be issued upon conversion of shares
of Series A Preferred Stock. Instead of any fractional share of Common
Stock which would otherwise be issued upon conversion of any shares of
Series A Preferred Stock, the Corporation shall pay a cash adjustment in
respect of such fractional share in an amount equal to the same fraction of
the market price per share of Common Stock as determined in good faith by
the Corporation's Board of Directors. For purposes of this Section 5, the
phrase "Trigger Date" shall mean the earliest of (i) April 15, 1998, (ii)
30 days after any "person" (as such term is used in Section 13(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), but
excluding Carl H. Westcott, any affiliates of Carl H. Westcott, any members
of the immediate family of Carl H. Westcott, and any trusts for the benefit
of any of the foregoing), is or becomes the "beneficial owner" (as defined
under Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of Jayhawk Acceptance Corporation, a Texas corporation ("JAC"),
representing 25% or more of the combined voting power of all outstanding
securities of JAC with the intention of changing or influencing control of
JAC, (iii) the date of the appointment of a trustee or receiver of JAC in
JAC's reorganization proceeding under Chapter 11 of the United States
Bankruptcy Code (Case No. 397-31261-SAF-11) (the "Proceeding") or the
conversion of the Proceeding to a Chapter 7 proceeding, (iv) the first date
following termination or suspension of JAC's right to use cash collateral
in the Proceeding for a period of more than fifteen (15) calendar days, (v)
the date the Bankruptcy Court lifts the stay thereby enabling Fleet Capital
Corporation (or another debtor-in-possession lender that is owed by JAC in
excess of $5 million) to foreclose on its respective lien on JAC's assets,
(vi) the date that any of the security agreements securing the Westcott
Debt (as defined in Section 6 hereof), or any part thereof, shall cease to
be legal, valid, binding enforceable agreements or shall in any way be
terminated or become or be declared ineffective or inoperative or cease to
provide the first priority liens intended to be created thereby or the date
that the Corporation or any of its stockholders or creditors or any other
person or entity shall institute any legal actions that, if successful,
would have such effect, or (vii) the date, after confirmation of JAC's plan
of reorganization, JAC defaults on any material indebtedness and the
payment or maturity of such indebtedness is accelerated in consequence of
such default or demand for payment of such indebtedness is made. The
Corporation shall give Carl H. Westcott prompt notice of the occurrence of
a Trigger Date.
3
<PAGE>
(b) In order to convert shares of Series A Preferred Stock into shares
of Common Stock, a holder shall (i) surrender the certificate or
certificates evidencing the shares of Series A Preferred Stock to be
converted, duly endorsed to the Corporation or in blank, at the executive
office of the Corporation, or such other place as may be reasonably
designated by the Corporation, (iii) notify the Corporation at such office
or other place of his election to convert shares of Series A Preferred
Stock and of the number of such shares which he wishes to convert, (iii)
state in writing the name or names in which he wishes the certificate or
certificates for shares of Common Stock to be issued, and (iv) pay any
transfer or similar tax if required. The date on which the holder satisfies
the last of such requirements is herein referred to as the "Conversion
Date." As soon as possible on or after the Conversion Date, the Corporation
shall deliver a certificate for the number of full shares of Common Stock
issuable upon the conversion and a new certificate representing the
unconverted portion, if any, of the shares of Series A Preferred Stock
represented by the certificate or certificates surrendered for conversion.
The person in whose name the certificate for the Common Stock is registered
shall become a shareholder of record of Common Stock on the Conversion
Date.
(c) The issuance of certificates for shares of Common Stock upon the
conversion of shares of Series A Preferred Stock shall be made without
charge to the converting shareholders for such certificates or for any tax
in respect of the issuance of such certificates; provided, however, that
the Corporation shall not be required to pay any tax that may be payable in
respect of any transfer involved in the issuance and delivery of any such
certificate in a name other than that of the holder of the shares so
converted, and the Corporation shall not be required to issue or deliver
any such certificate unless and until the person or persons requesting the
issuance thereof shall have paid to the Corporation the amount of such tax
or shall have established to the satisfaction of the Corporation that such
tax has been paid; and provided further that the Corporation shall not be
required to pay or reimburse the shareholders for any income tax payable by
such shareholders as a result of such issuance.
(d) The Corporation shall at all times reserve and keep available out
of any stock held as treasury stock or out of its authorized but unissued
Common Stock, or both, solely for the purpose of effecting the conversion
of the shares of Series A Preferred Stock, the full number of shares of
Common Stock then issuable upon the conversion of all outstanding shares of
Series A Preferred Stock. The Corporation shall from time to time, in
accordance with the laws of the State of Texas, increase the authorized
amount of its Common Stock if, at any time, the authorized amount of its
Common Stock remaining unissued shall not be sufficient to permit the
conversion of all shares of Series A Preferred Stock.
6. Redemption.
----------
(a) Right to Redeem. To the extent the Corporation shall have funds
---------------
legally available therefor and subject to the terms and conditions hereof,
the Corporation, at the option of the Board of Directors, may redeem, in
whole or in part, the shares of Series
4
<PAGE>
A Preferred Stock at the time outstanding, at any time or from time to
time, at a redemption price equal to the Liquidation Value per share;
provided that, notwithstanding the foregoing, the Corporation may not, and
shall have no right to, redeem any shares of Common Stock issued pursuant
to the conversion of shares of Series A Preferred Stock, and further the
Corporation may not, and shall have no right to redeem any shares of Series
A Preferred Stock unless at or prior to such redemption all Westcott Debt
(as defined below) of the Corporation to Carl H. Westcott, any affiliate of
Carl H. Westcott, any members of the immediate family of Carl H. Westcott,
and any trusts for the benefit of any of the foregoing, including, but not
limited to, the NationsBank Acquired Debt (as defined below), has been paid
in full; provided further, that at the written request of the holders of a
majority of the outstanding shares of Common Stock, to the extent the
Corporation shall have funds legally available therefor (including without
limitation by way of a loan from JAC), the Corporation shall promptly
discharge all of the Westcott Debt and, if all of the Westcott Debt is
discharged, redeem all of the outstanding shares of Series A Preferred
Stock at the time outstanding at a redemption price equal to the
Liquidation Value per share. If fewer than all of the outstanding shares of
Series A Preferred Stock are to be redeemed pursuant to this Subsection
(a), the number of shares to be redeemed shall be determined by the Board
of Directors of the Corporation, and such shares shall be redeemed pro rata
from the holders of shares of Series A Preferred Stock in proportion to the
number of shares of Series A Preferred Stock held by such holders (with
adjustments to avoid redemption of fractional shares). As used herein, the
term "Westcott Debt" shall mean all indebtedness owing by the Corporation,
now or hereafter, to Carl H. Westcott, any affiliate of Carl H. Westcott,
any members of the immediate family of Carl H. Westcott, and/or any trusts
for the benefit of any of the foregoing, including, but not limited to, the
following indebtedness existing as of the date hereof, and all future
indebtedness due by the Corporation to Carl H. Westcott: (i) promissory
note dated February 11, 1997 in the original principal amount of $1,050,000
payable by the Corporation to Carl H. Westcott; (ii) promissory note dated
February 18, 1997 in the original principal amount of $900,000 payable by
the Corporation to Carl H. Westcott; (iii) promissory note dated February
26, 1997 in the original principal amount of $1,000,000 payable by the
Corporation to Carl H. Westcott; (iv) promissory note dated March 4, 1997
in the original principal amount of $1,000,000 payable by the Corporation
to Carl H. Westcott; (v) promissory note dated March 10, 1997 in the
original principal amount of $1,000,000 payable by the Corporation to Carl
H. Westcott; (vi) promissory note dated March 31, 1997 in the original
principal amount of $1,000,000 payable by the Corporation to Carl H.
Westcott; (vii) promissory note dated April 11, 1997 in the original
principal amount of $1,000,000 payable by the Corporation to Carl H.
Westcott; and (viii) that certain promissory note dated October 1, 1996 in
the original principal amount of $15,000,000 and payable by NationsBank of
Texas, N.A., which note has been assigned to Carl H. Westcott (the
indebtedness evidenced by such assigned note is referred to herein as the
"NationsBank Acquired Debt").
(b) Procedure for Redemption. If the Corporation shall elect to redeem
------------------------
shares of Series A Preferred Stock pursuant to Subsection (a) above, not
less than twenty or more than sixty days prior to the redemption date,
notice of such redemption shall be mailed by
5
<PAGE>
first class mail, postage prepaid, to each holder of the shares to be
redeemed, at such holder's address as the same appears on the books of the
Corporation. Each such notice shall state the redemption date, the number
of shares to be redeemed, the redemption price and the place or places
where certificates for shares are to be surrendered for payment of the
redemption price. If fewer than all shares of Series A Preferred Stock held
by any holder are to be redeemed, the notice mailed to such holder shall
also specify the number of shares to be redeemed from such holder. On and
after the date specified in the notice described above, each holder of
shares of Series A Preferred Stock specified for redemption, upon
presentation and surrender at the place designated in the notice of the
certificates evidencing the shares called for redemption, accompanied by
proper instruments of assignment or transfer in blank, shall be entitled to
receive thereof the applicable redemption price heretofore specified. If,
on the date fixed for redemption, the Westcott Debt shall not have been
discharged, any notice of redemption shall be of no effect and the shares
called for redemption shall remain outstanding and shall be entitled to the
benefits, rights and privileges herein contained.
FURTHER RESOLVED, that the appropriate officers of the Corporation are
hereby authorized to execute and acknowledge a statement of resolution
establishing series of shares (the "Statement") and to cause such Statement to
be filed and recorded, all in accordance with the requirements of Article 2.13
of the Texas Business Corporation Act.
IN WITNESS WHEREOF, the undersigned has executed this statement on this
11th day of April, 1997.
JAYHAWK MEDICAL ACCEPTANCE
CORPORATION
By: /s/ DOUGLAS THEODORE
---------------------------------
Douglas Theodore
Vice President
6
<PAGE>
EXHIBIT 10.7
JAYHAWK
ACCEPTANCE CORPORATION
DEALER AGREEMENT
This Dealer Agreement is made between Jayhawk Acceptance Corporation, a Texas
corporation ("JAYHAWK"), with its principal business office at 13455 Noel Road,
Suite 1800, Dallas, Texas 75240, and ______________________________________, a
("DEALER"), with its principal business office at _____________________________.
In consideration of the mutual agreements contained herein, Jayhawk and
Dealer agree as follows:
ARTICLE 1. DEFINITIONS
Section 1.1 DEFINITIONS. Whenever used in this Agreement, the following
-----------
words and phrases, unless the context otherwise requires, shall have the
following meanings:
"AGREEMENT" means this Dealer Agreement as executed by Jayhawk and Dealer and
all amendments and supplements hereto.
"COLLECTION COSTS" means all costs of Jayhawk associated with a Purchased
Contract, including, without limitation, the costs of repossessing, storing,
selling and preparing for sale any related Financed Vehicle, agency fees,
attorneys' fees, court costs, filing fees and other costs. Collection Costs
also include amounts expended by Jayhawk to maintain any insurance upon a
Financed Vehicle.
"COLLECTIONS" means cash receipts that are applied as reductions to the
principal balance of a Purchased Contract and that are received by Jayhawk from
(a) payments made by or on behalf of the Obligor on the Contract or (b) the net
proceeds realized upon the sale of the Financed Vehicle. "Collections" does not
include interest, late charges, returned check fees, repossession charges or
other charges, fees, proceeds or amounts that may be received with respect to a
Purchased Contract.
"CONTRACT" means a retail installment sales contract, conditional sales
contract, security agreement or other document in the form prescribed by Jayhawk
from time to time under which Dealer is financing the acquisition of an
automobile or light truck from Dealer.
"CONTRACT FILE" with respect to a Contract means all writings (including the
executed Contract) and business records relating to such Contract.
"CONTRACT SPECIFICATIONS" has the meaning set forth in Section 2.1.
"EVENT OF DEFAULT" means an event specified in Section 5.2.
"FINANCED VEHICLE" with respect to a Contract means an automobile or light
truck, together with all accessions thereto, securing the related Obligor's
indebtedness and obligations under such Contract.
"INCENTIVE POOL" means, as described in Section 3.4, a group of Purchased
Contracts originated by a Dealer.
"JAYHAWK PAYMENT" means an amount determined pursuant to Section 3.1.
"NET PURCHASE PRICE" means the Purchase Price with respect to a Contract
minus the transaction fees and charges deducted from such Purchase Price
- -----
pursuant to Section 2.3.
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<PAGE>
"OBLIGOR" with respect to a Contract means the purchaser or co-purchaser of a
Financed Vehicle or any other Person who owes or guarantees payments under such
Contract.
"PAYMENT DATE" means a date that is on or about the last business day of the
third month immediately following the date identified by Jayhawk on the
signature page hereof and on or about the last business day of each month
thereafter in which Collections were received by Jayhawk and for which month the
calculations of Section 3.1 are made.
"PERSON" means a legal person, including any individual, limited liability
company, corporation, estate, partnership, joint venture, association, joint
stock company, trust, incorporated organization, or government or any agency or
political subdivision thereof.
"POOL BALANCE" has the meaning specified in Section 3.1.
"PURCHASE PRICE" with respect to a Contract means the amount payable to
Dealer with respect to such Contract pursuant to Section 2.3 (without taking
into account the deduction of any transaction fees and charges therefrom as
provided in Section 2.3).
"PURCHASED CONTRACT" means a Contract that has been purchased by Jayhawk from
Dealer under this Agreement.
ARTICLE 2. PURCHASE OF CONTRACTS
Section 2.1 CONTRACT SPECIFICATIONS. Dealer shall not submit a Contract to
-----------------------
Jayhawk for purchase unless it meets each of the following specifications (the
"CONTRACT SPECIFICATIONS"):
(a) the Contract is in the form prescribed or approved by Jayhawk, has not
been rescinded, and is a legal, valid, binding, enforceable, and
undisputed obligation of the related Obligor;
(b) the Contract complied at the time originated or made, and is currently in
compliance in all respects, with all requirements of applicable federal,
state and local laws, and regulations thereunder, including without
limitation applicable usury laws, the Federal Truth-in-Lending Act, the
Equal Credit Opportunity Act, the Fair Credit Billing Act, the Fair
Credit Reporting Act, the Fair Debt Collection Practices Act, the Federal
Trade Commission Act, the Magnuson-Moss Warranty Act, Federal Reserve
Board Regulations B, M and Z, state adaptations of the National Consumer
Act and of the Uniform Consumer Credit Code and any other federal or
state consumer credit or equal opportunity laws or regulations;
(c) Dealer has transferred and assigned to Jayhawk a first and prior
perfected security interest in the related Financed Vehicle;
(d) all representations and warranties contained in the assignment section of
the Contract are true and correct as of the date of transfer to Jayhawk;
(e) Dealer has received the cash down payment or trade-in described in the
Contract and other documents as prescribed by Jayhawk and no part of that
cash down payment has been financed in any manner;
(f) the related Financed Vehicle was sold to the related Obligor in
satisfactory operating condition with no material defects known to Dealer
but concealed from such Obligor; and
(g) all amounts indicated in the Contract to be paid by Dealer to any third
party have been paid, including all title fees, license plate fees, sales
taxes, insurance premiums and/or extended warranty or service contract
premiums.
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<PAGE>
Section 2.2 TERMS AND CONDITIONS REGARDING APPROVAL OF CONTRACTS. Any
----------------------------------------------------
purchase of a Contract by Jayhawk shall be upon and subject to the following
terms and conditions:
(a) Submission of each Contract to Jayhawk constitutes a representation and
warranty by Dealer that such Contract fulfills all Contract
Specifications and that the related Contract File is in compliance with
the requirements and policies issued by Jayhawk to Dealer from time-to-
time regarding Dealer's submission of Contracts to Jayhawk. Such
requirements and policies may include, without limitation, (i)
qualifications required of Obligors and Financed Vehicles, and (ii)
specifications of documents to be included in each Contract File.
(b) Jayhawk's issuance of a preliminary fax approval number shall not be
deemed to be approval of a Contract for purchase hereunder. Acceptance
of a Contract for purchase hereunder shall occur only at such time as
Jayhawk receives and approves the related Contract File. Upon the
request of Jayhawk, Dealer will furnish Jayhawk with any additional
powers of attorney and other documents that Jayhawk deems necessary or
appropriate to enable Jayhawk to exercise its rights and duties with
respect to each Purchased Contract.
(c) Jayhawk is hereby authorized and empowered to endorse Dealer's name on
any payments made payable to Dealer and execute and deliver, in Jayhawk's
own name, any and all instruments of satisfaction or cancellation, or of
partial or full release or discharge, and all other comparable
instruments, with respect to the Purchased Contracts or the Financed
Vehicles.
(d) Dealer shall have no obligation to submit any Contracts to Jayhawk for
purchase under this Agreement, and Jayhawk shall have no obligation to
purchase any Contracts submitted to Jayhawk by Dealer.
Section 2.3 PURCHASE OF CONTRACTS. Prior to the approval by Jayhawk of a
---------------------
Contract for purchase as provided in Section 2.2, Jayhawk and Dealer shall
mutually agree upon the price to be paid by Jayhawk to Dealer for the purchase
of such Contract (the "PURCHASE PRICE" with respect to such Contract). Jayhawk
will have the right to deduct from the Purchase Price and/or add to Dealer's
Pool Balance whatever transaction fees and charges that Dealer and Jayhawk
mutually agree upon prior to Jayhawk's purchase of the Contract. The result
derived from subtracting such transaction fees and charges from the Purchase
Price is referred to herein as the "NET PURCHASE PRICE" and shall be the amount
to be paid by Jayhawk to Dealer for the Purchased Contract. Such Net Purchase
Price (which shall not include any Jayhawk Payments) shall constitute the full
amount to be paid to Dealer to purchase such Contract. Upon payment of the Net
Purchase Price to Dealer with respect to a Contract (a) such Contract shall
become a Purchased Contract, and (b) Dealer shall have sold to Jayhawk all of
Dealer's right, title and interest in and to and Dealer shall no longer have any
right, title or interest in and to, such Purchased Contract (including, but not
limited to, all payments, Collections, proceeds or other receipts with respect
to such Purchased Contract) and the related Financed Vehicle (including, but not
limited to, the security interest therein). Dealer acknowledges and agrees that
it will not charge or otherwise pass on to any Obligor any part of the
difference between the amount financed by the Purchased Contract and the Net
Purchase Price therefor or any part of the transaction fees and charges deducted
from the Purchase Price in a manner which would (i) constitute a hidden finance
charge under the Federal Truth-in-Lending Act or the regulations promulgated
thereunder, (ii) cause the interest contracted for in the Purchased Contract to
exceed the maximum amount allowed by applicable law, or (iii) violate any
applicable laws or regulations.
Section 2.4 PURCHASED CONTRACT PAYMENTS RECEIVED BY DEALER. If any payments
----------------------------------------------
on a Purchased Contract are received by Dealer, then Dealer will, no later than
by the close of the following business day, forward such payments to Jayhawk.
Section 2.5 PHYSICAL DAMAGE INSURANCE. Dealer shall require that each
-------------------------
Obligor with respect to a Purchased Contract shall have obtained or agreed to
obtain adequate insurance covering damage, destruction and theft of the related
Financed Vehicle, in the minimum amount of the greater of (a) the minimum amount
required by law, or (b) the principal balance of such Purchased Contract. If
Jayhawk has determined that an Obligor with respect to a Purchased Contract has
not obtained such insurance or
Page 3
<PAGE>
has allowed it to lapse, Jayhawk may obtain insurance (which, at the option of
Jayhawk, may insure only the interest of the owner of the Purchased Contract in
the related Financed Vehicle) naming Jayhawk or such owner as the loss payee,
and may charge the amount paid therefor as a Collection Cost.
Section 2.6 SECURITY INTERESTS IN FINANCED VEHICLES. Dealer will take such
---------------------------------------
steps as are necessary to perfect the security interest in the Financed Vehicles
relating to the Purchased Contracts in the name of Jayhawk, including placing
Jayhawk's or Jayhawk's designee's name as lienholder on all titles to such
Financed Vehicles.
Section 2.7 VOLUME REQUIREMENT. If at any time following the first six
------------------
months of this Agreement, (a) Dealer has not sold to Jayhawk more than 24
Contracts during the term of this Agreement, and (b) Dealer has not sold to
Jayhawk more than, on average, three Contracts per month for the immediately
preceding six months, then all rights of Dealer to Jayhawk Payments shall
automatically terminate without any notice to Dealer and the provisions of
Sections 3.1 and 3.2 will not survive any termination of this Agreement.
ARTICLE 3. PAYMENTS
Section 3.1 JAYHAWK PAYMENTS. Jayhawk desires to provide Dealer with an
----------------
incentive to sell high-quality Contracts to Jayhawk. To provide such incentive,
and not as part of the Purchase Price to be paid for any Purchased Contract, and
subject to Sections 3.4 and 3.5, Jayhawk shall pay to Dealer on each Payment
Date a "JAYHAWK PAYMENT", if any, calculated based on (but not payable from)
Collections on Purchased Contracts with respect to an Incentive Pool, as
provided below in this Section. The Jayhawk Payment, if any, will be determined
by Jayhawk as of the end of each month and will equal the amount by which the
cumulative total amount of all Collections on all Purchased Contracts with
respect to an Incentive Pool exceeds the sum (the "POOL BALANCE") of (a) the
cumulative total of all Purchase Price amounts determined pursuant to Section
2.3 for all Purchased Contracts in that Incentive Pool, plus (b) the cumulative
----
total of all Jayhawk Payments paid by Jayhawk to Dealer with respect to that
Incentive Pool, plus (c) the cumulative total of all Collection Costs that are
----
incurred by Jayhawk with respect to the Purchased Contracts in the Incentive
Pool and that are not recovered by Jayhawk from amounts received on the
Purchased Contracts, plus (d) the cumulative total of all fees and charges which
----
Jayhawk has the right to add to Dealer's Pool Balance pursuant to Section 2.3
with respect to the Purchased Contracts in the Incentive Pool. For purposes of
the calculations set forth in this Section, Collections and other amounts
received on Purchased Contracts will be applied in accordance with Jayhawk's
policies and procedures or otherwise as required by applicable law.
Section 3.2 STATEMENT TO DEALER. On each Payment Date, Jayhawk shall
-------------------
provide to Dealer a statement providing the detail on each of the computations
reflected in Section 3.1.
Section 3.3 ENROLLMENT AND ANNUAL FEES. Concurrently with the execution of
--------------------------
this Agreement, Dealer has paid to Jayhawk, and Jayhawk has received, a non-
refundable enrollment fee in an amount that was mutually agreed upon by Dealer
and Jayhawk. On each anniversary of the Effective Date of this Agreement (as
identified by Jayhawk on the signature page hereof), Dealer will be assessed a
non-refundable annual fee of $1,000 that will be added to Dealer's Pool Balance.
Section 3.4 INCENTIVE POOLS. For the sole purpose of calculating Jayhawk
---------------
Payments under Section 3.1, all Purchased Contracts sold by Dealer to Jayhawk
shall be recorded in an initial Incentive Pool until such time as a subsequent
Incentive Pool is established as provided below in this Section. On each
anniversary of the Effective Date of this Agreement (as identified by Jayhawk on
the signature page hereof), if at least 25 Purchased Contracts have been
recorded in the Incentive Pool in which Purchased Contracts are then being
recorded, a subsequent Incentive Pool shall be established. In addition, if at
any time at least 100 Purchased Contracts have been recorded in the Incentive
Pool in which Purchased Contracts are then being recorded, a subsequent
Incentive Pool shall be established. At such time as a subsequent Incentive
Pool is established, the previously established Incentive Pool shall be closed
and all subsequent Purchased Contracts will be recorded in the subsequent
Incentive Pool. Subject to Section 3.5, Jayhawk Payments under Section 3.1
shall be calculated with respect to each separate Incentive Pool. Pursuant to
Section 3.2, Dealer shall receive a separate statement for each Incentive Pool.
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<PAGE>
Section 3.5 CROSS CALCULATION OF JAYHAWK PAYMENTS FOR INCENTIVE POOLS.
---------------------------------------------------------
Notwithstanding the establishment of separate Incentive Pools pursuant to
Section 3.4, if Jayhawk, in its sole discretion, determines that the Collections
with respect to Purchased Contracts recorded in any of Dealer's Incentive Pools
are unlikely to exceed the Pool Balance for such Incentive Pool, Jayhawk may
combine all or a portion of the Pool Balance for that Incentive Pool with the
Pool Balance of any other of Dealer's Incentive Pools for purposes of
calculating Jayhawk Payments for such other Incentive Pool. Jayhawk reserves
the right to consolidate all of Dealer's Incentive Pools for calculation
purposes if any Event of Default has occurred or if Dealer is otherwise in
breach of this Agreement.
ARTICLE 4. DEALER'S REPRESENTATIONS AND COVENANTS
Section 4.1 GENERAL REPRESENTATIONS OF DEALER. Dealer hereby represents and
---------------------------------
warrants and upon the submission for approval of each Contract pursuant to
Section 2.2:
(a) ORGANIZATION AND GOOD STANDING. Dealer is duly organized and is validly
------------------------------
existing in good standing under the laws of the state of its
incorporation or organization, with full power and authority to own its
properties and to conduct its business, has had at all relevant times the
power, authority and legal right to originate, acquire, and own such
Contract, and is duly qualified to do business in the state in which such
Contract was originated.
(b) AUTHORIZATION, EXECUTION AND DELIVERY; ENFORCEABILITY. This Agreement
-----------------------------------------------------
has been duly authorized, executed and delivered by Dealer and is a valid
and binding agreement of Dealer, enforceable against Dealer in accordance
with its terms, except to the extent that enforcement may be limited by
(i) bankruptcy, insolvency, reorganization, moratorium or other similar
laws now or hereafter in effect relating to creditors' rights generally,
and (ii) general principles of equity (regardless of whether
enforceability is considered in a proceeding at law or in equity).
(c) COMPLIANCE WITH LAWS. Dealer has complied with all federal, state, local
--------------------
and foreign laws, ordinances, regulations and orders applicable to it, or
the related Financed Vehicle. All licenses, permits, orders or approvals
of any governmental or regulatory body which are required in connection
with Dealer's business are in full force and effect, no violations are
or have been recorded with respect to any of the same and no proceedings
are pending or, to Dealer's knowledge, threatened to terminate, revoke or
limit any of the same.
(d) CHARACTERISTICS OF CONTRACT. Such Contract was originated by Dealer for
---------------------------
the sale of a Financed Vehicle in the ordinary course of Dealer's
business, was fully and properly executed by the parties thereto, and
contains customary and enforceable provisions for an installment sale of
a motor vehicle in the state in which the related Obligor is located.
Such Contract is in compliance with all applicable consumer laws and
regulations and meets the Contract Specifications.
(e) LAWFUL ASSIGNMENT. Such Contract has not been originated in, and is not
-----------------
subject to the laws of, any jurisdiction under which the assignment of
such obligation as contemplated under this Agreement would be unlawful,
void or voidable.
(f) ONE ORIGINAL. There is only one executed original of such Contract.
------------
(g) DISCLOSURE OF MATERIAL FACTS. The representations and warranties
----------------------------
contained in this Agreement or in any other agreement, schedule, exhibit
or other document delivered pursuant hereto do not contain any untrue
statements of a material fact or omit to state any material fact
necessary to make the statements contained herein or therein not
misleading.
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Section 4.2 REPRESENTATIONS, WARRANTIES AND COVENANTS REGARDING SALE OF
-----------------------------------------------------------
PURCHASED CONTRACTS. With respect to each Purchased Contract, Dealer hereby
- -------------------
represents, warrants and covenants that:
(a) The payment to Dealer of the Net Purchase Price with respect to such
Purchased Contract represents fair and reasonably equivalent value to the
Dealer for the sale of such Purchased Contract; and
(b) Upon payment of the Net Purchase Price to Dealer with respect to a
Purchased Contract to Jayhawk, Dealer has relinquished all rights therein
and Jayhawk has obtained good and indefeasible title to such Purchased
Contract free and clear of any lien, claim or encumbrance on such
Purchased Contract in favor of Dealer; and
(c) Dealer shall not be insolvent when such Purchased Contract is sold to
Jayhawk and shall not be rendered insolvent as a result of such sale; and
(d) Jayhawk's obligation to make Jayhawk Payments is solely an unsecured
general corporate obligation of Jayhawk.
Section 4.3 INDEMNITIES. Dealer will defend, indemnify, and hold harmless
-----------
Jayhawk from and against any and all costs, expenses, losses, damages, claims
and liabilities arising out of or resulting from:
(a) breach of any of the representations, warranties, or agreements made by
Dealer in this Agreement;
(b) sale of a Financed Vehicle or origination of a Contract by Dealer, or
(c) taxes that may at any time be asserted against Jayhawk with respect to
the transactions contemplated herein (other than taxes measured by the
net income of Jayhawk or taxes or fees imposed upon Jayhawk's
registration, qualification or licensing), including any sales, use,
gross receipts, tangible or intangible personal property, or ad valorem
taxes and costs and expenses in defending against same.
Indemnification under this Section shall include attorneys' fees and all
expenses of litigation.
ARTICLE 5. TERMINATION
Section 5.1 TERMINATION. Either Jayhawk or Dealer may terminate this
-----------
Agreement upon 30 days prior written notice to the other, or Jayhawk may
terminate this Agreement, upon the occurrence of an Event of Default,
immediately upon the giving of notice of termination.
Section 5.2 EVENTS OF DEFAULT. The following constitute "EVENTS OF DEFAULT"
-----------------
hereunder:
(a) assignment by Dealer of its rights or the delegation of its duties under
this Agreement, or any change in the control of Dealer without the prior
written consent of Jayhawk; provided, however, that Jayhawk shall not
unreasonably withhold consent to any assignment by Dealer of its rights
to receive payments of Purchase Prices and/or Jayhawk Payments under this
Agreement; or
(b) failure on the part of Dealer duly to observe or to perform any covenant
or agreement set forth in this Agreement, which failure shall continue
unremedied for a period of ten business days after the date on which
written notice of such failure, requiring the same to be remedied, shall
have been given to Dealer by Jayhawk; or
(c) the breach by Dealer of any representation or warranty set forth in this
Agreement, including with respect to any Purchased Contracts, including
representations regarding cash down payments or trade-in values; or
Page 6
<PAGE>
(d) the misrepresentation by Dealer in any respect of any information
(written or oral) or circumstances relating to a Contract submitted to
Jayhawk or relating to any Obligor or Financed Vehicle.
Section 5.3 CERTAIN JAYHAWK REMEDIES. If Jayhawk determines that an Event of
------------------------
Default has occurred, or if any claim or action is made or brought against
Jayhawk that arises out of or relates to Dealer's sale of a Financed Vehicle or
Dealer's origination of a Contract, then, in addition to and not in lieu of any
other remedies available to Jayhawk under this Agreement, at law, in equity, or
otherwise, Jayhawk may, in its sole discretion:
(a) demand, by written notice to Dealer, that Dealer repurchase from Jayhawk
the Purchased Contract(s) that is(are) the subject of or affected by such
Event of Default or claim or action for an amount equal to the lesser of
(i) the Purchase Price amount(s) for such Purchased Contract(s), or (ii)
the sum of all amounts remaining to be paid on such Purchased
Contract(s); or
(b) demand, by written notice to Dealer, that Dealer repurchase all Purchased
Contracts for an amount equal to the lesser of (i) the aggregate Purchase
Price amounts for all Purchased Contracts, or (ii) the aggregate of all
amounts remaining to be paid on all Purchased Contracts.
Dealer will pay all costs associated with the transfer of Purchased Contracts
pursuant to this Section. Amounts payable by Dealer to Jayhawk under this
Section will be due and payable within 30 days following the date of Jayhawk's
demand therefor. If Dealer fails to repurchase any Purchased Contract pursuant
to this Section, then all rights of Dealer to Jayhawk Payments will
automatically terminate as of the date of Jayhawk's demand for repurchase, and
the provisions of Sections 3.1 and 3.2 will not survive any termination of this
Agreement.
Section 5.4 EFFECT OF TERMINATION. All remedies set forth in this
---------------------
Agreement, including any right to terminate pursuant to this Article, shall be
cumulative and in addition to and not in lieu of any other remedies available to
either party at law, in equity, or otherwise, and may be enforced concurrently
or from time to time. If this Agreement is terminated in accordance with
Section 5.1:
(a) except as provided under Section 2.7, 5.3, or 5.4(b), Jayhawk shall pay
Dealer any Jayhawk Payments as they become due pursuant to Section 3.1
with respect to Purchased Contracts existing on the effective date of
such termination and the provisions of Article 1, Sections 2.4, 2.5, 2.6,
3.1, 3.2, 3.4, 3.5, Article 4, Sections 5.2, 5.3 and 5.4 and Article 6
shall survive the termination of this Agreement; and
(b) if Dealer has not sold to Jayhawk more than 24 Contracts after the date
of this Agreement, in addition to any other rights accruing to Jayhawk
hereunder, all rights of Dealer to Jayhawk Payments shall automatically
terminate without any notice to Dealer and the provisions of Sections 3.1
and 3.2 will not survive the termination of this Agreement, and in
addition, Jayhawk may, in its sole discretion, demand in writing that
Dealer repurchase all Purchased Contracts for an amount equal to the
positive difference between (i) Dealer's Pool Balance, minus (ii) the
-----
cumulative total amount of all Collections received by Jayhawk on all
such Purchased Contracts as of the date of Jayhawk's demand for
repurchase. Dealer shall complete such repurchase within 30 days after
Jayhawk's written demand therefor.
ARTICLE 6. MISCELLANEOUS PROVISIONS
Section 6.1 NOTICES. All demands, notices and communications under this
-------
Agreement shall be sufficient if in writing and delivered personally or sent by
certified mail, return receipt requested, first-class postage prepaid, by
regular mail, first-class postage prepaid, by overnight delivery service
providing evidence of delivery, or by telecopier and shall be deemed to have
been duly given upon first attempted delivery if sent by certified mail or
overnight delivery service and upon receipt if delivered personally or sent by
regular mail or telecopier, at the address specified on the first page of this
Agreement, or at such other address as shall be designated in writing by a
party.
Page 7
<PAGE>
Section 6.2 ASSIGNMENT. This Agreement shall inure to the benefit of
----------
Jayhawk and its successors and assigns. This Agreement shall inure to the
benefit of Dealer and its permitted successors and assigns. Dealer may not
assign any of its rights or obligations hereunder without the written consent of
Jayhawk. Jayhawk may assign its rights hereunder, and may sell or pledge
Purchased Contracts and payments thereon, and any assignee or pledgee shall not,
unless otherwise agreed to between Jayhawk and such assignee or pledgee, assume
any of Jayhawk's obligations hereunder.
Section 6.3 DELEGATION OF DUTIES; LIABILITY. Jayhawk may execute any of its
-------------------------------
duties under this Agreement by or through agents, assignees, nominees or
attorneys-in-fact and shall be entitled to advice of counsel concerning all
matters pertaining to such duties. Jayhawk shall not be responsible for the
negligence or misconduct of any agents, assignees, nominees or attorneys-in-fact
selected by it with reasonable care. Neither Jayhawk nor any of its officers,
directors, employees, nominees, attorneys-in-fact or affiliates (the "LIABLE
ENTITIES") shall be liable for any action lawfully taken or omitted to be taken
by any of the Liable Entities under or in connection with this Agreement (except
for its own gross negligence or willful misconduct). In no event will the
aggregate amount of damages recoverable against the Liable Entities include any
amounts for indirect, incidental, consequential, or punitive damages or lost
profits of any party, including third parties. Each party must initiate any
claim or cause of action arising out of this agreement within two years of the
accrual of the claim or cause of action.
Section 6.4 RIGHTS CUMULATIVE. All rights and remedies from time to time
-----------------
conferred upon or reserved to Jayhawk are cumulative, and none is intended to be
exclusive of another. No delay or omission in insisting upon the strict
observance or performance of any provision of this Agreement or in exercising
any right or remedy, shall be construed as a waiver or relinquishment of such
provision, nor shall it impair such right or remedy.
Section 6.5 SETOFF. Jayhawk may, at any time and from time to time, at its
------
option, set off and apply against any amounts due by it to Dealer either
hereunder or otherwise, any amounts due to Jayhawk by Dealer.
Section 6.6 LITIGATION COSTS. In the event that a dispute arises between
----------------
the parties to this Agreement with respect to the subject matter hereof, except
as otherwise expressly provided herein, the prevailing party in litigation or
other dispute resolution proceeding shall be entitled to receive an amount equal
to its reasonable attorneys' fees, court costs, and expenses arising out of such
dispute from the nonprevailing party.
Section 6.7 RELATIONSHIP AND INTENTION OF PARTIES. Notwithstanding any
-------------------------------------
provision to the contrary elsewhere in this Agreement, Jayhawk is acting
independently of Dealer, and shall have no duties or responsibilities to Dealer,
except those expressly set forth herein, or any fiduciary relationship with
Dealer, and no implied covenants, functions, responsibilities, duties,
obligations, liabilities, joint venture or partnership arrangement shall be read
into this Agreement or otherwise exist between Jayhawk and Dealer. Dealer and
Jayhawk intend that the sale of each Purchased Contract to Jayhawk pursuant to
this Agreement be an absolute sale, conveyance, and assignment free and clear of
all liens, rather than a financing.
Section 6.8 COMPLETE AGREEMENT. This Agreement contains the complete
------------------
agreement of the parties hereto, and supersedes any and all prior agreements,
including prior Dealer Agreements (whether written or oral), and prior courses
of dealing. This Agreement may be amended from time to time (a) in writing by
the parties hereto or (b) by written notice from Jayhawk. Any such amendment by
written notice from Jayhawk shall be effective only if Dealer submits a Contract
for purchase after the date of such notice. Should any provision of this
Agreement be in conflict with any provision of any Purchased Contract, the
provision set forth in this Agreement shall govern as between the parties to
this Agreement, and the conflicting provision in the Purchased Contract shall
be deemed deleted to the extent of such conflict.
Section 6.9 PRIOR DEALER AGREEMENTS. If Jayhawk and Dealer have entered
-----------------------
into any prior agreements ("PRIOR DEALER AGREEMENTS"), in consideration of the
mutual agreements contained herein Jayhawk and Dealer hereby agree that (a) this
Agreement shall be deemed to amend and restate in its
Page 8
<PAGE>
entirety each such Prior Dealer Agreements, effective as of the date of such
Prior Dealer Agreements, and (b) each retail motor vehicle installment contract,
conditional sales contract, security agreement or other document previously
purchased by Jayhawk shall be deemed to have been purchased on the terms and
conditions set forth in this Agreement and shall constitute a Purchased Contract
hereunder.
Section 6.10 SEVERABILITY OF PROVISIONS. If any one or more of the
--------------------------
provisions of this Agreement shall be for any reason whatsoever held invalid,
then such provisions shall be deemed severable from the remaining provisions of
this Agreement or the rights of Dealer or Jayhawk.
Section 6.11 GOVERNING LAW; VENUE. This Agreement shall be deemed made
--------------------
under the laws of the State of Texas and shall be construed and enforced in
accordance with and governed by the laws of the State of Texas and the laws of
the United States of America, except with respect to specific liens, or the
perfection thereof, evidenced by loan documents covering personal property that
by the laws applicable thereto are required to be construed under the laws of
another jurisdiction. Dealer hereby irrevocably submits to the jurisdiction of
the state and federal courts of the State of Texas and agrees and consents that
service of process may be made upon it in any legal proceeding relating to this
Agreement by any means allowed under Texas or federal law.
Section 6.12 USAGE OF TERMS. With respect to all terms in this Agreement,
--------------
the singular includes the plural and the plural the singular; words importing
any gender include the other gender; references to agreements and other
contractual instruments include all subsequent amendments thereto or changes
therein entered into in accordance with their respective terms and not
prohibited by this Agreement; references to Persons include their permitted
successors and assigns; and the term "including" means "including without
limitation."
Section 6.13 HEADINGS. The headings herein are for convenience of reference
--------
only and shall not control or affect the meaning or construction of any
provisions hereof.
Section 6.14 COUNTERPARTS. This Agreement may be executed in any number of
------------
counterparts, either by facsimile or original signature. Each counterpart of
this Agreement so executed shall be fully effective as an original.
IN WITNESS WHEREOF, Jayhawk and Dealer each have caused this Agreement to be
signed and delivered by its duly authorized representative to be effective as of
the date set forth below the signature of Jayhawk when executed by both parties.
JAYHAWK ACCEPTANCE CORPORATION DEALER:
----------------------
By: By:
--------------------------------------- -------------------------------
Richard B. Hoffmann, President
Name (print):
---------------------
Effective Date: Title:
--------------------------- ----------------------------
(to be completed by Jayhawk)
CAR LOTS OWNED BY DEALERSHIP:
- -----------------------------
Name Address Telephone Number Fax Number
---- ------- ---------------- ----------
Page 9
<PAGE>
Exhibit 10.22
[LETTERHEAD OF JAYHAWK ACCEPTANCE CORPORATION APPEARS HERE]
September 5, 1996
Mr. Jack T. Smith
1912 MacGregor
Plano, Texas 75093
Re: Consulting Agreement
Dear Jack:
This confirms your agreement to provide business, financial and management
consulting services and advice to Jayhawk Acceptance Corporation beyond the
service and advice that might be anticipated from your duties as a director. You
will make available adequate time to perform such services to the satisfaction
of Jayhawk. Jayhawk will provide you office space, equipment and supplies, as
required when you perform your services at Jayhawk. You will be responsible for
providing your own secretarial support.
To encourage you to devote such time and attention as reasonably may be
required by Jayhawk, Jayhawk will grant to you, under the terms of its 1994
Stock Option and Restricted Stock Plan, an option to purchase 100,000 shares of
the common stock of Jayhawk. The option will become exercisable in increments of
25,000 shares, with the first 25,000 shares being immediately exercisable on the
date of grant and each subsequent increment of 25,000 shares becoming
exercisable on each of the next three anniversaries of such date. If either you
or Jayhawk terminate this Consulting Agreement for any reason, then the option
will automatically terminate as to any shares which have not become exercisable
as of the effective date of termination. You understand and agree that Jayhawk's
obligation to grant such option to you is contingent upon the approval of the
Compensation Committee of Jayhawk's Board of Directors. Jayhawk will seek such
approval on or before the next scheduled meeting of the Compensation Committee.
You agree to treat as confidential all confidential, proprietary and trade
secret information of Jayhawk to which you may be exposed in providing services
to Jayhawk. Either you or Jayhawk may terminate this Consulting Agreement at any
time upon 30 days advance written notice to the other party.
If you are in agreement with the terms of this Agreement, then so indicate
by signing this Consulting Agreement in the space provided below.
Sincerely,
Jayhawk Acceptance Corporation
By: /s/ Mike Smartt
-------------------------------------
Mike Smartt, Chairman of the Board
and Chief Executive Officer
Accepted and Agreed:
/s/ Jack T. Smith
- ------------------------------------
Jack T. Smith
<PAGE>
Exhibit 10.24
September 27, 1996
Mr. John D. Curtis
4337 Livingston
Dallas, Texas 75205
Re: Consulting Agreement
Dear John:
This confirms your agreement to provide legal and business consulting
services and advice to Jayhawk Acceptance Corporation beyond the service and
advice that might be anticipated from your duties as a director. You will make
available adequate time to perform such services to the satisfaction of Jayhawk.
You will be responsible for providing your own office space, equipment and
secretarial support.
To encourage you to devote such time and attention as reasonably may be
required by Jayhawk, Jayhawk will grant to you, under the terms of its 1994
Stock Option and Restricted Stock Plan, an option to purchase 20,000 shares of
the common stock of Jayhawk. The option will become exercisable in increments of
5,000 shares, with the first 5,000 shares being immediately exercisable on the
date of grant and each subsequent increment of 5,000 shares becoming exercisable
on each of the next three anniversaries of such date. If either you or Jayhawk
terminate this Consulting Agreement for any reason, then the option will
automatically terminate as to any shares which have not become exercisable as of
the effective date of termination. You understand and agree that Jayhawk's
obligation to grant such option to you is contingent upon the approval of the
Compensation Committee of Jayhawk's Board of Directors. Jayhawk will seek such
approval on or before the next scheduled meeting of the Compensation Committee.
You agree to treat as confidential all confidential, proprietary and trade
secret information of Jayhawk to which you may be exposed in providing services
to Jayhawk. Either you or Jayhawk may terminate this Consulting Agreement at any
time upon 30 days advance written notice to the other party.
If you are in agreement with the terms of this Agreement, then so indicate
by signing this Consulting Agreement in the space provided below.
Sincerely,
Jayhawk Acceptance Corporation
By: /s/ Mike Smartt
-------------------------------------
Mike Smartt, Chairman of the Board
and Chief Executive Officer
Accepted and Agreed:
/s/ John D. Curtis
- ------------------------------------
John D. Curtis
<PAGE>
Exhibit 10.28
[LETTERHEAD OF JAYHAWK ACCEPTANCE CORPORATION APPEARS HERE]
December 2, 1996
Mr. David C. Carrithers
1923 Meed Meadows
St. Louis, Missouri 63026
Dear David:
It is with pleasure that we provide you this offer of employment with Jayhawk
Acceptance Corporation to serve as Vice President of Sales and Marketing. I feel
that your acceptance today launches a new era for Jayhawk. The synergy resulting
from your participation on the senior management team suggests dynamic results
- -- mutually rewarding for all of us, and for the business.
Your 12-month base salary will be $130,000, and is payable on the 15th and the
last working day of each month. In addition to your base salary, you can earn a
bonus based on Company and individual performance. Bonus awards will be made
annually, beginning shortly after the completion of 1997. For the year ending
December 31, 1997, your earned bonus would be a minimum of $45,000, of which
$15,000 will be paid by June 30, 1997. Your minimum earned bonus for 1998 will
be $30,0000./1/
On the date your employment commences, Jayhawk will grant you a seven year
option to purchase 25,000 shares of Jayhawk Acceptance Corporation common stock
under the Company's Employee Stock Option Plan. These options will be granted at
the closing sale price of the stock on the grant date, as determined under the
plan -vesting at a rate of 25% per year from your date of employment.
Jayhawk will also provide a relocation package/2/ of $30,000 for your move to
the Dallas area. This package will cover house hunting trips, temporary housing
and movement of household goods. The sum will be "grossed up," in order to avoid
the payment of taxes on your part.
This letter is not an agreement to employ you for any particular period of time.
However, if, during the first year of your employment, your employment is
terminated by Jayhawk for any reason, other than cause,/3/ or if you are asked
to take a reduction in wages, or your position is eliminated or significantly
downgraded, you will receive 12 months' base salary. Furthermore, during the
first 12 months of your employment by Jayhawk, if Jayhawk experiences a "change
of control"/4/ which results in a material change to your job function, you will
receive 12 months of your then current base salary. Should your employment be
terminated as described
<PAGE>
[LOGO OF JAYHAWK APPEARS HERE]
Mr. David C. Carrithers
December 2, 1996
Page 2
above, the Company would maintain, upon the same terms offered to its employees,
your health and welfare benefits for the same period as it is obligated to pay
your base salary. Should your employment be terminated as a result of a "change
of control" of the Company, all unvested stock options will vest immediately, in
accordance with the terms of the Plans. In the event you are terminated for any
reason other than as a result of a "change in control," all options would be
treated in accordance with the terms of the stock plan under which they were
granted.
Kindly return a signed copy of this letter, using the enclosed Federal Express
package.
I am excited and happy about the successful future that your appointment
suggests for all of us. Mike Smartt joins me and the management team of Jayhawk
in welcoming you.
Sincerely,
/s/ Richard B. Hoffmann
Richard B. Hoffmann
President
/lb
Accepted By: /s/ David Carrithers
----------------------
Date: Dec. 4, 1996
-----------------------------
<PAGE>
Offer Letter Footnotes
1. 1998 minimum assumes that the Company hasn't adopted a formal incentive
program to supersede it.
2. This sum to be refunded by you to the Company, should you leave Jayhawk's
employ voluntarily, prior to your one year employment anniversary.
3. Termination for "cause" shall mean the Company's termination of your
employment due to: (i) consistent and material violation of the Company's
policies or procedures; (ii) material violation of any material law, rule
or regulation; (iii) conduct involving moral turpitude or adverse to the
public image of the Company; (iv) action in the aid of a competitor, vendor
or supplier of the Company to the disadvantage of the Company; (v) material
misrepresentation or false statements on any document provided to the
Company in connection with your hiring or the commencement of your
employment with the Company; (vi) misappropriation of funds or assets of
the Company; (vii) willful refusal to perform your duties or to comply with
the Company's direction or instructions.
4. A "change of control" will be deemed to occur if (i) the "beneficial
ownership" (as defined in Rule 13d-3 under the Exchange Act), of securities
representing more than 25% of the combined voting power of the Company is
acquired by a "person" as defined in Sections 13(d) and 14(d) of the
Exchange Act (other than the Company, any trustee or other fiduciary
holding securities under an employee benefit plan of the Company, any
corporation owned, directly, by the stockholders of the Company in
substantially the same proportions as their ownership of stock of the
Company, or any person who is the beneficial owner of 25% or more of the
combined voting power of the Company as of the effective date of the Stock
Option Plan), (ii) the stockholders of the Company approve a definitive
agreement to merge or consolidate the company with or into another
corporation or to sell or otherwise dispose of all or substantially all of
its assets, or adopt a plan of liquidation, or (iii) during any period of
two consecutive years, individuals who at the beginning of such period were
members of the Board of Directors of the Company cease for any reason to
constitute at least a majority thereof (unless the election, or the
nomination for election by the company's stockholders, of each new director
was approved by a vote of at least two-thirds of the directors then still
in office who were directors at the beginning of such period).
<PAGE>
EXHIBIT 10.29
SEVENTH AMENDMENT
TO
LOAN AND SECURITY AGREEMENT
---------------------------
THIS SEVENTH AMENDMENT TO LOAN AND SECURITY AGREEMENT (this "Amendment")
---------
dated as of the 9th day of January, 1997, by and between JAYHAWK ACCEPTANCE
CORPORATION, a Texas corporation ("Borrower"), and FLEET CAPITAL CORPORATION, a
--------
Rhode Island corporation ("Lender").
------
RECITALS
A. Borrower and Lender have entered into that certain Loan
and Security Agreement, dated April 4, 1995, as amended by the following:
(i) that certain First Amendment to Loan and Security Agreement,
dated July 11, 1995, by and between Borrower and Lender,
(ii) that certain Second Amendment to Loan and Security
Agreement, dated December 29, 1995, by and between Borrower and Lender,
(iii) that certain Third Amendment to Loan and Security
Agreement, dated January 25, 1996, by and between Borrower and Lender,
(iv) that certain Fourth Amendment to Loan and Security
Agreement, dated March 7, 1996, by and between Borrower and Lender,
(v) that certain Fifth Amendment to Loan and Security Agreement,
dated March 15, 1996, by and between Borrower and Lender, and
(vi) that certain Sixth Amendment to Loan and Security
Agreement, dated April 25, 1996, by and between Borrower and Lender
(as amended, the "Loan Agreement").
--------------
B. Borrower and Lender desire to amend the Loan Agreement and the Other
Agreements to allow and provide for certain matters as hereinafter set forth,
including, without limitation, the following:
(i) a temporary increase in the Advance Rate from forty percent
(40%) to fifty percent (50%), and
<PAGE>
(ii) a limited Guaranty by Carl H. Westcott.
NOW, THEREFORE, in consideration of the premises herein contained and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties, intending to be legally bound, agree as
follows:
ARTICLE I
Definitions
-----------
1.01 Capitalized terms used in this Amendment are defined in
the Loan Agreement, as amended hereby, unless otherwise stated.
ARTICLE II
Amendments
----------
2.01 Amendment to Appendix A of the Loan Agreement; Amendment to the
---------------------------------------------------------------
Definition of "Borrowing Base". Effective as of the date hereof, the definition
- -----------------------------
of "Borrowing Base" contained in Appendix A of the Loan Agreement is hereby
-------------- ----------
amended and restated in its entirety to read as follows:
"Borrowing Base - as at any date of determination thereof, an
--------------
amount equal to the lesser of:
(i) the Revolving Credit Commitment; or
(ii) an amount equal to:
(a) the Advance Rate times the sum of (A) the Net Eligible
Account Amount outstanding at such date with no installment greater than forty-
five (45) days past due on a contractual basis, plus (B) the Net Eligible
----
Diminutive Account Amount outstanding at such date;
PLUS
(b) the lesser of (A) Three Million Nine Hundred Thousand and
No/100 Dollars ($3,900,000.00) or (B) the Advance Rate times the Net Eligible
Account Amount, with an installment greater than forty-five (45) days past due
and less than sixty (60) days past due, on a contractual basis."
<PAGE>
2.02 Amendment to Appendix A of the Loan Agreement; Inclusion of
-----------------------------------------------------------
Definitions. Effective as of the date hereof, Appendix A of the Loan Agreement
- ----------- ----------
is hereby amended to include the following definitions:
"Advance Rate - shall mean
------------
(i) fifty percent (50%) during the period beginning on the date of
the Seventh Amendment and ending on the earliest of (a) March 31, 1997, (b)
the date of the initial High-Yield Offering, and (c) two (2) Business Days
after the date Guarantor has provided to Lender a written request of
termination of the Guaranty; and
(ii) forty percent (40%) at all times thereafter."
"Guarantor - Carl H. Westcott."
---------
"Guaranty - the Unconditional Guaranty, dated as of the date of
--------
the Seventh Amendment, executed by Guarantor, in favor of Lender."
"High-Yield Offering - shall means the sale of Borrower's high-
-------------------
yield debt instruments or other securities pursuant to a public or private
offering which result in gross proceeds of at least $100,000,000."
"Seventh Amendment - the Seventh Amendment to Loan and Security
-----------------
Agreement dated January 9, 1997, by and between Borrower and Lender."
2.03 Amendment to Section 10.1 of the Loan Agreement. Effective as of
-----------------------------------------------
the date hereof, Section 10.1 of the Loan Agreement is hereby amended by adding
------------
a new Section 10.1.17 thereto, which shall read in its entirety as follows:
---------------
"10.1.17 Repudiation of or Default Under Guaranty - Guarantor
----------------------------------------
shall revoke or attempt to revoke the Guaranty or shall repudiate his
liability under the Guaranty or Guarantor shall be in default under the
terms of the Guaranty or Guarantor shall in any manner attack or call into
question the provisions of the Guaranty."
ARTICLE III
Conditions Precedent
--------------------
3.01 Conditions to Effectiveness. The effectiveness of this Amendment is
---------------------------
subject to the satisfaction of the following conditions precedent, unless
specifically waived in writing by Lender:
<PAGE>
(a) Lender shall have received the following:
(i) this Amendment, duly executed by Borrower,
(ii) a company general certificate in the form of Annex A
-------
attached hereto (hereinafter referred to as the "Company General
---------------
Certificate") certified by the Secretary or Assistant Secretary of the
-----------
Borrower acknowledging the names of the officers of the Borrower authorized
to sign this Amendment and each of the other Loan Documents to which the
Borrower is or is to be a party hereunder (including the certificates
contemplated herein) together with specimen signatures of such officers,
(iii) the Guaranty, in the form of Annex B attached hereto,
-------
duly executed by Guarantor, and
(iv) such additional documents, instruments and information as
Lender or its legal counsel may request;
(b) The representations and warranties contained herein and in the
Loan Agreement and the other Loan Documents, as each is amended hereby, shall be
true and correct as of the date hereof, as if made on the date hereof;
(c) No Default or Event of Default shall have occurred and be
continuing; and
(d) All corporate proceedings taken in connection with the
transactions contemplated by this Amendment and all documents, instruments and
other legal matters incident thereto shall be satisfactory to Lender and its
legal counsel.
ARTICLE IV
Condition Subsequent
--------------------
4.01 Notwithstanding anything to the contrary in the Loan Agreement or
in any other Loan Document, Borrower and Lender hereby agree that Borrower shall
deliver to Lender on or before the date indicated below the item indicated
below, time being of the essence. The failure to deliver such item by such date
shall constitute an "Event of Default" under the Loan Agreement:
(a) By February 7, 1997, Borrower's Board of Directors shall have
adopted resolutions in substantially the form of Annex C attached hereto, which
-------
resolutions shall specifically approve, ratify and confirm Borrower's execution
of this Amendment and all other documents executed in connection herewith.
<PAGE>
ARTICLE V
No Waiver
---------
Nothing contained in this Amendment shall be construed as a waiver by
Lender of any covenant or provision of the Loan Agreement, the other Loan
Documents, this Amendment, or of any other contract or instrument between
Borrower and Lender, and the failure of Lender at any time or times hereafter to
require strict performance by Borrower of any provision thereof shall not waive,
affect or diminish any right of Lender to thereafter demand strict compliance
therewith. Lender hereby reserves all rights granted under the Loan Agreement,
the other Loan Documents, this Amendment and any other contract or instrument
between Borrower and Lender.
ARTICLE VI
Ratifications, Representations, Warranties and Covenants
--------------------------------------------------------
6.01 Ratifications. The terms and provisions set forth in this Amendment
-------------
shall modify and supersede all inconsistent terms and provisions set forth in
the Loan Agreement and the other Loan Documents, and, except as expressly
modified and superseded by this Amendment, the terms and provisions of the Loan
Agreement and the other Loan Documents are ratified and confirmed and shall
continue in full force and effect. Borrower and Lender agree that the Loan
Agreement and the other Loan Documents, as amended hereby, shall continue to be
legal, valid, binding and enforceable in accordance with their respective terms.
6.02 Representations and Warranties. Borrower hereby represents and
------------------------------
warrants to Lender that (a) the execution, delivery and performance of this
Amendment and any and all other Loan Documents executed and/or delivered in
connection herewith have been authorized by all requisite corporate action on
the part of Borrower and will not violate the Articles of Incorporation or
Bylaws of Borrower; (b) the representations and warranties contained in the Loan
Agreement, as amended hereby, and any other Loan Documents are true and correct
on and as of the date hereof and on and as of the date of execution hereof as
though made on and as of each such date; (c) no Default or Event of Default
under the Loan Agreement, as amended hereby, has occurred and is continuing; and
(d) Borrower is in full compliance with all covenants and agreements contained
in the Loan Agreement and the other Loan Documents, as amended hereby.
ARTICLE VII
Miscellaneous Provisions
------------------------
7.01 Survival of Representations and Warranties. All representations and
warranties made by the Loan Agreement or any other Loan Documents, including,
without
<PAGE>
limitation, any document furnished in connection with this Amendment, shall
survive the execution and delivery of this Amendment and the other Loan
Documents, and no investigation by Lender or any closing shall affect the
representations and warranties or the right of Lender to rely upon them.
7.02 Reference to Loan Agreement. Each of the Loan Agreement and the
---------------------------
Other Agreements, and any and all other agreements, documents or instruments now
or hereafter executed and delivered pursuant to the terms hereof or pursuant to
the terms of the Loan Agreement, as amended hereby, are hereby amended so that
any reference in the Loan Agreement and such other Loan Documents to the Loan
Agreement shall mean a reference to the Loan Agreement as amended hereby.
7.03 Expenses of Lender. As provided in the Loan Agreement, Borrower
------------------
agrees to pay on demand all costs and expenses incurred by Lender in connection
with the preparation, negotiation, and execution of this Amendment and the other
Loan Documents executed pursuant hereto and any and all amendments,
modifications, and supplements thereto, including, without limitation, the costs
and fees of Lender's legal counsel, and all costs and expenses incurred by
Lender in connection with the enforcement or preservation of any rights under
the Loan Agreement, as amended hereby, or any other Loan Documents, including,
without, limitation, the costs and fees of Lender's legal counsel.
7.04 Severability. Any provision of this Amendment held by a court of
------------
competent jurisdiction to be invalid or unenforceable shall not impair or
invalidate the remainder of this Amendment and the effect thereof shall be
confined to the provision so held to be invalid or unenforceable.
7.05 Successors and Assigns. This Amendment is binding upon and shall
----------------------
inure to the benefit of Lender and Borrower and their respective successors and
assigns, except that Borrower may not assign or transfer any of its rights or
obligations hereunder without the prior written consent of Lender.
7.06 Counterparts. This Amendment may be executed in one or more
------------
counterparts, each of which when so executed shall be deemed to be an original,
but all of which when taken together shall constitute one and the same
instrument.
7.07 Effect of Waiver. No consent or waiver, express or implied, by
----------------
Lender to or for any breach of or deviation from any covenant or condition by
Borrower shall be deemed a consent to or waiver of any other breach of the same
or any other covenant, condition or duty.
7.08 Headings. The headings, captions, and arrangements used in this
--------
Amendment are for convenience only and shall not affect the interpretation of
this Amendment.
<PAGE>
7.09 Applicable Law. THIS AMENDMENT AND ALL OTHER AGREEMENTS EXECUTED
--------------
PURSUANT HERETO SHALL BE DEEMED TO HAVE BEEN MADE AND TO BE PERFORMABLE IN AND
SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
TEXAS.
7.10 Final Agreement. THE LOAN AGREEMENT AND THE OTHER LOAN DOCUMENTS,
---------------
EACH AS AMENDED HEREBY, REPRESENT THE ENTIRE EXPRESSION OF THE PARTIES WITH
RESPECT TO THE SUBJECT MATTER HEREOF ON THE DATE THIS AMENDMENT IS EXECUTED. THE
LOAN AGREEMENT AND THE OTHER LOAN DOCUMENTS, AS AMENDED HEREBY, MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS
OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. NO
MODIFICATION, RESCISSION, WAIVER, RELEASE OR AMENDMENT OF ANY PROVISION OF THIS
AMENDMENT SHALL BE MADE, EXCEPT BY A WRITTEN AGREEMENT SIGNED BY BORROWER AND
LENDER.
<PAGE>
7.11 Release. BORROWER HEREBY ACKNOWLEDGES THAT IT HAS NO DEFENSE,
-------
COUNTERCLAIM, OFFSET, CROSS-COMPLAINT, CLAIM OR DEMAND OF ANY KIND OR NATURE
WHATSOEVER THAT CAN BE ASSERTED TO REDUCE OR ELIMINATE ALL OR ANY PART OF ITS
LIABILITY TO REPAY THE "OBLIGATIONS" OR TO SEEK AFFIRMATIVE RELIEF OR DAMAGES OF
ANY KIND OR NATURE FROM LENDER. BORROWER HEREBY VOLUNTARILY AND KNOWINGLY
RELEASES AND FOREVER DISCHARGES LENDER, ITS PREDECESSORS, AGENTS, EMPLOYEES,
SUCCESSORS AND ASSIGNS, FROM ALL POSSIBLE CLAIMS, DEMANDS, ACTIONS, CAUSES OF
ACTION, DAMAGES, COSTS, EXPENSES, AND LIABILITIES WHATSOEVER, KNOWN OR UNKNOWN,
ANTICIPATED OR UNANTICIPATED, SUSPECTED OR UNSUSPECTED, FIXED, CONTINGENT, OR
CONDITIONAL, AT LAW OR IN EQUITY, ORIGINATING IN WHOLE OR IN PART ON OR BEFORE
THE DATE THIS AMENDMENT IS EXECUTED, WHICH THE BORROWER MAY NOW OR HEREAFTER
HAVE AGAINST LENDER, ITS PREDECESSORS, AGENTS, EMPLOYEES, SUCCESSORS AND
ASSIGNS, IF ANY, AND IRRESPECTIVE OF WHETHER ANY SUCH CLAIMS ARISE OUT OF
CONTRACT, TORT, VIOLATION OF LAW OR REGULATIONS, OR OTHERWISE, AND ARISING FROM
ANY "LOANS", INCLUDING, WITHOUT LIMITATION, ANY CONTRACTING FOR, CHARGING,
TAKING, RESERVING, COLLECTING OR RECEIVING INTEREST IN EXCESS OF THE HIGHEST
LAWFUL RATE APPLICABLE, THE EXERCISE OF ANY RIGHTS AND REMEDIES UNDER THE LOAN
AGREEMENT OR OTHER LOAN DOCUMENTS, AND NEGOTIATION FOR AND EXECUTION OF THIS
AMENDMENT.
<PAGE>
IN WITNESS WHEREOF, this Amendment has been executed and is effective as of
the date first above-written.
"BORROWER"
JAYHAWK ACCEPTANCE CORPORATION
By: /s/ C. FRED JACKSON
-----------------------------------------
C. Fred Jackson
Chief Financial Officer
"LENDER"
FLEET CAPITAL CORPORATION
By: /s/ H. Michael Wills
-----------------------------------------
H. Michael Wills
Vice President
<PAGE>
ANNEX A
-------
FORM OF COMPANY GENERAL CERTIFICATE
-----------------------------------
(See Attached)
<PAGE>
COMPANY GENERAL CERTIFICATE
---------------------------
From: JAYHAWK ACCEPTANCE CORPORATION ("Company")
-------
To: FLEET CAPITAL CORPORATION ("Lender")
------
Closing Date: January 9, 1997
The undersigned certifies that he is the Secretary of the Company and that, as
such officer, the undersigned is authorized to execute and deliver this
certificate in the name and on behalf of the Company. The undersigned further
certifies that:
1. This certificate is being delivered on the Closing Date pursuant to the
provisions of a Seventh Amendment to Loan and Security Agreement, dated as of
the Closing Date, between the Company and Lender (the "Amendment"). The terms
---------
used in this certificate, if not defined herein, have the meanings specified in
that certain Loan and Security Agreement, dated April 4, 1995, between the
Company and Lender, as amended.
2. The Company's Articles of Incorporation are in full force and effect on
and as of the Closing Date without modification or amendment in any respect
since April 4, 1995.
3. The Company's Bylaws are in full force and effect on and as of the
Closing Date without modification or amendment in any respect since July 11,
1995.
4. As of the Closing Date, (a) the Company is in existence and in corporate
and tax good standing in the State of Texas, (b) the Company is qualified to do
business as a foreign corporation and is in corporate and tax good standing in
each jurisdiction where the Company is doing business and is required to be so
qualified, (c) the Company does not owe franchise taxes or other taxes required
to maintain its corporate existence which are due and no franchise tax reports
are due, and (d) no proceedings are pending for forfeiture of the Company's
charter or for its dissolution either voluntarily or, to my knowledge,
involuntarily.
5. Each officer of the Company indicated below has been duly elected and is,
at present, qualified and acting in the office indicated opposite such officer's
name and is authorized by the Resolutions to execute on behalf of the Company,
the Amendment and all agreements, documents or instruments required to be
executed and delivered by the Company in order to give effect to and consummate
the transactions contemplated by the Amendment. The specimen signatures below
are the genuine signatures of such officers:
<PAGE>
Name Title Signature
---- ----- ---------
C. Fred Jackson Chief Financial Officer /s/ C. FRED JACKSON
--------------------
Mark Taken Secretary /s/ MARK TAKEN
--------------------
This certificate may be signed in one or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
IN WITNESS WHEREOF, the undersigned has executed and delivered this
certificate in the name and on behalf of the Company and under its corporate
seal on and as of the Closing Date.
/s/ MARK TAKEN
--------------------
Mark Taken,
Secretary
The undersigned, being the duly authorized and acting Chief Financial Officer
of the Company, hereby certifies that the person signing immediately above is
the authorized and acting Secretary of the Company and that the signature
appearing above is such person's genuine signature.
/s/ C. FRED JACKSON
------------------------
C. Fred Jackson,
Chief Financial Officer
<PAGE>
ANNEX B
-------
GUARANTY
--------
(SEE ATTACHED)
<PAGE>
UNCONDITIONAL GUARANTY
----------------------
FOR VALUE RECEIVED, CARL H. WESTCOTT ("Guarantor") guarantees unconditionally
---------
the full and prompt payment to FLEET CAPITAL CORPORATION ("Lender") at Lender's
------
office in Dallas County, Texas, when due, whether by acceleration or otherwise,
of the following obligations and indebtedness of JAYHAWK ACCEPTANCE CORPORATION,
a Texas corporation (the "Borrower"):
--------
Any and all obligations for which Borrower, is now, or hereafter may
become, liable or indebted to Lender under that certain Loan and Security
Agreement, dated as of April 4, 1995, by and between Borrower and Lender,
as amended by the following:
(a) that certain First Amendment to Loan and Security
Agreement, dated July 11, 1995, by and between Borrower and Lender,
(b) that certain Second Amendment to Loan and Security
Agreement, dated December 29, 1995, by and between Borrower and
Lender,
(c) that certain Third Amendment to Loan and Security
Agreement, dated January 25, 1996, by and between Borrower and Lender,
(d) that certain Fourth Amendment to Loan and Security
Agreement, dated March 7, 1996, by and between Borrower and Lender,
(e) that certain Fifth Amendment to Loan and Security
Agreement, dated March 15, 1996, by and between Borrower and Lender,
and
(f) that certain Sixth Amendment to Loan and Security
Agreement, dated April 25, 1996, by and between Borrower and Lender,
and
(g) that certain Seventh Amendment to Loan and Security
Agreement, dated as of January 9, 1997, by and between Borrower and
Lender,
(as further renewed, extended, modified or replaced from time to time, the
"Loan Agreement"); all unpaid accrued interest on the Obligations, and all
--------------
costs, attorneys' fees, and other expenses incurred by Lender in enforcing
this Guaranty which are incurred by
<PAGE>
Lender by reason of any default by Borrower under the Loan Agreement (all
of the foregoing are hereinafter referred to as the "Obligations").
-----------
All sums paid Lender by Guarantor may be applied by Lender at its discretion
upon any of the Obligations. To further secure payment of the Obligations,
Guarantor grants to Fleet Capital Corporation, in addition to all other
contractual, legal, and equitable rights of Fleet Capital Corporation, the right
to offset against any account, certificate of deposit, or other funds of
Guarantor in the possession of or under the control of Fleet Capital
Corporation.
Guarantor hereby waives notice of acceptance of this Guaranty and all other
notices in connection herewith or in connection with the Obligations, including,
without limitation, notice of intent to accelerate and notice of acceleration,
and waives diligence, presentment, demand, protest, and suit on the part of
Lender in the collection of any of the Obligations, and agrees that Lender shall
not be required to first endeavor to collect any of the Obligations from
Borrower, or any other party liable for payment of the Obligations (hereinafter
referred to as an "Obligated Party"), before requiring Guarantor to pay the full
---------------
amount of the Obligations. Without impairing the rights of Lender against
Guarantor, Borrower or any other Obligated Party, suit may be brought and
maintained against Guarantor at the election of Lender with or without joinder
of Borrower or any other Obligated Party, any right to any such joinder being
hereby waived by Guarantor.
Guarantor represents to Lender he is receiving a direct and indirect benefit
as a result of this Guaranty and the Obligations; represents to Lender that
after giving effect to this Guaranty and the contingent obligations evidenced
hereby he is, and will be, solvent; acknowledges that his liability hereunder
shall be cumulative and in addition to any other liability or obligation to
Lender, whether the same is incurred through the execution of a note, a similar
guaranty, through endorsement, or otherwise; and acknowledges that neither
Lender nor any officer, employee, agent, attorney or other representative of
Lender has made any representation, warranty or statement to Guarantor to induce
him to execute this Guaranty.
Guarantor hereby agrees that, except as hereinafter provided, his obligations
under this Guaranty shall be continuing, absolute and unconditional,
irrespective of (i) the validity or enforceability of the Obligations or of any
promissory note or other document evidencing all or any part of the Obligations,
(ii) the absence of any attempt to collect the Obligations from Borrower or any
other Obligated Party or other action to enforce the same, (iii) the waiver or
consent by Lender with respect to any provision of any instrument evidencing the
Obligations, or any part thereof, or any other agreement now or hereafter
executed by Borrower and delivered to Lender, (iv) failure by Lender to take any
steps to perfect and maintain its security interest in, or to preserve its
rights to, any security or collateral for the Obligations, (v) the surrender,
release, exchange, or alteration by
<PAGE>
Lender of any security or collateral for the Obligations, (vi) Lender's
election, in any proceeding instituted under Chapter 11 of Title 11 of the
United States Code (11 U.S.C. (S)101 et seq.) (the "Bankruptcy Code"), of the
---------------
application of Section 1111(b)(2) of the Bankruptcy Code, (vii) any borrowing or
grant of a security interest by Borrower, as debtor-in-possession, under Section
364 of the Bankruptcy Code, (viii) the disallowance of all or any portion of
Lender's claim(s) for repayment of the Obligations under Section 502 of the
Bankruptcy Code, or (ix) any other circumstance which might otherwise constitute
a legal or equitable discharge or defense of a guarantor.
No release, waiver, or discharge of Borrower or any Obligated Party from
liability for payment of any of the Obligations, nor any renewal,
supplementation, modification, rearrangement or acceleration of any of the
Obligations, nor any amendment of any document evidencing any of the
Obligations, either express or implied, shall relieve Guarantor from liability
for payment of the full amount of the Obligations then or thereafter
outstanding; and Guarantor will immediately pay all Obligations to Lender or
other person entitled thereto, regardless of any defense, right of set-off, or
counterclaim which Borrower or any other Obligated Party may have or assert, and
regardless of whether Lender or any other party shall have taken any steps to
enforce any rights against Borrower, any other Obligated Party, or any other
party to collect such sum, and regardless of any other condition or contingency,
including, without limitation, any neglect, delay, or omission of Lender.
Lender is hereby authorized, without notice or demand and without affecting the
liability of Guarantor, to, from time to time: (i) accept partial payments on
the Obligations; (ii) take and hold security or collateral for the payment of
this Guaranty or any other guarantees of the Obligations, and exchange, enforce,
waive and release any such security or collateral; (iii) apply such security or
collateral therefor in any manner, without affecting or impairing the
obligations of Guarantor hereunder.
Notwithstanding anything to the contrary contained herein, Guarantor shall not
have any right, claim or action, now or hereafter, against Borrower or any other
Obligated Party arising out of or in connection with this Guaranty or any other
document evidencing or securing the Obligations, including, without limitation,
any right or claim of subrogation, contribution, reimbursement, exoneration, or
indemnity, until all of the Obligations are paid in full.
Guarantor is familiar with, and has independently reviewed the financial
condition of, Borrower and hereby assumes responsibility for keeping itself
informed of the financial condition of Borrower, and any and all endorsers or
other guarantors of any instrument or document evidencing all or any part of the
Obligations and of all other circumstances bearing upon the risk of nonpayment
of the Obligations or any part thereof that diligent inquiry would reveal.
Guarantor hereby agrees that Lender shall have no duty to advise Guarantor of
information known to Lender
<PAGE>
regarding such condition or any such circumstances. Guarantor is not relying on
the financial condition of Borrower or the value of any collateral for the
Obligations as an inducement to enter into this Guaranty. If Lender, in its
sole discretion, undertakes at any time or from time to time to provide any such
information to Guarantor, Lender shall be under no obligation (i) to undertake
any investigation not a part of its regular business routine, (ii) to disclose
any information which, pursuant to accepted or reasonable commercial finance
practices, Lender wishes to maintain confidential, or (iii) to make any other or
future disclosures of such information or any other information to Guarantor.
Guarantor consents and agrees that Lender shall be under no obligation to
marshall any assets in favor of Guarantor or against or in payment of any or all
of the Obligations. Guarantor further agrees that, to the extent that Borrower
makes a payment or payments to Lender, or Lender receives any proceeds of
collateral, which payment or payments or any part thereof are subsequently
invalidated, declared to be fraudulent or preferential, set aside and/or
required to be repaid to Borrower, any of its estate, trustee, receiver or any
other party, including, without limitation, Guarantor, under any bankruptcy law,
state or federal law, common law or equitable cause, then to the extent of such
payment or repayment, the Obligations or part thereof which has been paid,
reduced or satisfied by such amount shall be reinstated and continued in full
force and effect as of the date such initial payment, reduction or satisfaction
occurred and this Guaranty, if previously terminated, shall be reinstated for
the benefit of Lender.
Lender may, without notice to Guarantor or any other party, assign its rights
hereunder to any holder of the Obligations, in whole or in part, and upon any
such assignment all the terms and provisions of this Guaranty shall inure to the
benefit of such assignee, to the extent so assigned.
Lender is relying and is entitled to rely upon each and all of the provisions
of this Guaranty; and, accordingly, if any provision of this Guaranty should be
held to be invalid or ineffective, then all other provisions shall continue in
full force and effect notwithstanding.
Any and all notices, requests and demands to or upon Guarantor to be effective
shall be in writing and shall be deemed to have been validly served, given or
delivered as follows: (a) if sent by certified or registered mail return
receipt requested, three business days after deposit in the mail, postage
prepaid, or, if earlier, when delivered against receipt; or (b) in the case of
telegraphic notice, when delivered to the telegraph company; or (c) in the case
of telex notice, when sent, answerback received; or (d) if sent by any other
method, upon actual delivery; in each case addressed to the address set forth
opposite Guarantor's signature below or at such other address as Guarantor shall
hereafter notify Lender.
<PAGE>
It is the intention of Borrower, Guarantor and Lender to conform strictly to
applicable usury laws. Accordingly, no agreements, conditions, provisions or
stipulations contained in this Guaranty or any other instrument, document or
agreement between Guarantor or Borrower and Lender or default of Guarantor or
Borrower, or the exercise by Lender of the right to accelerate the payment of
the maturity of principal and interest, or to exercise any option whatsoever
contained in this Guaranty or any other agreement between Guarantor or Borrower
and Lender, or the arising of any contingency whatsoever, shall entitle Lender
to collect, in any event, interest exceeding the maximum rate of interest
permitted by applicable state or federal law in effect from time to time
hereafter (the "Maximum Legal Rate") and in no event shall Guarantor be
------------------
obligated to pay interest exceeding such Maximum Legal Rate and all agreements,
conditions or stipulations, if any, which may in any event or contingency
whatsoever operate to bind, obligate or compel Guarantor to pay a rate of
interest exceeding the Maximum Legal Rate, shall be without binding force or
effect, at law or in equity, to the extent only of the excess of interest over
such Maximum Legal Rate. In the event any interest is charged in excess of the
Maximum Legal Rate ("Excess"), Guarantor acknowledges and stipulates that any
------
such charge shall be the result of an accident and bona fide error, and such
Excess shall be, first, applied to reduce the principal then unpaid hereunder;
second, applied to reduce the Obligations; and third, returned to Guarantor, it
being the intention of the parties hereto not to enter at any time into a
usurious or otherwise illegal relationship. Guarantor recognizes that, with
fluctuations in the applicable rate on the Obligations and the Maximum Legal
Rate, such an unintentional result could inadvertently occur. By the execution
of this Guaranty, Guarantor covenants that Guarantor shall not seek or pursue
any other remedy, legal or equitable, against Lender, based in whole or in part
upon the contracting, charging or receiving of any interest in excess of the
maximum authorized by applicable law.
If any sum due Lender by Guarantor hereunder is placed in the hands of an
attorney for collection, or is collected through probate, bankruptcy, or other
court proceeding, then Guarantor promises to pay Lender all reasonable costs,
attorneys' fees, and other expenses incurred by Lender pursuant to such
collection efforts.
It is expressly agreed and acknowledged that notwithstanding anything
contained in this Guaranty to the contrary, the liability of Guarantor under
this Guaranty shall be limited to an amount equal to the sum of the following:
(i) Ten Million and No/100 Dollars ($10,000,000.00) (the "Guaranteed
----------
Obligations") plus
----------- ----
(ii) all costs and expenses of any kind incurred by Lender in enforcing
this Guaranty which are incurred by Lender by reason of any default by
Borrower under the
<PAGE>
Loan Agreement, or any instrument or document executed in connection with
or as security for payment of the Obligations or any renewal, extension or
modification thereof (hereinafter referred to as the "Collection
----------
Expenses"); plus
----
(iii) interest that accrues on outstanding, unpaid amount of the
Guaranteed Obligations and Collection Expenses, at the same rate of
interest that accrues on the Obligations and the Collection Expenses under
the terms of the Loan Agreement, from and after the date Lender demands
performance and / or payment by Guarantor hereunder until payment in full
by Guarantor of all sums owing hereunder.
Any and all existing and future indebtedness and/or obligations of Borrower to
Lender and all extensions, renewals and replacements thereof, whether now
existing or hereafter incurred, whether direct, primary, absolute, secondary,
contingent, secured, matured or unmatured, whether from time to time reduced and
thereafter increased, or entirely extinguished and thereafter reincurred,
whether originally contracted with Lender or with another or others, whether or
not evidenced by a negotiable or non-negotiable instrument or any other writing,
and whether contracted by Borrower along or jointly or severally with another or
others, other than the Guaranteed Obligations, are hereinafter referred to as
the "Unguaranteed Obligations". If at any time there exists any Unguaranteed
------------------------
Obligations (i) Lender may at its option, without impairing its rights
hereunder, exercise rights of offset by applying, first, to the Unguaranteed
Obligations any deposit balances to the credit of Borrower, and (ii) apply all
amounts realized by Lender from collateral or security held by Lender for
payment of the Obligations against the amount of the Collection Expenses,
Guaranteed Obligations and/or the Unguaranteed Obligations in such order or
manner as Lender shall determine in its sole discretion.
Notwithstanding anything to the contrary contained in the foregoing provisions
of this Guaranty, but subject to the terms of the next following paragraph, the
Lender shall promptly release Guarantor from its liability hereunder upon
Guarantor providing a request, in writing, of termination of Guarantor's
liability under this Guaranty, so long as the following terms and conditions are
satisfied as of the date of Guarantor's written request:
(i) the Advance Rate (as defined in the Loan Agreement), after giving
effect to the provisions of the Loan Agreement, in general, and the Seventh
Amendment to the Loan Agreement, in particular, shall have been reduced,
pursuant to the terms thereof, from fifty percent (50%) to forty percent
(40%); and
(ii) after giving effect to the reduction to the Advance Rate referenced
in clause (i) preceding, an Overadvance (as defined in the Loan Agreement)
shall not exist.
<PAGE>
Any such termination of this Guaranty pursuant to the preceding paragraph
shall be effective only upon the written acknowledgment of Lender that this
Guaranty has been terminated. In the event that Lender makes demand on
Guarantor under this Guaranty prior to termination as provided above, then this
Guaranty will terminate only upon payment in full by Guarantor of the Guaranteed
Obligations, the Collection Expenses, if any, and accrued interest thereon, in
any.
THIS GUARANTY HAS BEEN NEGOTIATED AND SHALL BE DEEMED TO HAVE BEEN MADE IN THE
STATE OF TEXAS. THIS GUARANTY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE INTERNAL LAWS OF THE STATE OF TEXAS AND NOT THE LAWS OF CONFLICTS OF
THE STATE OF TEXAS. AS PART OF THE CONSIDERATION FOR NEW VALUE AND BENEFIT THIS
DAY RECEIVED BY GUARANTOR, GUARANTOR HEREBY CONSENTS TO THE JURISDICTION OF ANY
STATE OR FEDERAL COURT LOCATED WITHIN DALLAS COUNTY OF THE STATE OF TEXAS AND
WAIVES PERSONAL SERVICE OF ANY AND ALL PROCESS UPON IT AND CONSENTS THAT ALL
SUCH SERVICE OF PROCESS BE MADE BY CERTIFIED OR REGISTERED MAIL DIRECTED TO
GUARANTOR AT THE ADDRESS STATED HEREIN AND SERVICE SO MADE SHALL BE DEEMED TO BE
COMPLETED UPON ACTUAL RECEIPT THEREOF. GUARANTOR WAIVES ANY OBJECTION TO
JURISDICTION AND VENUE OF ANY ACTION INSTITUTED AGAINST IT AS PROVIDED HEREIN
AND AGREES NOT TO ASSERT ANY DEFENSE BASED ON LACK OF JURISDICTION OR VENUE.
EXCEPT AS OTHERWISE PROVIDED FOR IN THIS GUARANTY, GUARANTOR WAIVES THE RIGHT
TO TRIAL BY JURY (WHICH LENDER HEREBY ALSO WAIVES) IN ANY ACTION, SUIT,
PROCEEDING OR COUNTERCLAIM OF ANY KIND ARISING OUT OF OR RELATED TO THIS
GUARANTY OR THE OBLIGATIONS.
THIS WRITTEN GUARANTY, TOGETHER WITH ALL OTHER INSTRUMENTS, AGREEMENTS AND
--------------------------------------------------------------------------
CERTIFICATES EXECUTED BY THE PARTIES IN CONNECTION WITH THE OBLIGATIONS OR WITH
- -------------------------------------------------------------------------------
REFERENCE HERETO OR THERETO, REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES
- ------------------------------------------------------------------------------
AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT
- --------------------------------------------------------------------------------
ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN
- -------------------------------------------------------------------------------
THE PARTIES.
- ------------
<PAGE>
Executed and delivered as of the 9th day of January, 1997.
/s/ CARL H. WESTCOTT
-----------------------
CARL H. WESTCOTT
Address:
- -------
CARL H. WESTCOTT
100 Crescent Court
Suite 1620
Dallas, Texas 75201
Telecopy No. (214) 777-5010
<PAGE>
ANNEX C
-------
RESOLUTIONS OF BOARD OF DIRECTORS
OF
JAYHAWK ACCEPTANCE CORPORATION (THE "COMPANY")
----------------------------------------------
RESOLVED: That the officers of the Company, by the signature of any one or
more of them, be, and the same hereby are, authorized and directed to execute
and deliver to Fleet Capital Corporation ("Fleet"), in the name of and on behalf
-----
of the Company, with such changes in the terms and provisions thereof as the
officer executing same shall, in his sole discretion, deem advisable, a certain
Seventh Amendment to Loan and Security Agreement (the "Amendment"), and to
---------
execute and deliver to Fleet, on behalf of the Company, such promissory notes,
agreements, instruments, statements and other writings as the officer or
officers executing the same may deem desirable or necessary in connection
therewith, and to incur on behalf of the Company the obligations described
therein, and any such papers executed by any of them prior to this time are
approved, ratified and confirmed, and be it
FURTHER RESOLVED: That the Amendment and the other documents executed in the
name and on behalf of the Company by the officers of the Company shall be
presumed conclusively to be the instruments, the execution of which is
authorized by these resolutions, and be it
FURTHER RESOLVED: That the officers of the Company and such employee or
employees of the Company as shall be designated by the officers of the Company
from time to time, by the signature of any one or more of them, be, and the same
hereby are, authorized and directed to execute, in the name of and on behalf of
the Company, the Amendment, and security agreements, financing statements,
assignments, collateral reports, loan statements, confirmations of delivery,
lien statements, pledge certificates, release certificates, removal reports,
guaranties, cross-collateralization agreements and such other writings as are
necessary in their dealings with Fleet, and any such papers executed by any of
them prior to this time are approved, ratified and confirmed; and that the
Secretary and every Assistant Secretary of the Company be, and they severally
hereby are, instructed to provide said Fleet, from time to time, with lists of
the persons who shall have been authorized by the Company to take the above
action; and that the presence of the name of any one of the above persons upon
any such agreement, document or instrument shall be deemed the signature of the
person named, whether actually signed by him or someone else, there being no
obligation on the part of Fleet to
SEVENTH AMENDMENT - Page 2
- -----------------
<PAGE>
certify such signature; and that such designations communicated to Fleet shall
continue in full force and effect until notice of revocation thereof is
communicated to Fleet at least ten (10) days prior to the effective date of
termination of such authority, and be it
FURTHER RESOLVED: That the Secretary or any Assistant Secretary of the
Company, by the signature of any one or more of them, be, and the same hereby
are, authorized and directed to attest the execution by the Company of the
papers signed pursuant to these resolutions, to affix the seal of the Company
thereto, and to certify to Fleet the adoption of these resolutions.
SEVENTH AMENDMENT - Page 3
- -----------------
<PAGE>
Exhibit 10.30
SECURITY AGREEMENT
------------------
This Security Agreement (the "Agreement") is entered into as of the 13th
day of January, 1997, by and between Jayhawk Medical Acceptance Corporation, a
Texas corporation (herein referred to as "Debtor"), and Carl H. Westcott (herein
referred to as "Secured Party").
Introductory Provisions:
-----------------------
The following provisions are true and correct and are a part of this
Agreement:
A. Debtor has executed a Promissory Note dated October 1, 1996, payable
to the order of NationsBank of Texas, N.A. (the "Bank") in the face amount of
$15,000,000 (the "Note").
B. Secured Party has executed a Continuing and Unconditional Guaranty
dated October 1, 1996, in favor of Bank (the "Guaranty"), pursuant to which
Secured Party guaranteed the payment when due of all indebtedness of Debtor to
Bank, including, without limitation, the obligations of Debtor to Bank under the
Note.
C. The execution of this Agreement by Debtor is a condition to Secured
Party guaranteeing future advances by Bank under the Note or otherwise.
D. In order to secure the payment by Debtor of the Obligations (as herein
defined below), Debtor desires to grant a security interest in and to certain
property of Debtor to Secured Party pursuant to the terms and conditions hereof.
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged and confessed, the parties hereto agree as follows:
1. CERTAIN DEFINITIONS. Unless otherwise defined herein, or the context
-------------------
hereof otherwise requires, each term defined in the Uniform Commercial Code of
the State of Texas (the "Code") is used in this agreement with the same meaning;
provided that if any definition given a term in Chapter 9 of the Code conflicts
- -------- ----
with the definition given that term in any other chapter of the Code, the
Chapter 9 definition shall prevail.
2. SECURITY INTEREST AND COLLATERAL. Debtor hereby grants to Secured
--------------------------------
Party a security interest in the following property (all of the following being
herein sometimes referred to as the "Collateral"):
a. Whether now owned or hereafter acquired by Debtor, wherever located,
all present and future accounts, general intangibles, chattel paper,
documents, instruments, inventory, equipment, fixtures, other goods,
minerals, money, installment contracts, and deposit accounts.
<PAGE>
b. The balance of every deposit account of Debtor and any claim of Debtor
against Secured Party, now or hereafter existing, whether liquidated
or unliquidated.
c. All present and future increases, profits, combinations,
reclassifications, improvements, and products of, accessions,
attachments, and other additions to, tools, parts, and equipment used
in connection with, and substitutes and replacements for, all or part
of the Collateral heretofore described.
d. All present and future accounts, general intangibles, chattel paper,
documents, instruments, cash and noncash proceeds, and other rights
arising from or by virtue of, or from the voluntary or involuntary
sale or other disposition of, or collections with respect to, or
insurance proceeds payable with respect to, or proceeds payable by
virtue of warranty or other claims against manufacturers of, or claims
against any other person or entity with respect to, all or any part of
the Collateral heretofore described in this subparagraph or otherwise.
e. All present and future security for the payment to Debtor of any of
the Collateral heretofore described and goods which gave or will give
rise to any of such Collateral or are evidenced, identified, or
represented therein or thereby; provided that the description of
-------- ----
Collateral contained in this Paragraph 2(e) shall not be deemed to
--------------
permit any action prohibited by this agreement or by terms
incorporated in this agreement.
3. THE OBLIGATION. The security interest herein granted shall secure
--------------
full payment and performance of any claim, right or remedy which Secured Party
may now have or hereafter acquire against Debtor that arises under the Guaranty
and/or from the performance by Secured Party thereunder including, without
limitation, any claim, remedy or right of subrogation, reimbursement,
exoneration, contribution, indemnification, or participation in any claim, right
or remedy of Bank against Debtor or against any security which Bank now has or
hereafter acquires, whether or not such claim arises in equity, under contract,
by statute, under common law or otherwise (the "Obligation").
4. REPRESENTATIONS AND WARRANTIES OF DEBTOR. Debtor represents and
----------------------------------------
warrants that: (a) Debtor is the owner of the Collateral; (b) Debtor has
authority to execute and deliver this Agreement; (c) no financing statement or
amendment or renewal of any financing statement covering the Collateral, or any
part thereof, has been filed and not fully released or completely expired,
except any financing statement showing Secured Party as the sole secured party
thereon; (d) no security agreement covering the Collateral, or any part thereof,
has been made and not fully released, except any security agreement with regard
to which Secured Party is the sole secured party; (e) no security interest in or
encumbrance on the Collateral, or any part thereof, exists, except any security
interest or encumbrance in favor of Secured Party; and (f) no dispute, right of
setoff, counterclaim, or defense exists with respect to all or any part of the
Collateral.
5. COVENANTS OF DEBTOR. So long as any part of the Obligation remains
-------------------
unpaid or unperformed, Debtor covenants and agrees to: (a) use the Collateral
with reasonable care, skill, and caution; (b) keep the tangible Collateral in
good repair, working order and condition, and promptly make all necessary
repairs and replacements to that end; (c) keep the Collateral properly
sheltered, and prevent the same from becoming damaged, injured, or depreciated;
(d) pay, before delinquent, all taxes and other assessments lawfully levied
against all or any of the Collateral; (e) keep the Collateral fully insured in
such amounts,
2
<PAGE>
against such risks, and with such insurers as may be satisfactory to Secured
Party, and at any time, at the request of Secured Party, furnish to Secured
Party satisfactory proof of maintenance of such insurance and the payment of
premiums thereon, and, if requested by Secured Party, deposit with the latter
the policies or certificates evidencing such insurance, provided that in the
event of a breach by Debtor of any of the provisions of this clause, Secured
Party may at its option maintain insurance on only Secured Party's interest in
the Collateral, any cost incurred thereby by Secured Party to be part of the
Obligation; (f) from time to time, and at any time, promptly execute and deliver
to Secured Party all other assignments, certificates, supplemental documents,
and financing statements, and do all other acts or things as Secured Party may
reasonably request in order to more fully evidence and perfect the security
interest herein created; (g) punctually and properly perform all of the
covenants, duties, obligations and liabilities of Debtor under the Note, and any
other agreement now or hereafter existing as security for or in connection with
the payment and performance of the Obligation or the Note, or any part thereof;
(h) promptly furnish such information as Secured Party may reasonably request
concerning the Collateral; (i) allow Secured Party to inspect the Collateral and
all records of any of Debtor relating thereto or to the Obligation, and to make
and take away copies of such records; (j) promptly notify Secured Party of any
change in any fact or circumstance warranted or represented by Debtor herein, or
in any other document furnished to Secured Party in connection with the
Collateral or the Obligation; (k) promptly notify Secured Party of any claim,
action, or proceeding affecting title to the Collateral, or any part thereof, or
the security interest herein created and, at the request of Secured Party,
appear in and defend, at Debtor's expense, any such action or proceeding; (l)
promptly, after being requested by Secured Party, pay to Secured Party the
amount of all reasonable expenses, reasonable attorneys' fees and other legal
expenses incurred by Secured Party in enforcing the Obligation and the security
interest herein created; (m) not, without the prior written consent of Secured
Party, lease, sell, assign, furnish under any contract of service, transfer,
abandon, or otherwise dispose of the Collateral; (n) not, without the prior
written consent of Secured Party, create any security interest in, mortgage, or
otherwise encumber the Collateral, or any part thereof, or permit the same to be
or become subject to any lien, attachment, execution, sequestration, or other
legal or equitable process, or any encumbrance of any kind or character, except
any solely in favor of Secured Party; (o) not use the Collateral, or permit the
same to be used, for any unlawful purpose or in any manner inconsistent with the
provisions or requirements of any insurance policy required hereunder; and (p)
not move or allow the Collateral, or any part thereof, to be moved across any
state boundary before (i) notice describing the current location, the proposed
removal and the proposed new location is given to and received by Secured Party
seven days in advance of a proposed removal and (ii) written consent of Secured
Party to the removal of such Collateral in such manner and to such location is
received by Debtor.
6. DEFAULT. The occurrence of any of the following events shall at the
-------
option of Secured Party (or automatically upon the occurrence of an event
described in clause (f) below of this Section 6) constitute an event of default
---------
(an "Event of Default") under this Agreement: (a) the failure to timely pay or
----------------
perform any obligations contained in the Note; (b) the failure or refusal of
Debtor to timely pay the Obligation, or any part thereof; (c) the occurrence of
an event of default under that certain Agreement dated October 1, 1996, by and
between Debtor and Bank; (d) any representation or warranty made by Debtor (or
any of its officers) under or in connection with this Agreement which shall
prove to have been incorrect in any material respect when made, or any failure
by Debtor to perform or observe any term, covenant or agreement contained in
this Agreement on its part to be performed or observed, which default or
nonperformance remains unremedied for a period of five (5) days after Debtor
receives notice thereof from Secured Party; or (f) Debtor shall (I) become
insolvent within the meaning of the Bankruptcy Code of the United States, as
amended, (II) admit in writing its or his inability to pay or otherwise fail to
pay its or his debts generally as they become due, or (III) suffer the
appointment of a receiver, trustee, custodian or similar
3
<PAGE>
fiduciary, or shall make an assignment for the benefit of creditors, or any
petition for an order for relief shall be filed by or against Debtor under the
Bankruptcy Code (if against Debtor, the continuation of such proceeding for more
than 30 days), or Debtor shall make any offer of settlement, extension or
composition to their respective unsecured creditors generally.
7. REMEDIES. Upon the occurrence of a Default, in addition to any and
--------
all other rights and remedies which Secured Party may then have hereunder, under
the Code or otherwise, Secured Party at its option may: (a) enter upon the
premises where any of the Collateral is located and take possession thereof and
remove the same, with or without judicial process; (b) reduce its claim to
judgment, foreclose or otherwise enforce its security interest in all or any
part of the Collateral by any available judicial procedure; (c) after
notification, if any, provided for in Paragraph 8 hereof, sell, lease, or
-----------
otherwise dispose of, at the office of Secured Party, on the premises of Debtor
or elsewhere, as chosen by Secured Party, all or any part of the Collateral, in
its then condition or following any commercially reasonable preparation or
processing, and any such sale or other disposition may be as a unit or in
parcels, by public or private proceedings, and by way of one or more contracts
(it being agreed that the sale of any part of the Collateral shall not exhaust
Secured Party's power of sale, but sales may be made from time to time, and at
any time, until all of the Collateral has been sold or until the Obligation has
been paid or performed in full), and at any such sale it shall not be necessary
to exhibit the Collateral; (d) at Secured Party's discretion, surrender any
policies of insurance on the Collateral and receive and apply the unearned
premiums as a credit on the Obligation, and, in connection therewith, Debtor
hereby appoints Secured Party as the agent and attorney-in-fact for Debtor to
collect such premiums, Secured Party to exercise such power at its sole
discretion; (e) at Secured Party's discretion, retain the Collateral in
satisfaction of the Obligation whenever the circumstances are such that Secured
Party is entitled to do so under the Code; (f) apply the proceeds of any sale or
other disposition of the Collateral in the following order: first, to the
payment of all of its reasonable expenses (including, but not limited to, the
cost of any insurance, payment of taxes or other charges, and reasonable
attorneys' fees and other legal expenses) incurred in retaking, holding,
operating, preparing and preserving the Collateral or any part thereof for
sale(s) or other disposition, in arranging for such sale(s) or other
disposition, and in actually selling the same; next, to the payment of the
balance of the Obligation in such order and manner as Secured Party, in its
discretion, may deem advisable; and last, Secured Party shall account to Debtor
for any surplus, payment of which surplus to Debtor shall discharge Secured
Party with regard to Debtor; provided that Secured Party shall not be required
to account to Debtor for, and shall be entitled to retain, all such surplus, if
any, until such time as all of the Obligation shall have been discharged in full
and no part of the Obligation, whether matured or to arise in the future, shall
remain undischarged; and (g) exercise any and all other rights, remedies and
privileges it may have hereunder or under the Guaranty.
8. NOTICE OF SALE. Reasonable notification of the time and place of any
--------------
public sale of the Collateral, or reasonable notification of the time after
which any private sale or other intended disposition of the Collateral is to be
made, shall be sent to Debtor and to any other person entitled under the Code to
notice; provided, that if the Collateral is perishable, threatens to decline
speedily in value, or is of a type customarily sold on a recognized market,
Secured Party may sell or otherwise dispose of the Collateral without
notification, advertisement, or other notice of any kind. It is agreed that
notice sent or given not less than ten calendar days prior to the taking of the
action to which the notice relates, is reasonable notification and notice for
the purposes of this paragraph.
9. MISCELLANEOUS.
-------------
4
<PAGE>
(a) Should any part of the Collateral come into the possession of Secured
Party, whether before or after Default, Secured Party may use or operate the
Collateral for the purpose of preserving it or its value or pursuant to the
order of a court of appropriate jurisdiction, or in accordance with any other
rights held by Secured Party in respect of the Collateral. Debtor covenants to
promptly reimburse and pay to Secured Party, at Secured Party's request, the
amount of all reasonable expenses (including, but not limited to, the cost of
any insurance, payment of taxes or other charges and reasonable attorney's fees
and other legal expenses) incurred by Secured Party in connection with its
custody, preservation, use or operation of the Collateral, and, all such
expenses, costs, taxes and other charges shall be a part of the Obligation and
shall bear interest at the highest lawful rate from the date incurred until the
date repaid to Secured Party. It is agreed, however, that the risk of loss or
damage to the Collateral is on Debtor, and Secured Party shall have no liability
whatever for failure to obtain or maintain insurance or for failure to determine
whether any insurance ever in force is adequate as to the amount or as to risks
insured.
(b) Secured Party shall have the right at any time to execute and file
this Agreement as a financing statement, but the failure of Secured Party to do
so shall not impair the validity or enforceability of this Agreement.
(c) All rights and remedies of Secured Party hereunder are cumulative of
each other and of every other right or remedy which Secured Party may otherwise
have at law or in equity or under any other contract or document for the
enforcement of the security interest herein or the collection of, or enforcement
of the security interest herein or the collection of, or enforcement of the
performance of, the Obligation, and the exercise of one or more rights or
remedies shall not prejudice or impair the concurrent or subsequent exercise of
other rights or remedies or a further or other exercise of the same right or
remedy.
(d) Debtor shall not be permitted to take or fail to take any action which
is permitted as an exception to any of the covenants contained herein or which
is within the permissible limits of any of the covenants contained herein if
such action or omission would result in the breach of any other covenant
contained herein.
(e) Whenever herein the singular number is used, the same shall include
the plural where appropriate, and words of any gender shall include each other
gender where appropriate.
(f) All notices, demands, requests and other communications required or
permitted hereunder must be in writing to be effective and shall be deemed to
have been given when actually received, or if earlier and regardless of whether
actually received (except where receipt is specified herein), upon deposit in a
regularly maintained receptacle for the United States mail, registered or
certified, postage prepaid, addressed to the addressee at its address set forth
below (provided that nothing in this subparagraph shall extend the notice period
set out in Paragraph 8 hereof):
-----------
Debtor: Jayhawk Medical Acceptance Corporation
Two Galleria Tower, Suite 1800
13455 Noel Road
Dallas, Texas 75240
5
<PAGE>
Secured Party: Carl H. Westcott
100 Crescent Court
Suite 1620
Dallas, Texas 75201
or to such other address as any party hereto shall hereafter designate by
written notice delivered in accordance with this subsection and actually
received by the addressed party.
(g) This Agreement is being executed and delivered in, and is intended to
be performed in, the State of Texas, and the laws of the State of Texas shall
govern the validity, construction, enforcement, and interpretation of this
Agreement.
(h) If any provision of this Agreement is held to be illegal, invalid, or
unenforceable under present or future laws effective during the term of this
Agreement, the legality, validity, and enforceability of the remaining
provisions of this Agreement shall not be affected thereby, and in lieu of each
such illegal, invalid, or unenforceable provision there shall be added
automatically as a part of this Agreement a provision as similar in terms to
such illegal, invalid, or unenforceable provision as may be possible and be
legal, valid, and enforceable.
(i) With respect to any of the Collateral which is or becomes accounts,
instruments or chattel paper, Secured Party, without notice to Debtor, shall be
entitled, but not obligated, at any time and from time to time, to notify and
direct the account debtor or obligor thereon to thereafter make all payments on
such Collateral directly to Secured Party, regardless of whether Debtor was
previously making collections thereon. Each account debtor and obligor making
payment to Secured Party hereunder shall be fully protected in relying on the
written statement of Secured Party that it then holds the security interest(s)
which entitle it to receive such payment, and the receipt of Secured Party for
such payment shall be full acquittance therefor to the one making such payment.
(j) This Agreement has been executed in a number of identical
counterparts, each of which, for all purposes, is to be deemed an original, and
all of which collectively constitute one agreement, but in making proof of this
Agreement, it shall not be necessary to produce or account for more than one
such counterpart.
(k) All covenants, agreements, undertakings, representations and
warranties made herein shall survive all closings hereunder unless and except as
otherwise indicated, and shall not be affected by any investigation made by any
party.
(l) This Agreement shall be binding upon and inure to the benefit of
Debtor, its successors and permitted assigns, and shall insure to the benefit of
Secured Party and its successors and assigns.
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed in multiple original counterparts as of the day, month and year
first above written.
DEBTOR:
JAYHAWK MEDICAL ACCEPTANCE CORPORATION
By: /s/ FRED JACKSON
----------------------------------------------
Title: Chief Financial Officer
-------------------------------------------
SECURED PARTY:
/s/ CARL H. WESTCOTT
-------------------------------------------------
CARL H. WESTCOTT
7
<PAGE>
EXHIBIT 10.31
PROMISSORY NOTE
$1,050,000 February 11, 1997
As hereinafter stated, for value received Jayhawk Medical Acceptance
Corporation promises to pay to the order of Carl Westcott in Dallas, Texas the
sum of One Million Fifty Thousand Dollars, payable on demand with interest at
the rate of prime per annum from the date of this Promissory Note. This
Promissory Note may be prepaid at any time without penalty. Amounts due under
this Promissory Note from and after it is due shall bear interest at the highest
lawful rate.
We, the makers, sureties, endorsers and guarantors of this Promissory Note,
hereby severally waive presentment for payment, notice of nonpayment, protest
and notice of protest and diligence of bringing suit for collection, and consent
that time of payment may be extended without notice thereof to any of the
makers, sureties, endorsers or guarantors of this Promissory Note. It is
further expressly agreed that if this Promissory Note is placed in the hands of
an attorney for collection, or suit is brought on same, or is collected through
the Probate Court, then, and in that event, the makers, sureties, endorsers and
guarantors will pay the holder of this Promissory Note the costs of collection,
including but not limited to the attorney's fees, incurred by the holder of this
Promissory Note.
MAKER: /s/ Douglas Theodore
-----------------------------------------
By: Douglas Theodore for
Jayhawk Medical Acceptance
<PAGE>
EXHIBIT 10.32
PROMISSORY NOTE
$900,000 February 18, 1997
As hereinafter stated, for value received Jayhawk Medical Acceptance
Corporation promises to pay to the order of Carl Westcott in Dallas, Texas the
sum of Nine Hundred Thousand Dollars, payable on demand with interest at the
rate of prime per annum from the date of this Promissory Note. This Promissory
Note may be prepaid at any time without penalty. Amounts due under this
Promissory Note from and after it is due shall bear interest at the highest
lawful rate.
We, the makers, sureties, endorsers and guarantors of this Promissory Note,
hereby severally waive presentment for payment, notice of nonpayment, protest
and notice of protest and diligence of bringing suit for collection, and consent
that time of payment may be extended without notice thereof to any of the
makers, sureties, endorsers or guarantors of this Promissory Note. It is
further expressly agreed that if this Promissory Note is placed in the hands of
an attorney for collection, or suit is brought on same, or is collected through
the Probate Court, then, and in that event, the makers, sureties, endorsers and
guarantors will pay the holder of this Promissory Note the costs of collection,
including but not limited to the attorney's fees, incurred by the holder of this
Promissory Note.
MAKER: /s/ Douglas Theodore
-----------------------------------------
Jayhawk Medical Acceptance
By: Douglas Theodore
<PAGE>
EXHIBIT 10.33
PROMISSORY NOTE
$1,000,000 February 26, 1997
As hereinafter stated, for value received Jayhawk Medical Acceptance
Corporation promises to pay to the order of Carl Westcott in Dallas, Texas the
sum of One Million Dollars, payable on demand with interest at the rate of prime
per annum from the date of this Promissory Note. This Promissory Note may be
prepaid at any time without penalty. Amounts due under this Promissory Note
from and after it is due shall bear interest at the highest lawful rate.
We, the makers, sureties, endorsers and guarantors of this Promissory Note,
hereby severally waive presentment for payment, notice of nonpayment, protest
and notice of protest and diligence of bringing suit for collection, and consent
that time of payment may be extended without notice thereof to any of the
makers, sureties, endorsers or guarantors of this Promissory Note. It is
further expressly agreed that if this Promissory Note is placed in the hands of
an attorney for collection, or suit is brought on same, or is collected through
the Probate Court, then, and in that event, the makers, sureties, endorsers and
guarantors will pay the holder of this Promissory Note the costs of collection,
including but not limited to the attorney's fees, incurred by the holder of this
Promissory Note.
MAKER: /s/ Douglas Theodore
-----------------------------------------
By: Douglas Theodore for
Jayhawk Medical Acceptance
<PAGE>
EXHIBIT 10.34
PROMISSORY NOTE
$1,000,000 March 4, 1997
As hereinafter stated, for value received Jayhawk Medical Acceptance
Corporation promises to pay to the order of Carl Westcott in Dallas, Texas the
sum of One Million Dollars, payable on demand with interest at the rate of prime
per annum from the date of this Promissory Note. This Promissory Note may be
prepaid at any time without penalty. Amounts due under this Promissory Note
from and after it is due shall bear interest at the highest lawful rate.
We, the makers, sureties, endorsers and guarantors of this Promissory Note,
hereby severally waive presentment for payment, notice of nonpayment, protest
and notice of protest and diligence of bringing suit for collection, and consent
that time of payment may be extended without notice thereof to any of the
makers, sureties, endorsers or guarantors of this Promissory Note. It is
further expressly agreed that if this Promissory Note is placed in the hands of
an attorney for collection, or suit is brought on same, or is collected through
the Probate Court, then, and in that event, the makers, sureties, endorsers and
guarantors will pay the holder of this Promissory Note the costs of collection,
including but not limited to the attorney's fees, incurred by the holder of this
Promissory Note.
MAKER: /s/ Douglas Theodore
-----------------------------------------
By: Douglas Theodore
For Jayhawk Medical Acceptance Corporation
<PAGE>
Exhibit 10.35
SECURITY AGREEMENT
------------------
THIS SECURITY AGREEMENT (this "Agreement") dated as of March 6, 1997, is by
---------
and between JAYHAWK MEDICAL ACCEPTANCE CORPORATION, a Texas corporation
("Pledgor") and CARL H. WESTCOTT (the "Secured Party").
- --------- -------------
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, Pledgor has borrowed funds from Secured Party and in connection
with such borrowed funds, Pledgor has executed and delivered to Secured Party
four notes, one of which is dated February 11, 1997, in the original principal
amount of One Million Fifty Thousand Dollars ($1,050,000), one of which is dated
February 18, 1997, in the original principal amount of Nine Hundred Thousand
Dollars ($900,000), one of which is dated February 26, 1997, in the original
principal amount One Million Dollars ($1,000,000) and one of which is dated
March 4, 1997, in the original principal amount of One Million Dollars
($1,000,000); and
WHEREAS, Pledgor has borrowed funds from NationsBank of Texas, N.A.
("NationsBank") and in connection with such borrowed funds, Pledgor has executed
and delivered to NationsBank a note, dated October 1, 1996, in the original
principal amount of Fifteen Million Dollars ($15,000,000) and subsequent to the
execution of such note, NationsBank assigned its rights in and to the note to
Secured Party (this assigned note, together with the notes in the original
principal amounts of $1,050,000, $900,000, $1,000,000 and $1,000,000, as each
may be modified, amended or restated, and any subsequent promissory note that
may be delivered in the future by Pledgor to Secured Party, shall be
collectively referred to as the "Notes"); and
-----
WHEREAS, Secured Party has requested that Pledgor execute and deliver to
Secured Party this Agreement to secure the obligation.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Pledgor and Secured Party hereby
agree as follows:
1. Incorporation of Notes. The Notes, and the terms and provisions
----------------------
thereof are hereby incorporated herein in their entirety.
2. Certain Definitions. As used herein, the following terms have the
-------------------
meanings indicated:
"Accounts Receivable" shall mean any "account", as such term is
-------------------
defined in the UCC, now owned or hereafter acquired by Pledgor and, in any
event, shall include, without limitation, all accounts, accounts
receivable, other receivables, contract rights, chattel paper, instruments,
documents, notes, purchase orders, receipts and other forms of obligations
now owned or hereafter received or acquired by or belonging or owing to
Pledgor (including, without limitation, under any trade names, styles or
divisions thereof) whether arising out of goods sold or services rendered
by Pledgor or from any other transaction, and all of Pledgor's
<PAGE>
rights to any goods represented by any of the foregoing, and all rights to the
payment of money, including but not limited to tax refunds and insurance
proceeds.
"Chattel Paper" shall mean any "chattel paper", as such term is defined in
-------------
the UCC, now owned or hereafter acquired by Pledgor.
"Collateral" shall have the meaning assigned to such term in Section 3 of
---------- ---------
this Agreement.
"Contracts" shall mean all contracts, licenses, undertakings or other
---------
agreements in or under which Pledgor may now or hereafter have any right, title
or interest, including, without limitation, (a) with respect to an Account
Receivable, any agreement relating to the terms of payment or the terms of
performance thereof, and (b) all lease agreements relating to Real Property or
personal property and any and all related agreements.
"Documents" shall mean any "documents", as such term is defined in the UCC,
---------
now owned or hereafter acquired by Pledgor, including, but not limited to all
files, records, books, ledger cards, computer programs, tapes, disks and related
electronic data processing software.
"Equipment" shall mean any "equipment", as such term is defined in the UCC,
---------
now owned or hereafter acquired by Pledgor and, in any event, shall include,
without limitation, all machinery, equipment, furnishings, fixtures, vehicles,
trucks, automobiles, tools, dies, computers and office equipment now owned or
hereafter acquired by Pledgor and any and all additions, substitutions and
replacements of any of the foregoing, wherever located, together with all
attachments, components, parts, equipment and accessories installed thereon or
affixed thereto.
"Event of Default" shall mean:
----------------
(a) Pledgor shall fail to pay any principal, interest or other amounts when
due and payable or declared due and payable (whether at maturity, by
acceleration or otherwise) under any one or more of the Notes;
(b) Pledgor shall fail or neglect to perform, keep or observe any
provision, condition, covenant or warranty contained in any one or more of the
Notes or in this Agreement;
(c) There shall occur any material uninsured damage to, or loss, theft, or
destruction of, any of the Collateral (as defined below);
(d) A judgment or judgments for the payment of money in excess of $50,000
in the aggregate shall be rendered against Pledgor and any such judgment or
judgments shall, if unsatisfied, remain unstayed for a period in excess of
thirty (30) days;
2
<PAGE>
(e) The Collateral or any assets of Pledgor are attached, seized, levied
upon or subjected to a writ or distress warrant, or come within the possession
of any receiver, trustee, custodian or assignee for the benefit of creditors and
the same is not cured within thirty (30) days thereafter; an application is made
by any person, other than Pledgor, for the appointment of a receiver, trustee,
or custodian for Pledgor's assets and the same is not dismissed within thirty
(30) days after the application therefor;
(f) An application is made by Pledgor for the appointment of a receiver,
trustee or custodian for any of Pledgor's assets; a petition under any section
or chapter of the Bankruptcy Code or any similar law or regulation shall be
filed by Pledgor; or Pledgor shall make an assignment for the benefit of its
creditors or any case or proceeding is filed by Pledgor for its dissolution,
liquidation, or termination;
(g) Pledgor shall be enjoined, restrained or in any way prevented by court
order from conducting all or any material part of its business affairs; a
petition under any section or chapter of the Bankruptcy Code or any similar law
or regulation is filed against Pledgor or any case or proceeding is filed
against Pledgor for its dissolution or liquidation, and such injunction,
restraint or petition is not dismissed within thirty (30) days after the entry
or filing thereof; or
(h) A notice of lien, levy or assessment is filed of record with respect to
all or any of Pledgor's assets by the United States, or any department, agency
or instrumentality thereof, or by any state, county, municipal or other
governmental agency, including, without limitation, the Pension Benefit Guaranty
Corporation, or if any taxes or debts owing at any time or times hereafter to
any one of these becomes a lien or encumbrance upon any of Pledgor's assets and
the same is not released within thirty (30) days after the same becomes a lien
or encumbrance.
"Intangible Assets" shall mean any "general intangibles", as such term is
-----------------
defined in the UCC, now owned or hereafter acquired by Pledgor and, in any
event, shall include, without limitation, all right, title and interest which
Pledgor may now or hereafter have in or under all licenses, customer lists,
trade names, assumed names, rights in intellectual property, permits, service
marks, service mark applications, patents, patent applications, telephone
numbers and listings of Pledgor, copyrights, trade secrets, proprietary or
confidential information, inventions (whether patented or patentable or not),
technical information, procedures, designs, knowledge, know-how, software, data
bases, data, skill, expertise, experience, processes, models, drawings,
materials, books, records, tax refunds, prepaid expenses, rights under
capitalized leases, lease agreements relating to Real Property or personal
property, rental contracts, lease-purchase agreements and related agreements,
goodwill and rights of indemnification now owned or hereafter acquired by
Pledgor.
"Instruments" shall mean any "instrument", as such term is defined in the
-----------
UCC, now owned or hereafter acquired by Pledgor.
"Inventory" shall mean any "inventory", as such term is defined in the UCC,
---------
now owned or hereafter acquired by Pledgor and, in any event, shall include,
without limitation,
3
<PAGE>
all inventory, merchandise, goods and other personal property now owned or
hereafter acquired by Pledgor which are held for sale, rental or lease or
are furnished or are to be furnished under a contract of service or which
constitute raw materials, work in process or materials used or consumed in
the processing, packaging, delivery or shipping of the same, and all
finished goods, and all parts and products thereof, all accessories
thereto, and all documents therefor.
"Proceeds" shall mean "proceeds", as such term is defined in the UCC
--------
and, in any event, shall include, without limitation, (a) any and all
proceeds of any insurance, indemnity, warranty or guaranty payable to
Pledgor from time to time with respect to any of the Collateral, (b) any
and all payments made or due and payable to Pledgor from time to time in
connection with any requisition, confiscation, condemnation, seizure or
forfeiture of all or any part of the Collateral by any governmental body,
authority, bureau or agency (or any person acting under color of
governmental authority), (c) any and all other amounts from time to time
paid or payable under or in connection with any of the Collateral, and (d)
any cash, deposits, securities, instruments, documents, policies and
certificates of insurance.
"Real Property" shall mean all right, title and interest now or
-------------
hereafter held by Pledgor (whether in fee, under leasehold or otherwise) to
or in any real property.
"Secured Obligations" shall mean all of Pledgor's liabilities,
-------------------
obligations, covenants, agreements and indebtedness to Secured Party of any
and every kind and nature, whether arising under the Notes, this Agreement,
or any other promissory note, instrument or document (including any
amendments, restatements, extensions, renewals or other modifications of
any of the foregoing) or otherwise, now or hereafter owing, arising, due,
or payable from Pledgor to Secured Party and howsoever evidenced, created,
incurred, acquired or owing, whether primary, secondary, direct,
contingent, fixed or otherwise, including obligations of performance.
"UCC" shall mean the Uniform Commercial Code as the same may, from time
---
to time, be in effect in the State of Texas; provided, however, in the
event that, by reason of mandatory provisions of law, any or all of the
attachment, perfection or priority of Secured Party's security interest in
any Collateral is governed by the Uniform Commercial Code as in effect in a
jurisdiction other than the State of Texas the term "UCC" shall mean the
Uniform Commercial Code as in effect in such other jurisdiction for
purposes of the provisions hereof relating thereto.
3. Grant of Security Interest. As collateral security for the prompt and
--------------------------
complete payment and performance when due (whether at stated maturity, by
acceleration or otherwise) of all the Secured Obligations, Pledgor hereby
assigns, conveys, mortgages, pledges, hypothecates and transfers to Secured
Party and hereby grants to Secured Party a continuing security interest in all
of Pledgor's right, title and interests in and to all of the following property
and interests in property of Pledgor, whether now owned or existing, hereafter
acquired or arising, or in which Pledgor now or hereafter has any rights,
wheresoever located: all Accounts Receivable, Chattel Paper, Contracts,
Documents, Equipment, Intangible Assets, Instruments, Inventory, Real Property,
cash, and all books and records relating to each of the foregoing (including,
without limitation, all data processing
4
<PAGE>
records, computer software, computer programs and other computer materials and
records), and to the extent not otherwise included, all Proceeds of each of the
foregoing and all accessions to, substitutions, additions, products, proceeds
and replacements for, and rents, profits and products of each of the foregoing
(all of the foregoing being hereinafter collectively referred to as the
"Collateral"). The assignments and security interests granted herein are made
- -----------
as security only and shall not subject Secured Party to, or transfer or in any
way affect or modify, any obligation of Pledgor with respect to any of the
Collateral or any transaction involving or giving rise thereto.
4. Rights of Secured Party; Limitations on Secured Party's Obligations.
-------------------------------------------------------------------
It is expressly agreed by Pledgor that, anything herein to the contrary
notwithstanding, Pledgor shall remain liable under each of its Contracts and
other Collateral to observe and perform all the conditions and obligations to be
observed and performed by it thereunder. Secured Party shall not have any
obligation or liability under any Contract or other Collateral by reason of or
arising out of this Agreement or the granting to Secured Party of a security
interest therein or the receipt by Secured Party of any payment relating
thereto, nor shall Secured Party be required or obligated in any manner to
perform or fulfill any of the obligations of Pledgor under or pursuant thereto,
or to make any inquiry as to the nature of the sufficiency of any payment
received by it or the sufficiency of any performance by any party thereunder, or
to present or file any claim, or to take any action to collect or enforce any
performance or the payment of any amounts which may have been assigned to it or
to which it may be entitled at any time or times.
5. Representations and Warranties. Pledgor represents and warrants to
------------------------------
Secured Party, as of the date hereof and continuously, all of which
representations and warranties shall survive indefinitely, that:
(a) Pledgor is a corporation duly formed, validly existing and in good
standing under the laws of the state of its corporation; is duly qualified to
transact business in each jurisdiction where the nature and extent of its
business and properties require the same and where the failure to be so
qualified would result in a material adverse effect on Pledgor; and possesses
all requisite authority, power, licenses, permits and franchises to conduct its
business and to execute, deliver and comply with the terms of this Agreement and
the Notes.
(b) Pledgor has taken all requisite corporate action(s) to authorize
the execution and delivery of this Agreement and the Notes, consummate all
transactions contemplated thereby, and perform and discharge all obligations
thereunder. This Agreement and the Notes, when executed and delivered by all
parties thereto, will constitute the valid, legal and binding obligations of
Pledgor, enforceable against Pledgor in accordance with their terms.
(c) Pledgor is the sole owner of each item of the Collateral in which
it purports to grant a security interest hereunder, having good and marketable
title thereto, free and clear of any and all liens and encumbrances.
(d) No effective security agreement, financing statement, equivalent
security or lien instrument or continuation statement covering all or any part
of the Collateral is on file or of record in any public office, except such as
may have been filed by Pledgor in favor of Secured Party.
5
<PAGE>
(e) Upon the filing of UCC financing statements with the Secretary of
State of the State of Texas and upon Secured Party obtaining possession of all
Instruments and Chattel Paper of the Pledgor, this Agreement will be effective
to create a valid and continuing lien on and perfected first priority security
interest in the Collateral prior to all other liens and security interests. All
action necessary or desirable to protect and perfect such security interest in
each item of the Collateral has been duly taken.
(f) Pledgor is not in default hereunder or under any of the Notes.
(g) Pledgor's principal place of business, chief executive office and
location where its records concerning the Collateral is kept is Two Galleria
Tower, Suite 1800, Dallas, Texas 75240. All offices and places of business of
Pledgor and all locations of Collateral are as described on Schedule 5(g) hereof
-------------
(collectively the "Collateral Locations"), which Schedule sets forth (i) the
--------------------
complete address for each such Collateral Location, (ii) identifies whether each
such Collateral Location is used by Pledgor as an office, warehouse, and/or
service center and (iii) provides a description of the lease pertaining to such
Collateral Location, including, the term, rental payment obligations and full
name and address of the landlord.
(h) Pledgor has complied with all laws, rules, regulations and orders
applicable to the operation of the business as conducted by Pledgor, the
noncompliance with which would result in a material adverse effect on Pledgor.
(i) Pledgor is not engaged in or threatened with any legal proceeding
and there are no proceedings, claims or investigations of any kind pending or
threatened against Pledgor, and Pledgor does not know of any basis or grounds
therefor. There are no outstanding adjudication orders of any agency or
tribunal against Pledgor.
6. Certain Covenants. Until the Notes are paid and performed in full,
-----------------
Pledgor covenants and agrees with Secured Party as follows:
(a) Financing Statements and Further Documentation. At any time and
----------------------------------------------
from time to time, upon the request of Secured Party, and at the sole expense of
Pledgor, Pledgor shall promptly execute and deliver all such further instruments
and documents and take such further action as Secured Party may reasonably deem
necessary or desirable to preserve and perfect its security interest in the
Collateral and carry out the provisions and purposes of this Agreement,
including, without limitation, the execution and filing of such financing
statements as Secured Party may require and the execution and delivery of such
documents (and the taking of such action) as may be necessary to preserve and
protect Secured Party's interests in the Collateral. Upon the request of
Secured Party, Pledgor agrees that it will, from time to time, furnish to
Secured Party statements and schedules further identifying and describing the
Collateral and such other reports in connection with the Collateral as Secured
Party may reasonably request, all in form and detail reasonably satisfactory to
Secured Party. A carbon, photographic, or other reproduction of this Agreement
or of any financing statement covering the Collateral or any part thereof shall
be sufficient as a financing statement and may be filed as a financing
statement. Upon request of Secured Party, Pledgor shall promptly endorse and
deliver to Secured Party all documents, instruments, and chattel paper that it
now owns or may hereafter acquire.
6
<PAGE>
(b) Certain Collateral. Immediately upon Pledgor's receipt of that
------------------
portion of the Collateral which is or becomes evidenced by an agreement,
instrument and/or document, including, without limitation, promissory notes,
trade acceptances, documents of title and warehouse receipts, Pledgor shall
deliver the original thereof to Secured Party together with appropriate
endorsements or other specific evidence (in form and substance acceptable to
Secured Party) of assignment thereof to Secured Party.
(c) Indemnification. In any suit, proceeding or action brought by
---------------
Secured Party relating to any of the Collateral for any sum owing thereunder, or
to enforce any provision of any of the Collateral, Pledgor will save, indemnify
and keep Secured Party harmless from and against all expense, loss or damage
suffered by reason of any defense, setoff, counterclaim, recoupment or reduction
of liability whatsoever of the obligor thereunder, arising out of a breach by
Pledgor of any obligation thereunder or arising out of any other agreement,
indebtedness or liability at any time owing to, or in favor of, such obligor or
its successors from Pledgor, and all such obligations of Pledgor shall be and
remain enforceable against and only against Pledgor and shall not be enforceable
against Secured Party.
(d) Compliance with Laws, etc. Pledgor will comply, in all material
--------------------------
respects, with all laws, acts, rules, regulations, orders, decrees and
directions of any governmental authority applicable to the Collateral or any
part thereof or to the operation of Pledgor's business.
(e) Limitation of Liens on Collateral. Pledgor will not create,
---------------------------------
permit or suffer to exist, and will defend the Collateral against and take such
other action as is necessary to remove, any lien, security interest or
encumbrance on the Collateral except for (i) the security interest of Secured
Party hereunder and will defend the right, title and interest of Secured Party
in and to any of the Pledgor's rights under the Collateral against the claims
and demands of all entities and persons whomsoever. Pledgor shall promptly pay
when due all claims (including claims for labor, material and supplies) against
the Collateral.
(f) Maintenance of Insurance. Pledgor will maintain, with financially
------------------------
sound and reputable companies, insurance policies insuring its tangible property
against loss and business interruption by fire, explosion, theft and such other
casualties as are usually insured against by companies engaged in the same or
similar businesses, and insuring Pledgor and Secured Party against liability for
personal injury and property damage relating to the Collateral, such policies to
be in such amounts and against at least such risks as are usually insured
against, in the same general area by companies engaged in the same or a similar
business, and notify Secured Party promptly of any occurrence causing a material
loss or decline in value of the Collateral and the estimated or actual amount of
such loss or decline. Pledgor shall deliver to Secured Party the original (or a
certified copy thereof) of each policy of insurance and evidence of payment of
all premiums therefore. Such policies of insurance shall contain an
endorsement, in form and substance acceptable to Secured Party, naming the
Secured Party as an additional insured with losses payable to Pledgor and
Secured Party, as their respective interests may appear, under a standard non-
contributory "secured party" clause. Pledgor hereby directs all insurers under
such policies of insurance to pay all proceeds payable thereunder directly to
Secured Party, as its interest may appear. All such insurance shall contain a
clause which provides that Secured Party's interest under the policy will not be
invalidated by any act or omission of, or any breach of warranty by, the
insured, or by any
7
<PAGE>
change in the title, ownership or possession of the insured property, or by the
use of the property for purposes more hazardous than is permitted in the policy,
and provide that no cancellation, reduction in amount or change in coverage
thereof shall be effective until at least thirty (30) days after receipt by
Secured Party of written notice thereof.
(g) Limitations on Disposition. Pledgor will not sell, lease,
--------------------------
transfer or otherwise dispose of any of the Collateral, or attempt or contract
to do so, except for the sale or rental of Inventory in the ordinary course of
business, and shall engage in substantially the same type of business engaged in
as of the date first provided herein.
(h) Right of Inspection. During regular business hours (unless an
-------------------
Event of Default has occurred and is continuing, in which case at all times),
Secured Party shall have full and free access to all books and records of
Pledgor, and Secured Party or its representatives may examine the same and take
extracts therefrom for the purpose of protecting and verifying its interests in
the Collateral hereunder. Secured Party and its representatives shall also have
the right to enter into and upon any premises where any of the Collateral is
located during such times for the purpose of inspecting the same or otherwise
protecting its interests therein.
(i) Continuous Perfection. Pledgor will not change its name, identity
---------------------
or corporate structure in any manner which might make any financing or
continuation statement filed in connection herewith seriously misleading within
the meaning of section 9-402 of the UCC (or any other then applicable provision
of the UCC) unless Pledgor shall have given Secured Party at least sixty (60)
days' prior written notice thereof and shall have taken all action necessary or
requested by Secured Party to amend each financing statement or continuation
statement so that it is not seriously misleading.
(j) Location of Collateral. Pledgor will not maintain any office or
----------------------
other place of business of any kind at, or consign Inventory to, any location
other than the Collateral Locations described on Schedule 5(e) hereof, unless
-------------
Pledgor shall have given Secured Party at least twenty (20) days' prior written
notice thereof and shall have taken all actions necessary or requested by
Secured Party to perfect its security interest in the Collateral at such
location.
(k) Taxes. Pledgor agrees to pay or discharge prior to delinquency
-----
all taxes, assessments, levies, and other governmental charges imposed on it or
its property, except Pledgor shall not be required to pay or discharge any tax,
assessment, levy, or other governmental charge if (i) the amount or validity
thereof is being contested by Pledgor in good faith by appropriate proceedings
diligently pursued, (ii) such proceedings do not involve any danger of sale,
forfeiture, or loss of the Collateral or any interest therein, and (iii)
adequate reserves therefor have been established in conformity with generally
accepted accounting principles.
(l) Notification. Pledgor shall promptly notify Secured Party of (i)
------------
any lien, security interest, encumbrance or claim made or threatened against the
Collateral from and after the date hereof, (ii) any material adverse change in
the Collateral, including without limitation, any material damage to or loss of
the Collateral, and (iii) the occurrence or existence of any Event of Default or
the occurrence or existence of any condition or event that, with the giving of
notice or lapse of time or both, would be an Event of Default.
8
<PAGE>
(m) Waiver by Pledgor. Pledgor waives notices of the creation,
-----------------
advance, increase, existence, extension, or renewal of, and of any indulgence
with respect to, the Notes; waives presentment, demand, notice of dishonor, and
protest; and waives notice of the amount of the Notes outstanding at any time,
notice of any change in financial condition of any party liable for the Notes or
any part thereof (including any guarantor or surety), notice of any default or
Event of Default, and all other notices respecting the Notes. No renewal or
extension of or any other indulgence with respect to the Notes or any part
thereof, no release of any security, no release of any party (including any
maker, endorser, guarantor, or surety) liable on the Notes, no delay in
enforcement of payment, and no delay, omission, or lack of diligence or care in
exercising any rights with respect to the Notes, any security therefor, or
guaranty thereof shall in any manner impair or affect the rights of Secured
Party under any law, in equity under this Agreement. Secured Party need not
file suit or assert a claim for judgment against any party for any part of the
Notes or seek to realize upon any other security for the Notes, before
foreclosing upon the Collateral for the purpose of paying the Notes. Pledgor
waives any right to the benefit of, or to require or control application of, any
other security or proceeds thereof, and agrees that Secured Party shall have no
duty or obligation to Pledgor to apply to the Notes any such other security or
proceeds thereof.
7. Secured Party's Appointment as Attorney-in-Fact.
-----------------------------------------------
(a) Pledgor hereby irrevocably constitutes and appoints Secured Party
and any designees or agents thereof, with full power of substitution, as its
true and lawful attorney-in-fact with full irrevocable power and authority in
the place and stead of Pledgor and in the name of Pledgor or in its own name,
from time to time in Secured Party's sole discretion, for the purpose of
carrying out the terms of this Agreement, without notice to Pledgor, to take any
and all appropriate action and to execute and deliver any and all documents and
instruments which may be necessary or desirable to accomplish the purposes of
this Agreement, including, without limitation, to ask, demand, collect, receive,
settle, compromise, adjust and give discharges, releases, acquittances and
receipts for any and all moneys due and to become due under any Collateral, to
enter on the premises of Pledgor to take possession of and endorse and collect
any checks, drafts, notes, acceptances or other instruments for the payment of
moneys due under any Collateral, or any other Collateral, to pay or discharge
taxes, liens, security interests or other encumbrances levied or placed on or
threatened against the Collateral, to effect any repairs or any insurance called
for by the terms of this Agreement and to pay all or any part of the premiums
therefor and the costs thereof, to receive, open and dispose of mail addressed
to either Pledgor, to sell, assign, transfer, make any agreements in respect of,
or otherwise deal with or exercise rights in respect of any Collateral as though
Secured Party were the absolute owner thereof, to adjust and settle claims under
any insurance policy, to execute financing statements or amendments thereto or
any other document or writing deemed necessary by Secured Party to evidence or
perfect its security interest in any Collateral and to effect an assignment of
Pledgor's telephone numbers and listings.
(b) Secured Party agrees that, except upon and after the occurrence
and of an Event of Default, it will not exercise the power of attorney or any
rights granted to Secured Party pursuant to this Section 7, except with respect
---------
to the power to execute financing statements or amendments thereto or any
document or writing deemed necessary by Secured Party to evidence or perfect its
security interest in the Collateral. Pledgor hereby ratifies, to the extent
permitted by law, all that said attorneys shall lawfully do or cause to be done
by virtue hereof. The power of attorney
9
<PAGE>
granted herein is a power coupled with an interest and shall be irrevocable
until the Notes are indefeasibly paid in full. The powers conferred on Secured
Party hereunder are solely to protect Secured Party's interests in the
Collateral and shall not impose any duty upon it to exercise any such powers and
Secured Party shall be accountable only for amounts that it actually receives as
a result of the exercise of such powers.
8. Performance by Secured Party of Pledgor's Obligations. If Pledgor
-----------------------------------------------------
fails to perform or comply with any of its agreements contained herein and
Secured Party, as provided for by the terms of this Agreement, shall itself
perform or comply, or otherwise cause performance or compliance, with such
agreement, the reasonable expenses of Secured Party incurred in connection with
such performance or compliance, together with interest thereon at the rate then
in effect in respect of the Notes, shall be payable by Pledgor to Secured Party
on demand and shall constitute Secured Obligations hereunder.
9. Security Interest Absolute. All rights of Secured Party, all security
--------------------------
interests, and all obligations of Pledgor hereunder shall be absolute and
unconditional irrespective of (a) any lack of validity or enforceable of any of
the Secured Obligations; (b) any change in the time, manner, or place of payment
of, or in any other term in respect of, any Secured Obligations, or any
amendment, modification, waiver, consent, release, or other action with respect
to any of the Secured Obligations; (c) any increase in, addition to, exchange or
release of, or non-perfection of any lien on, any other collateral, or any
release or amendment, modification, waiver, consent, release, or other action
with respect to any guaranty, for any Secured Obligations; (d) any other
circumstance which might otherwise constitute a defense available to, or a
discharge of, Pledgor in respect of the Secured Obligations; or (e) the absence
of any action on the part of Secured Party to obtain payment or performance of
the Secured Obligations from Pledgor.
10. Remedies, Rights Upon Default. Upon the occurrence of any Event of
-----------------------------
Default, Secured Party shall have the following rights and remedies:
(a) Secured Party may declare the Notes or any part thereof
immediately due and payable, without demand, presentment, notice of
dishonor, notice of acceleration, notice of intent to accelerate, notice of
intent to demand, protest, or any other notice whatsoever, all of which are
hereby expressly waived by Pledgor.
(b) Secured Party, without liability to Pledgor, may obtain from any
party information regarding Pledgor or Pledgor's business, which such party
may furnish without liability to Pledgor; require Pledgor to give
possession or control of any Collateral to Secured Party; endorse as
Pledgor's agent any instruments, documents, or chattel paper in the
Collateral or representing proceeds of the Collateral; contact account
debtors directly to verify information furnished by Pledgor; take control
of proceeds, including stock received as dividends or by reason of stock
splits; and release the Collateral in its possession to Pledgor,
temporarily or otherwise. Secured Party shall not be liable for failure to
collect any Collateral or proceeds thereof, or for any act or omission on
the part of Secured Party, its officers, agents, or employees, except for
its gross negligence or willful misconduct. The foregoing rights of Secured
Party shall be in addition to, and not a limitation upon, any rights
10
<PAGE>
of Secured Party given by law, in equity, elsewhere in the Transaction
Documents, or otherwise.
(c) Subject to the rights of any other party holding a security
interest in the Collateral as permitted under this Agreement, in addition
to all other rights and remedies granted to Secured Party in this Agreement
and in any other instrument or agreement securing, evidencing, or relating
to the Notes, Secured Party shall have all of the rights and remedies of a
secured party under the Uniform Commercial Code in force in the State of
Texas as of the date of this Agreement. Without limiting the generality of
the foregoing, Secured Party may (i) without demand or notice to Pledgor,
collect, receive, or take possession of the Collateral or any part thereof
and for that purpose Secured Party may enter upon any premises on which the
Collateral is located and remove the Collateral therefrom or render it
inoperable, and/or (ii) sell, lease, or otherwise dispose of the
Collateral, or any part thereof, in one or more parcels at public or
private sale or sales, at Secured Party's offices or elsewhere, for cash,
on credit, or for future delivery. Upon the request of Secured Party,
Pledgor shall assemble the Collateral and make it available to Secured
Party at any place designated by Secured Party that is reasonably
convenient to Pledgor and Secured Party. Pledgor agrees that Secured Party
shall not be obligated to give more than five (5) days' written notice of
the time and place of any public sale or of the time after which any
private sale may take place and that such notice shall constitute
reasonable notice of such matters. Pledgor shall be liable for all expenses
of retaking, holding, preparing for sale, or the like, and all reasonable
attorneys' fees and other expenses incurred by Secured Party in connection
with the collection of the Notes and the enforcement of Secured Party's
rights under this Agreement.
(d) Secured Party may cause any or all of the Collateral held by it to
be transferred into the name of Secured Party or the name or names of
Secured Party's nominee or nominees.
(e) In the event that the proceeds of any sale, collection, or
realization of Collateral are insufficient to pay all amounts to which
Secured Party is legally entitled, Pledgor shall be liable for the
deficiency, together with interest thereon at a per annum rate equal to
12%, and together with the costs of collection and the reasonable fees of
any attorneys or agents employed to collect such deficiency.
11. Application of Proceeds. The proceeds of any sale, disposition or
-----------------------
other realization upon all or any part of the Collateral shall be applied and
distributed by Secured Party in the following order of priorities:
first, to Secured Party in an amount sufficient to pay in full the
-----
expenses of Secured Party in connection with such sale, disposition or
other realization, including all expenses, liabilities and advances
incurred or made by Secured Party in connection therewith, including,
without limitation, reasonable attorneys' fees;
11
<PAGE>
second, to Secured Party in an amount equal to the then unpaid
------
principal of and accrued interest and prepayment premiums, if any, on
the Secured Obligations; and
finally, upon payment in full of all of the Notes, to pay to
-------
Pledgor, or its representatives or as a court of competent
jurisdiction may direct, any surplus then remaining from such
proceeds.
12. Indemnification. Pledgor hereby assumes all liability for the
---------------
Collateral, and for any use, possession and management of the Collateral,
including without limitation, any taxes arising as a result of, or in connection
with, the transactions contemplated herein and agrees to assume liability for,
and to indemnify and hold Secured Party harmless from and against any and all
claims, causes of action, or liability, howsoever arising from or incident to
such use, possession and management. Pledgor further agrees to exonerate
Secured Party from any liability for any loss, depreciation or other damage to
the Collateral by virtue of any action on inaction of Secured Party.
13. Reinstatement. This Agreement shall remain in full force and effect
-------------
and continue to be effective should any petition be filed by or against Pledgor
for liquidation or reorganization, should Pledgor become insolvent or make an
assignment for the benefit of creditors or should a receiver or trustee be
appointed for all or any significant part of Pledgor's assets, and shall
continue to be effective or be reinstated, as the case may be, if at any time
payment and performance of the Secured Obligations, or any part thereof, is,
pursuant to applicable law, rescinded or reduced in amount, or must otherwise be
restored or returned by any obligee of the Secured Obligations, whether as a
"voidable preference", "fraudulent conveyance", or otherwise, all as though such
payment or performance had not been made. In the event that any payment, or any
part thereof, is rescinded, reduced, restored or returned, the Secured
Obligations, shall be reinstated and deemed reduced only by such amount paid and
not so rescinded, reduced, restored or returned.
14. Miscellaneous.
-------------
(a) Waivers. Pledgor hereby waives (i) any right to require Secured
-------
Party to proceed against any other person or entity, to exhaust its rights in
the Collateral, or to pursue any other right which Secured Party may have; (ii)
with respect to the Secured Obligations, except as expressly required by the
Secured Obligations, presentment and demand for payment, protest, notice of
protest and non-payment, notice of the intention to demand or accelerate, notice
of acceleration and notice of dishonor, and diligence in collection, review or
sale of Collateral, grace, notice and protest; and (iii) all rights of
redemption and of marshalling in respect of any and all of the Collateral.
(b) Relief in Bankruptcy. For good and valuable consideration,
--------------------
Pledgor agrees that Secured Party shall be entitled to relief from the automatic
stay imposed by Section 362 of Title 11 of the U.S. Code, as amended, on or
against the exercise of the rights and remedies otherwise available to the
Secured Party hereunder or under any or all of the Notes, in the event Pledgor
files any petition for bankruptcy or is placed into or is the subject of a
petition for bankruptcy under Title 11 of the U.S. Code or suffers the
appointment of any trustee, receiver, liquidator or custodian.
12
<PAGE>
(c) Severability. Any provision of this Agreement which is prohibited
------------
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
(d) No Waiver; Cumulative Remedies. Secured Party shall not by any
------------------------------
act, delay, omission, or otherwise be deemed to have waived any of its rights or
remedies hereunder, and no waiver shall be valid unless in writing, signed by
Secured Party and then only to the extent therein set forth. A waiver by
Secured Party of any right or remedy hereunder on any one occasion shall not be
construed as a bar to any right or remedy which Secured Party would otherwise
have had on any future occasion. No failure to exercise nor any delay in
exercising on the part of Secured Party, any right, power or privilege
hereunder, shall operate as a waiver thereof, nor shall any single or partial
exercise of any right, power or privilege hereunder preclude any other or future
exercise thereof or the exercise of any other right, power or privilege. The
rights and remedies hereunder provided are cumulative and may be exercised
singly or concurrently, and are not exclusive of any rights and remedies
provided by law.
(e) Notices. All notices, demands, requests, consents and other
-------
communications hereunder shall be delivered pursuant to the terms and at the
addresses set forth below:
Pledgor: Jayhawk Medical Acceptance Corporation
Two Galleria Tower
Suite 1800
Dallas, Texas 75240
Secured Party: Carl H. Westcott
100 Crescent Court
Suite 1620
Dallas, Texas 75201
(f) Amendments; Assignments. This Agreement may be amended only by a
-----------------------
writing executed jointly by Pledgor and Secured Party. This Agreement is for
the benefit of and binding upon the parties hereto and their respective
successors and assigns. Secured Party may assign all or a part of its interest
in this Agreement and its rights hereunder to any party.
(g) Counterparts. This Agreement may be executed in any number of
------------
counterparts which shall, collectively and separately, constitute one agreement.
(h) Section Titles and Headings. All section titles and headings
---------------------------
contained in this Agreement are and shall be without substantive meaning or
content of any kind whatsoever and are not a part of the agreement between the
parties hereto.
(i) No Obligation to Renew, Etc. Secured Party shall have no
----------------------------
obligation to renew, extend, modify, rearrange or in any way alter the Secured
Obligations at any time and all of
13
<PAGE>
the Secured Obligations at any time outstanding shall be secured by the security
interests and liens granted in this Agreement.
(j) GOVERNING LAW; VENUE. THIS AGREEMENT SHALL BE DEEMED A CONTRACT
--------------------
AND INSTRUMENT MADE UNDER THE LAWS OF THE STATE OF TEXAS AND ACCEPTED BY PLEDGOR
IN SAID STATE, THE LOCATION OF SECURED PARTY'S PRINCIPAL PLACE OF BUSINESS, AND
ANY AND ALL CLAIMS, DEMANDS OR ACTIONS IN ANY WAY RELATING THERETO OR INVOLVING
ANY DISPUTE BETWEEN ANY OF THE PARTIES HERETO, WHETHER ARISING IN CONTRACT OR
TORT, AT LAW, IN EQUITY OR STATUTORILY, SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH AND/OR GOVERNED BY THE LAWS OF THE STATE OF TEXAS (EXCEPTING ITS
CHOICE OF LAW RULES) AND THE LAWS OF THE UNITED STATES OF AMERICA. PLEDGOR
HEREBY IRREVOCABLY SUBMITS ITSELF TO THE NON-EXCLUSIVE JURISDICTION OF THE STATE
AND FEDERAL COURTS OF THE STATE OF TEXAS AND AGREES AND CONSENTS THAT SERVICE OF
PROCESS MAY BE MADE UPON IT IN ANY LEGAL PROCEEDING RELATING TO THE TRANSACTION
DOCUMENTS, THE RELATIONSHIPS CREATED THEREBY OR THE SECURED OBLIGATIONS BY ANY
MEANS ALLOWED UNDER TEXAS OR FEDERAL LAW. VENUE FOR ANY LEGAL PROCEEDING MAY BE
DALLAS COUNTY, TEXAS; PROVIDED, THAT SECURED PARTY MAY CHOOSE ANY VENUE IN ANY
STATE WHICH IT DEEMS APPROPRIATE IN THE EXERCISE OF ITS SOLE DISCRETION.
(k) WAIVER OF JURY TRIAL. PLEDGOR AND SECURED PARTY HEREBY KNOWINGLY,
--------------------
VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHT TO A TRIAL BY JURY IN RESPECT OF
ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER OR IN CONNECTION WITH, THE
NOTES, THIS AGREEMENT, THE PURCHASE AGREEMENT, THE OTHER TRANSACTION DOCUMENTS
OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR
WRITTEN) OR ACTIONS OF PLEDGOR IN CONNECTION HEREWITH, WHETHER NOW EXISTING OR
HEREAFTER ARISING, AND WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE. PLEDGOR
HEREBY CONSENTS AND AGREES THAT ANY SUCH CLAIM, DEMAND, ACTION, CAUSE OF ACTION,
SUIT OR PROCEEDING SHALL BE DECIDED BY A COURT TRIAL, WITHOUT A JURY, AND THAT
ANY PARTY MAY FILE AN ORIGINAL COUNTERPART OR COPY OF THIS AGREEMENT WITH ANY
COURT AS WRITTEN EVIDENCE OF THE OTHER PARTIES' CONSENT TO SUCH.
(l) Severability. If any provision of this Agreement or any payments
------------
pursuant to the terms hereof shall be invalid or unenforceable to any extent,
the remainder of this Agreement and any other payments hereunder shall not be
affected thereby and shall be enforceable to the greatest extent permitted by
law.
(m) LEGAL COUNSEL. PLEDGOR AND SECURED PARTY ACKNOWLEDGE THAT EACH
-------------
HAS HAD THE OPPORTUNITY TO BE REPRESENTED BY INDEPENDENT LEGAL COUNSEL IN
CONNECTION WITH ALL MATTERS CONCERNING THIS AGREEMENT, INCLUDING, BUT NOT
LIMITED TO, THE NEGOTIATION, ACCEPTANCE AND EXECUTION OF THIS AGREEMENT; THAT
EACH HAD THE
14
<PAGE>
OPPORTUNITY TO RELY UPON THE ADVICE OF ITS INDEPENDENT LEGAL COUNSEL IN AGREEING
TO THE TERMS AND CONDITIONS HEREIN AND IN EXECUTING THIS AGREEMENT; THAT EACH
HAS READ, REVIEWED AND UNDERSTOOD THE TRANSACTION DOCUMENTS AND THAT THE
OBLIGATIONS THEREUNDER REPRESENT VALID AND BINDING OBLIGATIONS OF PLEDGOR; AND
THAT EACH HAS FREELY AND VOLUNTARILY ENTERED INTO THIS AGREEMENT AS THE PRODUCT
OF ARM'S LENGTH NEGOTIATIONS.
(n) ENTIRE AGREEMENT. THIS AGREEMENT, TOGETHER WITH THE NOTES AND THE
----------------
OTHER TRANSACTION DOCUMENTS, EMBODIES THE FINAL, ENTIRE AGREEMENT AMONG THE
PARTIES HERETO AND SUPERSEDES ANY AND ALL PRIOR COMMITMENTS, AGREEMENTS,
REPRESENTATIONS, AND UNDERSTANDINGS, WHETHER WRITTEN OR ORAL, RELATING TO THE
SUBJECT MATTER HEREOF AND MAY NOT BE CONTRADICTED OR VARIED BY EVIDENCE OF
PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OR DISCUSSIONS OF THE
PARTIES HERETO. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES
HERETO.
15
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
as of the day and year first above written.
SECURED PARTY: PLEDGOR:
/s/ CARL H. WESTCOTT JAYHAWK MEDICAL ACCEPTANCE
- ----------------------- CORPORATION
CARL H. WESTCOTT a Texas corporation
By: /s/ FRED JACKSON
-----------------------------
Name: FRED JACKSON
---------------------------
Title: Senior Vice President and
--------------------------
Chief Financial Officer
--------------------------
16
<PAGE>
Schedule 5(e)
Jurisdictions for Filing
UCC-1 Financing Statements
--------------------------
State of Texas, Secretary of State
Dallas County
17
<PAGE>
Schedule 5(g)
Collateral Locations
--------------------
Equipment and Inventory
<TABLE>
<CAPTION>
<S> <C>
Office Address and 2001 Bryan Tower, Suite 600
Service Location: Dallas, Texas 75201
Lease Term: Nine months, commencing October 1, 1996 and ending
at 5:00 p.m. June 30, 1997, subject to adjustment
and earlier termination as provided in Lease.
Rental Payment: $25,420.75 per month, which is based on an annual
Basic Rental of $11.50 per rentable square foot.
Landlord: Equitable-Crow Tower 2001, Ltd., a Texas limited
partnership
2200 Ross Avenue, Suite 3700
Dallas, Texas 75201
</TABLE>
Exhibit A, Page 1
<PAGE>
EXHIBIT 10.36
PROMISSORY NOTE
$1,000,000 March 10, 1997
As hereinafter stated, for value received Jayhawk Medical Acceptance
Corporation promises to pay to the order of Carl Westcott in Dallas, Texas the
sum of One Million Fifty Thousand Dollars, payable on demand with interest at
the rate of prime per annum from the date of this Promissory Note. This
Promissory Note may be prepaid at any time without penalty. Amounts due under
this Promissory Note from and after it is due shall bear interest at the highest
lawful rate.
We, the makers, sureties, endorsers and guarantors of this Promissory Note,
hereby severally waive presentment for payment, notice of nonpayment, protest
and notice of protest and diligence of bringing suit for collection, and consent
that time of payment may be extended without notice thereof to any of the
makers, sureties, endorsers or guarantors of this Promissory Note. It is
further expressly agreed that if this Promissory Note is placed in the hands of
an attorney for collection, or suit is brought on same, or is collected through
the Probate Court, then, and in that event, the makers, sureties, endorsers and
guarantors will pay the holder of this Promissory Note the costs of collection,
including but not limited to the attorney's fees, incurred by the holder of this
Promissory Note.
MAKER: /s/ Douglas Theodore
-----------------------------------------
By: Douglas Theodore for
Jayhawk Medical Acceptance
<PAGE>
EXHIBIT 10.37
PROMISSORY NOTE
$1,000,000 March 31, 1997
As hereinafter stated, for value received Jayhawk Medical Acceptance
Corporation promises to pay to the order of Carl Westcott in Dallas, Texas the
sum of One Million Dollars, payable on demand with interest at the rate of prime
per annum from the date of this Promissory Note. This Promissory Note may be
prepaid at any time without penalty. Amounts due under this Promissory Note
from and after it is due shall bear interest at the highest lawful rate.
We, the makers, sureties, endorsers and guarantors of this Promissory Note,
hereby severally waive presentment for payment, notice of nonpayment, protest
and notice of protest and diligence of bringing suit for collection, and consent
that time of payment may be extended without notice thereof to any of the
makers, sureties, endorsers or guarantors of this Promissory Note. It is
further expressly agreed that if this Promissory Note is placed in the hands of
an attorney for collection, or suit is brought on same, or is collected through
the Probate Court, then, and in that event, the makers, sureties, endorsers and
guarantors will pay the holder of this Promissory Note the costs of collection,
including but not limited to the attorney's fees, incurred by the holder of this
Promissory Note.
MAKER: /s/ Douglas Theodore
-----------------------------------
By: Douglas Theodore for
Jayhawk Medical Acceptance
<PAGE>
EXHIBIT 10.38
PROMISSORY NOTE
$1,000,000 April 11, 1997
As hereinafter stated, for value received Jayhawk Medical Acceptance
Corporation promises to pay to the order of Carl Westcott in Dallas, Texas the
sum of One Million Dollars, payable on demand with interest at the rate of prime
per annum from the date of this Promissory Note. This Promissory Note may be
prepaid at any time without penalty. Amounts due under this Promissory Note
from and after it is due shall bear interest at the highest lawful rate.
We, the makers, sureties, endorsers and guarantors of this Promissory Note,
hereby severally waive presentment for payment, notice of nonpayment, protest
and notice of protest and diligence of bringing suit for collection, and consent
that time of payment may be extended without notice thereof to any of the
makers, sureties, endorsers or guarantors of this Promissory Note. It is
further expressly agreed that if this Promissory Note is placed in the hands of
an attorney for collection, or suit is brought on same, or is collected through
the Probate Court, then, and in that event, the makers, sureties, endorsers and
guarantors will pay the holder of this Promissory Note the costs of collection,
including but not limited to the attorney's fees, incurred by the holder of this
Promissory Note.
MAKER: /s/ Douglas Theodore
-----------------------------------
By: Douglas Theodore for
Jayhawk Medical Acceptance
<PAGE>
EXHIBIT 10.39
AMENDMENT NO. 1
TO
JAYHAWK ACCEPTANCE CORPORATION AMENDED AND RESTATED
1994 STOCK OPTION AND RESTRICTED STOCK PLAN
The Jayhawk Acceptance Corporation Amended and Restated 1994 Stock Option
and Restricted Stock Plan (the "Plan") is hereby amended as follows:
1. By replacing "one million (1,000,000) shares" in Section 5(a) with "one
million five hundred thousand (1,500,000) Shares".
2. By adding the following Section 6(k) immediately after Section 6(j) of
the Plan:
(k) LIMITATION ON GRANTS. Notwithstanding any other provision
--------------------
contained in this Plan, no Employee may receive in any one calendar
year Options under this Plan to acquire in excess of 150,000 Shares.
<PAGE>
EXHIBIT 10.40
AMENDMENT OF LEASE AGREEMENT
----------------------------
THIS AMENDMENT OF LEASE AGREEMENT (the "Amendment") is made and entered
as of November 14, 1996, by and between EQUITABLE-CROW TOWER 2001, LTD., a Texas
limited partnership ("Landlord"), and JAYHAWK ACCEPTANCE CORPORATION, a Texas
corporation ("Tenant"). All terms used herein and not otherwise defined shall
have the meanings ascribed to them in the hereinafter defined Lease.
W I T N E S S E T H:
WHEREAS, Tenant and Landlord entered into that certain Lease Agreement
dated September 17, 1996 (the "Lease"), covering approximately 26,526 rentable
square feet of office space in Suite 600 (the "Initial Space") located in an
office building situated in Dallas, Dallas County, Texas, commonly known as 2001
Bryan Tower (the "Building"); and
WHEREAS, Tenant has requested Landlord to amend the Lease, and Landlord
has agreed to do so on the terms and conditions hereinafter set forth;
NOW, THEREFORE, for and in consideration of the foregoing recitals,
Ten and NO/100 Dollars ($10.00) in hand paid, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
Landlord and Tenant hereby agree as follows:
1. Expansion Space. Effective as of the Expansion Space Commencement
---------------
Date (as hereinafter defined), Landlord hereby leases and demises to Tenant, and
Tenant hereby leases from Landlord approximately 11,336 additional rentable
square feet of office space (the "Expansion Space"), as generally depicted on
Exhibit A to this Amendment. The sum of the Initial Space and the Expansion
- ---------
Space (collectively, the "Premises") shall total approximately 37,862 rentable
square feet of office space in the Building. Accordingly, on the Expansion
Space Commencement Date, Tenant's Proportionate Share shall be increased to
3.5778%, which percentage is expressed as a ration between the 37,862 rentable
square feet contained in the Premises and the 1,064,210 rentable square feet
contained in the Building.
2. Term. Landlord and Tenant hereby acknowledge and agree that (a) the
----
term of the Lease as to the Expansion Space shall commence on December 1, 1996
(the "Expansion Space Commencement Date") and shall terminate at 5:00 p.m.
Dallas, Texas time on June 30, 1997 (the "Expansion Term"), and (b) the lease of
the Initial Space and the Expansion Space shall be coterminous.
3. Rent. The Basic Rental and all additional sums to be paid by Tenant
----
to Landlord under the Lease shall continue to be
11/14/96
<PAGE>
paid on a timely basis, in the manner described in Section 4 of the Lease, and,
as to the Initial Space, in the amounts provided in the Lease. The Basic Rental
for the Expansion Space shall be (a) at an annual Basic Rental rate per rentable
square foot of $10.50, and (b) payable in advance in monthly payments of
$9,919.00. Tenant shall continue to pay Tenant's Proportionate Share of
Electrical Costs as required under Section 4.c. of the Lease, and Tenant's
Proportionate Share of any Excess in Basic Cost as provided in Exhibit C to the
---------
Lease.
4. Premises Delivered "As-Is". Tenant hereby accepts the Expansion Space
-------------------------
in its "AS-IS" condition, and Landlord shall have no obligation to perform any
-----
work therein (including, without limitation, demolition of any improvements
existing therein or construction of any tenant finish-work or other improvements
therein), and shall not be obligated to reimburse Tenant or provide an allowance
for any costs related to the he demolition or construction of improvements
therein. Tenant shall, at its expense, obtain and deliver to Landlord a
certificate of occupancy from the appropriate governmental authority for the
Expansion Space.
5. Early Occupancy. Landlord hereby agrees that, notwithstanding the
---------------
December 1, 1996 Expansion Space Commencement Date, Tenant may occupy up to
5,668 rentable square feet of the Expansion Space during the period of time
between November 15, 1996 and December 1, 1996 (any space so occupied being
called the "Early Occupancy Space"), such early occupancy to be subject to all
the terms and provisions of the Lease, except that Tenant shall pay Basic Rental
and Tenant's Proportionate Share of Excess Costs with respect to the Early
Occupancy Space (calculated by Landlord based on the actual rentable square
footage occupied and the actual number of days in occupancy prior to December 1,
1996) in arrears on the Expansion Space Commencement Date.
6. Ratification. Landlord and Tenant hereby ratify and affirm the Lease
------------
and agree that the Lease is and shall remain in full force and effect, except
as expressly amended hereby.
7. Counterparts. Facsimile signatures appearing hereon shall be deemed to
------------
be originals, and this Amendment may be executed in two or more counterparts,
each of which shall be deemed an original, and all of which together shall
constitute one and the same instrument.
-2-
<PAGE>
EXECUTED as of the date first above written.
LANDLORD: EQUITABLE-CROW TOWER 2001, LTD., a
Texas limited partnership
By: EQ/GP Southwest, Ltd., a Texas
limited partnership
By: GP/EQ Southwest, Inc., a
Texas corporation, its
sole general partner
By: /s/ JON L. DOOLEY
--------------------------
Jon. L. Dooley,
Senior Vice President
TENANT: JAYHAWK ACCEPTANCE CORPORATION,
a Texas corporation
By: /s/ CAMERON F. CHANDLER
-----------------------------------
Name: Cameron F. Chandler
---------------------------------
Its: Director H.R.
----------------------------------
-3-
<PAGE>
EXHIBIT A
[FLOORPLAN APPEARS HERE]
<PAGE>
EXHIBIT 10.41
SUBSEQUENT TRANSFER AGREEMENT
This SUBSEQUENT TRANSFER AGREEMENT is dated as of September 30, 1996 (the
"Subsequent Transfer Date") and is entered into by and between Jayhawk
Acceptance Corporation, a Texas corporation (in its individual capacity, "JAC"
and as Servicer under the Contribution and Servicing Agreement referred to
below, the "Service"), Jayhawk Funding Trust I, a limited purpose Delaware
business trust (the "Issuer"), Norwest Bank Minnesota, National Association, a
national banking association, as Trustee and as Backup Servicer.
Reference is hereby made to the Indenture (the "Indenture"), dated as of
August 7, 1996, and the Series 1996B Supplement (the "Series Supplement"), dated
as of August 7, 1996, each by and between the Issuer and the Trustee; and
reference is also hereby made to the Contribution and Servicing Agreement (the
"Contribution and Servicing Agreement"), dated as of August 7, 1996, by and
between JAC, the Servicer, the Issuer, the Trustee, and the Backup Servicer.
Capitalized terms used and not otherwise defined herein have the meanings
assigned to them in the Indenture, as supplemented by the Series Supplement, or
the Contribution and Servicing Agreement, as applicable.
RECITALS:
A. Pursuant to the terms of the Contribution and Servicing Agreement, JAC
and the Issuer agreed to the contribution by JAC to the Issuer of Subsequent
Contracts following the Closing Date.
B. Pursuant to the terms of the Indenture and the Series Supplement, the
Issuer and the Trustee agreed to the pledge by the Issuer to the Trustee on
behalf of the Trust Estate and for the benefit of the Noteholders and the Note
Insurer of Subsequent Contracts following the Closing Date.
C. JAC, the Servicer, the Issuer, the Trustee, and the Backup Servicer
desire to enter into this Subsequent Transfer Agreement to reflect (i) the
contribution to the capital of, conveyance to, and assignment to the Issuer by
JAC without recourse (except as otherwise specifically provided in the
Contribution and Servicing Agreement) of certain motor vehicle retail
installment sale contracts which constitute Subsequent Contracts, as set forth
on the Amendment to Contract Schedule attached hereto as Schedule A (the "Added
----------
Contracts"), and (ii) the Grant to the Trustee by the Issuer on behalf of the
Trust Estate, without recourse (except as otherwise specifically provided in the
Indenture), of all of the Issuer's right, title, and interest in and to such
Added Contracts.
NOW, THEREFORE, in consideration of the premises herein contained and for
other good and valuable consideration, the receipt and sufficiency of which are
mutually acknowledged, JAC, the Servicer, the Issuer, the Trustee, and the
Backup Servicer hereby agree as follows:
Section 1. Terms of the Subsequent Transfer. JAC and the Issuer hereby
--------------------------------
agree to the contribution to the capital ot conveyance to, and assignment to the
Issuer by JAC of the Added Contracts; and the Issuer and the Trust hereby agree
to the Grant by the Issuer to the Trustee on behalf of the Trust Estate and for
the ratable benefit of the Noteholders and the Note Insurer of the Added
Contracts. The Subsequent Release Amount with respect to the Added Contracts is
<PAGE>
$11,942,891.69 and the Subsequent Cutoff Date with respect to the Added
Contracts is September 20, 1996.
Section 2. Contribution by JAC to the Issuer of the Added Contracts.
---------------------------------------------------------
(a) JAC does hereby contribute to the capital of convey to, and assign to
the Issuer without recourse (except as otherwise specifically provided in the
Contribution and Servicing Agreement), and does hereby grant to the Issuer all
the right, title, and interest of JAC in and to the following and any and all
benefits accruing to JAC from (but none of the obligations of JAC under): (i)
the Added Contracts; (ii) all rights with respect to the Added Contracts
(including all guaranties and other agreements or arrangements of whatever
character from time to time supporting or securing payment of any Added
Contract, and all rights with respect to any agreement or arrangement with the
vendors, Dealers, or manufacturers of the Financed Vehicles to the extent
specifically related to any Added Contract, including, without limitation, the
related Dealer Agreements and each Dealer Agreement Addendum related thereto);
(iii) all payments on or with respect to the Added Contracts received on or
after the Subsequent Cutoff Date, including, without limitation, all Insurance
Proceeds and Liquidation Proceeds; (iv) the security interests created by the
Added Contracts in the related Financed Vehicles and in any other collateral
securing such Added Contracts; (v) the original Added Contracts, the Title
Documents, applications for Title Documents relating to the related Financed
Vehicles, and the Contract Files relating to the Added Contracts; (vi) all
rights of JAC under each Extended Service Agreement with respect to the Added
Contracts and the related Financed Vehicles; (vii) all rights of JAC under the
Administrative Services Agreement with respect to the Extended Service
Agreements applicable to the Added Contracts and the related Financed Vehicles;
and (viii) proceeds of the foregoing (including, but not by way of limitation,
all cash proceeds, accounts, accounts receivable, notes, drafts, acceptances,
chattel paper, checks, deposit accounts, insurance proceeds, condemnation
awards, rights to payment of any and every kind, and other forms of obligations
and receivables which at any time constitute all or part or are included in the
proceeds of any of the foregoing), in each case whether now owned or hereafter
acquired.
(b) With respect to the Added Contracts, JAC has delivered to or at the
direction of the Issuer, the Contract Files, the Assignments, and the related
Collection Account Deposit pursuant to the terms of the Contribution and
Servicing Agreement.
(c) The expenses and costs relating to the delivery of the Added Contracts
and this Agreement shall be borne by JAC.
Section 3. Grant by the Issuer to the Trustee of the Added Contracts. The
---------------------------------------------------------
Issuer does hereby Grant to the Trustee for the ratable benefit of the
Noteholders and the Note Insurer, as security for the Issuer's obligations
hereunder and under the Series Supplement and Series 1996B Notes, without
recourse, all of the Issuer's right, title, and interest in and to the following
and any and all benefits accruing to the Issuer from (but none of the
obligations of JAC or the Issuer under): (i) the Added Contracts; (ii) all
rights with respect to the Added Contracts (including all guaranties and other
agreements or arrangements of whatever character from time to time supporting or
securing payment of any Added Contract, and all rights with respect to any
agreement or arrangement with the vendors, Dealers, or manufacturers of the
Financed Vehicles to the extent specifically related to any Added Contract,
including, without limitation, the related Dealer
-2-
<PAGE>
Agreements and each Dealer Agreement Addendum related thereto); (iii) all
payments on or with respect to the Added Contracts received on or after the
Subsequent Cutoff Date, including without limitation, all Insurance Proceeds and
Liquidation Proceeds; (iv) the security interests created by the Added Contracts
in the related Financed Vehicles and in any other collateral securing such Added
Contracts; (v) the original Added Contracts, the Title Documents, applications
for Title Documents, and UCC financing statements relating to the related
Financed Vehicles, and the Contract Files the Added Contracts; (vi) all rights
of the Issuer pursuant to this Agreement; (vii) all rights of the Issuer under
each Extended Service Agreement with respect to the Added Contracts and the
related Financed Vehicles; (viii) all rights of the Issuer under the
Administrative Services Agreement and the FFG Policy with respect to the
Extended Service Agreements applicable to the Added Contracts and the related
Financed Vehicles; and (ix) proceeds of the foregoing (including, but not by way
of limitation, all cash proceeds, accounts, accounts receivable, notes, drafts,
acceptances, chattel paper, checks, deposit accounts, insurance proceeds,
condemnation awards, rights to payment of any and every kind, and other forms of
obligations and receivables which at any time constitute all or part or are
included in the proceeds of any of the foregoing), in each case whether now
owned or hereafter acquired.
The foregoing Grant does not constitute and is not intended to result in a
creation or an assumption by the Trustee, any Noteholder or the Note Insurer of
any obligation of the Issuer, JAC, the Servicer, or any other Person in
connection with the Trust Estate or under any agreement or instrument relating
thereto.
The Trustee acknowledges its acceptance on behalf of the Noteholders and
the Note Insurer of all right, title, and interest previously held by the Issuer
in and to the Trust Estate, and declares that it shall maintain such right,
title, and interest in accordance with the provisions of the Indenture and the
Series Supplement and agrees to perform the duties of the Trustee set forth in
the Indenture and the Series Supplement.
Section 4. Representations and Warranties: Conditions Precedent.
----------------------------------------------------
(a) JAC hereby (i) affirms to the Issuer, the Trustee, the Note Insurer,
and the Backup Servicer the representations, warranties, and covenants set forth
in Section 2.03(a)(i) through (x) and (xii) of the Contribution and Servicing
Agreement as of the Subsequent Transfer Date, and (ii) affirms to the Issuer,
the Trustee, the Note Insurer, and the Backup Servicer the representations,
warranties, and covenants set forth in Section 2.03(xi) and (xiii) of the
Contribution and Servicing Agreement as of the Subsequent Transfer Date, with
respect to the Added Contracts;
(b) JAC hereby represents, warrants, and covenants to the Issuer, the
Trustee, the Note Insurer, and the Backup Servicer that, as of the Subsequent
Transfer Date (or as of such other date as is specified below):
(i) JAC has not selected the Added Contracts in a manner that it
believes is adverse to the interests of the Noteholders or the Note
Insurer;
(ii) taking into consideration the Added Contracts, as of the
Subsequent Cutoff Date, assuming the Added Contracts had been included in
the Contracts pledged to the
-3-
<PAGE>
Trustee as of such date: (A) the weighted average APR of the overall pool
of Contracts would have been greater than or equal to 18.25%, (13)the
weighted average remaining term to maturity of the Contracts would have
been less than or equal to 26 months, (C) the percentage (by principal
balance) of the Aggregate Contract Principal Balance attributable to
Contracts due from Obligors residing in any single state would have been no
more than 10%, (D) the portion of the overall pool of Contracts (by
principal balance) purchased from any single Dealer would have been less
than or equal to 1.50% (other than those Dealers previously approved by the
Note Insurer and then only to the limit established for each such Dealer by
the Note Insurer), and (E) the percentage of the Aggregate Contract
Principal Balance attributable to Contracts bearing interest at an APR less
than 10% would have been less than or equal to 8%;
(iii) as of the Subsequent Cutoff Date, no more than 10% of the
Added Contracts were between 31 and 60 days past due, with the remaining
90% of such Added Contracts being 30 days or less past due; and
(iv) no Added Contract has a scheduled maturity later than
October 15, 1999;
(v) no Added Contract has a stated maturity later than the
Stated Maturity; and
(vi) the related Obligor with respect to each Added Contract has
made at least one Scheduled Payment.
(c) The Issuer hereby reaffirms the representations, warranties, and
covenants set forth in Sections 3.02 and 3.03 of the Indenture.
Section 5. Governing Law. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE
-------------
WITH THE LAWS OF THE STATE OF TEXAS, AND THE OBLIGATIONS, RIGHTS, AND REMEDIES
OF THE PARTIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS;
PROVIDED, HOWEVER, THAT SECTION 3 OF THIS AGREEMENT SHALL BE CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, AND THE OBLIGATIONS, RIGHTS,
AND REMEDIES OF THE PARTIES HEREUNDER WITH RESPECT TO SUCH SECTION 3 SHALL BE
DETERMINED IN ACCORDANCE WITH SUCH LAWS.
Section 6. Successors and Assigns. All covenants and agreements in this
----------------------
Agreement shall inure to the benefit of and be binding upon JAC, the Issuer, and
the Trustee and their respective successors and permitted assigns. The Note
Insurer and its successors and assigns shall be a third-party beneficiary to the
provisions of this Agreement, and shall be entitled to rely upon and directly to
enforce such provisions of this Agreement so long as no Note Insurer Default
shall have occurred and be continuing. Nothing in this Agreement, express or
implied, shall give to any Person, other than the parties hereto and their
successors hereunder and permitted assigns, any benefit or any legal or
equitable right, remedy or claim under this Agreement.
-4-
<PAGE>
Section 7. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which, when so executed, shall be deemed to be an
original, but all which together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused their names to be signed
hereto by their respective officers thereunto duly authorized, as of the date
and year first above written.
JAYHAWK ACCEPTANCE CORPORATION,
in its individual capacity and as Servicer
By: /s/ RICHARD B. HOFFMAN
-----------------------
Richard B. Hoffmann
President
JAYHAWK FUNDING TRUST I, as Issuer
By: /s/ RICHARD B. HOFFMAN
-----------------------
Richard B. Hoffmann
President
NORWEST BANK MINNESOTA, NATIONAL
ASSOCIATION, as Trustee
By: /s/ BONNIE SEIDEMAN
-------------------
Bonnie Seideman
Assistant Vice President
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, as
Backup Servicer
By: /s/ BONNIE SEIDEMAN
-------------------
Bonnie Seideman
Assistant Vice President
-5-
<PAGE>
EXHIBIT 10.42
PREFERRED STOCK PURCHASE AGREEMENT
PREFERRED STOCK PURCHASE AGREEMENT, dated as of April 11, 1997, by and
between Jayhawk Medical Acceptance Corporation, a Texas corporation (the
"Company"), and Carl H. Westcott ("Purchaser").
In consideration of the mutual covenants and agreements set forth herein
and for good and valuable consideration, the receipt of which is hereby
acknowledged, the parties agree as follows:
SECTION 1. DEFINITIONS.
-----------
1.1. Definitions.
-----------
As used in this Agreement, and unless the context requires a
different meaning, the following terms have the meanings indicated:
"Act" means the Securities Act of 1933, as amended, and the rules
---
and regulations of the Commission thereunder.
"Affiliate" means, with respect to any Person, any Person that,
---------
directly or indirectly, controls, is controlled by or is under common control
with, such Person in question. For the purposes of this definition, "control"
(including, with correlative meanings, the terms "controlled by" and "under
common control with"), as used with respect to any Person, shall mean the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities or by contract or otherwise.
"Agreement" means this Agreement as the same may be amended,
---------
supplemented or modified in accordance with the terms hereof and in effect.
"Closing" has the meaning assigned to that term in Section 2.1
-------
hereof.
"Closing Date" means the date specified pursuant to Section 2.1
------------
hereof.
"Common Stock" means the Common Stock, par value $.0l per share, of
------------
the Company.
"Company" means Jayhawk Medical Acceptance Corporation, a Texas
-------
corporation.
"Conversion Shares" means any shares of Common Stock or any
-----------------
successor class of stock of the Company issued or issuable upon conversion of
the Preferred Stock.
"JAC" means Jayhawk Acceptance Corporation, a Texas corporation and
---
holder of all of the issued and outstanding Common Stock of the Company.
<PAGE>
"Person" means an individual or corporation, partnership, trust,
------
incorporated or unincorporated association, joint venture, joint stock company,
government (or any agency or political subdivision thereof) or other entity of
any kind.
"Preferred Stock" means the Series A Redeemable, Convertible
---------------
Preferred Stock, par value $.01 per share, of the Company, having the rights and
designations set forth in that "Statement of Resolution Establishing Series of
Preferred Stock of Jayhawk Medical Acceptance Corporation," substantially in the
form attached as Exhibit A hereto.
---------
"Purchaser" means Carl H. Westcott.
---------
"Securities" means the Preferred Stock and the Conversion Shares.
----------
"Time of Purchase" has the meaning provided therefor in Section 2.1
----------------
of this Agreement.
SECTION 2. PURCHASE AND SALE OF PREFERRED STOCK.
------------------------------------
2.1. Purchase and Sale of Preferred Stock; the Closing.
-------------------------------------------------
Subject to the terms and conditions herein set forth, the Company
agrees to sell to the Purchaser, and the Purchaser agrees to purchase from the
Company, at the Time of Purchase, up to 50,000 shares of Preferred Stock at a
price equal to $100.00 per share, payable as set forth below.
The sale and purchase of the Preferred Stock shall take place from
time to time, at one or more closings (the "Closing") to be held at such time as
the Purchaser shall specify by notice to the Company, at least two business days
prior thereto, except that the first Closing shall occur on the date hereof. At
each such Closing, the Purchaser shall purchase from the Company, and the
Company shall sell to the Purchaser that number of shares of Preferred Stock
specified by Purchaser, within the aggregate limits set forth in the first
paragraph of this Section 2.1. On the first Closing, Purchaser shall purchase,
and the Company shall sell to Purchaser, 20,000 shares of Preferred Stock. The
date on which a Closing is scheduled to take place is herein called the "Closing
Date." The time at which such Closing is concluded is herein called the "Time
of Purchase."
Delivery of the Preferred Stock to be purchased by the Purchaser
pursuant to this Agreement shall be made at the specified Closing by the Company
delivering to the Purchaser, against payment of the purchase price therefor, an
appropriate certificate evidencing the number of shares of Preferred Stock
purchased by the Purchaser hereunder (registered in the name of the Purchaser).
Payment of the purchase price for the Preferred Stock to be
purchased hereunder shall be made by (i) in the case of the first 20,000 shares
of Preferred Stock to be purchased and
2
<PAGE>
sold hereunder, by the Purchaser's delivery and surrender to the Company of two
promissory notes, one dated March 31, 1997 and the other dated April 11, 1997,
each in the original principal amount of $1,000,000 and made by the Company in
favor of the Purchaser, and (ii) with respect to additional shares of Preferred
Stock to be purchased by the Purchaser, payable by check payable to the order of
the Company.
Following confirmation of a plan of reorganization containing the
Designated Provisions (as defined in Section 6.1) in JAC's chapter 11 case under
Title 11, United States Code, pending in the United States Bankruptcy Court
("Court") for the Northern District of Texas, Dallas Division, Case No. 397-
31261-SAF-11, and JAC's performance of its obligations under the Designated
Provisions, including payment of the JMAC Claim in full to the Purchaser and the
issuance of shares of JAC Common Stock in exchange for the shares of Preferred
Stock as described in clause (ii) of Section 6.1 hereof, the right of the
Purchaser to purchase shares of Preferred Stock hereunder, and the obligation of
the Company to sell such shares, shall terminate.
If the Company shall provide notice of its election to redeem all of
the outstanding shares of Preferred Stock in the manner provided in the
"Statement of Resolution Establishing Series of Preferred Stock of Jayhawk
Medical Acceptance Corporation," upon the receipt of such notice by the
Purchaser, the right of the Purchaser to purchase shares of Preferred Stock
hereunder, and the obligations of the Company to sell such shares, shall
terminate; provided, however, if on the date fixed for redemption, the Company
shall fail to discharge its obligations associated with such redemption and
shall fail to redeem all of the outstanding Preferred Stock on the date fixed
for redemption, the notice of redemption shall be of no effect and the right of
the Purchaser to purchase shares of Preferred Stock hereunder, and the
obligations of the Company to sell such shares to the Purchaser, shall be
reinstated and shall continue unimpaired.
SECTION 3. CLOSING CONDITIONS.
------------------
3.1. Conditions to the Obligations of the Purchaser.
----------------------------------------------
The obligation of the Purchaser to purchase and pay for the
Preferred Stock to be purchased by him at the Closing and to perform any
obligations hereunder shall be subject to the satisfaction or waiver of the
following conditions at the Time of Purchase:
3.1.1. Representations and Warranties True.
-----------------------------------
The representations and warranties of the Company contained in
Section 4 hereof shall be true and correct in all material respects at and as of
the Time of Purchase as if made at and as of the Time of Purchase.
3.1.2. Compliance with this Agreement.
------------------------------
The Company shall have performed and complied with all of its
agreements and conditions set forth herein which are required to be performed or
complied with by it on or before the Closing Date.
3
<PAGE>
3.1.3. All Proceedings Satisfactory.
----------------------------
All corporate and other proceedings taken prior to or at the
Closing in connection with the transactions contemplated by this Agreement, and
all documents and evidences thereto, shall be reasonably satisfactory in form
and substance to the Purchaser, and the Purchaser shall receive such copies
thereof and other materials (certified by an officer of the Company, if
requested) as he may reasonably request in connection therewith.
3.1.4. Purchase Permitted by Applicable Laws; Legal Investment.
-------------------------------------------------------
The purchase of and payment for the Preferred Stock to be
purchased by the Purchaser hereunder (i) shall not be prohibited by any
applicable law or governmental regulation (including, without limitation,
Regulation G, T, U or X of the Board of Governors of the Federal Reserve
System), (ii) shall not subject the Purchaser to any penalty or, in his
reasonable judgment, other onerous condition under or pursuant to any applicable
law or governmental regulation, and (iii) shall be permitted by the laws and
regulations of the jurisdictions to which he is subject.
3.1.5. Effectiveness of Preferred Stock Terms.
--------------------------------------
The Board of Directors of the Company shall have adopted a
resolution establishing the terms of the Preferred Stock substantially as set
forth in Exhibit "A" hereto, and such action shall have been made legally valid
----------
and effective by filing that resolution with the Secretary of State of the State
of Texas in accordance with Texas laws.
3.2. Conditions to the Obligations of the Company.
--------------------------------------------
The obligations of the Company to issue and sell the Preferred
Stock shall be subject to the following conditions: (i) the representations and
warranties made by the Purchaser at such Closing herein shall be true and
correct in all material respects at and as of the Time of Purchase with the same
effect as though such representations and warranties had been made at and as of
the Time of Purchase, and (ii) no statute, rule or regulation shall have been
enacted or promulgated by any governmental authority which prohibits the
consummation of the transaction contemplated hereby, and there shall be no order
or injunction of a court of competent jurisdiction in effect precluding the
consummation of this Agreement.
SECTION 4. REPRESENTATIONS AND WARRANTIES.
------------------------------
4.1. Representations and Warranties of the Company.
---------------------------------------------
A. The Company represents and warrants to the Purchaser as follows:
(a) Organization. The Company is a corporation duly organized,
------------
validly, existing and in good standing under the laws of the jurisdiction of its
organization, and is qualified to do business as a foreign corporation in each
jurisdiction in which such qualification
4
<PAGE>
is required. The Company has all required corporate power and authority to own
its property and to carry on its business as presently conducted. The copies of
the Articles of Incorporation and By-Laws of the Company, as amended to date,
which have been furnished by the Company to counsel for the Purchaser, are
correct and complete at the date hereof. The Company is not in violation of any
term of its Articles of Incorporation or By-Laws.
(b) Authority relative to the Agreement. The Company has all
-----------------------------------
required corporate power and authority to execute and deliver this Agreement and
to consummate the transactions contemplated hereby. The execution and delivery
by the Company of this Agreement and the consummation of the transactions
contemplated hereby have been duly and validly authorized by the Board of
Directors of the Company, and no other corporate proceedings on the part of the
Company are necessary for the execution and delivery of this Agreement, the
performance of its obligations hereunder and the consummation of the
transactions contemplated hereby. This Agreement has been duly and validly
executed and delivered by the Company, and constitutes a valid and binding
agreement of the Company, enforceable against the Company in accordance with its
terms. The Preferred Stock has been duly and validly authorized by the Company
and, when issued and paid for, will be fully paid and nonassessable and free of
preemptive or other similar rights; and the certificates evidencing the
Preferred Stock will be in due and proper form. The Company has authorized and
reserved for issuance upon conversion of the Preferred Stock not less than
20,000 shares of its Common Stock, and the Conversion Shares will be, when
issued, validly authorized and issued, fully paid and non-assessable and free of
preemptive rights.
(c) No Violation. Neither the execution and delivery of this
------------
Agreement nor the consummation of the transactions contemplated hereby nor
compliance by the Company with any of the provisions hereof will (i) conflict
with or result in any breach of any provision of the charter or bylaws of the
Company; (ii) require any consent, approval or notice under (other than consents
or approvals obtained and notices made), or result in a violation or breach of,
or constitute (with or without due notice or lapse of time or both) a default
(or give rise to any right of termination, cancellation or acceleration) under,
any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, license, agreement or other instrument or obligation to which the
Company is a party or by which the Company or any of its properties or assets
may be bound which would be materially adverse to the Company; or (iii) violate
any order, writ, injunction, decree, statute, rule or regulation applicable to
the Company or any of its properties or assets.
(d) Financial, Statements, Disclosure. The financial statements
---------------------------------
of the Company for the year ended December 31, 1996, together with the notes
related thereto, present fairly the financial position of the Company as of the
respective dates of the balance sheets included therein and the results of
operations and the changes in financial position of the Company for such fiscal
year, all in accordance with generally accepted accounting principles applied on
a consistent basis throughout the periods involved, and there has been no
material adverse change in the financial condition of the Company since December
31, 1996, except as has been disclosed to the Purchaser in writing.
5
<PAGE>
(e) Litigation. There are no actions, suits, proceedings or
----------
investigations pending or, to the best of the knowledge of the Company,
threatened against the Company or its parent corporation, Jayhawk Acceptance
Corporation, before or by any court, governmental agency or regulatory authority
(federal, state, local or foreign) or any other Person which (i) if adversely
determined could have a material adverse effect on the operations, business,
property, assets, financial condition or prospects of the Company or (ii) relate
to or challenge the legality, validity or enforceability of this Agreement.
(f) Governmental Consents. No consents, waivers, approvals or
---------------------
authorizations of, or filings, registrations or qualifications with, any
governmental authority is required on the part of the Company as a condition to
the execution, delivery and performance of this Agreement or the offer,
issuance, sale or delivery of the Preferred Stock.
(g) Capitalization. The authorized capital stock of the Company
--------------
consists of 100,000 shares of Common Stock, $.01 par value, of which 1,000
shares are issued and outstanding, and 100,000 shares of preferred stock, par
value, $.01, of which no shares are outstanding. All of the outstanding shares
are validly issued, fully paid and nonassessable and are free of preemptive
rights. The Company has no outstanding capital stock or securities convertible
into or exchangeable for any shares of its stock, or any rights (either
preemptive or other), to subscribe for or to purchase, or any options for the
purchase of, or any agreements providing for the issuance (contingent or
otherwise) of, or any calls, commitments or claims of any character relating to,
any stock or any stock or securities convertible into or exchangeable for any
stock. The Company is not subject to any obligation (contingent or otherwise) to
repurchase or otherwise acquire, redeem or retire any shares of its stock or any
securities convertible into or exchangeable for any stock. There are no voting
trusts or other agreements or understandings with respect to the voting of the
capital stock of the Company to which the Company is a party or of which the
Company has knowledge.
(h) Compliance with Applicable Laws. The business of the Company
-------------------------------
is not being conducted in violation of any law, ordinance or regulation of any
governmental body or agency, federal, state or local, except for possible
violations which individually or in the aggregate would not result in a material
adverse change in the condition (financial or otherwise), business, prospects or
results of operations of the Company.
(i) Approval of U.S. Bankruptcy Court to Amendment of
-------------------------------------------------
Corporation's Charter to Create a Class of Preferred Stock. An order has been
- ----------------------------------------------------------
entered by the U.S. Bankruptcy Court for the Northern District of Texas, Dallas
Division, which order has become non-appealable, which authorized the
Corporation's sole stockholder to vote its shares of common stock in the Company
to amend the Articles of Incorporation of the Company to create a class of
preferred stock that can be issued by the Board of Directors in accordance with
applicable corporate law, and no actions, suits or proceeds are pending or
threatened by any Person challenging such order or the transactions contemplated
hereby.
6
<PAGE>
4.2. Representations and Warranties of the Purchaser.
-----------------------------------------------
A. The Purchaser represents and warrants to, and covenants and
agrees with the Company, as follows:
(a) Authority. The execution of this Agreement has been duly
---------
executed and delivered, and constitutes a valid, legal, binding and enforceable
agreement of the Purchaser.
(b) Investment. The Purchaser is acquiring the Securities for
----------
his own account, for investment, and not with a view to any "distribution"
thereof within the meaning of the Act.
(c) Restrictions on Transfer. The Purchaser understands that
------------------------
because the Securities have not been registered under the Act, he cannot dispose
of any or all of the Securities unless such Securities are subsequently
registered under the Act or exemptions from such registration are available. The
Purchaser acknowledges and understands that he has no independent right to
require the Company to register the Securities. The Purchaser further
understands that the Company may, as a condition to the transfer of any of the
Securities, require that the request for transfer be accompanied by opinion of
counsel, in form and substance satisfactory to the Company, to the effect that
the proposed transfer does not result in violation of the Act, unless such
transfer is covered by an effective registration statement under the Act. The
Purchaser understands that each certificate representing the Securities will
bear the following legend or one substantially similar thereto:
The shares represented by this certificate have not been registered under
the Securities Act of 1933. These shares have been acquired for
investment and not with a view to distribution or resale, and may not be
sold, mortgaged, pledged, hypothecated or otherwise transferred without an
effective registration statement for such shares under the Securities Act
of 1933, or an opinion of counsel satisfactory to the corporation that
registration is not required under such Act.
(d) Sophistication. The Purchaser is knowledgeable and
--------------
experienced business and financial matters and capable of evaluating the merits
and risks of the investment in the Securities, is able to bear the economic risk
of loss of his investment in the Company, has been granted the opportunity to
make a thorough investigation of the affairs of the Company, and has availed
itself of such opportunity either directly or through his authorized
representative.
(e) Private Offering. The Purchaser has been advised that the
----------------
Securities have not been and are not being registered under the Act or under the
"blue sky" laws of any jurisdiction and that the Company in issuing the
Preferred Stock and the Conversion Shares is relying upon, among other things,
the representations and warranties of the Purchaser contained in this Section
4.2 in concluding that each such issuance is a "private offering" and does not
require compliance with the registration provisions of the Act.
7
<PAGE>
(f) Accredited Investor. The Purchaser is an "accredited
-------------------
investor" within the meaning of Rule 501 under the Act.
SECTION 5. FEES AND EXPENSES.
-----------------
The Company agrees to pay the following expenses relating to this
Agreement:
(a) the fees and expenses of legal counsel to the Purchaser
incurred in connection with the negotiation and documentation of the
transactions contemplated hereby, together with the fees and expenses of
bankruptcy counsel to the Purchaser associated with approval of the U.S.
Bankruptcy Court to the amendment of the Articles of Incorporation of the
Company.
(b) the cost of reproduction, execution and delivery of this
Agreement and any other documents contemplated hereby or thereby;
(c) all expenses relating to any amendment or modification of,
or any waiver or consent under, this Agreement; and
(d) all other fees and expenses incurred by the Purchaser
relating to the transactions contemplated hereby.
SECTION 6. FURTHER COVENANTS OF PURCHASER AND THE COMPANY.
----------------------------------------------
6.1. Covenant of the Purchaser.
-------------------------
The Purchaser hereby agrees to support and vote in favor of JAC's
plan of reorganization (the "Plan") that is filed by JAC in JAC's Chapter 11
case under Title 11, United States Code, pending in the United States Bankruptcy
Court (the "Court") for the Northern District of Texas, Dallas Division, Case
No. 397-31261-SAF-11; provided, however, the Purchaser shall not be obligated to
-------- -------
support or vote in favor of JAC's Plan if the Plan is not confirmed by the Court
by October 2, 1997, in which case the provisions of this Section 6.1 shall be of
no force or legal effect; and further, provided, that the Purchaser shall not be
------- --------
obligated to support or vote for the Plan unless the Plan contains the following
provisions (herein, the "Designated Provisions") (or, in lieu of any one or more
of the Designated Provisions, such other provisions substantially similar to the
Designated Provisions respecting the treatment of the Preferred Stock and the
JMAC Claim (as defined below) as are reasonably acceptable to the Purchaser and
are agreed to in writing by the Purchaser prior to confirmation of the Plan):
(i) The Plan shall provide for payment by JAC of the $7.4 million
claim due to the Company (the "JMAC Claim") in full within six months
following confirmation of the Plan in accordance with an amortization
schedule reasonably acceptable to the Purchaser and to be specified in
the Plan; and
8
<PAGE>
(ii) On the confirmation date of the Plan, JAC shall issue to the
Purchaser a number of shares of Common Stock of JAC equal to the
amount derived by dividing (i) the redemption price of the Preferred
Stock at the confirmation date, as determined pursuant to that
"Statement of Resolution Establishing Series A Preferred Stock of
Jayhawk Medical Corporation," the form of which is attached hereto, by
(ii) an amount equal to 75% of the average of the last reported daily
sale price per share of JAC's Common Stock on the NASDAQ National
Market during the period beginning with the twentieth (20th) trading
day preceding the date the Plan is confirmed and continuing for a
period ending on the twentieth (20th) trading day following the date
the Plan is confirmed, as reported in The Wall Street Journal, and in
exchange therefore the Purchaser shall surrender the Preferred Stock
to JAC for cancellation (such shares of Common Stock shall be issued
in the name of the Purchaser or such other name as he shall direct).
In the event that the terms of the Plan, as proposed for confirmation or as
confirmed, vary in any respect with respect to the foregoing, or do not contain
all of the Designated Provisions (or, in lieu of any one or more of the
Designated Provisions, such other provisions substantially similar to the
Designated Provisions respecting the treatment of the Preferred Stock and the
JMAC Claim as are reasonably acceptable to the Purchaser and as are agreed to in
writing by the Purchaser prior to confirmation of the Plan), or in the event the
Plan is not confirmed by October 2, 1997, the Purchaser shall have no obligation
to support or to vote for the Plan and the foregoing provisions for the
treatment of the Preferred Stock and the JMAC Claim under the Plan shall be of
no further effect, and the Preferred Stock shall be retained by the Purchaser
and Purchaser shall be entitled to all the rights and privileges provided
therefor under the aforesaid Statement of Resolution Establishing Series of
Preferred Stock of Jayhawk Medical Corporation and under this Agreement.
6.2. Covenant of the Company.
-----------------------
The Company agrees that promptly upon receipt of the proceeds of
JAC's payment of all or any part of the JMAC Claim, the Company shall remit such
payment to the Purchaser in reduction of indebtedness of the Company due to the
Purchaser (to be applied on a dollar-for-dollar basis). In furtherance of the
foregoing and to further secure the Purchaser, the Company hereby assigns to the
Purchaser all of its right, title and interest to the JMAC Claim and all
proceeds receivable in payment thereof and hereby unconditionally and
irrevocably directs JAC to make payment of the JMAC Claim due to the Company
directly to the Purchaser.
SECTION 7. INDEMNIFICATION.
---------------
7.1. Indemnification.
---------------
(a) The Company agrees to indemnify the Purchaser and any Affiliate
thereof against and hold each of them harmless from all losses, claims,
obligations, demands, assessments, penalties, liabilities, costs, damages,
reasonable attorneys' fees and expenses asserted against or incurred by the
Purchaser or any Affiliate thereof by reason of or resulting from a breach by
the Company of any representation, warranty, covenant or agreement contained
herein.
9
<PAGE>
(b) The remedies provided in this Section 6.1 shall not be exclusive
of any other rights or remedies available by one party against the other, either
at law or in equity.
SECTION 8. MISCELLANEOUS.
-------------
8.1. Survival of Provisions.
----------------------
All of the representations, warranties and covenants of the parties
made herein and each of the provisions of Sections 4, 5, 6, 7 or 8.1 shall
survive (i) the execution and delivery of the shares and closing under this
Agreement, (ii) any investigation by or on behalf of the Purchaser, the Company
or any Affiliate of either party, acceptance by the Purchaser of any of the
Preferred Stock and payment therefor and (iii) the termination of this
Agreement.
8.2. Notices.
-------
All notices, demands and other communications provided for or
permitted hereunder shall be made in writing and shall be by registered or
certified first-class mail, return receipt requested, telex, telegram,
telecopier, courier service or personal delivery:
(a) if to the Purchaser, at the following address:
100 Crescent Court
Suite 1620
Dallas, TX 75201
With copy to:
L. Steven Leshin
Jenkens & Gilchrist
1445 Ross Avenue, Suite 3200
Dallas, Texas 75202
(b) if to the Company, at the following address:
Galleria Tower II
13455 Noel Road, Suite 1800
Dallas, TX 75240
Attention: President
All such notices and communications shall be deemed to have been
duly given: when delivered by hand, if personally delivered; five business days
after being deposited in the mail, postage prepaid, if mailed; when answered
back, if telexed; when receipt is acknowledged, if telecopied; and on the day
delivered, if sent by courier service.
10
<PAGE>
8.3. Successors and Assigns.
----------------------
This Agreement shall inure to the benefit of and be binding upon the
successors and assigns of the parties hereto, other than transferees of
Preferred Stock or the Conversion Stock as such.
8.4. Amendment and Waiver.
--------------------
No failure or delay on the part of the Company or the Purchaser in
exercising any right, power or remedy hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise of any such right, power or
remedy preclude any other or further exercise thereof or the exercise of any
other right, power or remedy. The remedies provided for herein are cumulative
and are not exclusive of any remedies that may be available to the Company or
the Purchaser at law or in equity or otherwise. No waiver of or consent to any
departure by the Company or the Purchaser from any provision of this Agreement
shall be effective unless signed in writing by the party entitled to the benefit
thereof. Except as otherwise provided herein, no amendment, modification or
termination of any provision of this Agreement shall be effective unless signed
in writing by or on behalf of the Purchaser and the Company. Any amendment,
supplement or modification to any provision of this Agreement, any waiver of any
provision of this Agreement, and any consent to any departure by the Company
from the terms of any provision of this Agreement, shall be effective only in
the specific instance and for the specific purpose for which made or given.
8.5. Counterparts.
------------
This Agreement may be executed in any number of counterparts and by
the parties hereto in separate counterparts, each of which when so executed
shall be deemed to be an original and all of which taken together shall
constitute one and the same agreement.
8.6. Governing Law.
-------------
THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF TEXAS, WITHOUT REGARD TO PRINCIPLES OF CONFLICT OF
LAWS.
8.7. Severability.
------------
Any provision of this Agreement that is prohibited or unenforceable
in any jurisdiction shall, in such jurisdiction, be ineffective to the extent of
such prohibition or unenforceability without invalidating the remaining
provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
11
<PAGE>
8.8. Entire Agreement.
----------------
This Agreement, together with the exhibits hereto, is intended by
the parties as a final expression of their agreement and intended to be a
complete and exclusive statement of the agreement and understanding of the
parties hereto in respect of the subject matter contained herein. There are no
restrictions, promises, warranties or undertakings, other than those set forth
or referred to herein or therein. This Agreement, together with the exhibits
hereto, supersede all prior agreements and understandings between the parties
with respect to such subject matter.
[Remainder of this Page intentionally left blank]
12
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their respective officers hereunto duly authorized, as of the
date first above written.
JAYHAWK MEDICAL
ACCEPTANCE CORPORATION
By: /s/ DOUGLAS THEODORE
---------------------------------
Douglas Theodore
Vice President
PURCHASER
/s/ CARL H. WESTCOTT
--------------------------------------
Carl H. Westcott
13
<PAGE>
EXHIBIT 10.43
SETTLEMENT AGREEMENT
--------------------
This Settlement Agreement (this "Agreement") is made and entered into as
---------
of the ___ day of April, 1997, by and among Jayhawk Acceptance Corporation (the
"Debtor"), Fleet Capital Corporation ("Fleet"), and Carl H. Westcott
------ -----
("Westcott").
----------
RECITALS
--------
A. The Debtor and Fleet entered into that certain Loan and Security
Agreement, dated April 4, 1995, as amended by various amendments numbered First
through Seventh (as amended, the "Pre-Petition Loan Agreement"), pursuant to
---------------------------
which Fleet made available to the Debtor a credit facility in an amount up to
$65,000,000, subject to certain terms and conditions.
B. On February 7, 1997 (such date, and the specific time of filing on
such date, being referred to as the "Petition Date"), the Debtor filed its
-------------
Chapter 11 voluntary petition pursuant to 11 U.S.C. (S) 101 et seq. (the
"Bankruptcy Code") as Case No. 397-31261-SAF-11 (the "Bankruptcy Case") in the
--------------- ---------------
United States Bankruptcy Court for the Northern District of Texas, Dallas
Division (the "Bankruptcy Court"). The Debtor has continued to operate and
----------------
manage its business from such date.
C. Since the Petition Date, the Debtor and Fleet have had disputes
concerning the Debtor's use of Fleet's cash collateral.
D. On or about February 11, 1997, the Bankruptcy Court entered the
Interim Order Authorizing The Use Of Cash Collateral And Providing For Adequate
Protection (the "First Interim Cash Collateral Order"), which governed the
-----------------------------------
Debtor's use of Fleet's cash collateral for the period from February 7, 1997
through February 28, 1997.
E. On or about March 14, 1997, the Bankruptcy Court entered the Second
Interim Order Authorizing The Use Of Cash Collateral And Providing For Adequate
Protection (the "Second Interim Cash Collateral Order"), which governs the
------------------------------------
Debtor's use of Fleet's cash collateral for the period from March 1, 1997
through March 31, 1997.
F. On or about March 25, 1997, the Bankruptcy Court entered the Third
Interim Order Authorizing The Use Of Cash Collateral And Providing For Adequate
Protection (the "Third Interim Cash Collateral Order"), which governs the
-----------------------------------
Debtor's use of Fleet's cash collateral for the period from April 1, 1997
through April 30, 1997 .
G. To settle all disputes of the parties hereto, including, but not
limited to, those arising from the Debtor's cash collateral motion and Fleet's
objections thereto, and to resolve issues addressed in this Agreement regarding
the Debtor's plan of reorganization, Fleet, the Debtor, and Westcott have
entered into this Agreement.
SETTLEMENT AGREEMENT - PAGE 1
- --------------------
<PAGE>
AGREEMENT OF PARTIES
--------------------
NOW, THEREFORE, for and in consideration of the mutual covenants set forth
in this Agreement and for other good and valuable consideration, Fleet, the
Debtor, and Westcott intending to be fully bound, agree to the above Recitals
and as follows:
1. Definitions. For purposes of this Agreement, the following terms will
-----------
have the definitions set forth below:
"Bankruptcy Case" shall have the meaning given it in Recital B.
--------------- ---------
"Bankruptcy Court" shall have the meaning given it in Recital B.
---------------- ---------
"Cash Collateral Orders" shall mean the First Interim Cash Collateral
----------------------
Order, the Second Interim Cash Collateral Order, the Third Interim Cash
Collateral Order (each as defined in the Recitals), and the Final Cash
Collateral Order.
"Debtor" shall have the meaning given it in the introductory paragraph
------
to this Agreement, and, to the extent that this Agreement refers to the Debtor
from and after the Effective Date, the term "Debtor" as used herein shall also
-----
refer to the "Reorganized Debtor."
------------------
"Effective Date" shall have the meaning ascribed to it in the Plan.
--------------
"Final Cash Collateral Order" shall mean the Joint Stipulation And
---------------------------
Agreed Final Order Authorizing The Use Of Cash Collateral And Providing For
Adequate Protection, which shall be in the form attached hereto as Exhibit A, or
---------
as may be modified by the mutual agreement of Fleet and the Debtor.
"Final Order" shall mean an order of the Bankruptcy Court, as entered
-----------
by the clerk of the Bankruptcy Court on a docket in, or related to, the
Bankruptcy Case, or an order of another court of competent jurisdiction that the
Bankruptcy Court has specifically permitted to proceed to enter such order, as
entered by the clerk of such court on the appropriate docket (i) as to which the
time to appeal or to seek certiorari has expired, and as to which no appeal or
petition for certiorari has been timely taken, or (ii) as to which any appeal
that has been or may be filed, such appeal or petition has been resolved by the
highest court to which the order was appealed or from which certiorari was
sought, and the time to appeal or any extension thereof or to seek certiorari of
such appellate order has expired.
"JayMed" shall mean Jayhawk Medical Acceptance Corporation, a Texas
------
corporation.
"Loan Agreement" shall mean a Loan and Security Agreement in the form
--------------
annexed hereto as B, or as may be modified by the mutual agreement of Fleet and
--
the Debtor.
SETTLEMENT AGREEMENT - PAGE 2
- --------------------
<PAGE>
"Loan Documents" shall mean the Note, the Loan Agreement, the Pledge
--------------
Agreement, the New Guaranty and all other documents executed in connection with
or as security for the Note.
"New Guaranty" shall mean the Limited Guaranty in the form annexed
------------
hereto as Exhibit C, or as may be modified by the mutual agreement of Fleet and
---------
the Debtor.
"Note" shall mean the Term Note in the form annexed hereto as Exhibit
---- -------
D, or as may be modified by the mutual agreement of Fleet and the Debtor.
- -
"Obligations" shall mean the Debtor's obligations to Fleet under the
-----------
Pre-Petition Loan Agreement (including the "Obligations", as defined therein),
together with the Debtor's and Reorganized Debtor's obligations herein.
"Participant" shall mean Texas Commerce Bank National Association.
-----------
"Petition Date" shall have the meaning given it in Recital B.
------------- ---------
"Plan" shall mean a plan of reorganization in the form annexed hereto
----
as Exhibit F, or as may be modified by the mutual agreement of Fleet and the
---------
Debtor, which is to be filed by the Debtor in the Bankruptcy Case.
"Plan Confirmation" shall mean confirmation of the Plan by the
-----------------
Bankruptcy Court in the Bankruptcy Case.
"Pledge Agreement" shall mean the Pledge Agreement in the form annexed
----------------
hereto as Exhibit E, or as may be modified by the mutual agreement of Fleet and
---------
the Debtor.
"Pre-Petition Loan Agreement" shall have the meaning given it in
---------------------------
Recital A.
- ---------
"Settlement Motion" shall mean a joint motion in the form of Exhibit G
----------------- ---------
annexed hereto, or as may be modified by the mutual agreement of Fleet and the
Debtor, to be filed in the Bankruptcy Court in support of and seeking
authorization for the Debtor to enter into and perform its obligations under
this Agreement.
"Settlement Order" shall mean an order approving the Settlement
----------------
Motion, which shall be in the form of Exhibit H annexed hereto, or as may be
---------
modified by the mutual agreement of Fleet and the Debtor.
"Trust" shall mean the Jayhawk Funding Trust I, a Delaware business
-----
trust, which is an entity wholly-owned by the Debtor.
"Westcott Release" shall mean a release executed by Westcott in favor
----------------
of Fleet and Participant, which shall be in the form of Exhibit I annexed
---------
hereto, or as may be modified by the mutual agreement of Fleet and the Debtor.
SETTLEMENT AGREEMENT - PAGE 3
- --------------------
<PAGE>
2. Plan Confirmation. The Debtor will seek to obtain Plan Confirmation
-----------------
as expeditiously as possible, and, in any event, not later than July 31, 1997.
Subject to satisfaction of the conditions precedent set forth in Sections 8 and
-------- -
9 below, Fleet will support the Plan and vote to accept it. The Debtor shall
- -
cause JayMed to support and vote for the Plan.
3. Final Cash Collateral Order. The Debtor and Fleet agree to support
---------------------------
and diligently seek approval of the Final Cash Collateral Order.
4. Payments. Prior to the Effective Date, the Debtor shall make to
--------
Fleet the payments as are provided for in the Third Interim Cash Collateral
Order, and, subject to Bankruptcy Court approval, the Final Cash Collateral
Order. After the Effective Date, the Debtor shall make to Fleet the payments
required by the Note, the other Loan Documents, and the Plan.
5. Collateral. Prior to the Effective Date, the Collateral securing the
----------
Obligations shall consist of the property of Debtor described in the Pre-
Petition Loan Agreement that was in existence on the Petition Date and such
other property of Debtor in which Fleet is accorded a lien pursuant to any of
the Cash Collateral Orders. After the Effective Date, the Collateral securing
the Obligations shall consist of all of the property described in any of the
Loan Documents.
6. Reporting. Prior to the Effective Date, the Debtor shall provide to
---------
Fleet reports in accordance with Cash Collateral Orders entered in the
Bankruptcy Case. After the Effective Date, the Debtor shall provide to Fleet the
reports as and when called for by the Loan Documents.
7. Loan Documents. On or before, but effective only on the Effective
--------------
Date, the Debtor shall execute or cause to be executed and deliver or cause to
be delivered to Fleet the Loan Documents and such other instruments, documents,
certificates, opinions and assurances as Fleet might reasonably request in
connection with the use of Fleet's cash collateral on the basis outlined in the
Loan Documents and in connection with the Debtor's authority and capacity to
accept the use of Fleet's cash collateral and execute the Loan Documents. Upon
the execution, delivery and effectiveness of the Loan Documents, the Loan
Documents will constitute the entire agreement among the parties hereto with
respect to the subject matter hereof, and will supersede all prior agreements,
understandings, negotiations and discussions, whether oral or written, of the
parties with respect thereto, including specifically, but without limitation,
this Agreement.
8. Specific Agreements of Westcott. Prior to, but effective on, the
-------------------------------
Effective Date, Westcott shall execute and deliver to Fleet the New Guaranty and
the Westcott Release. Westcott shall support and vote for the Plan. Westcott
shall execute or cause to be executed and deliver or cause to be delivered to
Fleet such instruments, documents, certificates, opinions and assurances as
Fleet might reasonably request in connection with the foregoing undertakings.
Westcott consents to the terms of this Agreement and to the terms of the Plan
and the Loan Documents, which are annexed to this Agreement as Exhibits.
SETTLEMENT AGREEMENT - PAGE 4
- --------------------
<PAGE>
9. Conditions Precedent. Fleet's agreement to support and vote for the
--------------------
Plan is subject to satisfaction of each of the following conditions precedent:
(a) The Bankruptcy Court shall have entered the Final Cash Collateral
Order on or before April 30, 1997, and it shall have become a Final Order.
(b) The Debtor shall have filed the Plan on or before April 18, 1997,
with all of the Loan Documents appended to a Supplement to the Plan, which
will be filed with the Bankruptcy Court simultaneously with the Plan.
(c) The Plan is not modified or amended without Fleet's prior written
consent (which Fleet may give or withhold in its sole discretion).
(d) The Disclosure Statement shall have been filed on or before April
18, 1997.
(e) The Debtor shall have filed the Settlement Motion concurrently
with its filing of the Plan and shall have diligently and in good faith
sought to obtain entry of the Settlement Order.
(f) Fleet shall have reviewed and approved, in its reasonable
discretion, the Final Order Authorizing Debtor's Limited Use Of Cash
Collateral Of Prudential Securities Credit Corporation, which will be filed
in the Bankruptcy Case.
(g) No liens or other encumbrances shall have been created on the
Collateral securing the Obligations, other than liens and encumbrances in
favor of Fleet, the encumbrance in favor of Prudential Securities Credit
Corporation ("PSCC") covering the Debtor's interest in the Trust, which
----
shall secure only the indebtedness of the Debtor owing to PSCC as of the
Petition Date.
(h) JayMed, and any assignee, in whole or in part, of any claim of
JayMed in the Bankruptcy Case (including Westcott), shall have voted for
and supported the Plan.
(i) The Disclosure Statement accompanying the Plan shall have been
approved by the Bankruptcy Court.
10. Certain Representations and Warranties. As further consideration for
--------------------------------------
the execution of this Agreement, each party hereby expressly warrants and
represents to the other party hereto that before executing this Agreement, each
such party has fully informed himself or itself of its terms, contents,
conditions and effects; that in executing this Agreement each such party has had
the opportunity to seek the benefits and advice of attorneys of its own choosing
and has voluntarily executed this Agreement; that no promise or representation,
oral or otherwise, has been made to him or it by any other party or anyone
acting for any other party, except as is expressly stated in this Agreement and
in the instruments referred to herein; and each party fully understands that the
considerations mentioned herein, and the receipt of the considerations which
SETTLEMENT AGREEMENT - PAGE 5
- --------------------
<PAGE>
are herein acknowledged and confessed, are all the considerations that are ever
to be given for the release of claims against the other party or parties. Each
party further warrants and represents that he or it has made no transfer or
assignment of any rights being released hereunder. Each of the parties further
warrants and represents that all necessary corporate and board approval has been
obtained approving this Agreement. Fleet, Westcott and the Debtor represent and
warrant that each one of them has the legal capacity to enter into this
Agreement, and this Agreement is binding and enforceable on each one of them in
accordance with its terms; provided, however, that this Agreement shall not be
binding upon the Debtor, the Debtor's estate or its creditors and other parties
until the Settlement Order is entered.
11. Time of Essence. Time is of the essence of this Agreement.
---------------
12. Governing Law. This Agreement shall be governed by the laws of the
-------------
State of Texas and by the laws of the United States of America, which are
effective this date.
13. Counterparts. This Agreement may be executed in counterparts, and
------------
when so executed each counterpart shall be deemed to be an original, and said
counterparts together shall constitute one and the same instrument. However, no
party shall be required to exhibit or prove all counterparts of the original
agreement to make proof of same, rather each counterpart shall constitute an
enforceable agreement against the party who has executed the same.
14. Successors and Assigns. This Agreement shall be binding upon and
----------------------
inure to the benefit of the parties hereto and their respective heirs,
successors, personal representatives and assigns hereto.
15. Final Agreement. THIS AGREEMENT, TOGETHER WITH ALL DOCUMENTS OR
---------------
PLEADINGS REFERENCED HEREIN OR TO BE EXECUTED IN CONNECTION THEREWITH,
CONSTITUTES THE ENTIRE AGREEMENT BETWEEN THE PARTIES HERETO WITH RESPECT TO THE
SUBJECT MATTER HEREOF AND SUPERSEDES ALL PRIOR AND CONTEMPORANEOUS AGREEMENTS,
UNDERSTANDINGS, NEGOTIATIONS AND DISCUSSIONS, WHETHER ORAL OR WRITTEN, OF THE
PARTIES WITH RESPECT THERETO. NO AMENDMENT, MODIFICATION OR RESCISSION OF THIS
AGREEMENT SHALL BE EFFECTIVE UNLESS SET FORTH IN WRITING SIGNED BY EACH PARTY
HERETO.
16. JURY TRIAL WAIVER. EACH OF THE DEBTOR AND WESTCOTT WAIVES THE RIGHT
-----------------
TO TRIAL BY JURY (WHICH FLEET HEREBY ALSO WAIVES) IN ANY ACTION, SUIT,
PROCEEDING OR COUNTERCLAIM OF ANY KIND ARISING OUT OF OR RELATED TO ANY OF THE
LOAN DOCUMENTS, THE OBLIGATIONS OR THE COLLATERAL. EACH OF THE DEBTOR AND
WESTCOTT ACKNOWLEDGES THAT THE FOREGOING WAIVER IS A MATERIAL INDUCEMENT TO
FLEET'S ENTERING INTO THIS AGREEMENT AND THAT FLEET IS RELYING UPON THE
FOREGOING WAIVER IN ITS FUTURE DEALINGS WITH THE DEBTOR AND WESTCOTT. EACH OF
THE DEBTOR AND WESTCOTT
SETTLEMENT AGREEMENT - PAGE 6
- --------------------
<PAGE>
WARRANTS AND REPRESENTS THAT IT HAS REVIEWED THE FOREGOING WAIVER WITH ITS LEGAL
COUNSEL AND HAS KNOWINGLY AND VOLUNTARILY WAIVED ITS JURY TRIAL RIGHTS FOLLOWING
CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY
BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.
[This space intentionally left blank.]
SETTLEMENT AGREEMENT - PAGE 7
- --------------------
<PAGE>
IN WITNESS WHEREOF, the parties, acting individually or by and through
their duly authorized representatives, have executed this Agreement as of the
day and year first above written.
JAYHAWK ACCEPTANCE CORPORATION
By: /s/ Jack T. Smith
------------------------------------
Title: President
---------------------------------
Dated: April 17, 1997
FLEET CAPITAL CORPORATION
By: /s/ H. Michael Wills
------------------------------------
Title: Vice President
---------------------------------
Dated: April 17, 1997
Carl H. Westcott joins in this Agreement for
the purpose of evidencing his agreement with
the terms and conditions set forth in
Sections 8, 10, 15 and 16 of this Agreement
---------- -- -- --
and acknowledging accuracy of Recitals.
/s/ Carl H. Westcott
------------------------------------------
CARL H. WESTCOTT
Dated: April 17, 1997
EXHIBITS:
- --------
A - Final Cash Collateral Order
B - Loan Agreement
C - New Guaranty
D - Note
E - Pledge Agreement
F - Plan
G - Settlement Motion
H - Settlement Order
I - Westcott Release
SETTLEMENT AGREEMENT - PAGE 8
- --------------------
<PAGE>
STATE OF TEXAS (S)
(S)
COUNTY OF DALLAS (S)
BEFORE ME, the undersigned authority, on this day personally appeared H.
Michael Wills, known to me to be the person whose name is subscribed to this
Settlement Agreement and acknowledged that he is the Vice President of Fleet
Capital Corporation and that he is fully authorized to execute this Settlement
Agreement for the purposes and consideration expressed herein.
GIVEN UNDER MY HAND AND SEAL OF OFFICE this 17 day of April, 1997.
/s/ Peggy Sinclair
----------------------------------------
NOTARY PUBLIC
in and for the State of Texas
My Commission Expires:
9/22/97
- ------------------------
STATE OF TEXAS (S)
(S)
COUNTY OF DALLAS (S)
BEFORE ME, the undersigned authority, on this day personally appeared Jack
T. Smith, known to me to be the person whose name is subscribed to this
Settlement Agreement and acknowledged that he is the President of Jayhawk
Acceptance Corporation and that he is fully authorized to execute this
Settlement Agreement for the purposes and consideration expressed herein.
GIVEN UNDER MY HAND AND SEAL OF OFFICE this 17 day of April, 1997.
/s/ Peggy Sinclair
--------------------------------------
NOTARY PUBLIC
in and for the State of Texas
My Commission Expires:
9/22/97
- ----------------------
SETTLEMENT AGREEMENT - PAGE 9
- --------------------
<PAGE>
STATE OF TEXAS (S)
(S)
COUNTY OF DALLAS (S)
BEFORE ME, the undersigned authority, on this day personally appeared Carl
H. Westcott, known to me to be the person whose name is subscribed to this
Settlement Agreement and acknowledged that he is Carl H. Westcott and that he is
executing this Settlement Agreement for the purposes and consideration expressed
herein.
GIVEN UNDER MY HAND AND SEAL OF OFFICE this 17 day of April, 1997.
/s/ Judith Pearce LeDoux
---------------------------------------
NOTARY PUBLIC
in and for the State of Texas
My Commission Expires:
12/16/2000
- ---------------------
SETTLEMENT AGREEMENT - PAGE 10
- --------------------
<PAGE>
EXHIBIT A
---------
to
Settlement Agreement
Final Cash Collateral Order
---------------------------
[Attached.]
EXHIBIT A - PAGE 1
- ---------
<PAGE>
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF TEXAS
DALLAS DIVISION
IN RE: (S)
(S)
JAYHAWK ACCEPTANCE (S) NO. 397-31261-SAF-11
CORPORATION, (S)
(S) CHAPTER 11
DEBTOR. (S)
JOINT STIPULATION AND AGREED FINAL ORDER
AUTHORIZING THE USE OF CASH COLLATERAL
AND PROVIDING FOR ADEQUATE PROTECTION
-------------------------------------
On the ____ day of April, 1997, there came on for consideration the
final hearing on the Debtor's Joint Motion To Approve Entry Of Joint Stipulation
And Agreed Final Order Authorizing The Use Of Cash Collateral And Providing For
Adequate Protection, with respect to the Debtor's request to use cash collateral
for the period from and after May 1, 1997 pursuant to the terms hereof (the
"Motion"). Fleet Capital Corporation ("Fleet") appeared by and through its
- ------- -----
counsel, David Weitman, Esq. of the law firm of Hughes & Luce, L.L.P. and C.
Edward Dobbs, Esq. of the law firm of Parker, Hudson, Rainer & Dobbs, L.L.P.;
the Debtor, Jayhawk Acceptance Corporation (the "Debtor"), appeared by and
------
through its counsel, Harry A. Perrin, Esq. of the law firm of Weil, Gotshal &
Manges, L.L.P. Counsel for the Debtor and Fleet announced to the Court that
parties had reached agreement with respect to issues relating to the Debtor's
use of cash collateral of Fleet and Fleet's request for adequate protection
thereof, which agreement is set forth hereafter. The Court finds that notice is
sufficient and appropriate under the particular circumstances of this case. The
Court is advised that Fleet has demanded adequate protection of its interests in
its collateral to be used by the Debtor under 11 U.S.C. (S)(S) 361 and 363. The
Debtor represented to the Court that it will comply with the terms of this Joint
JOINT STIPULATION AND AGREED FINAL ORDER
AUTHORIZING THE USE OF CASH COLLATERAL, ETC - PAGE 1
- -------------------------------------------
<PAGE>
Stipulation And Agreed Final Order Authorizing Use Of Cash Collateral And
Providing For Adequate Protection (this "Final Cash Collateral Order"). The
---------------------------
parties hereto stipulate and agree to the terms set forth herein, and the Court
finds that there is cause to adopt said stipulation and approve the agreement of
such parties. The Court hereby makes the following findings of fact and
conclusions of law as set forth below:
I. FINDINGS OF FACT
1. Appropriate notice and opportunity for hearing have been
given for the Motion in accordance with the provisions of (S)(S) 361 and 363 of
the Bankruptcy Code. This Court has jurisdiction of this contested matter
pursuant to 28 U.S.C. (S) 1334. This is a core proceeding as defined in 28
U.S.C. (S) 157(b)(2)(A), (M), and (O) and is governed by 11 U.S.C. (S)(S) 361
and 363.
2. On or about February 7, 1997 (such date, and the specific time of
filing on such date, being referred to as the "Petition Date"), the Debtor filed
-------------
its voluntary petition under Chapter 11 of the Bankruptcy Code. Since that date,
the Debtor has remained in possession of its property and operated its affairs
as a debtor-in-possession pursuant to 11 U.S.C. (S)(S) 1107 and 1108.
3. The Debtor, which is a Texas corporation, is a specialized
financial services company, principally engaged in the business of serving
automobile dealers in the sub-prime credit market, providing an indirect
financing source to buyers of used vehicles with limited access to traditional
sources of consumer credit. The Debtor also owns 100% of the shares of Jayhawk
Medical Acceptance Corporation ("Jaymed") and Jayhawk Services, Inc.
------
("Jayserv"), neither of which have filed for bankruptcy protection. Jaymed is a
-------
start-up subsidiary in a large new market of purchasing, what the Debtor
maintains are, creditworthy receivables from plastic surgeons, other doctors and
dentists. The Debtor maintains that Jayserv is the employer of all of the
employees of Jaymed and Debtor.
4. No party disputes that during 1996, Jayhawk completed two
securitization transactions, whereby it created Jayhawk Funding Trust I, a
Delaware business trust (the "Trust"), selling contracts (the "Trust
----- -----
Contracts") to the Trust having an aggregate principal balance of approximately
- ---------
$177 million. The Debtor maintains that the Trust sold approximately $42
million in aggregate principal face amount of notes (the "Series A Notes") to
--------------
investors in March 1996, and the Trust sold approximately $47.9 million in
aggregate principal face amount of notes (the "Series B Notes") to a single
--------------
investor in August 1996.
5. The Debtor maintains that neither the Trust Contracts nor any
collections from such Trust Contracts are property of the estate. The legal and
beneficial ownership interest (shares) in the Trust holding the Trust Contracts
is owned by the Debtor. The Debtor also services the Trust Contracts owned by
the Trust, receiving income in the form of servicing fees.
JOINT STIPULATION AND AGREED FINAL ORDER
AUTHORIZING THE USE OF CASH COLLATERAL, ETC - PAGE 2
- -------------------------------------------
<PAGE>
6. The Debtor maintains that Prudential Securities Credit
Corporation ("Prudential") holds a valid and properly perfected security
----------
interest in the Debtor's legal and beneficial ownership interest (shares) in the
Trust and the Trust shares, securing the principal sum of approximately $5
million as of the Petition Date.
7. The Debtor's operation of its business requires that it use Cash
Collateral (as defined below) of Fleet immediately under the terms hereof to
preserve the assets of its estate and to enable its operations to continue from
and after May 1, 1997. Without the use of its Cash Collateral, the Debtor will
suffer irreparable harm.
8. The Debtor acknowledges the debts owed to Fleet defined as the
"Pre-Petition Indebtedness" in Fleet's first objection filed with the Court on
February 11, 1997 (hereafter "Fleet Objection 1"), and acknowledges that Fleet
-----------------
is oversecured. Fleet maintains that it has a first, valid, prior, and perfected
security interest in and lien on the Fleet Collateral (as defined in Fleet
Objection 1), and all proceeds thereof, including cash collateral derived
therefrom that constitute "cash collateral" within the meaning of 11 U.S.C. (S)
363(a) (subject to the provisions of paragraph 3(f) below, the "Cash
----
Collateral"), to secure repayment of the Pre-Petition Indebtedness.
- ----------
9. The Debtor admits, acknowledges, and stipulates that the
principal amount of the Pre-Petition Indebtedness, as of the Petition Date, owed
by the Debtor to Fleet (under the Loan Documents, as defined in Fleet Objection
1) is $63,079,797.34 in unpaid principal, exclusive of accrued but unpaid
interest, attorneys' fees, costs and expenses.
10. Fleet maintains that the Pre-Petition Indebtedness is secured by
first, valid, prior, and continuing perfected security interests in and liens on
all of the Fleet Collateral and the proceeds and products thereof, all as more
fully described in the Loan Documents, and any and all rents, income, or
proceeds derived therefrom, and accessions, substitutions, renewals,
improvements, replacements, and additions thereto, then owned or thereafter
acquired by the Debtor, and all rights and property of any kind forming the
subject matter of any of the foregoing existing as of the Petition Date,
including the Cash Collateral and all post-petition proceeds and products
thereof under 11 U.S.C. (S) 552(b) (collectively, the "Pre- Petition
-------------
Collateral"). Fleet and the Debtor maintain that the Pre-Petition Indebtedness
- ----------
is fully secured by the Pre-Petition Collateral. The Pre-Petition Collateral
continues to secure the repayment of the Pre-Petition Indebtedness as evidenced
by the Loan Documents.
11. Based upon descriptions of the Pre-Petition Collateral in the
parties' pleadings and statements by counsel for the Debtor and for Fleet, the
Pre-Petition Collateral includes a large amount of consumer chattel paper, much
of which is located in a secure storage facility at Inwood Security Vaults, Inc.
Fleet has consented to Debtor's access to the Fleet Collateral and the Post-
Petition New Contracts (as defined hereafter) located at the storage facility,
subject to the conditions set forth below. Those contracts funded by the Debtor
from and after the Petition Date which are funded with any Cash Collateral are
hereafter referred to as the "Post-Petition New Contracts." Auto contracts which
---------------------------
the Debtor reported in Fleet's Borrowing Base as Fleet's
JOINT STIPULATION AND AGREED FINAL ORDER
AUTHORIZING THE USE OF CASH COLLATERAL, ETC - PAGE 3
- -------------------------------------------
<PAGE>
collateral as of the Petition Date, but which the Debtor had not purchased as of
the Petition Date, and that are estimated by the Debtor as of the Petition Date
to be in the amount of $10 million, less $3.4 million of such auto contracts
later unwound by the Debtor, together with auto contracts purchased by the
Debtor from the Petition Date through and including February 28, 1997, shall
hereafter be referred to, as the "Additional Fleet Contracts." As of this date,
--------------------------
all of the Additional Fleet Contracts have been funded by the Debtor. Hereafter,
the term "Existing Fleet Collateral" shall mean the Pre-Petition Collateral,
-------------------------
the Post-Petition New Contracts, and the Additional Fleet Contracts, and any
"cash collateral" derived therefrom within the meaning of 11 U.S.C. (S) 363(a).
12. On February 11, 1997, this Court entered a certain Order
Authorizing The Use of Cash Collateral And Providing For Adequate Protection
(the "First Interim Cash Collateral Order"), which governed the Debtor's use of
-----------------------------------
Cash Collateral for the period from February 1, 1997 to February 28, 1997.
13. On or about March 14, 1997, this Court entered a certain Second
Interim Order Authorizing The Use of Cash Collateral And Providing For Adequate
Protection (the "Second Interim Cash Collateral Order"), which governed the
------------------------------------
Debtor's use of Cash Collateral for the period from March 1, 1997 to March 31,
1997.
14. On or about March 25, 1997, this Court entered a certain Third
Interim Order Authorizing The Use of Cash Collateral And Providing For Adequate
Protection (together with the Supplement thereto, collectively, the "Third
------
Interim Cash Collateral Order"), governing the Debtor's use of Cash Collateral
- -----------------------------
for the period from April 1, 1997 to April 30, 1997.
15. The Debtor and Fleet have reached agreement with respect to the
Debtor's use of Cash Collateral for the period from and after May 1, 1997
pursuant to the terms set forth herein and in that certain Settlement Agreement,
by and among Fleet, the Debtor, and Carl H. Westcott, dated April ___, 1997 (the
"Settlement Agreement"); and the Debtor has sought approval from this Court. The
--------------------
terms and provisions of the Settlement Agreement and the Exhibits thereto are
incorporated herein, but the Settlement Agreement is not binding upon the
parties thereto unless authorized pursuant to a separate order of this Court.
16. This Final Cash Collateral Order shall be effective on the date
that this Court signs this Final Cash Collateral Order.
WHEREUPON, the Court makes the following conclusions of law:
II. CONCLUSIONS OF LAW
A. Fleet, as the holder of a secured claim against the Debtor, is
entitled to adequate protection of its interests in the Fleet Collateral under
11 U.S.C. (S)(S) 361 and 363, as provided below.
B. Fleet agrees that it is adequately protected for the period from
and after May 1, 1997 by the provisions of this Final Cash Collateral Order.
Fleet should be granted a
JOINT STIPULATION AND AGREED FINAL ORDER
AUTHORIZING THE USE OF CASH COLLATERAL, ETC - PAGE 4
- -------------------------------------------
<PAGE>
replacement lien in any Post-Petition New Contracts which are funded by the use
of its Cash Collateral and should receive the same reports from the Debtor as
the Debtor had furnished pre-petition, together with such reports as provided
below.
C. The entry of this Final Cash Collateral Order is in the best
interests of the Debtor, its creditors, and its estate, and it is necessary to
the continued operations of the Debtor's business.
BASED UPON THE FOREGOING, it is therefore ORDERED, ADJUDGED, AND
DECREED:
1. Fleet shall be entitled to all of the benefits, rights,
protections, and liens of the First Interim Cash Collateral Order, the Second
Interim Cash Collateral Order, and the Third Interim Cash Collateral Order, each
of which shall continue in effect in accordance with the terms thereof.
2. Subject to the limitations and conditions hereof, the Debtor is
hereby authorized to use the Cash Collateral in accordance with the provisions
set forth in the Budget, with no single line item expenditure to exceed 10% of
the Budget amount as of the end of each month. As used herein, the following
terms have the following meanings:
(a) The term "Budget" means initially, for the first Budget
------
Period, the budget which is attached to this Final Cash Collateral
Order as Exhibit "A" and made a part hereof, and, thereafter, either
-----------
(i) any future budget that is mutually agreed to by Fleet
and the Debtor in writing, or
(ii) if no mutual agreement has been reached in writing as
of the end of any applicable expiring Budget Period, then such
budget that is for substantially the same purposes and in
substantially the same amounts for such line items as are set
forth in Exhibit "A" attached to this Final Cash Collateral
-----------
Order.
(b) The term "Budget Period" means initially the period from and
-------------
after May 1, 1997 through the end of the period provided for in the
initial Budget, and, thereafter, the period as may be provided for in
any future Budget.
The Debtor shall be entitled to use unspent funds, denominated in the budgets
attached to the Second Cash Collateral Order and the Third Interim Cash
Collateral Order as "Available for Post-Petition Fundings," for the respective
periods from March 1, 1997 to March 31, 1997 and April 1, 1997 to April 30, 1997
for the same purposes during the period from May 1, 1997 to July 31, 1997 in
accordance with this Final Cash Collateral Order, in addition to funds in such
amounts and for such purposes as provided in the attached Budget, in accordance
with the terms hereof. Notwithstanding the foregoing, so long as the Debtor
serves as servicing agent for the Trust, the Debtor is further authorized and
directed to continue to collect as servicing agent for
JOINT STIPULATION AND AGREED FINAL ORDER
AUTHORIZING THE USE OF CASH COLLATERAL, ETC - PAGE 5
- -------------------------------------------
<PAGE>
the Trust and segregate and pay over to the Trust all collections attributable
to the Trust Contracts.
3. (a) Subject to subparagraphs 3(e) and 3(f) below, as adequate
protection to Fleet and to safeguard Fleet against any diminution in the
value of the Pre-Petition Collateral from the use of Cash Collateral, Fleet
shall have (in addition to its lien upon the Pre-Petition Collateral as
security for its claim against the Debtor) and is hereby granted valid and
perfected continuing and replacement security interests and liens in and
upon all of the Post-Petition New Contracts and proceeds thereof to the
extent of the Cash Collateral expended in purchasing such Post-Petition New
Contracts. The Debtor shall provide to Fleet a daily listing of the
following:
(i) all of the Post-Petition New Contracts funded with Cash
Collateral;
(ii) those contracts that are booked or processed by the Debtor
and have not been funded (the "Unfunded Contracts");
------------------
(iii) those contracts intended by the Debtor to become funded in
the future by the Debtor;
(iv) those contracts intended to become "Unwound Contracts" (as
defined below) in the future; and
(v) those contracts that were pledged as collateral to Fleet
as of February 7, 1997.
The Debtor shall separately identify the collections of the Post-Petition New
Contracts, and provide to Fleet the quality of information previously required
in the form of the Borrowing Base Reports. For the period from and after March
1, 1997, the Debtor shall provide daily to Fleet two (2) separate Borrowing Base
Reports:
(i) one calculating the Borrowing Base from and after February
28, 1997 with respect to Fleet collateral consisting of the Post-
Petition New Contracts (exclusive of the Additional Fleet Contracts);
and
(ii) the other calculating the Borrowing Base with respect to
Fleet collateral existing as of February 28, 1997 (inclusive of the
Additional Fleet Contracts), with each report not distinguishing
whether such contracts have been funded or not funded.
The replacement liens granted hereby are retroactive to the Petition Date. A
contract which is unwound by the Debtor (an "Unwound Contract") is a contract
----------------
which results in the Debtor returning to a dealer a previously tendered
installment contract, title, and accompanying documentation for such
transaction.
(b) As further adequate protection for the Debtor's use of Cash
Collateral, the Debtor shall pay to Fleet monthly interest as provided below, on
the first day of the month. In addition
JOINT STIPULATION AND AGREED FINAL ORDER
AUTHORIZING THE USE OF CASH COLLATERAL, ETC - PAGE 6
- -------------------------------------------
<PAGE>
to the interest payments, the Debtor shall pay to Fleet, as adequate protection
to protect Fleet's interest in the Fleet Collateral, the principal amounts shown
below for the periods corresponding thereto. If the Debtor fails to pay for any
week the minimum of $500,000 due Fleet for such week as set forth in clause
(iii) below, then the Debtor may not use any Cash Collateral to purchase Post-
Petition New Contracts until Fleet is brought current. If the Debtor is more
than one weekly payment in arrears, the Debtor's right to use Cash Collateral
shall be limited to such amounts as Fleet, in its sole discretion, may authorize
the Debtor to use. No Cash Collateral may be used in any month unless during the
immediately preceding month Fleet has received all payments of principal and
interest required to be paid to Fleet for such preceding month. Fleet's Cash
Collateral may be used for pre-petition repossession claims pursuant to a
separate Order of this Court providing for same. The Debtor shall make the
following payments to Fleet:
(i) Interest. Accrued interest will continue to be paid to
--------
Fleet monthly, in arrears, on the first day of the month, commencing
June 1, 1997, at the non-default rate of interest provided in the Loan
Documents, without waiver of Fleet's right to assert the default rate
of interest as provided in the Loan Documents.
(ii) Monthly Principal Amortization. The outstanding
------------------------------
prinicpal balance of Fleet's claim (which is stipulated by the parties
hereto to be $63,079,797.34 in principal amount as of the Petition
Date) shall be due and payable to Fleet in monthly installments, the
aggregate amount of which during any particular month shall be not
less than the amount specified for such month as set forth below:
PER MONTH
MONTH: INSTALLMENT AMOUNT
------ ------------------
May through July, 1997 $4,000,000
August, 1997 $3,500,000
September, 1997 $3,250,000
October and November, 1997 $3,000,000
December, 1997 $2,750,000
January, 1998 $2,500,000
February, 1998 $2,000,000
March through August, 1998 $3,000,000
(iii) Weekly Principal Amortization. Weekly partial payments of
-----------------------------
the principal payment due for any month will be made to Fleet in the
amount of $500,000 per week, with the balance of such monthly payment
due not later than the end of the month. The foregoing amortization
will commence immediately.
(iv) Mandatory Prepayments. In addition to the principal
---------------------
payments provided for above, mandatory prepayments of principal will
be due and payable on a quarterly basis, on the 15th day of each
March, June, September and December, beginning June 15, 1997. The
amount of each mandatory prepayment shall be equal to fifty percent
(50%) of
JOINT STIPULATION AND AGREED FINAL ORDER
AUTHORIZING THE USE OF CASH COLLATERAL, ETC - PAGE 7
- -------------------------------------------
<PAGE>
Excess Cash Flow as defined below, with the first such payment, if any, for
the payment due June 15, 1997 to be placed into a separate segregated,
blocked account subject to Fleet's liens, at Texas Commerce Bank, and
distributed to Fleet on the earliest to occur of the following:
(i) the effective date of the Plan (as defined below),
(ii) an Event of Default (as defined below), or
(iii) September 15, 1997.
All such mandatory prepayments for future periods shall be paid to Fleet
when due. "Excess Cash Flow" will be measured on a cumulative basis,
beginning March 1, 1997 and continuing thereafter, and will consist of all
of the "Net Collections" received by the Debtor since March 1, 1997 through
the end of the month immediately preceding any principal prepayment due
date. As a result of the cumulative aspect of measuring Net Collections,
the Debtor will be entitled to a credit to each mandatory prepayment due,
which credit will be equal to the amount of mandatory prepayments
previously made pursuant to the requirements of this paragraph. In no
event, however, will this credit calculation require Fleet to refund any
mandatory prepayments by the Debtor. All mandatory prepayments will be
applied to principal amounts due in the inverse order of maturity. As used
herein, the following terms have the following meanings:
"Collections" shall mean all interest collections, all principal
-----------
collections, all other collections, and all recoveries net of expenses
of the each case, from (i) the Debtor's auto contracts owned as of the
Petition Date, (ii) the auto contracts owned by the Trust as of the
Petition Date, and (iii) the Additional Fleet Contracts.
"Excess Cash Flow" shall mean the amount, if any, by which actual
---------------- ------
Net Collections exceed Projected Net Collections.
"Gross Collections" shall mean the Collections.
-----------------
"Net Collections" shall mean the remainder of (i) Gross
---------------
Collections, less (iii) Collections that are retained by the Trust and
not distributed to the Debtor.
"Projected Gross Collections" shall mean the Debtor's projected
---------------------------
estimate of Gross Collections. The Debtor's projected estimate of such
collections is attached to this Final Cash Collateral Order as Exhibit
-------
"C" and made a part hereof.
---
"Projected Net Collections" shall mean the Debtor's projected Net
-------------------------
Collections, which form the basis for the calculation of Excess Cash
Flow and
JOINT STIPULATION AND AGREED FINAL ORDER
AUTHORIZING THE USE OF CASH COLLATERAL, ETC - PAGE 8
- -------------------------------------------
<PAGE>
which are attached to this Final Cash Collateral Order as Exhibit "B"
-----------
and made a part hereof.
(c) As further adequate protection to Fleet, and as a condition to
Debtor's ongoing right to use Cash Collateral, the Debtor agrees to achieve
Collections on the Debtor's auto contracts for the three (3)-month period
consisting of the calendar month then ended plus the immediately preceding two
calendar months (i.e., a rolling three (3)-month period), of not less than
eighty-five percent (85%) of Projected Gross Collections for the same rolling
three (3)-month period. If a default occurs by reason of a breach of this
covenant, then the Debtor will have the opportunity to cure this default for a
period of five (5) days from the earlier of the date of actual delivery, or, if
------
not delivered as required, the date of required delivery (which date will be not
--------
later than fifteen (15) days after the end of each month), to Fleet of a monthly
compliance certificate, executed by the President, Senior Vice President and
Chief Financial Officer, or Vice President and Comptroller of the Debtor for the
applicable month then ended, by making a prepayment (a "Cure Payment") on the
------------
outstanding principal amount of the Fleet indebtedness in an amount equal to the
difference between eighty-five percent (85%) of the Projected Gross Collections
and the actual amount of Gross Collections. All such prepayments will be
------
applied to principal amounts due in the inverse order of maturity. The first
measurement of this covenant will be conducted for the three (3) month period
that ends on May 31, 1997. This covenant is referred to as the "Gross
-----
Collections Covenant." If the Debtor makes a Cure Payment, as provided above,
- --------------------
then, for purposes of subsequent calculations of the Gross Collections Covenant
that involve any of the calendar months that were included in the calculation of
the Gross Collections Covenant with respect to which a Cure Payment was made,
the Collections, as a percentage of Projected Gross Collections, for any of such
months, will be deemed to be 85%; it being the intention of the parties to avoid
creating a default for a breach of the Gross Collections Covenant that is
calculated for a calendar month subsequent to a calendar month for which the
Debtor cured a default under the Gross Collections Covenant by making a Cure
Payment.
(d) As of July 31, 1997, and as additional adequate protection to
Fleet, cash collateral issues in accordance with the Settlement Agreement, the
Debtor has agreed in the Settlement Agreement and by the terms hereof that it
will diligently and in good faith seek confirmation of the Debtor's Plan of
Reorganization attached to the Settlement Agreement as an exhibit thereto, or as
modified by the mutual agreement in writing of Fleet and the Debtor (the
"Plan"). Fleet has agreed to support the Plan so long as each of the conditions
----
precedent set forth in the Settlement Agreement are satisfied.
(e) If the effective date of the Plan does not occur on or before July
31, 1997, then Fleet shall have, and the Debtor shall be deemed to have granted
to Fleet, a replacement lien on and security interest in the Debtor's legal and
beneficial ownership interest in the Trust and the rights to distribution
therefrom (subject only to Prudential's existing lien thereon securing its
existing indebtedness), to the extent of an amount equal to all Cash Collateral
used by the Debtor during the pendency of the Chapter 11 Case and all Cash
Collateral on hand as of July 31, 1997, less all adequate protection payments of
----
principal and interest made to Fleet. Contemporaneously with the Debtor's grant
to Fleet of such replacement lien, as provided in the immediately preceding
sentence,
JOINT STIPULATION AND AGREED FINAL ORDER
AUTHORIZING THE USE OF CASH COLLATERAL, ETC - PAGE 9
- -------------------------------------------
<PAGE>
(i) the Debtor and Fleet shall implement the cash management
procedures as contemplated by and provided in Section 5.2.4 of the Loan and
Security Agreement to be executed by the Reorganized Debtor and Fleet on or
before the effective date of the Plan and in the form attached as Exhibit B
to the Settlement Agreement (the "New Fleet Loan Agreement"); and
------------------------
(ii) on and after July 31, 1997, the Existing Fleet Collateral shall
be deemed, by the terms of this Final Cash Collateral Order, to be replaced
by all of the "Collateral" as defined in the New Fleet Loan Agreement
(hereinafter the "Reconstituted Fleet Collateral") to secure the Pre-
------------------------------
Petition Indebtedness, and Fleet shall be deemed to release, by the terms
of this Final Cash Collateral Order, its liens on any of the Existing Fleet
Collateral that does not constitute Reconstituted Fleet Collateral.
(f) After July 31, 1997, in the event the Plan does not become effective
on or before July 31, 1997, the term "Cash Collateral," as used in this Final
Cash Collateral Order, shall mean "cash collateral" within the meaning of 11
U.S.C. (S) 363(a) that is derived from the Reconstituted Fleet Collateral, other
than cash distributed to the Debtor's operating account in accordance with
subparagraph 3(e)(i) above and Section 5.2.4 of the New Fleet Loan Agreement. On
and prior to July 31, 1997, the term "Cash Collateral," as used in this Final
Cash Collateral Order, shall mean "cash collateral" within the meaning of 11
U.S.C. (S) 363(a) that is derived from the Existing Fleet Collateral, unless the
Plan becomes effective before such date.
(g) Fleet shall be entitled to all of its rights and protections with
respect to the unwinding of contracts as provided in the Second Interim Cash
Collateral Order. The Debtor agrees and stipulates that (i) the total amount of
unfunded contracts pledged to Fleet as collateral and included in the Borrowing
Base as of February 7, 1997 was approximately $10 million; and (ii) of that
approximately $10 million amount, approximately $6.6 million of such contracts
have now been funded by the Debtor, constitute Post-Petition New Contracts, and
are part of Fleet's collateral.
4. This Final Cash Collateral Order shall be sufficient and conclusive
evidence of the priority, perfection, and validity of all of the security
interests in and liens upon the property of the estate of the Debtor granted to
Fleet as set forth in this Final Cash Collateral Order, and the liens and
security interests granted and created herein shall, by virtue of this Final
Cash Collateral Order, constitute valid and perfected security interests without
the necessity of creating, filing, recording, or serving any financing
statements or other documents that might otherwise be required under federal or
state law in any jurisdiction or the taking of any other action to validate or
perfect the security interests and liens granted to Fleet in this Final Cash
Collateral Order and the Loan Documents. If Fleet shall, in its discretion,
elect for any reason to file any such financing statements or other documents
with respect to such security interests and liens, the Debtor is authorized and
directed to execute, or cause to be executed, all such financing statements or
other documents upon Fleet's reasonable request, and the filing, recording, or
service thereof (as the case may be) of such financing statements or similar
documents shall be deemed to have been made at the time of and on the Petition
Date, and the signature(s) of any
JOINT STIPULATION AND AGREED FINAL ORDER
AUTHORIZING THE USE OF CASH COLLATERAL, ETC - PAGE 10
- -------------------------------------------
<PAGE>
person(s) designated by the Debtor, whether by letter to Fleet or by appearing
on any one or more of the agreements or other documents respecting the security
interest and lien of Fleet in and upon the Collateral, shall bind the Debtor and
its estate. Fleet may, in its discretion, file a certified copy of this Final
Cash Collateral Order in any filing or recording office in any county or other
jurisdiction in which the Debtor has real or personal property, and, in such
event, subject to applicable law, the subject filing or recording officer is
authorized and directed to file or record such certified copy of this Final Cash
Collateral Order.
5. Subject to subparagraphs 3(e) and 3(f) above, Inwood Security Vaults,
Inc., the Custodian under the Custodial Agreement between the Debtor and Fleet,
dated April 6, 1995, is authorized and directed to allow the Debtor to enjoy all
privileges it has under said Custodial Agreement to Fleet's collateral held by
said Custodian, subject to the following:
(1) any use or disposition of the Accounts and Auto Titles (as
defined in the Custodial Agreement) that are removed from the possession of
the Custodian (as defined in the Custodial Agreement) will be solely in
accordance with the terms and conditions of the Custodial Agreement;
(2) the proceeds of any sale or disposition of the Accounts and Auto
Titles that are subject to the terms of the Custodial Agreement are, and
shall remain Cash Collateral; and
(3) perfection and priority of Fleet's security interest in and to
the Accounts and Auto Titles shall continue and be preserved and
maintained, notwithstanding any interruption or lapse of Fleet's perfection
that otherwise would occur following any use or disposition of the Accounts
or Auto Titles other than as specifically provided in the Custodial
Agreement.
6. (a) The Debtor shall be bound to cooperate immediately with Fleet to
provide Fleet not less than two (2) business days after the end of each
preceding Friday during the term of this Final Cash Collateral Order with
all reports reasonably requested by Fleet, including, without limitation,
financial and collateral information, and such information described below.
Fleet shall have the right to visit the Debtor's business from time to time
during ordinary business hours and conduct audits after reasonable notice
and accompanied by an officer of the Debtor. The Debtor shall be bound to
provide to Fleet the following:
(i) on a weekly basis, the Debtor's actual performance and
results of operations as compared to its Budget, as to each and every
line item on the Budget;
(ii) management's report and explanation of the variance, if
any, from its Budget;
(iii) copies of all reports made to the United States Trustee,
and
JOINT STIPULATION AND AGREED FINAL ORDER
AUTHORIZING THE USE OF CASH COLLATERAL, ETC - PAGE 11
- -------------------------------------------
<PAGE>
(iv) any financial records or statements regularly generated in
the normal course of its business.
The Debtor shall continue to be bound to furnish to Fleet reports as it had
furnished pre-petition including, without limitation, a daily report of
collections and a report in the form attached as Exhibit "B" to the Fleet
Objection 1. Each day the Debtor shall provide to Fleet Borrowing Base
Reports, including an aging of the auto contracts and accompanied by copies
of the underlying work papers which substantiate the numbers on each such
report, to the extent provided pre-petition. Not less than fifteen (15)
days after the end of each month, the Debtor shall provide to Fleet reports
pertaining to Net Collections, Gross Collections, Excess Cash Flow, the
Debtor's performance of the Gross Collections Covenant, the monthly static
pool analysis, and the payment status of each auto contract (including an
aging of each auto contract.) If the Debtor fails to provide timely to
Fleet the reports as provided in this paragraph 6(a), the Debtor shall have
five (5) business days after written notice from Fleet of such default to
cure same and provide such reports to Fleet, but during such period of
default, the Debtor shall have no right to use any Cash Collateral.
(b) The Debtor shall not fund the expenses of Jaymed directly or
indirectly through Jayserv.
(c) Unless authorized pursuant to a separate Order of this Court, the
Debtor has no authority to pay pre-petition debts owing to (i) auto
repossession contractors, (ii) collection system consultants, or (iii)
dealers on account of their Dealer Agreements with the Debtor.
(d) Unless authorized pursuant to a separate Order of this Court, the
Debtor shall not fund any sums for legal, accounting or investment banking
services.
7. In the event of the occurrence of any of the following:
(a) the Debtor's violation of any of the terms of this Final Cash
Collateral Order;
(b) conversion of the Chapter 11 case of the Debtor to a case under
Chapter 7 of the Bankruptcy Code;
(c) the appointment of a trustee pursuant to Section 1104(a)(1) or
(a)(2) of the Bankruptcy Code in this case;
(d) dismissal of the Debtor's Chapter 11 case,
JOINT STIPULATION AND AGREED FINAL ORDER
AUTHORIZING THE USE OF CASH COLLATERAL, ETC - PAGE 12
- -------------------------------------------
<PAGE>
(e) failure to file the Plan on or before April 18, 1997, amendment
of the Plan in a manner that is unacceptable to Fleet and is inconsistent
with the terms of the Settlement Agreement, or withdrawal of the Plan; or
(f) failure to support and diligently and in good faith seek
confirmation of the Plan
(any of the foregoing being referred to in this Final Cash Collateral Order,
individually, as an "Event of Default" and, collectively, as "Events of
---------------- ---------
Default"); then (unless such Event of Default is specifically waived in writing
- -------
by Fleet, which waiver shall not be inferred from any other action, inaction, or
acquiescence by Fleet) upon or after the occurrence of any of the foregoing,
(x) with respect to a failure by the Debtor to make timely payments
of principal and interest as provided for in paragraphs 3(b) or 3(c) above
or timely provide such reports to Fleet as provided in paragraph 6(a)
immediately above, the Debtor's breach of its covenants in any of such
paragraphs shall result in the immediate cessation of any Cash Collateral
use by the Debtor, or
(y) with respect to any breach of the above Events of Default
exclusive of those referred to in the subparagraph (x) above, after Fleet's
giving three (3) business days' notice, served by overnight delivery
service or telefax upon the Debtor, the Debtor's counsel, counsel to the
Unsecured Creditors' Committee, and the United States Trustee, the Debtor
shall not use any of the Cash Collateral without further order of the
Court, which shall not issue until after notice and a hearing.
Any further order of this Court governing the use of Cash Collateral shall
afford adequate protection to Fleet on terms no less favorable than those set
forth in this Final Cash Collateral Order.
8. The provisions of this Final Cash Collateral Order shall inure to the
benefit of the Debtor and Fleet and shall be binding upon the Debtor and its
successors and assigns, and shall also be binding upon all creditors of the
Debtor and other parties in interest from and after the date of the signing of
this Final Cash Collateral Order.
9. Nothing contained herein shall preclude Fleet from making appropriate
application or request to the Court for such other relief as shall be necessary
to protect adequately its interests, including, without limitation, including,
but not limited to, objecting to the Debtor's violation of the terms of this
Final Cash Collateral Order and any use of the Cash Collateral after the Budget
Period.
10. Notwithstanding anything to the contrary stated herein, the Debtor's
authority to use Cash Collateral shall expire on the earliest to occur of the
following:
(i) the effective date of the Plan;
JOINT STIPULATION AND AGREED FINAL ORDER
AUTHORIZING THE USE OF CASH COLLATERAL, ETC - PAGE 13
- -------------------------------------------
<PAGE>
(ii) the occurrence of an Event of Default not relating to the
Debtor's breach of subparagraphs 3(b), 3(c) or 6(a) above, in consequence
of which Fleet gives notice pursuant to paragraph 7 of this Final Cash
Collateral Order ;
(iii) the Debtor's failure to pay timely to Fleet all principal and
interest as set forth in paragraph 3(b) above, until such default is cured,
at which time, if cured, the Debtor may use Cash Collateral without further
authorization from this Court;
(iv) the Debtor's failure to provide timely to Fleet such reports
as provided in paragraph 6(a) above in this Order, until such default is
cured, at which time, if cured, the Debtor may use Cash Collateral without
further authorization from this Court; or
(v) the Debtor's failure to pay to Fleet the amounts set forth in
paragraph 3(c) above and the cure period referred to therein shall have
expired, and thereafter until such default is cured, at which time, if
cured, the Debtor may use Cash Collateral without further authorization
from this Court.
11. This Court hereby expressly retains jurisdiction over all persons
and entities, co-extensive with the powers granted to the United States
Bankruptcy Court under the Bankruptcy Code to enforce the terms of this Final
Cash Collateral Order and to adjudicate any and all disputes in connection
therewith.
SIGNED this ____ day of April, 1997.
_____________________________
HONORABLE STEVEN A. FELSENTHAL
UNITED STATES BANKRUPTCY JUDGE
EXHIBITS
- --------
A - Budget (May, June, July, 1997)
B - Projected Net Collections
C - Projected Gross Collections
JOINT STIPULATION AND AGREED FINAL ORDER
AUTHORIZING THE USE OF CASH COLLATERAL, ETC - PAGE 14
- -------------------------------------------
<PAGE>
AGREED AS TO FORM AND SUBSTANCE:
HUGHES & LUCE, L.L.P.
By: /s/ David Weitman
--------------------
David Weitman, Esq.
State Bar No. 21116200
Marc H. Stone, Esq.
State Bar No. 00785064
1717 Main Street, Suite 2800
Dallas, Texas 75201
(214) 939-5427
FAX: (214) 939-6100
- and -
PARKER, HUDSON, RAINER & DOBBS, L.L.P.
C. Edward Dobbs, Esq.
1500 Marquis Two Tower
285 Peachtree Center Avenue, N.E.
Atlanta, Georgia 30303
(404) 523-5300
FAX: (404) 522-8409
ATTORNEYS FOR
FLEET CAPITAL CORPORATION
JOINT STIPULATION AND AGREED FINAL ORDER
AUTHORIZING THE USE OF CASH COLLATERAL, ETC - PAGE 15
- -------------------------------------------
<PAGE>
WEIL, GOTSHAL & MANGES, L.L.P.
By: /s/ D. J. Baker
-----------------
D. J. Baker, Esq.
State Bar No. 01566500
Harry A. Perrin, Esq.
State Bar No. 15796800
700 Louisiana, Suite 1600
Houston, Texas 77002
(713) 546-5000
FAX: (713) 224-9511
- and -
Kelli Walsh, Esq.
100 Crescent Court, Suite 1300
Dallas, Texas 75201
(214) 746-7777
FAX: (214) 746-7700
ATTORNEYS FOR
JAYHAWK ACCEPTANCE CORPORATION
JOINT STIPULATION AND AGREED FINAL ORDER
AUTHORIZING THE USE OF CASH COLLATERAL, ETC - PAGE 16
- -------------------------------------------
<PAGE>
EXHIBIT B
---------
to
Settlement Agreement
Loan Agreement
--------------
[Attached.]
EXHIBIT B - PAGE 1
- ---------
<PAGE>
__________________________________________________
JAYHAWK ACCEPTANCE CORPORATION
__________________________________________________
__________________________________________________
__________________________________________________
LOAN AND SECURITY AGREEMENT
Dated: ________, 1997
$____________
__________________________________________________
__________________________________________________
__________________________________________________
FLEET CAPITAL CORPORATION
__________________________________________________
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 1. TERM LOAN.......................................... 1
1.1 Term Loan................................................ 1
1.2 Use of Proceeds.......................................... 1
SECTION 2. INTEREST, FEES AND CHARGES......................... 1
2.1 Interest................................................. 1
2.2 Computation of Interest.................................. 3
2.3 Reimbursement of Expenses................................ 3
2.4 Bank Charges............................................. 3
SECTION 3. LOAN ADMINISTRATION................................ 3
3.1 Payments................................................. 3
3.2 Application of Payments and Collections.................. 5
3.3 Loan Account............................................. 5
3.4 Statements of Account.................................... 5
SECTION 4. SECURITY INTERESTS................................. 6
4.1 Security Interest in Collateral.......................... 6
4.2 Lien Perfection; Further Assurances...................... 6
SECTION 5. COLLATERAL ADMINISTRATION.......................... 7
5.1 General.................................................. 7
5.2 Administration of Contracts.............................. 8
5.3 Administration of Equipment.............................. 10
5.4 Payment of Charges....................................... 10
5.5 Permitted Liens on Servicing Equipment................... 11
SECTION 6. REPRESENTATIONS AND WARRANTIES..................... 11
6.1 General Representations and Warranties................... 11
6.2 Continuous Nature of Representations and Warranties...... 15
6.3 Survival of Representations and Warranties............... 15
SECTION 7. COVENANTS AND CONTINUING AGREEMENTS................ 15
7.1 Affirmative Covenants.................................... 15
7.2 Negative Covenants....................................... 19
7.3 Specific Financial Covenant.............................. 20
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
SECTION 8. CONDITIONS PRECEDENT............................... 21
8.1 Documentation............................................ 21
8.2 No Default............................................... 22
8.3 Other Loan Documents..................................... 22
8.4 Reorganization Plan...................................... 22
8.5 No Litigation............................................ 22
8.6 Costs and Expenses....................................... 22
SECTION 9. EVENTS OF DEFAULT; RIGHTS AND REMEDIES ON DEFAULT.. 23
9.1 Events of Default........................................ 23
9.2 Acceleration of the Obligations.......................... 25
9.3 Other Remedies........................................... 25
9.4 Remedies Cumulative; No Waiver........................... 26
SECTION 10. MISCELLANEOUS..................................... 26
10.1 Power of Attorney....................................... 26
10.2 INDEMNITY............................................... 27
10.3 Modification of Agreement; Sale of Interest............. 28
10.4 Severability............................................ 28
10.5 Successors and Assigns.................................. 29
10.6 Cumulative Effect; Conflict of Terms.................... 29
10.7 Execution in Counterparts............................... 29
10.8 Notice.................................................. 29
10.9 Lender's Consent........................................ 30
10.10 Credit Inquiries....................................... 30
10.11 Time of Essence........................................ 30
10.12 Entire Agreement....................................... 30
10.13 Interpretation......................................... 30
10.14 Non-applicability of Article 5069-15.01 et seq......... 30
10.15 No Preservation or Marshaling.......................... 31
10.16 GOVERNING LAW; CONSENT TO FORUM........................ 31
10.17 WAIVERS BY BORROWER.................................... 32
10.18 WAIVER OF CONSUMER RIGHTS.............................. 32
10.19 ORAL AGREEMENTS INEFFECTIVE............................ 32
</TABLE>
ii
<PAGE>
LOAN AND SECURITY AGREEMENT
THIS LOAN AND SECURITY AGREEMENT is made this ____ day of ______, 1997, by
and between FLEET CAPITAL CORPORATION ("Lender"), a Rhode Island corporation
with an office at 2711 Haskell Avenue, Suite 2100, LB 21, Dallas, Texas 75204;
and JAYHAWK ACCEPTANCE CORPORATION ("Borrower"), a Texas corporation with its
chief executive office and principal place of business at 2001 Bryan Tower,
Suite 600, Dallas, Texas 75201. Capitalized terms used in this Agreement have
the meanings assigned to them in Appendix A, General Definitions.
SECTION 1. TERM LOAN
Subject to the terms and conditions of, and in reliance upon the
representations and warranties made in, this Agreement and the other Loan
Documents, Lender agrees to make available upon Borrower's request therefor a
Term Loan, as follows:
1.1 Term Loan. Lender agrees, for so long as no Default or
---------
Event of Default exists, to make a Term Loan to Borrower, in the principal
amount of $____________. This amount represents the unpaid principal
amount of sums owing to Lender under the Prior Loan Agreement, which was
Sixty-Three Million Seventy-Nine Thousand Seven Hundred Ninety-Seven and
34/100 Dollars ($63,079,797.34), as stipulated in the Final Cash Collateral
Order, after giving credit to Borrower for payments in the amount of
_________________ Dollars ($________), made by Borrower to Lender under the
terms of the Final Cash Collateral Order and other predecessor cash
collateral orders entered in the Bankruptcy Proceedings.
1.2 Use of Proceeds. The Term Loan shall be used solely for the
---------------
satisfaction of existing Indebtedness of Borrower to Lender under the Prior Loan
Agreement, as of the Closing Date.
SECTION 2. INTEREST, FEES AND CHARGES
2.1 Interest.
--------
2.1.1 Rate of Interest. Interest shall accrue on the principal
----------------
amount of the Term Loan outstanding at the end of each day at a fluctuating rate
per annum (the "Applicable Annual Rate") equal to the Base Rate. The Applicable
----------------------
Annual Rate shall increase or decrease by an amount equal to any increase or
decrease in the Base Rate, effective as of the opening of business on the day
that any such change in the Base Rate occurs.
2.1.2 Default Rate of Interest. Upon and after the occurrence of
------------------------
an Event of Default, and during the continuation thereof, the principal amount
of the Term Loan shall bear interest at a rate per annum equal to 2.00% above
the Applicable Annual Rate or other applicable rate of interest (the "Default
-------
Rate").
- ----
LOAN AND SECURITY AGREEMENT - Page 1
- ---------------------------
<PAGE>
2.1.3 Maximum Rate of Interest. Notwithstanding the foregoing,
------------------------
(i) if at any time the amount of interest computed as provided in the Loan
Documents would exceed the amount of such interest computed upon the basis of
the maximum rate of interest permitted by applicable state or federal law in
effect from time to time hereafter (the "Maximum Legal Rate"), the interest
------------------
payable under this Agreement shall be computed upon the basis of the Maximum
Legal Rate, but any subsequent reduction in the Applicable Annual Rate, Default
Rate or other rate, as applicable, shall not reduce such interest thereafter
payable hereunder below the amount computed on the basis of the Maximum Legal
Rate until the aggregate amount of such interest accrued and payable under this
Agreement equals the total amount of interest which would have accrued if such
interest had been at all times computed solely as provided in the Loan
Documents; and (ii) unless preempted by federal law, the Applicable Annual Rate,
Default Rate or other rate, as applicable, from time to time in effect hereunder
may not exceed the "indicated ceiling rate" from time to time in effect under
Tex. Rev. Civ. Stat. Ann. art 5069-1.04(c) (Vernon 1987). If the applicable
state or federal law is amended in the future to allow a greater rate of
interest to be charged under this Agreement than is presently allowed by
applicable state or federal law, then the limitation of interest hereunder shall
be increased to the maximum rate of interest allowed by applicable state or
federal law as amended, which increase shall be effective hereunder on the
effective date of such amendment, and all interest charges owing to Lender by
reason thereof shall be payable upon demand.
2.1.4 Excess Interest. No agreements, conditions, provisions or
---------------
stipulations contained in this Agreement or any other instrument, document or
agreement between Borrower and Lender or default of Borrower, or the exercise by
Lender of the right to accelerate the payment of the maturity of principal and
interest, or to exercise any option whatsoever contained in this Agreement or
any other Loan Document, or the arising of any contingency whatsoever, shall
entitle Lender to contract for, charge, or receive, in any event, interest
exceeding the Maximum Legal Rate. In no event shall Borrower be obligated to
pay interest exceeding such Maximum Legal Rate and all agreements, conditions or
stipulations, if any, which may in any event or contingency whatsoever operate
to bind, obligate or compel Borrower to pay a rate of interest exceeding the
Maximum Legal Rate, shall be without binding force or effect, at law or in
equity, to the extent only of the excess of interest over such Maximum Legal
Rate. In the event any interest is contracted for, charged or received in
excess of the Maximum Legal Rate ("Excess"), Borrower acknowledges and
------
stipulates that any such contract, charge, or receipt shall be the result of an
accident and bona fide error, and that any Excess received by Lender shall be
---- ----
applied, first, to reduce the principal then unpaid hereunder; second, to reduce
the other Obligations; and third, returned to Borrower, it being the intention
of the parties hereto not to enter at any time into a usurious or otherwise
illegal relationship. Borrower recognizes that, with fluctuations in the Base
Rate and the Maximum Legal Rate, such a result could inadvertently occur. By the
execution of this Agreement, Borrower covenants that the credit or return of any
Excess shall constitute the acceptance by Borrower of such Excess. For the
purpose of determining whether or not any Excess has been contracted for,
charged or received by Lender, all interest at any time contracted for, charged
or received by Lender in connection with the Loan Documents shall be amortized,
prorated, allocated and spread in equal parts during the entire term of this
Agreement and the Term Loan.
LOAN AND SECURITY AGREEMENT - Page 2
- ---------------------------
<PAGE>
2.2 Computation of Interest. Interest hereunder shall be calculated
-----------------------
daily and shall be computed on the actual number of days elapsed over a year of
360 days. For the purpose of computing interest hereunder, all items of payment
received by Lender shall be deemed applied by Lender on account of the
Obligations (subject to final payment of such items) 1 Business Day after
receipt by Lender of such items in Lender's account located in Chicago,
Illinois.
2.3 Reimbursement of Expenses. If, at any time or times regardless of
-------------------------
whether or not an Event of Default then exists, Lender incurs reasonable and
necessary legal or accounting expenses or any other costs or out-of-pocket
expenses (other than Lender's overhead expenses) in connection with the
negotiation and preparation of any amendment of or modification of this
Agreement or any of the other Loan Documents;, then all such legal and
accounting expenses, other costs and out of pocket expenses of Lender (other
than Lender's overhead expenses) shall be charged to Borrower). For purposes of
the immediately preceding sentence, overhead expenses shall mean labor and
material costs of Lender not directly related to the negotiation, preparation
and administration of this Agreement, the other Loan Documents and/or any
amendment thereto. If, upon the occurrence and during the continuance of an
Event of Default, Lender incurs reasonable and necessary legal or accounting or
any other costs or out-of-pocket expenses in connection with (i) any litigation,
contest, dispute, suit, proceeding or action (whether instituted by Lender,
Borrower or any other Person) in any way relating to the Collateral, this
Agreement or any of the other Loan Documents or Borrower's affairs; (ii) any
attempt to enforce any rights of Lender against Borrower or any other Person
which may be obligated to Lender by virtue of this Agreement or any of the other
Loan Documents, including, without limitation, the Account Debtors; or (iii) any
attempt to inspect, verify, protect, preserve, restore, collect, sell, liquidate
or otherwise dispose of or realize upon the Collateral;, then all such legal and
accounting expenses, other costs and out of pocket expenses of Lender shall be
charged to Borrower. To the extent not paid as required by Sections 7.1.11 or
---------------
8.6, all amounts chargeable to Borrower under this Section 2.3 shall be
- --- -----------
Obligations secured by all of the Collateral and shall be payable to Lender
within 30 days of Borrower's receipt of an invoice with respect to such charges.
Borrower shall also reimburse Lender for expenses incurred by Lender in its
administration of the Collateral to the extent and in the manner provided in
Section 5 hereof.
- ---------
2.4 Bank Charges. Borrower shall pay to Lender any and all fees, costs or
------------
expenses which Lender pays to a bank or other similar institution arising out of
or in connection with the depositing for collection, by Lender, of any check or
item of payment received or delivered to Lender on account of the Obligations.
SECTION 3. LOAN ADMINISTRATION
3.1 Payments. The Obligations shall be payable as follows:
--------
3.1.1 Principal. From and after the Effective Date, principal
---------
payable on account of Term Loan shall be payable by Borrower to Lender in
installments, on the last day of each calendar month, the amount of which is due
for any particular month being equal to the amount specified for such month as
set forth below (exclusive of the mandatory prepayments required by
LOAN AND SECURITY AGREEMENT - Page 3
- ---------------------------
<PAGE>
Section 3.1.3, but without duplication of amounts paid in accordance with the
- -------------
Final Cash Collateral Order);
<TABLE>
<CAPTION>
AGGREGATE INSTALLMENTS
----------------------
MONTH: PER MONTH:
------ ----------
<S> <C>
[June] through July, 1997 $4,000,000
August, 1997 $3,500,000
September, 1997 $3,250,000
October and November, 1997 $3,000,000
December, 1997 $2,750,000
January, 1998 $2,500,000
February, 1998 $2,000,000
March through August, 1998 $3,000,000
</TABLE>
All outstanding principal shall be due and payable on September 1, 1998 (the
"Maturity Date"). In addition, principal payable on account of the Term Loan
shall be payable by Borrower to Lender immediately upon the occurrence of an
Event of Default in consequence of which Lender elects to accelerate the
maturity and payment of the Obligations.
3.1.2 Interest. Interest accrued on the Term Loan shall be due on
--------
(i) the first calendar day of each month (for the immediately preceding month),
computed through the last calendar day of the preceding month, and (ii) the
occurrence of an Event of Default in consequence of which Lender elects to
accelerate the maturity and payment of the Obligations.
3.1.3 Mandatory Prepayments of Principal.
----------------------------------
(a) In addition to principal payments provided in Section
3.1.1 above, Borrower shall make mandatory prepayments of principal on a
quarterly basis, on the 15th day of each March, June, September and
December, beginning June 15, 1997. The amount of each mandatory prepayment
shall be equal to 50% of Excess Cash Flow. Excess Cash Flow will be
measured on a cumulative basis, beginning March 1, 1997 and continuing
thereafter, and will consist of all Net Collections received by Borrower
since March 1, 1997 through the end of the month immediately preceding any
principal prepayment due date. As a result of the cumulative aspect of
measuring Net Collections, Borrower will be entitled to a credit to each
mandatory prepayment due, which credit will be equal to the amount of
mandatory prepayments previously made by Borrower pursuant to the
requirements of this Section 3.1.3 or the Final Cash Collateral Order. In
no event, however, will this credit calculation require Lender to refund
any prepayments by Borrower. All mandatory prepayments will be applied to
principal payments due under the Term Loan in inverse order of maturity.
(b) In the event that the Effective Date has not occurred
on or before June 1, 1997, then the mandatory prepayment of 50% of Excess
Cash Flow that otherwise would be paid to Lender on June 15, 1997 shall be
paid into escrow in accordance with
LOAN AND SECURITY AGREEMENT - Page 4
- ---------------------------
<PAGE>
the provisions of the Final Cash Collateral Order. Upon the occurrence of
the earlier of the Effective Date or September 15, 1997, the funds in the
escrow shall be released and paid to Lender.
3.1.4 Voluntary Prepayments of Principal. Borrower may make
----------------------------------
voluntary prepayments of principal, without penalty, at the option of Borrower.
All voluntary prepayments will be applied to principal payments due under the
Term Loan in inverse order of maturity.
3.1.5 Costs, Fees and Charges. Costs, fees and charges payable
-----------------------
pursuant to this Agreement (other than those specifically mentioned above in
this Section 3) shall be payable by Borrower, to Lender or to any other Person
---------
designated by Lender in writing, within 30 days after the date of Lender's
invoice or other written notice thereof to Borrower.
3.1.6 Other Obligations. The balance of the Obligations requiring
-----------------
the payment of money, if any (other than those specifically mentioned above in
this Section 3), shall be payable by Borrower to Lender, within 30 days of the
---------
date of Lender's invoice or other written notice thereof to Borrower.
3.2 Application of Payments and Collections. All items of payment
---------------------------------------
received by Lender by 1:00 p.m., Dallas, Texas time, on any Business Day shall
be deemed received on that Business Day. All items of payment received after
1:00 p.m., Dallas, Texas time, on any Business Day shall be deemed received on
the following Business Day. Borrower irrevocably waives the right to direct the
application of any and all payments and Collections at any time or times
received by Lender from or on behalf of Borrower after the occurrence and during
the continuance of an Event of Default, and, subject to the provisions of
Section 5.2.4 of this Agreement, Borrower does hereby irrevocably agree that
- -------------
Lender shall have the continuing exclusive right to apply and reapply any and
all such payments and Collections received at any time or times hereafter by
Lender or its agent against the Obligations, in such manner as Lender may deem
advisable, notwithstanding any entry by Lender upon any of its books and
records.
3.3 Loan Account. Lender shall enter the Term Loan as a debit to the Loan
------------
Account and shall also record in the Loan Account all payments made by Borrower
on any Obligations and all proceeds of Collateral which are finally paid to
Lender, and may record therein, in accordance with customary accounting
practice, other debits and credits, including interest and all charges and
expenses properly chargeable to Borrower.
3.4 Statements of Account. Lender will account to Borrower monthly with a
---------------------
statement of the Term Loan, charges and payments made pursuant to this
Agreement, and such account rendered by Lender shall be deemed final, binding
and conclusive upon Borrower absent manifest error unless Lender is notified by
Borrower in writing to the contrary within 30 days of the date each accounting
is received by Borrower. Such notice shall only be deemed an objection to those
items specifically objected to therein.
LOAN AND SECURITY AGREEMENT - Page 5
- ---------------------------
<PAGE>
SECTION 4. SECURITY INTERESTS
4.1 Security Interest in Collateral. To secure the prompt payment and
-------------------------------
performance to Lender of the Obligations, Borrower hereby grants to Lender a
continuing Lien upon all of the following Property and interests in Property of
Borrower, whether now owned or existing or hereafter created, acquired or
arising and wheresoever located:
(i) Pledged Contracts and rights to payment in connection
therewith;
(ii) Equipment;
(iii) General Intangibles, excluding, however, Borrower's tax
refunds and choses in action that do not relate to the Collateral;
(iv) the Contribution and Servicing Agreements, and rights to
payment in connection therewith;
(v) Investment Property (as defined in the Code) consisting of
Borrower's interest in the Trust;
(vi) All monies now or at any time or times hereafter in the
possession or under the control of Lender or a bailee or Affiliate of
Lender;
(vii) All accessions to, substitutions for and all replacements,
products and cash and non-cash proceeds of (i) through (vi) above,
including, without limitation, proceeds of and unearned premiums with
respect to insurance policies insuring any of the Collateral; and
(viii) All books and records (including, without limitation, customer
lists, credit files, computer programs, print-outs, and other computer
materials and records) of Borrower pertaining to any of (i) through (vii)
above.
4.2 Lien Perfection; Further Assurances. At Lender's request, Borrower
-----------------------------------
shall execute such UCC-1 financing statements as are required by Lender and such
other instruments, assignments or documents as Lender may deem necessary to
perfect or continue the perfection of Lender's Lien upon any of the Collateral.
Unless prohibited by applicable law, Borrower hereby authorizes Lender to
execute and file any such financing statement on Borrower's behalf. The parties
agree that a carbon, photographic or other reproduction of this Agreement shall
be sufficient as a financing statement and may be filed in any appropriate
office in lieu thereof. At Lender's request, Borrower shall also promptly
execute or cause to be executed and shall deliver to Lender any and all
documents, instruments and agreements deemed necessary by Lender to give effect
to or carry out the terms or intent of the Loan Documents.
LOAN AND SECURITY AGREEMENT - Page 6
- ---------------------------
<PAGE>
SECTION 5. COLLATERAL ADMINISTRATION
5.1 General.
-------
5.1.1 Location of Collateral. All Collateral will at all times be
----------------------
kept by Borrower at one or more of the business locations set forth in Exhibit C
---------
hereto and shall not, without the prior written approval of Lender, be moved
therefrom except, prior to an Event of Default and Lender's acceleration of the
maturity of the Obligations in consequence thereof, for removals in connection
with dispositions of Equipment that are authorized by Section 5.3.2 hereof.
--------------------
5.1.2 Insurance of Collateral. Borrower shall maintain and pay
-----------------------
for insurance upon all Collateral (other than Pledged Contracts) wherever
located and with respect to Borrower's business, covering casualty, hazard,
public liability and such other risks in such amounts and with such insurance
companies as are reasonably satisfactory to Lender. The requirements for such
insurance shall be consistent with the insurance that Borrower previously
maintained under the terms of the Prior Loan Agreement. In addition, Borrower
shall, at its own expense, obtain a security bond covering all of its employees,
which are designated by Borrower to deliver to the Custodian and remove from the
possession of the Custodian any Pledged Contracts and Auto Titles, in such
amounts and with such insurance companies as are reasonably satisfactory to
Lender. As with Borrower's insurance, the requirements for a security bond shall
be consistent with the security bond that Borrower previously maintained under
the terms of the Prior Loan Agreement. Borrower shall deliver copies of the
originals of such policies to Lender with satisfactory lender's loss payable
endorsements, naming Lender as loss payee, assignee or additional insured, as
appropriate, and as Lender's interests may appear. Each policy of insurance or
endorsement shall contain a clause requiring the insurer to give not less than
30 days prior written notice to Lender in the event of cancellation of the
policy for any reason whatsoever and a clause specifying that the interest of
Lender shall not be impaired or invalidated by any act or neglect of Borrower or
the owner of the Property or by the occupation of the premises for purposes more
hazardous than are permitted by said policy. If Borrower fails to provide and
pay for such insurance, Lender may, at its option, but shall not be required to,
procure the same at competitive market rates and charge Borrower therefor.
Borrower agrees to deliver to Lender, promptly as rendered, true copies of all
reports made in any reporting forms to insurance companies.
5.1.3 Protection of Collateral. All expenses of protecting,
------------------------
storing, warehousing, insuring, handling, maintaining and shipping the
Collateral, any and all excise, property, sales, and use taxes imposed by any
state, federal, or local authority on any of the Collateral or in respect of the
sale thereof shall be borne and paid by Borrower. If Borrower fails to promptly
pay any portion thereof when due, Lender may, at its option, but shall not be
required to, pay the same and charge Borrower therefor. Lender shall not be
liable or responsible in any way for the safekeeping of any of the Collateral or
for any loss or damage thereto (except for reasonable care in the custody
thereof while any Collateral is in Lender's actual possession) or for any
diminution in the value thereof, or for any act or default of any warehouseman,
carrier, forwarding agency, or other person whomsoever, but the same shall be at
Borrower's sole risk.
LOAN AND SECURITY AGREEMENT - Page 7
- ---------------------------
<PAGE>
5.2 Administration of Contracts.
---------------------------
5.2.1 Records and Schedules of Pledged Contracts. Borrower shall
------------------------------------------
keep accurate and complete records of its Pledged Contracts and all payments and
Collections thereon and shall submit to Lender the following:
(i) on a monthly basis on or before the 15th day of each month
from and after the date hereof, or, during the existence of a Default or
Event of Default, upon Lender's request, and for such shorter period of
time as Lender may request, as the case may be, a summary of Collections
and dilutions of Pledged Contracts for the preceding month, in form
satisfactory to Lender;
(ii) on or before the 15th day of each month from and after the
date hereof, or, during the existence of a Default or Event of Default,
upon Lender's request, and for such shorter period of time as Lender may
request, as the case may be, in form acceptable to Lender, a summary of
aged Pledged Contracts balances (net of unearned finance charges) of all
active Pledged Contracts (i.e., Pledged Contracts not purged, accelerated
or otherwise terminated) existing as of the last day of the preceding
month, as the case may be; provided that until such time as Lender provides
--------
notice to the contrary, Diminutive Pledged Contracts shall be deemed to be
current Pledged Contracts for purposes of preparing of such report; and
(iii) on or before the 15th day of each month from and after the
date hereof, or, during the existence of a Default or Event of Default,
upon Lender's request, and for such shorter period of time as Lender may
request, as the case may be, in form acceptable to Lender, a "static pool
analysis" report in the form attached hereto as Exhibit M; and
---------
(iv) during the existence of a Default or Event of Default, upon
Lender's request therefor, copies of computer records pertaining to
repayment histories, showing performance by month, delinquencies and
Collections, and present status reports relating to the Pledged Contracts
and such other matters and information relating to the status of then
existing Pledged Contracts as Lender shall reasonably request.
5.2.2 Taxes. If a Pledged Contract includes a charge for any tax
-----
payable to any governmental taxing authority, Lender is authorized, in its sole
discretion, to pay the amount thereof to the proper taxing authority for the
account of Borrower and to charge Borrower therefor; provided, however, that
-------- -------
Lender shall not be liable for any taxes to any governmental taxing authority
that may be due by Borrower.
5.2.3 Pledged Contract Verification. Upon the occurrence and
-----------------------------
during the continuance of a Default or an Event of Default, any of Lender's
officers, employees or agents shall have the right, at any time or times
hereafter, in the name of Lender, any designee of Lender or Borrower, to verify
the validity, amount or any other matter relating to any Pledged Contracts by
mail, telephone, telegraph or otherwise. Borrower shall cooperate fully with
Lender in an effort to facilitate and promptly conclude any such verification
process.
LOAN AND SECURITY AGREEMENT - Page 8
- ---------------------------
<PAGE>
5.2.4 Maintenance of Clearing Account. Until payment in full of
-------------------------------
all Obligations, Borrower shall establish and maintain a procedure for its
collections and cash management as follows:
(a) Clearing Account. Borrower shall maintain a clearing
account pursuant to a lockbox arrangement acceptable to Lender with the
Lockbox Bank. Borrower shall obtain the agreement by the Lockbox Bank in
favor of Lender to waive any offset rights against the funds deposited in
such account. Lender assumes no responsibility for such lockbox
arrangement, including, without limitation, any claim of accord and
satisfaction or release with respect to deposits accepted by any bank
thereunder. Borrower agrees that withdrawals from the Clearing Account are
restricted, depending on the Property that generated the funds deposited in
the Clearing Account, and that withdrawals may be made only by way of wire
transfer initiated by Borrower and payable only as follows:
(i) to Lender, with respect to payments, other
remittances and funds constituting Collateral;
(ii) to the Trust, with respect to payments, other
remittances and funds constituting Property owned by the Trust; and
(iii) to Borrower, with respect to payments, other
remittances and funds constituting Property other than Property
described in clauses (i) and (ii) above.
(b) Fleet Account. Borrower specifically agrees that proceeds
-------------
of the Collateral shall be deposited in the Clearing Account for wire
transfer to the Fleet Account, and that, by way of illustration but not in
limitation, the following are included within the meaning of proceeds of
Collateral: (i) Collections, (ii) distributions from the Trust; and (iii)
Servicing Fees. Borrower shall initiate by way of wire transfer to the
Fleet Account, as collateral for the Obligations, on the first business day
following Borrower's receipt thereof, all payments and other remittances
constituting the Collateral which are received in the lockbox; provided,
--------
however, that if Borrower receives any payment or other remittance as to
-------
which Borrower does not receive therewith, or otherwise have, sufficient
information to verify that such payment or other remittance relates to a
Pledged Contract, a distribution from the Trust, or a Servicing Fee, then
Borrower shall deposit such payment or other remittance in the Fleet
Account no later than the second business day after Borrower verifies that
such payment or other remittance relates to a Pledged Contract, a
distribution from the Trust, or a Servicing Fee.
(c) Operating Account. So long as no Event of Default has
-----------------
occurred and is continuing, then Lender will initiate by way of wire transfer,
at Borrower's expense, to Borrower's operating account, for Borrower's use, on
the next Business Day following Lender's receipt thereof, the payments and other
remittances constituting the Collateral that were received as collected funds in
the Fleet Account; and Borrower may use and enjoy such funds free and clear of
Liens in favor of Lender; Lender being then deemed to have
LOAN AND SECURITY AGREEMENT - Page 9
- ---------------------------
<PAGE>
released its Lien thereon. If a Default has occurred and is
continuing, then Lender may, at Lender's option, reserve from funds that
otherwise would be wired from the Fleet Account to Borrower's operating
account, an amount determined by Lender, in its reasonable discretion, to
be sufficient to enable Borrower either to cure such Default at or prior to
the time such Default becomes an Event of Default or to pay any Obligations
that are due or shall become due during any applicable cure or grace
period. If an Event of Default has occurred and is continuing, then Lender
will have no obligation to transfer any funds from the Fleet Account to
Borrower's operating account and, instead, may exercise Lender's remedies
in Section 9 with respect to any funds in the Fleet Account.
---------
5.2.5 Collection of Pledged Contracts; Proceeds of Collateral. To
-------------------------------------------------------
expedite collection, Borrower shall endeavor in the first instance to make
collection of its Pledged Contracts for Lender. All remittances received by
Borrower on account of Pledged Contracts, together with the proceeds of any
other Collateral, shall be held as Lender's property by Borrower as trustee of
an express trust for Lender's benefit and Borrower shall immediately deposit
same in kind in the Clearing Account. Lender retains the right at all times
after the occurrence of an Event of Default to notify Account Debtors that
Pledged Contracts have been assigned to Lender and to collect Pledged Contracts
directly in its own name and to charge the collection costs and expenses,
including attorneys' fees to Borrower.
5.3 Administration of Equipment.
----------------------------
5.3.1 Records and Schedules of Equipment. Borrower shall keep
----------------------------------
accurate records itemizing and describing the kind, type, quality, quantity and
value of its Equipment and all dispositions made in accordance with Section
-------
5.3.2 hereof, and shall furnish Lender with a current schedule containing the
- -----
foregoing information on at least an annual basis and more often if requested by
Lender. Immediately on request therefor by Lender, Borrower shall deliver to
Lender any and all evidence of ownership, if any, of any of the Equipment.
5.3.2 Dispositions of Equipment. Borrower will not sell, lease or
-------------------------
otherwise dispose of or transfer any of the Equipment or any part thereof
without the prior written consent of Lender; provided, however, that the
-------- -------
foregoing restriction shall not apply, for so long as no Default or Event of
Default exists, and so long as Borrower maintains adequate Servicing Equipment
to service and administer the Pledged Contracts in the ordinary course of
Borrower's business.
5.4 Payment of Charges. All amounts chargeable to Borrower under Section 5
------------------ ---------
hereof shall be Obligations secured by all of the Collateral, shall be payable
and shall bear interest from the date such advance was made until paid in full
at the rate applicable to the Term Loan from time to time.
5.5 Permitted Liens on Servicing Collateral. Lender agrees to consent to a
---------------------------------------
Lien on all Equipment, General Intangibles, books and records, and related
Intellectual Property (collectively, the "Servicing Collateral") in favor of a
--------------------
Person who hereafter extends credit to Borrower for the purpose of financing
purchase of Contracts, loans or receivables, and who is not an Affiliate of
Borrower, subject to the following terms and conditions:
LOAN AND SECURITY AGREEMENT - Page 10
- ---------------------------
<PAGE>
(a) each of Lender and such other Person shall have equal access to
the Servicing Collateral for purposes of obtaining information regarding
the Contracts, loans or receivables, in which such Person has a Lien;
(b) until the Obligations to Lender and the Indebtedness to such other
Person have been paid in full, neither Fleet nor such Person may exercise
any foreclosure remedies against the Servicing Collateral to the extent
such exercise would interfere with the ability of the other to preserve its
interest in the Servicing Collateral;
(c) Lender and such other Person shall have entered into a mutually
acceptable intercreditor agreement pertaining to their respective security
interests in the Servicing Collateral, which shall generally provide for
equal rights with respect to the Servicing Collateral;
(d) the priority of the Lien of such Person may be junior to or equal
in priority to, but not superior to, the priority of the Lien in favor of
Lender;
(e) no Default or Event of Default has occurred and is continuing; and
(f) Lender shall receive all of the proceeds from any disposition of
the Servicing Collateral after an Event of Default for application to the
Obligations.
SECTION 6. REPRESENTATIONS AND WARRANTIES
6.1 General Representations and Warranties. To induce Lender to enter into
--------------------------------------
this Agreement Borrower warrants, represents and covenants to Lender that:
6.1.1 Organization and Qualification. As of the Closing Date,
------------------------------
Borrower is, and until the Obligations are repaid in full, Borrower will remain,
an entity duly organized, validly existing and in good standing under the laws
of Borrower's state of organization. Borrower is, and until the Obligations are
repaid in full, Borrower will remain, duly qualified and authorized to do
business and in good standing as a foreign corporation in each state or
jurisdiction in which the failure of Borrower to be so qualified would have a
material adverse effect on the financial condition, business or Properties of
Borrower.
6.1.2 Corporate Power and Authority. As of the Closing Date,
-----------------------------
Borrower is duly authorized and empowered to enter into, execute, deliver and
perform this Agreement and each of the other Loan Documents to which it is a
party. The execution, delivery and performance of this Agreement and each of
the other Loan Documents have been duly authorized by all necessary corporate
action and do not and will not (i) require any consent or approval of the
shareholders of Borrower; (ii) contravene Borrower's, articles of incorporation
or by-laws; (iii) violate, or cause Borrower to be in default under, any
provision of any law, rule, regulation, order, writ, judgment, injunction,
decree, determination or award in effect having applicability to Borrower; (iv)
result in a breach of or constitute a default under any indenture or loan or
credit agreement or any other
LOAN AND SECURITY AGREEMENT - Page 11
- ---------------------------
<PAGE>
agreement, lease or instrument to which Borrower is a party or by which it or
its Properties may be bound or affected; or (v) result in, or require, the
creation or imposition of any Lien (other than Permitted Liens) upon or with
respect to any of the Properties now owned or hereafter acquired by Borrower.
6.1.3 Legally Enforceable Agreement. As of the Closing Date, this
-----------------------------
Agreement is, and each of the other Loan Documents when delivered under this
Agreement will be, a legal, valid and binding obligation of Borrower enforceable
against it in accordance with its respective terms.
6.1.4 Corporate Names. As of the Closing Date, Borrower, has not
---------------
been known as or used any corporate, fictitious or trade names except those
listed on Exhibit D hereto. As of the Closing Date, Borrower has not been the
---------
surviving corporation of a merger or consolidation or acquired all or
substantially all of the assets of any Person.
6.1.5 Business Locations. As of the Closing Date Borrower's chief
------------------
executive office and other places of business are as listed on Exhibit C hereto.
---------
During the one-year period preceding the Closing Date, Borrower has not had an
office or place of business other than as listed on Exhibit C.
---------
6.1.6 Title to Properties; Priority of Liens. Borrower has and,
--------------------------------------
until the Obligations are repaid in full, Borrower will continue to have, good
title to all of the Collateral free and clear of all Liens except Permitted
Liens. Borrower has paid or discharged, and, until the Obligations are repaid in
full, Borrower will continue to pay and discharge, all lawful claims which, if
unpaid, might become a Lien against any of the Collateral that is not a
Permitted Lien. The Liens granted to Lender under Section 4 hereof are first
---------
priority Liens, subject only to Permitted Liens.
6.1.7 Servicing Equipment. The Servicing Equipment is in good
-------------------
operating condition and repair, and all necessary replacements of and repairs
thereto shall be made so that the value and operating efficiency of the
Servicing Equipment shall be maintained and preserved, reasonable wear and tear
excepted. Borrower will not permit any of the Servicing Equipment to become
affixed to any real Property leased to Borrower so that an interest arises
therein under the real estate laws of the applicable jurisdiction unless the
landlord of such real Property has executed a landlord waiver or leasehold
mortgage in favor of and in form acceptable to Lender, and Borrower will not
permit any of the Servicing Equipment to become an accession to any personal
Property other than Servicing Equipment that is subject to first priority
(except for Permitted Liens) Liens in favor of Lender.
6.1.8 Financial Statements; Fiscal Year. The balance sheets of
---------------------------------
Borrower as of ____________, 1997, and the related statements of income, changes
in stockholder's equity, and changes in financial position for the periods ended
on such dates, have been prepared in accordance with GAAP, and present fairly
the financial position of Borrower at such dates and the results of Borrower's
operations for such periods. The fiscal year of Borrower ends on December 31 of
each year.
LOAN AND SECURITY AGREEMENT - Page 12
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<PAGE>
6.1.9 Disclosure Statement. As of the Closing Date, the Disclosure
--------------------
Statement does not contain any untrue statement of a material fact or omit a
material fact necessary to make the statements contained therein or herein not
misleading.
6.1.10 Taxes. Borrower's federal tax identification number is 75-
-----
2486444. As of the Closing Date Borrower has filed, and, until the Obligations
are repaid in full, Borrower will continue to file, all federal, state and local
tax returns and other reports it is required by law to file. As of the Closing
Date Borrower has paid, or made provision for the payment of and, until the
Obligations are repaid in full, Borrower will continue to pay and make provision
for the payment of, all taxes, assessments, fees, levies and other governmental
charges upon it, its income and Properties as and when such taxes, assessments,
fees, levies and charges that are due and payable, unless and to the extent any
thereof are being actively contested in good faith and by appropriate
proceedings and Borrower maintains reasonable reserves on its books therefor.
The provision for taxes on the books of Borrower are adequate for all years not
closed by applicable statutes, and for its current fiscal year.
6.1.11 Brokers. There are no claims for brokerage commissions,
-------
finder's fees or investment banking fees in connection with the transactions
contemplated by this Agreement.
6.1.12 Intellectual Property. Borrower owns or possesses all the
---------------------
Intellectual Property necessary for the conduct of its business and all the
Intellectual Property related to or used in connection with Servicing Equipment,
in each case without any known conflict with the rights of others. All such
Intellectual Property is listed on Exhibit E hereto as of the date hereof.
---------
6.1.13 Governmental Consents. As of the Closing Date, Borrower has,
---------------------
and is in good standing with respect to, all governmental consents, approvals,
licenses, authorizations, permits, certificates, inspections and franchises
necessary to continue to conduct its business as heretofore conducted by it and
to own or lease and operate its Properties as now owned or leased by it.
6.1.14 Compliance with Laws. Borrower has duly complied with, and
--------------------
its Properties, business operations and leaseholds are in compliance in all
material respects with, the provisions of all federal, state and local laws,
rules and regulations applicable to Borrower, its Properties or the conduct of
its business. Until the Obligations are repaid in full, Borrower will continue
to comply with, and its Properties, business operations and leaseholds will
continue to be in compliance in all material respects with, the provisions of
all federal, state and local laws, rules and regulations applicable to Borrower,
its Properties or the conduct of its business. Borrower has established and
maintains an adequate monitoring system to insure that it remains in compliance
with all federal, state and local laws, rules and regulations applicable to it.
6.1.15 Restrictions. Borrower is not a party or subject to any
------------
contract, agreement, or charter or other corporate restriction, which
materially and adversely affects its business or the use or ownership of any of
its Collateral. As of the Closing Date, Borrower is not a party or subject to
any contract or agreement which restricts its right or ability to incur
Indebtedness, other than as
LOAN AND SECURITY AGREEMENT - Page 13
- ---------------------------
<PAGE>
set forth on Exhibit F hereto, none of which prohibit the execution of or
---------
compliance with this Agreement or the other Loan Documents by Borrower.
6.1.16 Litigation. As of the Closing Date, and except as set forth
----------
on Exhibit G hereto, there are no actions, suits, proceedings or investigations
---------
pending, or to the knowledge of Borrower, threatened, against or affecting
Borrower, or the business, operations, Properties, prospects, profits or
condition of Borrower. As of the Closing Date, Borrower is not in default with
respect to any order, writ, injunction, judgment, decree or rule of any court,
governmental authority or arbitration board or tribunal.
6.1.17 No Defaults. As of the Closing Date, no event has occurred
-----------
and no condition exists which would, upon or after the execution and delivery of
this Agreement or Borrower's performance hereunder, constitute a Default or an
Event of Default. As of the Closing Date, Borrower is not in default, and no
event has occurred and no condition exists which constitutes, or which with the
passage of time or the giving of notice or both would constitute, a default in
the payment of any Indebtedness to any Person for Money Borrowed.
6.1.18 Leases. Exhibit H hereto is a complete listing as of the
------ ---------
Closing Date of all capitalized leases of Borrower pertaining to Equipment; and
Exhibit I hereto is a complete listing as of the Closing Date of all operating
- ---------
leases of Borrower pertaining to Equipment. As of the Closing Date, Borrower is
in full compliance in all material respects with the terms of each of its
respective capitalized and operating leases.
6.1.19 Pension Plans. As of the Closing Date, and except for
-------------
Borrower's 401(k) Plan, Borrower has no Plan. Borrower is, and, until the
Obligations are repaid in full, will continue to be, in full compliance with the
requirements of ERISA with respect to each Plan. As of the Closing Date, no
fact or situation that could result in a material adverse change in the
financial condition of Borrower exists in connection with any Plan. As of the
Closing Date, Borrower has no withdrawal liability in connection with a
Multiemployer Plan; and until the Obligations are repaid in full, Borrower will
not incur any withdrawal liability in connection with a Multiemployer Plan.
6.1.20 Trade Relations. There exists no actual or threatened
---------------
termination, cancellation or limitation of, or any modification or change in,
the business relationship between Borrower and any Collection Agents or any
group of Collection Agents whose services individually or in the aggregate are
material to the business of Borrower; and there exists no present condition or
state of facts or circumstances which would materially affect adversely Borrower
or prevent Borrower from conducting such business after the consummation of the
transaction contemplated by this Agreement in substantially the same manner in
which it has heretofore been conducted.
6.1.21 Labor Relations. As of the Closing Date, and except as
---------------
described on Exhibit J hereto, Borrower is not a party to any collective
---------
bargaining agreement. There are no material grievances, disputes or
controversies with any union or any other organization of Borrower's or any of
its Subsidiaries' employees, or threats of strikes, work stoppages or any
asserted pending demands for collective bargaining by any union or organization.
LOAN AND SECURITY AGREEMENT - Page 14
- ---------------------------
<PAGE>
6.2 Continuous Nature of Representations and Warranties. Except with
---------------------------------------------------
regard to representations and warranties that, by their stated terms, are
limited by or designated as being applicable to a specific time or period of
time, each representation and warranty contained in this Agreement and the other
Loan Documents shall be continuous in nature and shall remain accurate, complete
and not misleading at all times during the term of this Agreement, except for
changes in Borrower's business or operations that would render the information
in any Exhibit attached hereto either inaccurate, incomplete or misleading, so
long as such changes have been disclosed confidentially to Lender or disclosed
publicly by Borrower or such changes are expressly permitted by this Agreement.
6.3 Survival of Representations and Warranties. All representations
------------------------------------------
and warranties of Borrower contained in this Agreement or any of the other Loan
Documents shall survive the execution, delivery and acceptance thereof by Lender
and the parties thereto and the closing of the transactions described therein or
related thereto.
SECTION 7. COVENANTS AND CONTINUING AGREEMENTS
7.1 Affirmative Covenants. During the term of this Agreement, and
---------------------
thereafter for so long as there are any Obligations to Lender, Borrower
covenants that, unless Lender, at its option, otherwise consents in writing,
Borrower shall:
7.1.1 Visits and Inspections. Permit representatives of Lender,
----------------------
from time to time, as often as may be reasonably requested, but only during
normal business hours, to visit and inspect the Properties of Borrower, inspect,
audit and make extracts from its books and records and discuss with its
officers, its employees and its independent accountants, Borrower's and each of
its Subsidiaries' business, assets, liabilities, financial condition, business
prospects and results of operations. Furthermore, and not in limitation of the
foregoing, Borrower shall permit Lender to visit Borrower's Properties and the
storage facility of the Custodian, from time to time, as often as may be
reasonably requested, but only during the normal business hours of Borrower and
Custodian, as the case may be, to conduct inspections and audits of Borrower's
Pledged Contracts and related Auto Titles, and the records relating thereto, in
order for Lender to test the segregation of the Collateral and the proper
allocation of cash Collections from Pledged Contracts.
7.1.2 Notices. Promptly notify Lender in writing of the occurrence of
-------
any event or the existence of any fact which renders any representation or
warranty in this Agreement or any of the other Loan Documents inaccurate,
incomplete or misleading.
7.1.3 Financial Statements. Keep adequate records and books of
--------------------
account with respect to its business activities in which proper entries are made
in accordance with GAAP reflecting all its financial transactions; and cause to
be prepared and furnished to Lender the following (all to be prepared in
accordance with GAAP applied on a consistent basis, unless Borrower's certified
public accountants concur in any change therein and such change is disclosed to
Lender and is consistent with GAAP):
LOAN AND SECURITY AGREEMENT - Page 15
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<PAGE>
(i) not later than 120 days after the close of each fiscal
year of Borrower, unqualified audited financial statements of Borrower and
its Subsidiaries as of the end of such year, on a Consolidated and
consolidating basis, certified by Ernst & Young, L.L.P. or by such other
firm of independent certified public accountants of recognized standing
selected by Borrower but acceptable to Lender (except for a qualification
for a change in accounting principles with which the accountant concurs);
(ii) not later than 45 days after the end of each month
hereafter, including the last month of Borrower's fiscal year, unaudited
interim financial statements of Borrower and its Subsidiaries as of the
end of such month and of the portion of Borrower's financial year then
elapsed, on a Consolidated and consolidating basis, certified by the
principal financial officer of Borrower as prepared in accordance with
GAAP and fairly presenting the Consolidated financial position and results
of operations of Borrower and its Subsidiaries for such month and period
subject only to changes from audit and year-end adjustments and except
that such statements need not contain notes;
(iii) promptly after the sending or filing thereof, as the case
may be, copies of any proxy statements, financial statements or reports
which Borrower has made available to its shareholders and copies of any
regular, periodic and special reports or registration statements which
Borrower files with the Securities and Exchange Commission or any
governmental authority which may be substituted therefor, or any national
securities exchange;
(iv) promptly after the filing thereof, copies of any annual
report to be filed with ERISA in connection with each Plan;
(v) promptly after the initiation thereof, copies of
materials relating to actions, suits, proceedings or investigations
against or affecting Borrower, or the business, operations, Properties,
prospects, profits or condition of Borrower in each case that exceed
$100,000 as the amount in controversy, or that could be reasonably
expected to have a material adverse effect on Borrower's financial
condition or results of operations;
(vi) promptly after the execution thereof, copies of
capitalized and operating leases to which Borrower is a party;
(vii) not later than 15 days after the end of each month
hereafter, a Compliance Certificate in the form of Exhibit K hereto,
---------
executed by the Executive Vice President and Treasurer of Borrower; and
(viii) such other data and information (financial and
otherwise) as Lender, from time to time, may reasonably request, bearing
upon or related to the Collateral or Borrower's financial condition or
results of operations.
LOAN AND SECURITY AGREEMENT - Page 17
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<PAGE>
Concurrently with the delivery of the financial statements described
in clause (i) of this Section 7.1.3, Borrower shall forward to Lender a copy of
-------------
the accountants' letter to Borrower's management, if any, that is prepared in
connection with such financial statements.
7.1.4 Landlord and Storage Agreements. Provide Lender with copies
-------------------------------
of all agreements between Borrower and any landlord or warehouseman which owns
any premises at which any Pledged Contracts or related Auto Titles may, from
time to time, be kept.
7.1.5 Possession of Pledged Contracts and Auto Titles by
--------------------------------------------------
Custodian. The Custodian shall maintain possession of Pledged Contracts and
- ---------
related Auto Titles according to the terms and conditions of the Custodial
Agreement.
7.1.6 Delivery of Pledged Contracts and Auto Titles. Upon the
---------------------------------------------
occurrence and during the continuance of an Event of Default, Borrower shall at
Borrower's own expense, (i) physically deliver to Lender or its agent original
Auto Titles in its possession for all vehicles securing any of the Pledged
Contracts and original copies of its Pledged Contracts in its possession and all
related documents and instruments, and all files, certificates of title,
correspondence, appraisals, computer programs, tapes, discs, cards, accounting
records and other information and data relating to the Collateral and (ii) duly
note or cause to be duly noted Lender's name on each Auto Title securing a
Pledged Contract pursuant to the proper certificate of title act in the proper
state, so that Lender will have a perfected security interest in the motor
vehicles purchased pursuant to any Pledged Contract. Failure to deliver any
Pledged Contract or related Auto Title, or failure to deliver physical
possession of any instruments, documents or writings in respect of any Pledged
Contract as provided herein shall not invalidate Lender's lien and security
interest therein, except to the extent that possession may be required by
applicable law for the perfection of said lien or security interest, in which
latter case, the Pledged Contract shall be deemed to be held by the Borrower as
the custodial agent of Lender, for the benefit of Lender. Failure of Lender to
demand or require Borrower to include any Pledged Contract or related Auto Title
securing a Pledged Contract in any schedule, to execute any schedule, to assign
and deliver any schedule or to deliver physical possession of any instruments,
documents, or writings related to any Pledged Contract shall not relieve
Borrower of its duty so to do.
7.1.7 Landlord's Consent Letter. Borrower shall use its best
-------------------------
efforts to obtain for Lender for each leased location of Borrower, landlord
consent letters from each of the landlords from whom Borrower leases Real
Property, in form and substance satisfactory to Lender.
7.1.8 Licensor's Consent Letter. Borrower shall use its best
-------------------------
efforts to obtain for Lender consent letters from each of the licensors from
whom Borrower licenses Intellectual Property relating to the servicing and
administering of Pledged Contracts, in form and substance satisfactory to
Lender.
7.1.9 Amendments to Securitization Documents. Provide Lender with
--------------------------------------
prior written notice of any amendment or modification to the Securitization
Documents. Prior to entering into any amendment or modification to the
Securitization Documents, Borrower shall
LOAN AND SECURITY AGREEMENT - Page 17
- ---------------------------
<PAGE>
deliver to Lender true, correct and complete drafts of such amendment or
modification and copies of the executed amendment or modification promptly upon
execution.
7.1.10 Duties of Collection and Administration. Borrower shall
---------------------------------------
service, manage, administer, and make Collections on the Pledged Contracts and
shall do any and all things which it may deem necessary or desirable in
connection therewith which are consistent with this Agreement. Borrower shall
service and administer the Pledged Contracts by employing such procedures
(including collection procedures) and degree of care, in each cash consistent
with prudent industry standards, as are customarily employed by Borrower in
servicing and administering motor vehicle retain installment sales contracts and
notes owned or serviced by Borrower comparable to the Pledged Contracts. In
performing such duties, Borrower shall comply with Borrower's Credit and
Collection Policy. Payments by or on behalf of Account Debtors shall be
allocated by Borrower to scheduled payments, late fees, other charges, and
principal and interest in accordance with the terms of the Pledged Contracts and
Borrower's normal servicing practices and procedures (which shall be Borrower's
Credit and Collection Policy). Borrower's obligations to collect and administer
Pledged Contracts shall include, without limitation, collection and posting of
all payments, responding to inquiries of Account Debtors, investigating
delinquencies, sending payment coupons to Account Debtors, reporting any
required tax information to Account Debtors or to such other Persons as may be
required in connection with servicing the Pledged Contracts, monitoring the
collateral, and accounting for Collections. Borrower shall also (i) perform all
obligations of Borrower under the Pledged Contracts and (ii) administer and
enforce all rights of Borrower under the Dealer Agreements, including but not
limited to the right to require Dealers to repurchase Pledged Contracts for
breaches of representations and warranties made by the Dealers.
7.1.11 Costs and Expenses. Pay the balance of Lender's and TCB's
------------------
costs, fees (including attorneys' and other professionals' fees) and other
expenses incurred in connection with the Bankruptcy Proceedings and allowed by
the Bankruptcy Court that remains after satisfaction of the condition precedent
set forth in Section 8.6, without reduction, in 6 equal monthly installments,
-----------
the first installment commencing ________, 1997, so long as such costs, fees and
expenses represent actual out-of-pocket costs, fees and expenses incurred by
Lender and TCB and so long as attorneys' and other professionals' fees consist
of fees billed at the regular and normal hourly rates of such professionals,
without any allowance for premiums, surcharge or increase in such hourly rates
that might otherwise be applied given the complexity and demands of the
Bankruptcy Proceedings and that are not otherwise unreasonable.
7.2 Negative Covenants. During the term of this Agreement, and thereafter
------------------
for so long as there are any Obligations to Lender, Borrower covenants that,
unless Lender, at its option, otherwise consents thereto in writing, it will
not:
7.2.1 Mergers; Consolidations; Acquisitions. Merge or consolidate
-------------------------------------
with any Person; provided, that Borrower may merge with and into another Person
--------
so long as upon the consummation of any such merger, Borrower is the surviving
entity and no Default or Event of Default would exist after giving effect to the
consummation of the merger; nor acquire all or any substantial part of the
Properties of any Person, provided that Borrower may acquire Properties of
--------
LOAN AND SECURITY AGREEMENT - Page 18
- ---------------------------
<PAGE>
another Person so long as upon the consummation of any such acquisition, no
Default or Event of Default would exist after giving effect to the consummation
of such acquisition.
7.2.2 Limitation on Liens. Create or suffer to exist, any Lien upon
-------------------
any of the Collateral whether now owned or hereafter acquired, except:
(i) Liens at any time granted in favor of Lender;
(ii) Liens for taxes (excluding any Lien imposed pursuant to
any of the provisions of ERISA) not yet due, or being contested in the
manner described in Section 6.1.10 hereto, but only if in Lender's judgment
--------------
such Lien does not adversely affect Lender's rights or the priority of
Lender's Lien in the Collateral;
(iii) Liens arising in the ordinary course of Borrower's
business by operation of law or regulation, but only if payment in respect
of any such Lien is not at the time required and such Liens do not, in the
aggregate, materially detract from the value of the Property of Borrower or
materially impair the use thereof in the operation of Borrower's business;
(iv) Purchase Money Liens securing Permitted Purchase Money
Indebtedness;
(v) Liens securing Indebtedness of one of Borrower's
Subsidiaries to Borrower or another such Subsidiary;
(vi) such other Liens as appear on Exhibit L hereto;
---------
(vii) such other Liens as Lender may hereafter approve in
writing;
(viii) Liens in favor of Prudential Securities Credit
Corporation but only to the extent that they secure Indebtedness to
Prudential Securities Credit Corporation as of the Petition Date or
refinancings thereof pursuant to the Plan; and
(ix) Liens on Servicing Collateral, as contemplated and
permitted by Section 5.5.
-----------
7.2.3 Disposition of Assets. Sell, lease or otherwise dispose of
---------------------
any of the Collateral, including any disposition of Collateral as part of a sale
and leaseback transaction, to or in favor of any Person, except (i)
dispositions expressly authorized by this Agreement, and (ii) sales or other
dispositions of Equipment in the ordinary course of its business, subject,
however, to the terms of Section 5.3.2.
-------------
7.2.4 Change of Locations. Borrower will not change the location
-------------------
of its chief executive office or any other place of business from those listed
on Exhibit C hereto, without giving Lender at least 30 days prior written notice
---------
of the new location of its chief executive office or other
LOAN AND SECURITY AGREEMENT - Page 19
- ---------------------------
<PAGE>
place of business, as the case may be, and delivering to Lender UCC-1 financing
statements or UCC-3 amendments, as appropriate, reflecting any new location
prior to such change in location.
7.2.5 Amendments to Securitization Documents. Amend or modify the
--------------------------------------
Securitization Documents in any manner that would have an adverse affect, as
determined by Lender in its discretion, on the Trust, the Collections that the
Trust would otherwise receive on the Series 1996A Notes or the Series 1996B
Notes (as such terms are defined in the Contribution and Servicing Agreements),
Lender's Lien on Borrower's interest in the Trust, or the timing or amount of
any distribution from the Trust to Borrower.
7.2.6 Amendments to Reorganization Plan. Amend or modify the
---------------------------------
Reorganization Plan in any manner that would have an adverse affect on Lender,
as determined by Lender in its discretion.
7.2.7 Amendments to Contribution and Servicing Agreement. Amend or
--------------------------------------------------
modify either of the Contribution and Servicing Agreements in any manner that
would have an adverse affect, as determined by Lender in its discretion, on the
timing or amount of any fees or distributions therefrom to Borrower.
7.3 Specific Financial Covenant. During the term of this Agreement, and
---------------------------
thereafter for so long as there are any Obligations to Lender, Borrower
covenants that, unless otherwise consented to by Lender in writing, it shall:
7.3.1 Minimum Gross Collections.
-------------------------
(a) Gross Collections Covenant. For each calendar month during the
--------------------------
term of this Agreement, achieve Collections on Pledged Contracts, for the
3-month period consisting of the calendar month then ended plus the
immediately preceding two calendar months (i.e., a rolling 3-month period),
of not less than 85% of Projected Gross Collections for the same rolling 3-
month period. If a Default occurs by reason of a breach of this covenant,
then the Borrower will have the opportunity to cure this Default for a
period of 5 days from the earlier of the date of actual delivery, or, if
------
not delivered as required, the date of required delivery, pursuant to
--------
Section 7.1.3(vii) of this Agreement, to Fleet of the monthly Compliance
------------------
Certificate for the applicable month then ended, by making a prepayment (a
"Cure Payment") on the outstanding principal amount of the Term Loan in an
------------
amount equal to the difference between 85% of the Projected Gross
Collections and the actual amount of Gross Collections. All such
------
prepayments will be applied to principal amounts due in the inverse order
of maturity. The first measurement of this covenant will be conducted for
the 3- month period that ends on ________, 1997. This covenant is referred
to as the "Gross Collections Covenant."
--------------------------
(b) Cure Payments. If Borrower makes a Cure Payment, as provided
-------------
above, then, for purposes of subsequent calculations of the Gross
Collections Covenant that involve any of the calendar months that were
included in the calculation of the Gross Collections Covenant with respect
to which a Cure Payment was made, the Collections
LOAN AND SECURITY AGREEMENT - Page 20
- ---------------------------
<PAGE>
on Pledged Contracts, as a percentage of Projected Gross Collections, for
any of such months will be deemed to be 85%; it being the intention of the
parties to avoid creating a Default for a breach of the Gross Collections
Covenant that is calculated for a calendar month subsequent to a calendar
month for which Borrower cured a Default under the Gross Collections
Covenant by making a Cure Payment.
SECTION 8. CONDITIONS PRECEDENT
Notwithstanding any other provision of this Agreement or any of the other
Loan Documents, and without affecting in any manner the rights of Lender under
the other sections of this Agreement, Lender shall not be required to make the
Term Loan under this Agreement unless and until each of the following conditions
has been and continues to be satisfied:
8.1 Documentation. Lender shall have received, in form and substance
-------------
satisfactory to Lender and its counsel, a duly executed copy of this Agreement
and the other Loan Documents, together with such additional documents,
instruments and certificates as Lender and its counsel shall require in
connection therewith from time to time, all in form and substance satisfactory
to Lender and its counsel, including, but not limited to the following
documents:
(a) copies of all filing receipts or acknowledgments issued by any
governmental authority to evidence any filing or recordation necessary to
perfect the Liens of Lender in the Collateral;
(b) good standing certificates for Borrower, issued within 15 days
before the Closing Date by the Secretary of State or other appropriate official
of Borrower's jurisdiction of incorporation;
(c) the written opinions of Baker & McKenzie and Weil, Gotshal &
Manges, L.L.P., counsel to Borrower, regarding Borrower and the execution of
this Agreement and the Other Agreements executed in connection with this
Agreement, and the transactions contemplated hereby, to be in form and substance
satisfactory to Lender;
(d) the Trademark Security Agreement, the Trust Pledge Agreement, the
Guaranty, and the Releases shall have been executed, and shall be in form and
substance satisfactory to Lender, in its sole discretion, and true and correct
copies of such executed documents shall have been delivered to Lender; and
(e) evidence satisfactory to Lender that the conditions precedent to
Lender's agreement to support and vote for the Reorganization Plan, as such
conditions precedent are as set forth in the Settlement Agreement, have been
satisfied.
8.2 No Default. No Default or Event of Default shall exist.
----------
8.3 Other Loan Documents. Each of the conditions precedent set forth in
--------------------
the other Loan Documents shall have been satisfied.
LOAN AND SECURITY AGREEMENT - Page 21
- ---------------------------
<PAGE>
8.4 Reorganization Plan. The Effective Date shall have occurred under
-------------------
the Reorganization Plan without any of the conditions precedent thereto in the
Reorganization Plan having been waived, unless consented to in writing by
Lender.
8.5 No Litigation. No action, proceeding, investigation, regulation or
-------------
legislation shall have been instituted, threatened or proposed before any court,
governmental agency or legislative body to enjoin, restrain or prohibit, or to
obtain damages in respect of, or which is related to or arises out of this
Agreement or the consummation of the transactions contemplated hereby.
8.6 Costs and Expenses. Borrower shall have paid Lender's and TCB's
------------------
costs, fees (including attorneys' and other professionals' fees) and other
expenses incurred in connection with the Bankruptcy Proceedings, in an amount of
at least $300,000, without reduction, but subject to allowance by the Bankruptcy
Court. Borrower acknowledges that the fees and expenses heretofore incurred by
Lender and TCB through March, 1997 in the approximate amount of $287,000 are not
unreasonable. Borrower shall not have opposed the application for payment
thereof if it is submitted to the Bankruptcy Court for approval in the
Bankruptcy Proceedings prior to the Closing Date.
8.7 Prudential Security Credit Corporation. Lender shall have approved
--------------------------------------
the New Prudential Security Documents; and Lender will be deemed to have
approved the New Prudential Security Documents if such documents do not increase
the scope or nature of or the amount of indebtedness (inclusive of indebtedness
consisting of PSCC's costs, fees and expenses incurred in connection with the
Bankruptcy Proceedings and allowed by the Bankruptcy Court) secured by or the
remedies available with respect to PSCC's liens and security interests, as
provided under PSCC's security documents existing as of the Petition Date.
SECTION 9. EVENTS OF DEFAULT; RIGHTS AND REMEDIES ON DEFAULT
9.1 Events of Default. The occurrence of one or more of the following
-----------------
events shall constitute an "Event of Default":
9.1.1 Payment of Obligations. Borrower shall fail to pay any of
----------------------
the Obligations on the due date thereof (whether due at stated maturity, on
demand, upon acceleration or otherwise).
9.1.2 Misrepresentations. Any representation, warranty or other
------------------
statement made or furnished to Lender by or on behalf of Borrower in this
Agreement, any of the other Loan Documents or any instrument, certificate or
financial statement furnished in compliance with or in reference thereto proves
to have been false or misleading in any material respect when made or furnished.
9.1.3 Breach of Specific Covenants. Borrower shall fail or
----------------------------
neglect to perform, keep or observe any covenant contained in Sections 4.2,
------------
5.1.1, 5.2, 7.1.1, 7.1.3, 7.1.5, 7.1.6, 7.2 or 7.3 hereof on the date that
- ----- --- ----- ----- ----- ----- --- ---
Borrower is required to perform, keep or observe such covenant, and,
LOAN AND SECURITY AGREEMENT - Page 22
- ---------------------------
<PAGE>
with respect to the covenant contained in Section 7.3, the cure period provided
-----------
for in Section 7.3 shall have expired.
-----------
9.1.4 Breach of Other Covenants. Borrower shall fail or neglect
-------------------------
to perform, keep or observe any covenant contained in this Agreement (other than
a covenant which is dealt with specifically elsewhere in Section 9.1 hereof) and
-----------
the breach of such other covenant is not cured to Lender's satisfaction within
30 days after the sooner to occur of Borrower's receipt of notice of such breach
from Lender or the date on which such failure or neglect first becomes known to
any officer of Borrower.
9.1.5 Default Under Security Documents/Other Agreements. Any
-------------------------------------------------
event of default shall occur under, or Borrower shall default in the performance
or observance of any term, covenant, condition or agreement contained in, any of
the Security Documents or the Other Agreements and such default shall continue
beyond any applicable grace period.
9.1.6 Other Defaults. There shall occur any default or event of
--------------
default on the part of Borrower under any agreement, document or instrument to
which Borrower is a party or by which Borrower or any of its Property is bound,
creating or relating to any Indebtedness (other than the Obligations) evidencing
an obligation to pay money in excess of $1,000,000 if the payment or maturity of
such Indebtedness is accelerated in consequence of such event of default or
demand for payment of such Indebtedness is made.
9.1.7 Insolvency and Related Proceedings. Borrower shall suffer
----------------------------------
the appointment of a receiver, trustee, custodian or similar fiduciary, or shall
make an assignment for the benefit of creditors, or any petition for an order
for relief shall be filed by or against Borrower under the Bankruptcy Code (if
against Borrower, the continuation of such proceeding for more than 30 days), or
Borrower shall make any offer of settlement, extension or composition to its
unsecured creditors generally.
9.1.8 ERISA. A Reportable Event shall occur which Lender, in
-----
its sole discretion, shall determine in good faith constitutes grounds for the
termination by the Pension Benefit Guaranty Corporation of any Plan or for the
appointment by the appropriate United States district court of a trustee for any
Plan, or if any Plan shall be terminated or any such trustee shall be requested
or appointed, or if Borrower, any Subsidiary of Borrower is in "default" (as
defined in Section 4219(c)(5) of ERISA) with respect to payments to a
Multiemployer Plan resulting from Borrower's, such Subsidiary's complete or
partial withdrawal from such Plan.
9.1.9 Challenge to Agreement. Borrower, any Subsidiary of
----------------------
Borrower, or any Affiliate of any of them, shall challenge or contest in any
action, suit or proceeding the validity or enforceability of this Agreement, or
any of the other Loan Documents, the legality or enforceability of any of the
Obligations or the perfection or priority of any Lien granted to Lender.
9.1.10 Criminal Forfeiture. Borrower shall be criminally
-------------------
convicted under any law that could lead to a forfeiture of any Collateral of
Borrower.
LOAN AND SECURITY AGREEMENT - Page 23
- ---------------------------
<PAGE>
9.1.11 Judgments. Any money judgment, writ of attachment or
---------
similar process, which is not otherwise bonded against and stayed on appeal, (i)
in excess of $250,000 (net of any amounts satisfied by insurance) or (ii) which
has a material adverse effect on the business or properties of Borrower, is
filed against Borrower or any of its Property.
9.1.12 Default by Custodian. Default by Custodian under the
--------------------
Custodial Agreement as may be amended from time to time which has not been cured
by Borrower or Custodian within 20 days after Lender has given Borrower written
notice of such Default.
9.1.13 Default Under Contribution and Servicing Agreement.
--------------------------------------------------
Borrower shall revoke, discontinue or terminate, or attempt to revoke,
discontinue or terminate its obligations as servicer under the Contribution and
Servicing Agreement or Borrower's obligations as servicer under the Contribution
and Servicing Agreement are otherwise terminated.
9.1.14 Default Under Bankruptcy Court Order. Borrower fails to
------------------------------------
perform its obligations under, or comply with the provisions of, either the
Reorganization Plan or the order of the Bankruptcy Court confirming Borrower's
Reorganization Plan in the Bankruptcy Proceedings (other than the obligations
and provisions relating to the Secured Fleet Claim), as determined by the
Bankruptcy Court, and the Bankruptcy Court further determines that such failure
has not been cured or waived; provided that such failure shall not be an Event
of Default under this Section 9.1.14 if the Bankruptcy Court determines that
--------------
such failure does not warrant the exercise of available remedies against
Borrower.
9.1.15 Failure to Consummate Reorganization Plan. The
-----------------------------------------
Reorganization Plan shall not be substantially consummated in accordance with
its terms.
9.2 Acceleration of the Obligations. Without in any way limiting the
-------------------------------
right of Lender to demand payment of any portion of the Obligations payable on
demand in accordance with Section 3.2 hereof, upon or at any time after the
-----------
occurrence of an Event of Default, all or any portion of the Obligations shall,
at the option of Lender and without presentment, demand, protest notice of
intent to accelerate, notice of acceleration, or further notice by Lender except
to the extent notice is expressly provided for in this Agreement, become at once
due and payable and Borrower shall forthwith pay to Lender, the full amount of
such Obligations, provided, that upon the occurrence of an Event of Default
--------
specified in Section 9.1.7 hereof, all of the Obligations shall become
-------------
automatically due and payable without declaration, notice or demand by Lender.
9.3 Other Remedies. Upon and after the occurrence of an Event of
--------------
Default, Lender shall have and may exercise from time to time the following
rights and remedies:
9.3.1 All of the rights and remedies of a secured party under
the Code or under other applicable law, and all other legal and equitable rights
to which Lender may be entitled, all of which rights and remedies shall be
cumulative and shall be in addition to any other rights or remedies contained in
this Agreement or any of the other Loan Documents, and none of which shall be
exclusive.
LOAN AND SECURITY AGREEMENT - Page 24
- ---------------------------
<PAGE>
9.3.2 The right to take immediate possession of the Collateral,
and to (i) require Borrower to assemble the Collateral, at Borrower's expense,
and make it available to Lender at a place designated by Lender which is
reasonably convenient to both parties, (ii) enter any premises where any of the
Collateral shall be located and to keep and store the Collateral on said
premises until sold (and if said premises be the Property of Borrower, Borrower
agrees not to charge Lender for storage thereof), and (iii) to take control of
all Collections on Pledged Contracts and to apply all payments and remittances
constituting the Collateral to the Obligations on as frequent a basis as Lender
deems desirable.
9.3.3 The right to sell or otherwise dispose of all or any
Collateral in its then condition, or after any further manufacturing or
processing thereof, at public or private sale or sales, with such notice as may
be required by law, in lots or in bulk, for cash or on credit, all as Lender, in
its sole discretion, may deem advisable. Borrower agrees that 10 days written
notice to Borrower of any public or private sale or other disposition of
Collateral shall be reasonable notice thereof, and such sale shall be at such
locations as Lender may designate in said notice. Lender shall have the right
to conduct such sales on Borrower's premises, without charge therefor, and such
sales may be adjourned from time to time in accordance with applicable law.
Lender shall have the right to sell, lease or otherwise dispose of the
Collateral, or any part thereof, for cash, credit or any combination thereof,
and Lender may purchase all or any part of the Collateral at public or, if
permitted by law, private sale and, in lieu of actual payment of such purchase
price, may set off the amount of such price against the Obligations. The
proceeds realized from the sale of any Collateral may be applied, after allowing
2 Business Days for collection, first to the costs, expenses and attorneys' fees
incurred by Lender in collecting the Obligations, in enforcing the rights of
Lender under the Loan Documents and in collecting, retaking, completing,
protecting, removing, storing, advertising for sale, selling and delivering any
Collateral, second to the interest due upon any of the Obligations; and third,
to the principal of the Obligations. If any deficiency shall arise, Borrower
shall remain liable to Lender therefor.
9.3.4 Lender is hereby granted a license or other right to use,
without charge, Borrower's labels, patents, copyrights, rights of use of any
name, trade secrets, tradenames, trademarks and advertising matter, or any
Property of a similar nature, as it pertains to the Collateral, in advertising
for sale and selling any Collateral.
9.4 Remedies Cumulative; No Waiver. All covenants, conditions,
------------------------------
provisions, warranties, guaranties, indemnities, and other undertakings of
Borrower contained in this Agreement and the other Loan Documents, or in any
document referred to herein or contained in any agreement supplementary hereto
or in any schedule given to Lender or contained in any other agreement between
Lender and Borrower, heretofore, concurrently, or hereafter entered into, shall
be deemed cumulative to and not in derogation or substitution of any of the
terms, covenants, conditions, or agreements of Borrower herein contained. The
failure or delay of Lender to require strict performance by Borrower of any
provision of this Agreement or to exercise or enforce any rights, Liens, powers,
or remedies hereunder or under any of the aforesaid agreements or other
documents or security or Collateral shall not operate as a waiver of such
performance, Liens, rights, powers and remedies, but all such requirements,
Liens, rights, powers, and remedies shall continue in full force and effect
until the Term Loan and all other
LOAN AND SECURITY AGREEMENT - Page 25
- ---------------------------
<PAGE>
Obligations owing or to become owing from Borrower to Lender shall have been
fully satisfied. None of the undertakings, agreements, warranties, covenants and
representations of Borrower contained in this Agreement or any of the other Loan
Documents and no Event of Default by Borrower under this Agreement or any other
Loan Documents shall be deemed to have been suspended or waived by Lender,
unless such suspension or waiver is by an instrument in writing specifying such
suspension or waiver and is signed by a duly authorized representative of Lender
and directed to Borrower.
SECTION 10. MISCELLANEOUS
10.1 Power of Attorney. Borrower hereby irrevocably designates, makes,
-----------------
constitutes and appoints Lender (and all Persons designated by Lender) as
Borrower's true and lawful attorney (and agent-in-fact) and Lender, or Lender's
agent, may, without notice to Borrower and in either Borrower's or Lender's
name, but at the cost and expense of Borrower:
10.1.1 At such time or times upon or after the occurrence of a
Default or an Event of Default as Lender or said agent, in its sole discretion,
may determine, endorse Borrower's name on any checks, notes, acceptances,
drafts, money orders or any other evidence of payment or proceeds of the
Collateral which come into the possession of Lender or under Lender's control.
10.1.2 At such time or times upon or after the occurrence of an
Event of Default as Lender or its agent in its sole discretion may determine:
(i) demand payment of the Pledged Contracts from the Account Debtors, enforce
payment of the Pledged Contracts by legal proceedings or otherwise, and
generally exercise all of Borrower's rights and remedies with respect to the
collection of the Pledged Contracts; (ii) settle, adjust, compromise, discharge
or release any of the Pledged Contracts or other Collateral or any legal
proceedings brought to collect any of the Pledged Contracts or other Collateral;
(iii) sell or assign any of the Pledged Contracts and other Collateral upon such
terms, for such amounts and at such time or times as Lender deems advisable;
(iv) take control, in any manner, of any item of payment or proceeds relating to
any Collateral; (v) prepare, file and sign Borrower's name to a proof of claim
in bankruptcy or similar document against any Account Debtor or to any notice of
lien, assignment or satisfaction of lien or similar document in connection with
any of the Collateral; (vi) receive, open and dispose of all mail addressed to
Borrower and to notify postal authorities to change the address for delivery
thereof to such address as Lender may designate; (vii) endorse the name of
Borrower upon any of the items of payment or proceeds relating to any Collateral
and deposit the same to the account of Lender on account of the Obligations;
(viii) endorse the name of Borrower upon any chattel paper, document,
instrument, invoice, freight bill, bill of lading or similar document or
agreement relating to the Pledged Contracts and any other Collateral; (ix) use
Borrower's stationery and sign the name of Borrower to verifications of the
Pledged Contracts and notices thereof to Account Debtors; (x) use the
information recorded on or contained in any data processing equipment and
computer hardware and software relating to the Pledged Contracts, Equipment and
any other Collateral; (xi) make and adjust claims under policies of insurance;
and (xii) do all other acts and things necessary, in Lender's determination, to
fulfill Borrower's obligations under this Agreement.
LOAN AND SECURITY AGREEMENT - Page 26
- ---------------------------
<PAGE>
10.2 INDEMNITY. BORROWER HEREBY INDEMNIFIES, HOLDS LENDER HARMLESS AND
---------
SHALL DEFEND LENDER AND ITS DIRECTORS, OFFICERS, AGENTS, COUNSEL AND EMPLOYEES
("INDEMNIFIED PERSONS") FROM AND AGAINST ANY AND ALL LOSSES, LIABILITIES,
DAMAGES, COSTS, EXPENSES, SUITS, ACTIONS AND PROCEEDINGS CAUSED OR ASSERTED BY
THIRD PARTIES ("LOSSES") EVER SUFFERED OR INCURRED BY ANY INDEMNIFIED PERSON
(INCLUDING REASONABLE ATTORNEYS FEES AND LEGAL EXPENSES) ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR ANY OTHER TRANSACTION CONTEMPLATED HEREBY,
INCLUDING, WITHOUT LIMITATION, ANY LOSSES CAUSED BY THE NEGLIGENCE OF SUCH
INDEMNIFIED PERSON, BUT NOT INCLUDING ANY LOSSES CAUSED BY THE GROSS NEGLIGENCE
OR WILLFUL MISCONDUCT OF SUCH INDEMNIFIED PERSON, AND BORROWER SHALL REIMBURSE
THE LENDER AND EACH OTHER INDEMNIFIED PERSON FOR ANY EXPENSES (INCLUDING IN
CONNECTION WITH THE INVESTIGATION OF, PREPARATION FOR OR DEFENSE OF ANY ACTUAL
OR THREATENED CLAIM, ACTION OR PROCEEDING ARISING THEREFROM, INCLUDING ANY SUCH
COSTS OF RESPONDING TO DISCOVERY REQUESTS OR SUBPOENAS). IN ADDITION, BORROWER
SHALL DEFEND LENDER AGAINST AND SAVE IT HARMLESS FROM ALL CLAIMS OF ANY PERSON
(OTHER THAN BORROWER) WITH RESPECT TO THE COLLATERAL. WITHOUT LIMITING THE
GENERALITY OF THE FOREGOING, THESE INDEMNITIES SHALL EXTEND TO ANY CLAIMS
ASSERTED AGAINST LENDER OR ANY OTHER INDEMNIFIED PERSON (OTHER THAN BORROWER) BY
ANY PERSON UNDER ANY ENVIRONMENTAL LAWS OR SIMILAR LAWS BY REASON OF BORROWER'S
OR ANY OTHER PERSON'S FAILURE TO COMPLY WITH LAWS APPLICABLE TO SOLID OR
HAZARDOUS WASTE MATERIALS OR OTHER TOXIC SUBSTANCES. EACH INDEMNIFIED PERSON MAY
SELECT ITS OWN COUNSEL WITH RESPECT TO LOSSES, IN ADDITION TO ANY BORROWER'S
COUNSEL, AND SHALL BE INDEMNIFIED THEREFOR HEREUNDER. NOTWITHSTANDING ANY
CONTRARY PROVISION IN THIS AGREEMENT, THE OBLIGATION OF BORROWER UNDER THIS
SECTION 10.2 SHALL SURVIVE THE PAYMENT IN FULL OF THE OBLIGATIONS AND THE
- ------------
TERMINATION OF THIS AGREEMENT.
10.3 Modification of Agreement; Sale of Interest. This Agreement may not
-------------------------------------------
be modified, altered or amended, except by an agreement in writing signed by
Borrower and Lender. Borrower may not sell, assign or transfer any interest in
this Agreement, any of the other Loan Documents, or any of the Obligations, or
any portion thereof, including, without limitation, Borrower's rights, title,
interests, remedies, powers, and duties hereunder or thereunder. Borrower hereby
consents to Lender's participation, sale, assignment, transfer or other
disposition, at any time or times hereafter, of this Agreement and any of the
other Loan Documents, or of any portion hereof or thereof, including, without
limitation, Lender's rights, title, interests, remedies, powers, and duties
hereunder or thereunder. In the case of an assignment, the assignee shall have,
to the extent of such assignment, the same rights, benefits and obligations as
it would if it were "Lender" hereunder and shall be accorded all of the rights
LOAN AND SECURITY AGREEMENT - Page 27
- ---------------------------
<PAGE>
of the Lender with respect to exercise of the right of set off against any
deposits, credit balances, or other funds of the Borrower which are or may be in
its possession. Lender shall be relieved of all obligations hereunder upon any
such assignments. Borrower agrees that it will use its best efforts to assist
and cooperate with Lender in any manner reasonably requested by Lender to effect
the sale of participations in or assignments of any of the Loan Documents or any
portion thereof or interest therein, including, without limitation, assisting in
the preparation of appropriate disclosure documents. Borrower further agrees
that Lender may disclose credit information regarding Borrower and its
Subsidiaries to any potential participant or assignee. Without the prior
consent of Borrower, which consent shall not be unreasonably withheld, Lender
shall not sell or assign its interest in this Agreement, the Loan Documents and
the Term Loan if after giving effect to such sale or assignment, Lender will
maintain less than a 51% beneficial interest in this Agreement, the Loan
Documents and the Term Loan; provided, however, that the consent of Borrower
-------- -------
shall not be required if such sale, assignment, transfer or disposition is part
of the transfer of Lender's entire loan portfolio.
10.4 Severability. Wherever possible, each provision of this Agreement
------------
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement shall be prohibited by or
invalid under applicable law, such provision shall be ineffective only to the
extent of such prohibition or invalidity, without invalidating the remainder of
such provision or the remaining provisions of this Agreement.
10.5 Successors and Assigns. This Agreement, the Other Agreements and
----------------------
the Security Documents shall be binding upon and inure to the benefit of the
successors and assigns of Borrower and Lender permitted under Section 10.3
------------
hereof.
10.6 Cumulative Effect; Conflict of Terms. The provisions of the Other
------------------------------------
Agreements and the Security Documents are hereby made cumulative with the
provisions of this Agreement. Except as otherwise provided in Section 3.2 hereof
-----------
and except as otherwise provided in any of the other Loan Documents by specific
reference to the applicable provision of this Agreement, if any provision
contained in this Agreement is in direct conflict with, or inconsistent with,
any provision in any of the other Loan Documents, the provision contained in
this Agreement shall govern and control.
10.7 Execution in Counterparts. This Agreement may be executed in any
-------------------------
number of counterparts and by different parties hereto in separate counterparts,
each of which when so executed and delivered shall be deemed to be an original
and all of which counterparts taken together shall constitute but one and the
same instrument.
10.8 Notice. Except as otherwise provided herein, all notices, requests
------
and demands to or upon a party hereto, to be effective, shall be in writing and
shall be sent by certified or registered mail, return receipt requested, by
personal delivery against receipt, by overnight courier or by facsimile and,
unless otherwise expressly provided herein, shall be deemed to have been validly
served, given or delivered immediately when delivered against receipt, one
Business Day after deposit in the mail, postage prepaid, or with an overnight
courier or, in the case of facsimile notice, when sent, addressed as follows:
LOAN AND SECURITY AGREEMENT - Page 28
- ---------------------------
<PAGE>
If to Lender: Fleet Capital Corporation
2711 Haskell Avenue, Suite 2100
Dallas, Texas 75204
Attention: Loan Administration
Manager
Facsimile No.: (214) 828-6530
With a copy to: Hughes & Luce, L.L.P.
1717 Main Street, Suite 2800
Dallas, Texas 75201
Attention: Larry A. Makel, Esq.
Facsimile No.: (214) 939-6100
If to Borrower: Jayhawk Acceptance Corporation
2001 Bryan Tower, Suite 600
Dallas, Texas 75201
Attention: Jack Smith and Fred Jackson
Facsimile No.: (214) 855-3810
With a copy to: Baker & McKenzie
2001 Ross Avenue, Suite 4500
Dallas, Texas
Attention: Alan G. Harvey, Esq.
Facsimile No.: (214) 978-3099
or to such other address as each party may designate for itself by notice given
in accordance with this Section 10.8.
------------
10.9 Lender's Consent. Whenever Lender's consent is required to be
----------------
obtained under this Agreement, any of the Other Agreements or any of the
Security Documents as a condition to any action, inaction, condition or event,
Lender shall be authorized to give or withhold such consent in its sole and
absolute discretion and to condition its consent upon the giving of additional
collateral security for the Obligations, the payment of money or any other
matter.
10.10 Credit Inquiries. Borrower hereby authorizes and permits Lender to
----------------
respond to usual and customary credit inquiries from third parties concerning
Borrower or any of its Subsidiaries.
10.11 Time of Essence. Time is of the essence of this Agreement, the
---------------
Other Agreements and the Security Documents.
10.12 Entire Agreement. This Agreement and the other Loan Documents,
----------------
together with all other instruments, agreements and certificates executed by the
parties in connection therewith or with reference thereto, embody the entire
understanding and agreement between the parties
LOAN AND SECURITY AGREEMENT - Page 29
- ---------------------------
<PAGE>
hereto and thereto with respect to the subject matter hereof and thereof and
supersede all prior agreements, understandings and inducements, whether express
or implied, oral or written.
10.13 Interpretation. No provision of this Agreement or any of the other
--------------
Loan Documents shall be construed against or interpreted to the disadvantage of
any party hereto by any court or other governmental or judicial authority by
reason of such party having or being deemed to have structured or dictated such
provision.
10.14 Non-applicability of Article 5069-15.01 et seq. Borrower and Lender
--------------------------------- -------------
hereby agree that, except for Section 15.10(b) thereof, the provisions of Tex.
----------------
Rev. Civ. Stat. Ann. art. 5069-15.01 et seq. (Vernon 1987) (regulating certain
-- ---
revolving credit loans and revolving tri-party accounts) shall not apply to this
Agreement or any of the other Loan Documents.
10.15 No Preservation or Marshaling. Borrower agrees that Lender has no
-----------------------------
obligation to preserve rights to the Collateral against prior parties or to
marshal any Collateral for the benefit of any Person.
10.16 GOVERNING LAW; CONSENT TO FORUM. THIS AGREEMENT HAS BEEN
-------------------------------
NEGOTIATED, EXECUTED AND DELIVERED AT AND SHALL BE DEEMED TO HAVE BEEN MADE IN
DALLAS, TEXAS. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF TEXAS; PROVIDED, HOWEVER, THAT IF ANY OF THE
-------- -------
COLLATERAL SHALL BE LOCATED IN ANY JURISDICTION OTHER THAN TEXAS, THE LAWS OF
SUCH JURISDICTION SHALL GOVERN THE METHOD, MANNER AND PROCEDURE FOR FORECLOSURE
OF LENDER'S LIEN UPON SUCH COLLATERAL AND THE ENFORCEMENT OF LENDER'S OTHER
REMEDIES IN RESPECT OF SUCH COLLATERAL TO THE EXTENT THAT THE LAWS OF SUCH
JURISDICTION ARE DIFFERENT FROM OR INCONSISTENT WITH THE LAWS OF TEXAS. AS PART
OF THE CONSIDERATION FOR NEW VALUE RECEIVED, AND REGARDLESS OF ANY PRESENT OR
FUTURE DOMICILE OR PRINCIPAL PLACE OF BUSINESS OF BORROWER OR LENDER, BORROWER
HEREBY CONSENTS AND AGREES THAT THE DISTRICT COURT OF DALLAS, TEXAS, OR, AT
LENDER'S OPTION, THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF
TEXAS, DALLAS DIVISION, SHALL HAVE EXCLUSIVE JURISDICTION TO HEAR AND DETERMINE
ANY CLAIMS OR DISPUTES BETWEEN BORROWER AND LENDER PERTAINING TO THIS AGREEMENT
OR TO ANY MATTER ARISING OUT OF OR RELATED TO THIS AGREEMENT. BORROWER
EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR
SUIT COMMENCED IN ANY SUCH COURT, AND BORROWER HEREBY WAIVES ANY OBJECTION WHICH
BORROWER MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR
FORUM NON CONVENIENS AND HEREBY CONSENTS TO THE GRANTING OF SUCH LEGAL OR
- ----- --- ----------
EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY SUCH COURT. BORROWER HEREBY WAIVES
PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER PROCESS ISSUED IN ANY SUCH
ACTION
LOAN AND SECURITY AGREEMENT - Page 30
- ---------------------------
<PAGE>
OR SUIT AND AGREES THAT SERVICE OF SUCH SUMMONS, COMPLAINT AND OTHER PROCESS MAY
BE MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO BORROWER AT THE ADDRESS SET
FORTH IN THIS AGREEMENT AND THAT SERVICE SO MADE SHALL BE DEEMED COMPLETED UPON
THE EARLIER OF BORROWER'S ACTUAL RECEIPT THEREOF OR 3 DAYS AFTER DEPOSIT IN THE
U.S. MAILS, PROPER POSTAGE PREPAID. NOTHING IN THIS AGREEMENT SHALL BE DEEMED OR
OPERATE TO AFFECT THE RIGHT OF LENDER TO SERVE LEGAL PROCESS IN ANY OTHER MANNER
PERMITTED BY LAW, OR TO PRECLUDE THE ENFORCEMENT BY LENDER OF ANY JUDGMENT OR
ORDER OBTAINED IN SUCH FORUM OR THE TAKING OF ANY ACTION UNDER THIS AGREEMENT TO
ENFORCE SAME IN ANY OTHER APPROPRIATE FORUM OR JURISDICTION.
10.17 WAIVERS BY BORROWER. BORROWER WAIVES (I) THE RIGHT TO TRIAL BY JURY
-------------------
(WHICH LENDER HEREBY ALSO WAIVES) IN ANY ACTION, SUIT, PROCEEDING OR
COUNTERCLAIM OF ANY KIND ARISING OUT OF OR RELATED TO ANY OF THE LOAN DOCUMENTS,
THE OBLIGATIONS OR THE COLLATERAL: (II) PRESENTMENT, DEMAND, NOTICE OF INTENTION
TO ACCELERATE, NOTICE OF ACCELERATION, AND PROTEST AND NOTICE OF PRESENTMENT,
PROTEST, DEFAULT (EXCEPT TO THE EXTENT NOTICE IS EXPRESSLY PROVIDED FOR IN THIS
AGREEMENT), NON PAYMENT, MATURITY, RELEASE, COMPROMISE, SETTLEMENT, EXTENSION OR
RENEWAL OF ANY OR ALL COMMERCIAL PAPER, ACCOUNTS, CONTRACT RIGHTS, DOCUMENTS,
INSTRUMENTS CHATTEL PAPER AND GUARANTIES AT ANY TIME HELD BY LENDER ON WHICH
BORROWER MAY IN ANY WAY BE LIABLE AND HEREBY RATIFIES AND CONFIRMS WHATEVER
LENDER MAY DO IN THIS REGARD; (III) NOTICE PRIOR TO TAKING POSSESSION OR CONTROL
OF THE COLLATERAL OR ANY BOND OR SECURITY WHICH MIGHT BE REQUIRED BY ANY COURT
PRIOR TO ALLOWING LENDER TO EXERCISE ANY OF LENDER'S REMEDIES; (IV) THE BENEFIT
OF ALL VALUATION, APPRAISEMENT AND EXEMPTION LAWS; AND (V) NOTICE OF ACCEPTANCE
HEREOF. BORROWER ACKNOWLEDGES THAT THE FOREGOING WAIVERS ARE A MATERIAL
INDUCEMENT TO LENDER'S ENTERING INTO THIS AGREEMENT AND THAT LENDER IS RELYING
UPON THE FOREGOING WAIVERS IN ITS FUTURE DEALINGS WITH BORROWER. BORROWER
WARRANTS AND REPRESENTS THAT IT HAS REVIEWED THE FOREGOING WAIVERS WITH ITS
LEGAL COUNSEL AND HAS KNOWINGLY AND VOLUNTARILY WAIVED ITS JURY TRIAL RIGHTS
FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, THIS
AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.
10.18 WAIVER OF CONSUMER RIGHTS. BORROWER HEREBY WAIVES ALL PROVISIONS OF
-------------------------
THE DECEPTIVE TRADE PRACTICES - CONSUMER PROTECTION ACT (TEX. BUS. & COM. CODE
ANN. (S)17.01 ET SEQ. (VERNON
-- ---
LOAN AND SECURITY AGREEMENT - Page 31
- ---------------------------
<PAGE>
SUPP. 1987)), A LAW THAT GIVES CONSUMERS SPECIAL RIGHTS AND PROTECTIONS, OTHER
THAN SECTION 17.555 THEREOF PERTAINING TO CONTRIBUTION AND INDEMNITY, AND
--------------
EXPRESSLY WARRANTS AND REPRESENTS THAT AFTER CONSULTATION WITH AN ATTORNEY OF
BORROWER'S OWN SELECTION, BORROWER VOLUNTARILY CONSENTS TO THIS WAIVER.
10.19 ORAL AGREEMENTS INEFFECTIVE. THIS AGREEMENT AND THE OTHER LOAN
---------------------------------------------------------------
DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES, AND THE SAME MAY
- -----------------------------------------------------------------------------
NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL
- ----------------------------------------------------------------------------
AGREEMENTS BETWEEN THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN
- ------------------- ------------------------------------------------------------
THE PARTIES.
- ------------
IN WITNESS WHEREOF, this Agreement has been duly executed in Dallas, Texas,
on the day and year specified at the beginning of this Agreement.
JAYHAWK ACCEPTANCE CORPORATION
("Borrower")
By:___________________________
Name:_________________________
Title:________________________
ACCEPTED IN DALLAS, TEXAS:
FLEET CAPITAL CORPORATION
("Lender")
By:___________________________
Name:_________________________
Title:________________________
LOAN AND SECURITY AGREEMENT - Page 32
- ---------------------------
<PAGE>
APPENDIX A
GENERAL DEFINITIONS
When used in the Loan and Security Agreement dated as of _________, 1997,
by and between Fleet Capital Corporation and Jayhawk Acceptance Corporation the
following terms shall have the following meanings (terms defined in the singular
to have the same meaning when used in the plural and vice versa):
Account Debtor - any Person or Persons liable as an obligor or in
--------------
respect of any Pledged Contract.
Additional Fleet Contracts - Contracts that either (i) Borrower
--------------------------
purchased with Cash Collateral after the Petition Date and prior to March
1, 1997, or (ii) Borrower reported as being included in the Borrowing Base
as Lender's collateral as of the Petition Date, but which Borrower had not
purchased as of the Petition Date, and which Borrower estimated to be in
the amount of approximately $10,000,000 as of the Petition Date, less
those Contracts, in the approximate amount of $3,400,000, "unwound" by
Borrower subsequent to the Petition Date. As of the date hereof, Borrower
has funded all Additional Fleet Contracts.
Affiliate - a Person (other than a Subsidiary): (i) which directly or
---------
indirectly through one or more intermediaries controls, or is controlled
by, or is under common control with, a Person; (ii) which beneficially owns
or holds 5% or more of any class of the Voting Stock of a Person; or (iii)
5% or more of the Voting Stock (or in the case of a Person which is not a
corporation, 5% or more of the equity interest) of which is beneficially
owned or held by a Person or a Subsidiary of a Person.
Agreement - the Loan and Security Agreement referred to in the first
---------
sentence of this Appendix A, all Exhibits thereto and this Appendix A as
renewed, extended, modified and restated from time to time.
Auto Title - the certificate of title issued by the department of
----------
transportation or other corresponding instrumentality or agency of any
state which relates to an automobile sold pursuant to a Contract.
Bank - Fleet National Bank.
----
Bankruptcy Court - the United States Bankruptcy Court for the Northern
----------------
District of Texas, Dallas Division.
Bankruptcy Proceedings - the proceedings in Borrower's bankruptcy
----------------------
case, In re: Jayhawk Acceptance Corporation, Debtor, Case No. 397-31261-
SAF-11, in the Bankruptcy Court.
LOAN AND SECURITY AGREEMENT - Page 33
- ---------------------------
<PAGE>
Base Rate - the rate of interest generally announced or quoted by Bank
---------
from time to time as its base rate for commercial loans, whether or not
such rate is the lowest rate charged by Bank to its most preferred
borrowers; and, if such base rate for commercial loans is discontinued by
Bank as a standard, a comparable reference rate designated by Bank as a
substitute therefor shall be the Base Rate.
Business Day - any day excluding Saturday, Sunday and any day which is
------------
a legal holiday under the laws of the State of Texas or the State of
Illinois or is a day on which banking institutions located in either of
such states are closed.
Capitalized Lease Obligation - any Indebtedness represented by
----------------------------
obligations under a lease that is required to be capitalized for financial
reporting purposes in accordance with GAAP.
Clearing Account - a deposit account of Borrower established by
----------------
Borrower pursuant to this Agreement at a bank selected by Borrower, but
acceptable to Lender in its reasonable discretion.
Closing Date - the date on which all of the conditions precedent in
------------
Section 8 of the Agreement are satisfied and the Term Loan is made under
---------
the Agreement.
Code - the Uniform Commercial Code as adopted and in force in the
----
State of Texas, as from time to time in effect.
Collateral - all of the Property and interests in Property described
----------
in Section 4 of the Agreement and all other Property and interests in
---------
Property that now or hereafter secure the payment and performance of any of
the Obligations.
Collection Agent - means any Person engaged by Borrower in connection
----------------
with Borrower's efforts to collect payments on a Pledged Contract or to
repossess or liquidate the automobile that secures payment of a Pledged
Contract, including independent repossession agents, auctioneers,
remarketing firms, and independent collection agencies, and any Person
engaged in support of Borrower's systems for administering and servicing
the Pledged Contracts.
Collections - all interest collections, all principal collections, all
-----------
other collections, and all Recoveries, in each case, from (i) the
Borrower's Pledged Contracts owned as of the Petition Date, (ii) the
Additional Fleet Contracts, and (iii) the Trust's Contracts owned as of the
Petition Date.
Consolidated - the consolidation in accordance with GAAP of the
------------
accounts or other items as to which such term applies.
LOAN AND SECURITY AGREEMENT - Page 34
- ---------------------------
<PAGE>
Contract- a written agreement pursuant to which a Person agrees to
--------
purchase from a Dealer a new or used automobile and to pay for same on an
installment basis, with interest, over a period of months.
Contribution and Servicing Agreements - those certain Contribution and
-------------------------------------
Servicing Agreements dated March 15, 1996, and August 7, 1996,
respectively, by and among Borrower, in its individual capacity and in its
capacity as servicer, the Trust, Trustee, in its capacity as trustee, and
Norwest Bank Minnesota, National Association, in its capacity as back-up
servicer, pursuant to which (i) Borrower contributed to the capital of the
Trust certain retail installment contracts of Borrower and (ii) Borrower,
on behalf of the Trust, will service such contributed contracts.
Credit and Collection Policy - the Borrower's Credit and Collection
----------------------------
Policy, as presently in effect on the Closing Date.
Custodian - the Custodian as defined under the Custodial Agreement.
---------
Custodial Agreement - the Custodial Agreement dated on or about the
-------------------
Closing Date by and among Lender, Borrower and Custodian.
Dealer - a Person engaged in the business of selling new or used
------
automobiles pursuant to Contracts.
Dealer Agreement - an agreement between Borrower and each Dealer from
----------------
which Borrower purchases Pledged Contracts.
Dealer Pool - the aggregate number of Pledged Contracts purchased from
-----------
any Dealer pursuant to a Dealer Agreement.
Default - an event or condition the occurrence of which would, with
-------
the lapse of time or the giving of notice, or both, become an Event of
Default.
Default Rate - as defined in Section 2.1.2 of the Agreement.
------------ -------------
Disclosure Statement - means Debtor's Disclosure Statement Pursuant To
--------------------
Section 1125 Of The Bankruptcy Code, filed by the Borrower on April 18,
1997, in the Bankruptcy Court in connection with the Bankruptcy
Proceedings, as at any time amended with Lender's consent.
Distribution - in respect of any corporation means and includes: (i)
------------
the payment of any dividends or other distributions on capital stock of the
corporation (except distributions in such stock) and (ii) the redemption or
acquisition of Securities unless made contemporaneously from the net
proceeds of the sale of Securities.
LOAN AND SECURITY AGREEMENT - Page 35
- ---------------------------
<PAGE>
Effective Date - the first Business Day on which the conditions
--------------
specified in Section 10.1 of the Reorganization Plan have been satisfied or
waived.
Environmental Laws - all federal, state and local laws, rules,
------------------
regulations, ordinances, programs, permits, guidances, orders and consent
decrees relating to health, safety and environmental matters.
Equipment - all machinery, apparatus, equipment, fittings, furniture,
---------
fixtures, motor vehicles and other tangible personal Property (other than
Inventory) of every kind and description used in Borrower's operations or
owned by Borrower or in which Borrower has an interest, whether now owned
or hereafter acquired by Borrower and wherever located, and all parts,
accessories and special tools and all increases and accessions thereto and
substitutions and replacements therefor.
ERISA - the Employee Retirement Income Security Act of 1974, as
-----
amended, and all rules and regulations from time to time promulgated
thereunder.
Event of Default - as defined in Section 9.1 of the Agreement.
---------------- -----------
Excess - as defined in Section 2.1.4 of this Agreement.
------ -------------
Excess Cash Flow - the amount, if any, by which actual Net Collections
---------------- ------
exceed Projected Net Collections.
Final Cash Collateral Order - the Joint Stipulation And Agreed Final
---------------------------
Order Authorizing The Use of Cash Collateral And Providing For Adequate
Protection, entered on April __, 1997 by the Bankruptcy Court in the
Bankruptcy Proceeding, as at any time amended with Lender's consent.
Fleet Account - a deposit account of Lender established by Lender in
-------------
the name of "Fleet Capital Corporation - Dallas, re: Jayhawk Acceptance
Corporation" at Harris Trust and Savings Bank (Chicago, Illinois), ABA No.
0710-0028-8, Account No. 183-8549, or such other bank designated by Lender
from time to time.
GAAP - generally accepted account principles in the United States of
----
America in effect from time to time.
General Intangibles - as defined in the Code.
-------------------
Gross Collections - Collections.
-----------------
Guaranty - that certain unconditional guaranty of the Obligations,
--------
dated as of the date hereof, executed by Guarantor in favor of Lender,
limited in amount to $10,000,000 of the Obligations, and including
collection costs and interest after demand for payment by Lender.
LOAN AND SECURITY AGREEMENT - Page 36
- ---------------------------
<PAGE>
Guarantor - Carl H. Westcott.
---------
Indebtedness - as applied to a Person means, without duplication
------------
(i) other than contingent obligations owed by Borrower to
a Dealer under any Dealer Pool, all other items which in accordance
with GAAP would be included in determining total liabilities as shown
on the liability side of a balance sheet of such Person as at the date
as of which Indebtedness is to be determined, including, without
limitation, Capitalized Lease Obligations,
(ii) all obligations of other Persons which such Person
has guaranteed,
(iii) all reimbursement obligations in connection with
letters of credit or letter of credit guaranties issued for the
account of such Person, and
(iv) in the case of Borrower (without duplication), the
Obligations.
Intellectual Property - patents, trademarks, service marks,
---------------------
tradenames, copyrights, licenses (including software licenses), computer
software, source codes, use codes, and other similar rights.
Inventory - all of Borrower's inventory, whether now owned or
---------
hereafter acquired including, but not limited to, all goods in operable or
repairable condition, new or used, of whatever kind or nature, wherever
located, and all returns, repossessions, exchanges, substitutions,
replacements, attachments, parts, accessories and accessions thereto and
thereof, and all other goods intended to be used in connection therewith,
held for sale or lease by Borrower, or for display or demonstration; all
materials and supplies of every nature and description used or which might
be used in connection with the printing, packing, shipping, advertising,
selling, leasing or furnishing of such goods or otherwise used or consumed
in Borrower's business; and all documents evidencing and General
Intangibles relating to any of the foregoing, whether now owned or
hereafter acquired by Borrower.
Knowledge - means the actual knowledge of the existence or absence of
---------
certain facts after due inquiry by Borrower and such investigation by
Borrower as is prudent under current industry practices.
Lien - any interest in Property securing an obligation owed to, or a
----
claim by, a Person other than the owner of the Property, whether such
interest is based on common law, statute or contract.
LOAN AND SECURITY AGREEMENT - Page 37
- ---------------------------
<PAGE>
Loan Account - the loan account established on the books of Lender
------------
pursuant to Section 3.3 of the Agreement.
-----------
Loan Documents - the Agreement, the Other Agreements and the Security
--------------
Documents.
Lockbox Bank shall mean Texas Commerce Bank National Association, or
------------
such other bank as may be selected by Borrower and be acceptable to Lender.
Losses - as defined in Section 10.2 of this Agreement.
------ ------------
Maturity Date - as defined in Section 3.1.1 of the Agreement.
------------- -------------
Maximum Legal Rate - as defined in Section 2.1.3 of this Agreement.
------------------ -------------
Money Borrowed - means (i) Indebtedness arising from the lending of
--------------
money by any Person to Borrower; (ii) Indebtedness, whether or not in any
such case arising from the lending by any Person of money to Borrower, (A)
which is represented by notes payable or drafts accepted that evidence
extensions of credit, (B) which constitutes obligations evidenced by bonds,
debentures, notes or similar instruments, or (C) upon which interest
charges are customarily paid (other than accounts payable) or that was
issued or assumed as full or partial payment for Property; (iii)
Indebtedness that constitutes a Capitalized Lease Obligation; (iv)
reimbursement obligations with respect to letters of credit or guaranties
of letters of credit; and (v) Indebtedness of Borrower under any guaranty
of obligations that would constitute Indebtedness for Money Borrowed under
clauses (i) through (iii) hereof, if owed directly by Borrower.
Multiemployer Plan - has the meaning set forth in Section 4001(a)(3)
------------------
of ERISA.
Net Collections - the remainder of (i) Gross Collections, less (ii)
--------------- ----
any of the Trust's Collections that are retained by the Trust and not
distributed to Borrower.
New Prudential Security Documents - the new loan and security
---------------------------------
documents evidencing PSCC's indebtedness, lien and security interest in the
Trust, as contemplated by the Reorganization Plan.
Obligations - the Term Loan and all other debts, liabilities,
-----------
obligations, covenants and duties, together with all interest, fees and
other charges thereon, owing, arising, due or payable from Borrower to
Lender of any kind or nature, present or future, whether or not evidenced
by any note, guaranty or other instrument, whether arising under the
Agreement or any of the other Loan Documents or otherwise whether direct or
indirect (including those acquired by assignment), absolute or contingent,
primary or secondary, due or to become due, now existing or hereafter
arising and however acquired.
LOAN AND SECURITY AGREEMENT - Page 38
- ---------------------------
<PAGE>
Other Accounts - all accounts, contract rights, chattel paper,
--------------
instruments and documents, other than Contracts, whether now owned or
hereafter created or acquired by Borrower or in which Borrower now has or
hereafter acquired any interest, including specifically, but without
limitation, Servicing Fees.
Other Agreements - any and all agreements, instruments and documents
----------------
(other than the Agreement and the Security Documents), heretofore, now or
hereafter executed by Borrower, any Subsidiary of Borrower or any other
third party and delivered to Lender in respect of the transactions
contemplated by the Agreement.
Permitted Liens - any Lien of a kind specified in Section 7.2.5 of the
--------------- -------------
Agreement.
Permitted Purchase Money Indebtedness - Purchase Money Indebtedness of
-------------------------------------
Borrower incurred after the date hereof which is secured by a Purchase
Money Lien and which, when aggregated with the principal amount of all
other such Indebtedness and Capitalized Lease Obligations of Borrower at
the time outstanding, does not exceed $1,000,000. For the purposes of this
definition, the principal amount of any Purchase Money Indebtedness
consisting of capitalized leases shall be computed as a Capitalized Lease
Obligation.
Person - an individual, partnership, corporation, limited liability
------
company, joint stock company, land trust, business trust, or unincorporated
organization, or a government or agency or political subdivision thereof.
Petition Date - the date of Borrower's filing of its petition in the
-------------
Bankruptcy Proceedings (i.e., February 7, 1997), and the specific time of
filing on such date.
Plan - an employee benefit plan now or hereafter maintained for
----
employees of Borrower that is covered by Title IV of ERISA.
Pledged Contract - any Contract that Borrower owned as of the Petition
----------------
Date and any Additional Fleet Contract.
Prior Loan Agreement - the Loan and Security Agreement dated as of
--------------------
April 4, 1995, by and between Borrower and Lender, including all amendments
thereto.
Projected Gross Collections - the Borrower's projected estimate of
---------------------------
Gross Collections. Borrower's projected estimate of Gross Collections is
set forth on Exhibit A to this Agreement.
---------
Projected Net Collections - the projected Net Collections, which form
-------------------------
the basis for the calculation of Excess Cash Flow, and which are attached
to this Agreement as Exhibit B and made a part hereof.
---------
LOAN AND SECURITY AGREEMENT - Page 39
- ---------------------------
<PAGE>
Property - any interest in any kind of property or asset, whether
--------
real, personal or mixed, or tangible or intangible.
PSCC - Prudential Securities Credit Corporation, a Delaware
----
corporation.
Purchase Money Indebtedness - means and includes (i) Indebtedness
---------------------------
(other than the Obligations) for the payment of all or any part of the
purchase price of any fixed assets, (ii) any Indebtedness (other than the
Obligations) incurred at the time of or within 10 days prior to or after
the acquisition of any fixed assets for the purpose of financing all or any
part of the purchase price thereof, and (iii) any renewals, extensions or
refinancings thereof, but not any increases in the principal amounts
thereof outstanding at the time.
Purchase Money Lien - a Lien upon fixed assets which secures Purchase
-------------------
Money Indebtedness, but only if such Lien shall at all times be confined
solely to the fixed assets the purchase price of which was financed through
the incurrence of the Purchase Money Indebtedness secured by such Lien.
Recoveries - the remainder of (i) all cash received by Borrower in
----------
connection with the liquidation of Pledged Contracts, whether from the
Account Debtor, through sale of any financed automobile, or otherwise, less
(ii) all out-of-pocket expenses associated with the liquidation of Pledged
Contracts in accordance with Borrower's normal servicing procedures.
Releases - (a) a release from Guarantor of all claims, if any, against
--------
Lender, TCB, and their respective officers and agents, and (b) a release
from Borrower of all claims, if any, whether arising before or after the
Petition Date (including any claims arising under the Bankruptcy Code),
against Lender, TCB, and their respective officers and agents.
Reorganization Plan - the plan of reorganization filed by Borrower in
-------------------
the Bankruptcy Proceedings.
Reportable Event - any of the events set forth in Section 4043(b) of
----------------
ERISA.
Secured Fleet Claim - all claims (as such term is defined in the
-------------------
Federal Bankruptcy Code) and Liens arising under or related to the Prior
Loan Agreement or any instrument or agreement referred to therein or
executed by Borrower pursuant thereto.
Securitization Documents - the Contribution and Servicing Agreement
------------------------
and each of the other instruments, documents or agreements referred to
therein and executed in connection therewith.
Security - shall have the same meaning as in Section 2(1) of the
--------
Securities Act of 1933, as amended.
LOAN AND SECURITY AGREEMENT - Page 40
- ---------------------------
<PAGE>
Security Documents - the Trademark Security Agreement, the Trust
------------------
Pledge Agreement, the Guaranty, and all other instruments and agreements
now or at any time hereafter securing the whole or any part of the
Obligations as the same may be renewed, extended, modified and restated
from time to time.
Servicing Collateral - as defined in Section 5.5 of the Agreement.
-------------------- -----------
Servicing Equipment - all Equipment used in the servicing and/or
-------------------
administering of Contracts, including specifically, but without limitation,
Equipment consisting of computers, computer hardware, and office furniture,
fixtures and equipment.
Servicing Fee - any fee payable to Borrower by any Person as
-------------
compensation to Borrower under the Contribution and Servicing Agreements
for the servicing and/or administering of Contracts and other installment
or similar obligations.
Subordinated Debt - Indebtedness of Borrower that is subordinated to
-----------------
the Obligations in a manner satisfactory to Lender.
Subsidiary - any corporation of which a Person owns, directly or
----------
indirectly through one or more intermediaries, more than 50% of the Voting
Stock at the time of determination.
TCB - Texas Commerce Bank National Association, a national banking
---
association.
Term Loan - the loan made by Lender as provided in Section 2.1 of the
--------- -----------
Agreement.
Total Liabilities - at any date means all amounts properly classified
-----------------
as liabilities on a balance sheet at such date in accordance with GAAP,
plus all reserves for contingencies and all other potential liabilities for
which no reserves have previously been established on such balance sheet,
to the extent such amounts are not already classified as liabilities in
accordance with GAAP.
Trademark Security Agreement - that certain Trademark Security
----------------------------
Agreement, dated as of the date hereof, executed by Borrower and Lender,
and as the same may be further amended, modified, renewed and restated from
time to time.
Trust - Jayhawk Funding Trust I, a special purpose Delaware business
-----
trust.
Trustee - Norwest Bank Texas, N.A., a national banking association, or
-------
such other financial institution which may serve in the capacity as a
trustee under the Contribution and Servicing Agreement.
Trust Pledge Agreement - that certain Pledge and Security Agreement
----------------------
(Beneficial Interests), dated as of the date hereof, executed by Borrower
in favor of Lender, covering
LOAN AND SECURITY AGREEMENT - Page 41
- ---------------------------
<PAGE>
Borrower's interest in the Trust, as the same may be further amended,
modified, renewed and restated from time to time.
Voting Stock - Securities of any class or classes of a corporation the
------------
holders of which are ordinarily, in the absence of contingencies, entitled
to elect a majority of the corporate directors (or Persons performing
similar functions).
OTHER TERMS. All other terms contained in the Agreement shall have,
-----------
when the context so indicates, the meanings provided for by the Code to the
extent the same are used or defined therein.
CERTAIN MATTERS OF CONSTRUCTION. The terms "herein", "hereof" and
-------------------------------
"hereunder" and other words of similar import refer to the Agreement as a whole
and not to any particular section, paragraph or subdivision. Any pronoun used
shall be deemed to cover all genders. The section titles, table of contents and
list of exhibits appear as a matter of convenience only and shall not affect the
interpretation of the Agreement. All references to statutes and related
regulations shall include any amendments of same and any successor statutes and
regulations. All references to any of the Loan Documents shall include any and
all modifications thereto and any and all extensions or renewals thereof.
Accounting terms not otherwise specifically defined herein shall be construed in
accordance with GAAP consistently applied. The words "include" and "including"
mean "include without limitation" and "including without limitation",
respectively.
LOAN AND SECURITY AGREEMENT - Page 42
- ---------------------------
<PAGE>
LIST OF EXHIBITS
----------------
Exhibit A Projected Gross Collections
Exhibit B Projected Net Collections
Exhibit C Borrower's Business Locations
Exhibit D Corporate Names
Exhibit E Intellectual Property
Exhibit F Contracts Restricting Borrower's Right to Incur Debts
Exhibit G Litigation
Exhibit H Capitalized Leases
Exhibit I Operating Leases
Exhibit J Labor Contracts
Exhibit K Compliance Certificate
Exhibit L Permitted Liens
Exhibit M Form of Static Pool Analysis
LOAN AND SECURITY AGREEMENT - Page 43
- ---------------------------
<PAGE>
EXHIBIT C
---------
Borrower's Business Location
----------------------------
Jayhawk Acceptance Corporation
2001 Bryan Tower, Suite 600
Dallas, Texas 75201
<PAGE>
EXHIBIT D
---------
Corporate Names
---------------
Name of Subsidiaries:
Jayhawk Funding Trust I
Jayhawk Medical Acceptance Corporation
Jayhawk Services, Inc.
Name of Corporate Affiliates of Borrower:
First Computer Service Corporation
First Extended Service Corporation
FFG Insurance Company
Jayhawk, Inc.
Texas Professional Baseball, Inc.
Cougar Advertising, Inc.
<PAGE>
EXHIBIT K
---------
Compliance Certificate
----------------------
[Letterhead of Borrower]
__________________, 19__
Jayhawk Acceptance Corporation
2001 Bryan Tower
Suite 600
Dallas, Texas 75201
The undersigned, the Executive Vice President and Treasurer of Jayhawk
Acceptance Corporation, a Texas corporation ("Borrower"), gives this certificate
to Fleet Capital Corporation ("Lender") in accordance with the requirements of
Section 7.1.3 of that certain Loan and Security Agreement dated __________,
- -------------
1997, between Borrower and Lender ("Loan Agreement"). Capitalized terms used in
this Certificate, unless otherwise defined herein, shall have the meanings
ascribed to them in the Loan Agreement.
1. Based upon my review of the balance sheets and statements of income of
Borrower for the monthly period ending __________________, 19__, copies of which
are attached hereto, I hereby certify as follows:
Collections on Pledged Contracts: $____________________
Projected Gross Collections: $____________________
The ratio, as a percentage, of Collections to Projected Gross: ________%
Requirement of Loan Agreement: not less than 85%
<PAGE>
2. No Default exists on the date hereof, other than: ____________________
__________________________________________________[if none, so state]; and
3. No Event of Default exists on the date hereof, other than:__________
__________________________________________________[if none, so state].
Very truly yours,
_______________________________________
Name: ________________________________
Executive Vice President and Treasurer
<PAGE>
EXHIBIT L
---------
Permitted Liens
---------------
1. Lien granted to Landlord under Office Lease for Bryan Tower.
2. Liens granted to Prudential Securities Credit Corporation covering
Borrower's interest in the Trust.
<PAGE>
EXHIBIT M
---------
Form of Static Pool Analysis
----------------------------
[See Attached.]
<PAGE>
EXHIBIT C
---------
to
Settlement Agreement
New Guaranty
------------
[Attached.]
EXHIBIT C - PAGE 1
- ---------
<PAGE>
UNCONDITIONAL GUARANTY
----------------------
FOR VALUE RECEIVED, CARL H. WESTCOTT ("Guarantor") guarantees
---------
unconditionally the full and prompt payment to FLEET CAPITAL CORPORATION
("Lender") at Lender's office in Dallas County, Texas, when due, whether by
-------
acceleration or otherwise, of the following obligations and indebtedness of
JAYHAWK ACCEPTANCE CORPORATION, a Texas corporation (the "Borrower"):
--------
any and all obligations for which Borrower, is now, or hereafter may
become, liable or indebted to Lender under that certain Loan and Security
Agreement, dated as of ______, 1997, by and between Borrower and Lender (as
may be renewed, extended, modified or replaced from time to time, the "Loan
Agreement"); all unpaid accrued interest on the Obligations; and all costs,
attorneys' fees, and other expenses incurred by Lender in enforcing this
Guaranty which are incurred by Lender by reason of any default by Borrower
under the Loan Agreement (all of the foregoing are hereinafter referred to
--------------
as the "Obligations").
-----------
All sums paid Lender by Guarantor may be applied by Lender at its
discretion upon any of the Obligations. To further secure payment of the
Obligations, Guarantor grants to Lender, in addition to all other contractual,
legal, and equitable rights of Lender, the right to offset against any account,
certificate of deposit, or other funds of Guarantor in the possession of or
under the control of Lender.
Guarantor hereby waives notice of acceptance of this Guaranty and all other
notices in connection herewith or in connection with the Obligations, including,
without limitation, notice of intent to accelerate and notice of acceleration,
and waives diligence, presentment, demand, protest, and suit on the part of
Lender in the collection of any of the Obligations, and agrees that Lender shall
not be required to first endeavor to collect any of the Obligations from
Borrower, or any other party liable for payment of the Obligations (hereinafter
referred to as an "Obligated Party"), before requiring Guarantor to pay the full
---------------
amount of the Obligations. Without impairing the rights of Lender against
Guarantor, Borrower or any other Obligated Party, suit may be brought and
maintained against Guarantor at the election of Lender with or without joinder
of Borrower or any other Obligated Party, any right to any such joinder being
hereby waived by Guarantor.
Guarantor represents to Lender he is receiving a direct and indirect
benefit as a result of this Guaranty and the Obligations; represents to Lender
that after giving effect to this Guaranty and the contingent obligations
evidenced hereby he is, and will be, solvent; acknowledges that his liability
hereunder shall be cumulative and in addition to any other liability or
obligation to Lender, whether the same is incurred through the execution of a
note, a similar guaranty, through endorsement, or otherwise; and acknowledges
that neither Lender nor any officer, employee, agent, attorney or other
representative of Lender has made any representation, warranty or statement to
Guarantor to induce him to execute this Guaranty.
UNCONDITIONAL GUARANTY - Page 1
- ----------------------
<PAGE>
Guarantor hereby agrees that, except as hereinafter provided, his
obligations under this Guaranty shall be continuing, absolute and unconditional,
irrespective of (i) the validity or enforceability of the Obligations or of any
promissory note or other document evidencing all or any part of the Obligations,
(ii) the absence of any attempt to collect the Obligations from Borrower or any
other Obligated Party or other action to enforce the same, (iii) the waiver or
consent by Lender with respect to any provision of any instrument evidencing the
Obligations, or any part thereof, or any other agreement now or hereafter
executed by Borrower and delivered to Lender, (iv) failure by Lender to take any
steps to perfect and maintain its security interest in, or to preserve its
rights to, any security or collateral for the Obligations, (v) the surrender,
release, exchange, or alteration by Lender of any security or collateral for the
Obligations, (vi) Lender's election, in any proceeding instituted under Chapter
11 of Title 11 of the United States Code (11 U.S.C. (S)101 et seq.) (the
"Bankruptcy Code"), of the application of Section 1111(b)(2) of the Bankruptcy
---------------
Code, (vii) any borrowing or grant of a security interest by Borrower, as
debtor-in-possession, under Section 364 of the Bankruptcy Code, (viii) the
disallowance of all or any portion of Lender's claim(s) for repayment of the
Obligations under Section 502 of the Bankruptcy Code, or (ix) any other
circumstance which might otherwise constitute a legal or equitable discharge or
defense of a guarantor.
No release, waiver, or discharge of Borrower or any Obligated Party from
liability for payment of any of the Obligations, nor any renewal,
supplementation, modification, rearrangement or acceleration of any of the
Obligations, nor any amendment of any document evidencing any of the
Obligations, either express or implied, shall relieve Guarantor from liability
for payment of the full amount of the Obligations then or thereafter
outstanding; and Guarantor will immediately pay all Obligations to Lender or
other person entitled thereto, regardless of any defense, right of set-off, or
counterclaim which Borrower or any other Obligated Party may have or assert, and
regardless of whether Lender or any other party shall have taken any steps to
enforce any rights against Borrower, any other Obligated Party, or any other
party to collect such sum, and regardless of any other condition or contingency,
including, without limitation, any neglect, delay, or omission of Lender. Lender
is hereby authorized, without notice or demand and without affecting the
liability of Guarantor, to, from time to time: (i) accept partial payments on
the Obligations; (ii) take and hold security or collateral for the payment of
this Guaranty or any other guarantees of the Obligations, and exchange, enforce,
waive and release any such security or collateral; (iii) apply such security or
collateral therefor in any manner, without affecting or impairing the
obligations of Guarantor hereunder.
Notwithstanding anything to the contrary contained herein, Guarantor shall
not have any right, claim or action, now or hereafter, against Borrower or any
other Obligated Party arising out of or in connection with this Guaranty or any
other document evidencing or securing the Obligations, including, without
limitation, any right or claim of subrogation, contribution, reimbursement,
exoneration, or indemnity, until all of the Obligations are paid in full.
Guarantor is familiar with, and has independently reviewed the financial
condition of, Borrower and hereby assumes responsibility for keeping itself
informed of the financial condition of Borrower, and any and all endorsers or
other guarantors of any instrument or document evidencing all or any part of the
Obligations and of all other circumstances bearing
UNCONDITIONAL GUARANTY - Page 2
- ----------------------
<PAGE>
upon the risk of nonpayment of the Obligations or any part thereof that diligent
inquiry would reveal. Guarantor hereby agrees that Lender shall have no duty to
advise Guarantor of information known to Lender regarding such condition or any
such circumstances. Guarantor is not relying on the financial condition of
Borrower or the value of any collateral for the Obligations as an inducement to
enter into this Guaranty. If Lender, in its sole discretion, undertakes at any
time or from time to time to provide any such information to Guarantor, Lender
shall be under no obligation (i) to undertake any investigation not a part of
its regular business routine, (ii) to disclose any information which, pursuant
to accepted or reasonable commercial finance practices, Lender wishes to
maintain confidential, or (iii) to make any other or future disclosures of such
information or any other information to Guarantor.
Guarantor consents and agrees that Lender shall be under no obligation to
marshall any assets in favor of Guarantor or against or in payment of any or all
of the Obligations. Guarantor further agrees that, to the extent that Borrower
makes a payment or payments to Lender, or Lender receives any proceeds of
collateral, which payment or payments or any part thereof are subsequently
invalidated, declared to be fraudulent or preferential, set aside and/or
required to be repaid to Borrower, any of its estate, trustee, receiver or any
other party, including, without limitation, Guarantor, under any bankruptcy law,
state or federal law, common law or equitable cause, then to the extent of such
payment or repayment, the Obligations or part thereof which has been paid,
reduced or satisfied by such amount shall be reinstated and continued in full
force and effect as of the date such initial payment, reduction or satisfaction
occurred and this Guaranty, if previously terminated, shall be reinstated for
the benefit of Lender.
Lender may, without notice to Guarantor or any other party, assign its
rights hereunder to any holder of the Obligations, in whole or in part, and upon
any such assignment all the terms and provisions of this Guaranty shall inure to
the benefit of such assignee, to the extent so assigned.
Lender is relying and is entitled to rely upon each and all of the
provisions of this Guaranty; and, accordingly, if any provision of this Guaranty
should be held to be invalid or ineffective, then all other provisions shall
continue in full force and effect notwithstanding.
Any and all notices, requests and demands to or upon Guarantor to be
effective shall be in writing and shall be deemed to have been validly served,
given or delivered as follows: (a) if sent by certified or registered mail
return receipt requested, three business days after deposit in the mail, postage
prepaid, or, if earlier, when delivered against receipt; or (b) in the case of
telegraphic notice, when delivered to the telegraph company; or (c) in the case
of telex notice, when sent, answer-back received; or (d) if sent by any other
method, upon actual delivery; in each case addressed to the address set forth
opposite Guarantor's signature below or at such other address as Guarantor shall
hereafter notify Lender.
It is the intention of Borrower, Guarantor and Lender to conform strictly
to applicable usury laws. Accordingly, no agreements, conditions, provisions or
stipulations contained in this Guaranty or any other instrument, document or
agreement between Guarantor or Borrower and Lender or default of Guarantor or
Borrower, or the exercise by Lender of the right to accelerate
UNCONDITIONAL GUARANTY - Page 3
- ----------------------
<PAGE>
the payment of the maturity of principal and interest, or to exercise any option
whatsoever contained in this Guaranty or any other agreement between Guarantor
or Borrower and Lender, or the arising of any contingency whatsoever, shall
entitle Lender to collect, in any event, interest exceeding the maximum rate of
interest permitted by applicable state or federal law in effect from time to
time hereafter (the "Maximum Legal Rate") and in no event shall Guarantor be
------------------
obligated to pay interest exceeding such Maximum Legal Rate and all agreements,
conditions or stipulations, if any, which may in any event or contingency
whatsoever operate to bind, obligate or compel Guarantor to pay a rate of
interest exceeding the Maximum Legal Rate, shall be without binding force or
effect, at law or in equity, to the extent only of the excess of interest over
such Maximum Legal Rate. In the event any interest is charged in excess of the
Maximum Legal Rate ("Excess"), Guarantor acknowledges and stipulates that any
------
such charge shall be the result of an accident and bona fide error, and such
Excess shall be, first, applied to reduce the principal then unpaid hereunder;
second, applied to reduce the Obligations; and third, returned to Guarantor, it
being the intention of the parties hereto not to enter at any time into a
usurious or otherwise illegal relationship. Guarantor recognizes that, with
fluctuations in the applicable rate on the Obligations and the Maximum Legal
Rate, such an unintentional result could inadvertently occur. By the execution
of this Guaranty, Guarantor covenants that Guarantor shall not seek or pursue
any other remedy, legal or equitable, against Lender, based in whole or in part
upon the contracting, charging or receiving of any interest in excess of the
maximum authorized by applicable law.
If any sum due Lender by Guarantor hereunder is placed in the hands of an
attorney for collection, or is collected through probate, bankruptcy, or other
court proceeding, then Guarantor promises to pay Lender all reasonable costs,
attorneys' fees, and other expenses incurred by Lender pursuant to such
collection efforts.
It is expressly agreed and acknowledged that notwithstanding anything
contained in this Guaranty to the contrary, the liability of Guarantor under
this Guaranty shall be limited to an amount equal to the sum of the following:
(i) Ten Million and No/100 Dollars ($10,000,000.00) (the
"Guaranteed Obligations"); plus
---------------------- ----
(ii) all costs and expenses of any kind incurred by Lender in
enforcing this Guaranty which are incurred by Lender by reason of any
default by Borrower under the Loan Agreement, or any instrument or document
executed in connection with or as security for payment of the Obligations
or any renewal, extension or modification thereof (hereinafter referred to
as the "Collection Expenses"); plus
------------------- ----
(iii) interest that accrues on outstanding, unpaid amount of the
Guaranteed Obligations and Collection Expenses, at the same rate of
interest that accrues on the Obligations and the Collection Expenses under
the terms of the Loan Agreement, from and after the date Lender demands
performance and/or payment by Guarantor hereunder until payment in full
by Guarantor of all sums owing hereunder.
UNCONDITIONAL GUARANTY - Page 4
- ----------------------
<PAGE>
Any and all existing and future indebtedness and/or obligations of Borrower
to Lender and all extensions, renewals and replacements thereof, whether now
existing or hereafter incurred, whether direct, primary, absolute, secondary,
contingent, secured, matured or unmatured, whether from time to time reduced and
thereafter increased, or entirely extinguished and thereafter reincurred,
whether originally contracted with Lender or with another or others, whether or
not evidenced by a negotiable or non-negotiable instrument or any other writing,
and whether contracted by Borrower along or jointly or severally with another or
others, other than the Guaranteed Obligations, are hereinafter referred to as
the "Unguaranteed Obligations". If at any time there exists any Unguaranteed
------------------------
Obligations (i) Lender may at its option, without impairing its rights
hereunder, exercise rights of offset by applying, first, to the Unguaranteed
Obligations any deposit balances to the credit of Borrower, and (ii) apply all
amounts realized by Lender from collateral or security held by Lender for
payment of the Obligations against the amount of the Collection Expenses,
Guaranteed Obligations and/or the Unguaranteed Obligations in such order or
manner as Lender shall determine in its sole discretion.
In the event that Lender makes demand on Guarantor under this Guaranty
prior to indefeasible payment of the Obligations, in full, to Lender, then this
Guaranty will terminate only upon payment, in full, to Lender by Guarantor of
the Guaranteed Obligations, the Collection Expenses, if any, and accrued
interest thereon, if any.
THIS GUARANTY HAS BEEN NEGOTIATED AND SHALL BE DEEMED TO HAVE BEEN MADE IN
THE STATE OF TEXAS. THIS GUARANTY SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF TEXAS AND NOT THE LAWS OF
CONFLICTS OF THE STATE OF TEXAS. AS PART OF THE CONSIDERATION FOR NEW VALUE AND
BENEFIT THIS DAY RECEIVED BY GUARANTOR, GUARANTOR HEREBY CONSENTS TO THE
JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED WITHIN DALLAS COUNTY OF THE
STATE OF TEXAS AND WAIVES PERSONAL SERVICE OF ANY AND ALL PROCESS UPON IT AND
CONSENTS THAT ALL SUCH SERVICE OF PROCESS BE MADE BY CERTIFIED OR REGISTERED
MAIL DIRECTED TO GUARANTOR AT THE ADDRESS STATED HEREIN AND SERVICE SO MADE
SHALL BE DEEMED TO BE COMPLETED UPON ACTUAL RECEIPT THEREOF. GUARANTOR WAIVES
ANY OBJECTION TO JURISDICTION AND VENUE OF ANY ACTION INSTITUTED AGAINST IT AS
PROVIDED HEREIN AND AGREES NOT TO ASSERT ANY DEFENSE BASED ON LACK OF
JURISDICTION OR VENUE.
EXCEPT AS OTHERWISE PROVIDED FOR IN THIS GUARANTY, GUARANTOR WAIVES THE
RIGHT TO TRIAL BY JURY (WHICH LENDER HEREBY ALSO WAIVES) IN ANY ACTION, SUIT,
PROCEEDING OR COUNTERCLAIM OF ANY KIND ARISING OUT OF OR RELATED TO THIS
GUARANTY OR THE OBLIGATIONS.
THIS WRITTEN GUARANTY, TOGETHER WITH ALL OTHER INSTRUMENTS, AGREEMENTS AND
--------------------------------------------------------------------------
CERTIFICATES EXECUTED BY THE
- ----------------------------
UNCONDITIONAL GUARANTY - Page 5
- ----------------------
<PAGE>
PARTIES IN CONNECTION WITH THE OBLIGATIONS OR WITH REFERENCE HERETO OR THERETO,
- -------------------------------------------------------------------------------
REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY
- --------------------------------------------------------------------------------
EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE
- ------------------------------------------------------------------------
PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
- -------------------------------------------------------------------
This Guaranty is given in modification, substitution and replacement of
that certain Unconditional Guaranty (the "Prior Guaranty"), dated January 9,
--------------
1997, executed by Guarantor in favor of Lender, covering certain obligations of
Borrower. Any and all liabilities of Guarantor to Lender under the Prior
Guaranty are modified, substituted and replaced by this Guaranty.
By acceptance of this Guaranty, Lender agrees and acknowledges in favor of
Guarantor as follows:
(a) Lender has rescinded Lender's demand to Guarantor, dated February
6, 1997, for payment and performance under the Prior Guaranty; and
(b) Lender knows of no other presently existing, matured, and
liquidated claims of Lender against guarantor.
Executed and delivered as of the ____ day of ________, 1997.
________________________________________
CARL H. WESTCOTT
Address:
- -------
CARL H. WESTCOTT
100 Crescent Court
Suite 1620
Dallas, Texas 75201
Telecopy No. (214) 777-5010
UNCONDITIONAL GUARANTY - Page 6
- ----------------------
<PAGE>
EXHIBIT D
---------
to
Settlement Agreement
Note
----
[Attached.]
EXHIBIT D - PAGE 1
- ---------
<PAGE>
SECURED PROMISSORY NOTE
$____________ _____________, 1997
FOR VALUE RECEIVED, the undersigned (hereinafter "Borrower"), hereby
--------
promises to pay to the order of FLEET CAPITAL CORPORATION, a Rhode Island
corporation (hereinafter "Lender"), at its office located at 2711 North Haskell,
------
Suite 2100, LB 21, Dallas, Texas 75204, or at such other location as Lender may
request, in such coin or currency of the United States which shall be legal
tender in payment of all debts and dues, public and private, at the time of
payment, the principal sum of _____ MILLION _______ THOUSAND AND NO/100 DOLLARS
($____________), together with interest from and after the date hereof at the
per annum rate set forth below.
Subject to Section 2.1.3 of the Loan Agreement (as defined below), the
--------------
unpaid principal balance outstanding hereunder shall accrue interest at the per
annum rate (hereinafter referred to as the "Applicable Annual Rate") specified
----------------------
in Section 2.1.1 of that certain Loan and Security Agreement, dated of even date
-------------
herewith, by and between Lender and Borrower (as amended, restated or renewed
from time to time, the "Loan Agreement"), except that upon and after the
--------------
occurrence and during the continuance of an Event of Default, the unpaid
principal balance outstanding hereunder, and, to the extent permitted by
applicable law, past due interest hereunder, shall accrue interest at the
Default Rate specified in Section 2.1.2 of the Loan Agreement.
-------------
This Secured Promissory Note (this "Note") is the Term Note referred
----
to in, and is issued pursuant to, the Loan Agreement, and is entitled to all of
the benefits and security of the Loan Agreement. All of the terms, covenants
and conditions of the Loan Agreement and all other instruments evidencing or
securing the indebtedness hereunder (including, without limitation, the
"Security Documents" as defined in the Loan Agreement) (hereinafter collectively
-------------------
referred to as the "Loan Documents") are hereby made a part of this Note and are
--------------
deemed incorporated herein in full. All capitalized terms used herein, unless
otherwise specifically defined in this Note, shall have the meanings ascribed to
them in the Loan Agreement.
The principal amount of and all accrued interest on this Note shall be
due and payable on the dates and in the manner hereinafter set forth:
(a) Interest. Interest shall be due and payable monthly, in arrears,
--------
on the first day of each month, commencing on _____1, 1997, and continuing
on the first day of each month thereafter until such time as the full
principal balance, together with all other amounts owing hereunder, shall
have been paid in full;
(b) Monthly Principal Amortization. The outstanding principal balance
------------------------------
of this Note shall be due and payable in monthly installments on the last
day of each calendar month, the amount of which for any particular month
being equal to the amount shown below for the month corresponding thereto,
except to extent Borrower previously
SECURED PROMISSORY NOTE - Page 1
- -----------------------
<PAGE>
made all or any portion of thereof pursuant to the Final Cash Collateral
Order (as such term is defined in the Loan Agreement):
<TABLE>
<CAPTION>
AGGREGATE INSTALLMENTS
MONTH: ----------------------
------ PER MONTH:
----------
<S> <C>
[June through July, 1997 $4,000,000
August, 1997 $3,500,000
September, 1997 $3,250,000
October and November, 1997 $3,000,000
December, 1997 $2,750,000
January, 1998 $2,500,000
February, 1998 $2,000,000
March through August, 1998 $3,000,000]
</TABLE>
(c) Maturity Date. The entire remaining principal amount then
-------------
outstanding, together with any and all other amounts due hereunder, shall
be due and payable on the Maturity Date (i.e., September 1, 1998).
In addition to principal payments provided for above, mandatory prepayments
of principal shall be due and payable on a quarterly basis, on the 15th day of
each March, June, September and December, beginning on the first such date after
the Closing Date, in an amount equal to fifty percent (50%) of Excess Cash Flow,
as defined and more particularly provided for in Section 3.1.3 of the Loan
Agreement.
Borrower may prepay this Note in whole or in part at any time without
premium or penalty, unless otherwise specified in the Loan Agreement.
All partial prepayments, whether mandatory or voluntary, shall be applied
to installments of principal in the inverse order of their maturities.
Upon or after the occurrence of an Event of Default, Lender shall have all
of the rights and remedies set forth in Section 9 of the Loan Agreement,
---------
including the right to declare the then outstanding principal balance and
accrued interest hereof to be and the same shall thereupon become, immediately
due and payable without notice of intention to accelerate, notice of
acceleration, or any other notice to or demand upon Borrower, all of which
Borrower hereby expressly waives.
Notwithstanding anything to the contrary in this Note or otherwise, (i) if
at any time the amount of interest computed on the basis of the Applicable
Annual Rate or the Default Rate would exceed the amount of such interest
computed upon the basis of the maximum rate of interest permitted by applicable
state or federal law in effect from time to time hereafter (the "Maximum Legal
-------------
Rate"), the interest payable under this Note shall be computed upon the basis of
- ----
the Maximum Legal Rate, but any subsequent reduction in such Applicable Annual
Rate or Default Rate, as applicable, shall not reduce such interest thereafter
payable hereunder below the
SECURED PROMISSORY NOTE - Page 2
- -----------------------
<PAGE>
amount computed on the basis of the Maximum Legal Rate until the aggregate
amount of such interest accrued and payable under this Note equals the total
amount of interest which would have accrued if such interest had been at all
times computed solely on the basis of the Applicable Annual Rate or Default
Rate, as applicable; and (ii) unless preempted by federal law, the Applicable
Annual Rate or Default Rate, as applicable, from time to time in effect
hereunder may not exceed the "indicated ceiling rate" from time to time in
effect under Tex. Rev. Civ. Stat. Ann. art. 5069-1.04(c) (Vernon 1987). If the
applicable state or federal law is amended in the future to allow a greater rate
of interest to be charged under this Note than is presently allowed by
applicable state or federal law, then the limitation of interest hereunder shall
be increased to the maximum rate of interest allowed by applicable state or
federal law as amended, which increase shall be effective hereunder on the
effective date of such amendment, and all interest charges owing to Lender by
reason thereof shall be payable at the same date and in the same manner as
accrued interest on this Note is generally payable pursuant to the provisions of
this Note.
No agreements, conditions, provisions or stipulation contained in this
Note, the Loan Agreement or any other instrument, document or agreement between
Borrower and Lender or default of Borrower, or the exercise by Lender of the
right to accelerate the payment of the maturity of principal and interest, or to
exercise any option whatsoever contained in this Note or any other Loan
Document, or the arising of any contingency whatsoever, shall entitle Lender to
contract for, charge, or receive, in any event, interest exceeding the Maximum
Legal Rate. In no event shall Borrower be obligated to pay interest exceeding
such Maximum Legal Rate and all agreements, conditions or stipulations, if any,
which may in any event or contingency whatsoever operate to bind, obligate or
compel Borrower to pay a rate of interest exceeding the Maximum Legal Rate,
shall be without binding force or effect, at law or in equity, to the extent
only of the excess of interest over such Maximum Legal Rate. In the event any
interest is contracted for, charged or received in excess of the Maximum Legal
Rate ("Excess Interest"), Borrower acknowledges and stipulate that any such
---------------
contract, charge, or receipt shall be the result of an accident and bona fide
error, and that any Excess Interest received by Lender shall be applied, first,
to reduce the principal then unpaid hereunder; second, to reduce the other
Obligations; and third, returned to Borrower, it being the intention of the
parties hereto not to enter at any time into a usurious or otherwise illegal
relationship. Borrower recognizes that, with fluctuations in the Applicable
Annual Rate and the Maximum Legal Rate, such a result could inadvertently occur.
By the execution of this Note, Borrower covenants that (i) the credit or return
of any Excess Interest shall constitute the acceptance by Borrower of such
Excess Interest, and (ii) Borrower shall not seek or pursue any other remedy,
legal or equitable, against Lender, based in whole or in part upon contracting
for, charging or receiving of any interest in excess of the maximum rate
authorized by applicable law. For the purpose of determining whether or not any
Excess Interest has been contracted for, charged or received by Lender, all
interest at any time contracted for, charged or received by Lender in connection
with this Note shall be amortized, prorated, allocated and spread in equal parts
during the entire term of this Note.
Time is of the essence of this Note. Unless otherwise provided in the Loan
Agreement, Borrower, for itself and its legal representatives, successors and
assigns, expressly waives, to the fullest extent permitted by Applicable Law,
presentment, demand, protest, notice of dishonor, notice of non-payment, notice
of intent to accelerate, notice of acceleration, notice of maturity,
SECURED PROMISSORY NOTE - Page 3
- -----------------------
<PAGE>
notice of protest, presentment for the purpose of accelerating maturity,
diligence in collection, and the benefit of any exemption or insolvency laws.
If this Note is collected by or through an attorney at law, Borrower shall
be obligated to pay, in addition to the principal balance and accrued interest
hereof, reasonable attorney's fees and court costs, and any other charges for
which Borrower is responsible under the Loan Agreement and other Loan Documents.
Wherever possible, each provision of this Note shall be interpreted in such
manner as to be effective and valid under Applicable Law, but if any provision
of this Note shall be prohibited or invalid under Applicable Law, such provision
shall be ineffective to the extent of such prohibition or invalidity without
invalidating the remainder of such provision or remaining provisions of this
Note. No delay or failure on the part of Lender in the exercise of any right or
remedy hereunder shall operate as a waiver thereof, nor as an acquiescence in
any default, nor shall any single or partial exercise by Lender of any right or
remedy preclude any other right or remedy. Lender, at its option, may enforce
its rights against any collateral securing this Note without enforcing its
rights against Borrower, any guarantor of the indebtedness evidenced hereby or
any other property or indebtedness due or to become due to Borrower. Borrower
agrees that, without releasing or impairing Borrower's liability hereunder,
Lender may at any time release, surrender, substitute or exchange any collateral
securing this Note and may at any time release any party primarily or
secondarily liable for the indebtedness evidenced by this Note.
This Note shall be governed by, and construed and enforced in accordance
with, the laws of the State of Texas.
IN WITNESS WHEREOF, Borrower has caused this Note to be duly executed and
delivered in Dallas, Texas, on the date first above written.
BORROWER:
JAYHAWK ACCEPTANCE CORPORATION
By:_______________________________
Name:_____________________________
Title:____________________________
SECURED PROMISSORY NOTE - Page 4
- -----------------------
<PAGE>
EXHIBIT E
---------
to
Settlement Agreement
Pledge Agreement
----------------
[Attached.]
EXHIBIT E - PAGE 1
- ---------
<PAGE>
EXHIBIT 10.43
PLEDGE AND SECURITY AGREEMENT
(BENEFICIAL INTERESTS)
THIS PLEDGE AND SECURITY AGREEMENT, dated as of the ___ day of ______,
1997, by JAYHAWK ACCEPTANCE CORPORATION, a Texas corporation, having an office
at 2001 Bryan Tower, Suite 600, Dallas, Texas 75201 ("Pledgor"), to and in favor
-------
of FLEET CAPITAL CORPORATION, having an office at 2711 North Haskell, Suite
2100, Dallas, Texas 75204 ("Pledgee").
-------
W I T N E S S E T H:
- - - - - - - - - -
PRELIMINARY STATEMENT. Pledgor is now the direct legal and beneficial
owner of one hundred percent (100%) of the issued and outstanding shares of
equity and beneficial interests, ownership rights and other ownership interests,
whether or not evidenced by any tangible indicia of ownership, issued by Jayhawk
Funding Trust I, a Delaware limited purpose business trust ("Issuer"), all as
------
more particularly described on Exhibit A hereto (the "Pledged Securities"). In
--------- ------------------
order to induce Pledgee to enter into the Loan Agreement (as defined below) with
Pledgee, Pledgor has agreed to secure the payment and performance of the
Obligations (as hereinafter defined) and to accomplish same by (i) executing and
delivering to Pledgee this Pledge Agreement, (ii) subject to the PSCC Agreement,
delivering to Pledgee such of the Pledged Securities as Pledgee shall now or
hereafter have in its possession from time to time, together with appropriate
powers and/or endorsements duly executed in blank by Pledgor, and (iii)
delivering to Pledgee any and all other documents which Pledgee deems necessary
to protect Pledgee's interests hereunder or with respect to the Obligations.
NOW, THEREFORE, in consideration of the premises and for other good
and valuable consideration, receipt of which is hereby acknowledged, Pledgor
hereby agrees as follows:
1. Definitions
-----------
(a) "Loan Agreement" shall mean that certain Loan and Security
--------------
Agreement, dated ________, 1997, as the same may be amended, renewed, modified
or extended at any time and from time to time.
(b) "Obligations" shall have the meaning given such term in the Loan
-----------
Agreement.
(c) "Pledge Agreement" shall mean and include this Pledge and
----------------
Security Agreement, as amended, modified or supplemented from time to time.
(d) "Pledged Property" shall mean and include (i) the Pledged
----------------
Securities, together with all interest, profits, redemptions, subscription
rights, stock, warrants, certificates of interest, shares, participations,
receipts, securities, options, substitutions, exchanges, dividends
PLEDGE AGREEMENT - Page 1
- ----------------
<PAGE>
and other distributions now or hereafter distributed by Issuer or which may
hereafter be acquired by or delivered to the possession of Pledgor or Pledgee
with respect to the Pledged Securities, (ii) Pledgor's records with respect to
the foregoing and (iii) the proceeds of all of the foregoing.
(e) "PSCC" shall mean Prudential Securities Credit Corporation, a
----
Delaware corporation.
(f) "PSCC Agreement" shall mean that certain Trust Shares Pledge
--------------
Agreement by and between PSCC and Pledgor, dated as of December 1, 1996.
(g) All other terms hereinbefore or hereinafter defined in this
Pledge Agreement shall have the meanings herein assigned to such terms.
(h) All capitalized terms not specifically defined herein shall have
the meanings assigned to them in the Loan Agreement, if therein defined;
otherwise, all capitalized terms not specifically defined herein or therein
which are defined in the Uniform Commercial Code (the "Code") as presently in
----
effect in the State of Texas shall be construed in accordance with the
definitions set forth in the Code.
2. Grant of Security Interest
--------------------------
As collateral security for the prompt and unconditional payment and
performance when due of each and every one of the Obligations, Pledgor hereby
assigns, mortgages, pledges, hypothecates, transfers and sets over to Pledgee
and grants to Pledgee a security interest in and lien upon all of the Pledged
Property, subject, however, to the PSCC Agreement.
3. Representations, Warranties, Covenants and Waivers
-------------------------------------------------
Pledgor hereby covenants, represents and warrants, with and to Pledgee
that (all of such covenants, representations and warranties being continuing in
nature so long as any of the Obligations are outstanding):
(a) The Pledged Securities are duly authorized, validly issued, fully
paid and non-assessable securities of the Issuer, constitute Pledgor's entire
interest in the Issuer and are not registered, nor has Pledgee authorized the
registration thereof, in the name of any person or entity other than PSCC,
pursuant to the PSCC Agreement, Pledgor or Pledgee.
(b) The Pledged Property is directly, legally and beneficially owned
by Pledgor free and clear of all claims, liens, pledges and encumbrances of any
kind, nature or description except for (i) the pledge and security interest with
respect thereto in favor of PSCC, as evidenced by the PSCC Agreement, and (ii)
the pledge and security interest with respect thereto in favor of Pledgee.
(c) The Pledged Property is not subject to any restrictions relative
to the transfer thereof, except as provided in the Declaration of Trust of the
Issuer and noted on the
PLEDGE AGREEMENT - Page 2
- ----------------
<PAGE>
certificates evidencing the Pledged Securities, and Pledgor has the right to
transfer and hypothecate the Pledged Property free and clear of any liens,
encumbrances or restrictions, except as otherwise provided herein.
(d) The Pledged Property is duly and validly pledged to Pledgee and
no consent or approval of any governmental or regulatory authority or of any
securities exchange or the like, nor any consent or approval of any other third
party was or is necessary to the validity and enforceability of this Pledge
Agreement, except for the consent of PSCC, which Pledgee has obtained.
(e) Pledgee is authorized, but not required, to (i) store, deposit
and safeguard the Pledged Property, (ii) perform any and all other acts which
Pledgee in good faith deems reasonable and/or necessary for the protection and
preservation of the Pledged Property or its value or Pledgee's security interest
therein, including without limitation, transferring, registering or arranging
for the transfer or registration of the Pledged Property to or in Pledgee's own
name and receiving the income therefrom as additional collateral for the
Obligations and (iii) pay any charges or expenses which Pledgee deems necessary
for the foregoing purposes. Any obligation of Pledgee for reasonable care for
the Pledged Property in Pledgee's possession shall be limited to the same degree
of care which Pledgee uses for similar property owned by Pledgee.
(f) Pledgor will pay all charges and assessments of any nature
against the Pledged Property or with respect thereto prior to said charges
and/or assessments being delinquent.
(g) Pledgor shall promptly reimburse Pledgee on demand, together with
interest at the rate provided in the Loan Agreement, for any charges,
assessments or expenses paid or incurred by Pledgee in its discretion for the
protection and preservation and maintenance of the Pledged Property and the
enforcement of Pledgee's rights hereunder, including, without limitation,
reasonable attorneys' fees and legal expenses incurred by Pledgee in seeking to
protect, collect or enforce its rights in the Pledged Property or otherwise
hereunder.
(h) Pledgor shall furnish Pledgee with such information concerning
Issuer and the Pledged Property as Pledgee may from time to time request,
including, without limitation, current financial statements.
(i) During the term of this Pledge Agreement, if Pledgor shall
receive, have registered in its name or become entitled to receive or acquire or
have registered in its name any certificate, option, warrant or right with
respect to the equity or beneficial or other interests of Issuer (including
without limitation, any certificate representing a dividend on or a distribution
or exchange of or in connection with any reclassification of the Pledged
Securities) whether as an addition to, in substitution of, or in exchange for
any of the Pledged Property or otherwise, Pledgor agrees to accept same as
Pledgee's agent, to hold same in trust for Pledgee and to deliver same forthwith
to Pledgee or Pledgee's agent or bailee in the form received, with the
endorsement(s) of Pledgor where necessary and/or duly executed appropriate
powers and/or assignments, to be held by Pledgee or Pledgee's agent or bailee
subject to the terms hereof, or, if
PLEDGE AGREEMENT - Page 3
- ----------------
<PAGE>
any of the foregoing is uncertificated, register same with the Pledgee's
security interest noted therein, as further security for the Obligations.
(j) During the term of this Pledge Agreement, Pledgor shall not
directly or indirectly sell, assign, transfer, or otherwise dispose of, or grant
any option with respect to the Pledged Property, nor shall Pledgor create, incur
or permit any further pledge, hypothecation, encumbrance, lien, mortgage or
security interest with respect to the Pledged Property, except pursuant to the
PSCC Agreement
(k) So long as no Event of Default (as hereinafter defined) has
occurred, Pledgor shall have the right to vote and exercise all ownership rights
with respect to the Pledged Securities, except as expressly prohibited herein.
(l) Pledgee may notify Issuer or the appropriate transfer agent of
the Pledged Securities to register the security interest and pledge granted
herein and honor the rights of Pledgee with respect thereto.
(m) No action has been taken or is being taken by or is currently
planned by Pledgor, or any agent acting on its behalf which would cause this
Pledge Agreement or the Obligations to violate Regulation U or any other
regulation of the Board of Governors of the Federal Reserve System, the
Securities and Exchange Act of 1934 or any other applicable law or regulation,
in each case as now in effect or as the same may hereafter be amended or
supplemented. Pledgor is not in the business of extending credit for the
purpose of purchasing or carrying margin stocks or other securities.
(n) Pledgor waives (i) all rights to require Pledgee to proceed
against any other person, entity or collateral or to exercise any remedy, (ii)
the defense of the statute of limitations in any action upon any of the
Obligations, (iii) any right of subrogation in the Obligations or Pledged
Property, (iv) any rights as a guarantor or surety, including, without
limitation, the right to be informed of additional credit extended by Pledgor,
any financial information relating to Obligor, the value of the Pledged
Property, any deterioration thereof, or of any other matter, unless specifically
required by applicable law and non-waivable and (v) to the extent permissible,
its rights under Section 9.112 and 9.207 of the Code. Pledgee is entitled to all
of the benefits of a secured party set forth in Section 9.207 of the Code.
Pledgor agrees that the Pledged Property, other collateral, Company or any other
guarantor or endorser may be released, substituted or added with respect to the
Obligations, in whole or in part, without releasing or otherwise affecting the
liability of Pledgor, the pledge and security interests granted hereunder, or
this Pledge Agreement.
(o) The PSCC Agreement has not been amended or modified, and the
"Secured Obligations" (as such term is defined in the PSCC Agreement) consist
only of the loan, the outstanding principal balance of which is, as of this
date, $_________________. The principal balance of the Secured Obligations will
not be increased above such amount.
PLEDGE AGREEMENT - Page 4
- ----------------
<PAGE>
4. Events of Default
-----------------
The occurrence of an "Event of Default" under (and as defined in) the
Loan Agreement or any representation or warranty made by Pledgor (or any of its
officers) under or in connection with this Pledge Agreement which shall prove to
have been incorrect in any material respect when made, or any failure by Pledgor
to perform or observe any term, covenant or agreement contained in this Pledge
Agreement on its part to be performed or observed, shall, at the sole option of
Pledgee, constitute and be deemed an Event of Default under this Pledge
Agreement.
5. Remedies After Default
----------------------
Upon or subsequent to the occurrence of an Event of Default:
(a) Pledgee, at its option, shall be empowered to exercise its
continuing right to instruct Issuer (or the appropriate transfer agent of the
Pledged Securities) to register any or all of the Pledged Securities and/or
other Pledged Property in the name of Pledgee or in the name of Pledgee's
nominee and Pledgee may complete, in any manner Pledgee may deem expedient, any
and all stock powers, assignments or other documents heretofore or hereafter
executed in blank by Pledgor and delivered to Pledgee. After said instruction,
and without further notice, Pledgee, in its discretion, shall have the exclusive
right to exercise all voting and business trust rights with respect to the
Pledged Securities and other Pledged Property and exercise any and all rights of
conversion, redemption, exchange, subscription or any other rights, privileges,
or options pertaining to any shares of the Pledged Securities or the other
Pledged Property as if Pledgee were the absolute owner thereof, including
without limitation, the right to exchange, in its discretion any and all of the
Pledged Securities and other Pledged Property upon any merger, consolidation,
reorganization, recapitalization or other readjustment with respect to Issuer.
Upon the exercise of any such rights, privileges or options by Pledgee, Pledgee
shall have the right to deposit and deliver any and all of the Pledged
Securities and other Pledged Property to any committee, depository, transfer
agent, registrar or other designated agency upon such terms and conditions as
Pledgee may determine, all without liability, except to account for property
actually received by Pledgee. However, Pledgee shall have no duty to exercise
any of the aforesaid rights, privileges or options (all of which are exercisable
in the sole discretion of Pledgee) and shall not be responsible for any failure
to do so or delay in doing so.
(b) In addition to all the rights and remedies of a secured party
under the Texas Business and Commerce Code, Pledgee shall have the right, at any
time and without demand of performance or other demand, advertisement or notice
of any kind (except the notice specified below of time and place of public or
private sale) to or upon Pledgor or any other person (all and each of which
demands, advertisements and/or notices are hereby expressly waived to the extent
permitted by law), to proceed forthwith to collect, redeem, receive,
appropriate, sell, or otherwise dispose of and deliver the Pledged Property or
any part thereof in one or more lots at public or private sale or sales at any
exchange, brokers board or at any of Pledgee's offices or elsewhere at such
prices and on such terms as Pledgee may deem best. The foregoing disposition(s)
may be for cash or on credit or for future delivery without assumption of
PLEDGE AGREEMENT - Page 5
- ----------------
<PAGE>
any credit risk by Pledgee, with Pledgee having the right to purchase all or any
part of said Pledged Property so sold at any such sale or sales, public or
private, free of any right or equity of redemption in Pledgor, which right or
equity is hereby expressly waived or released by Pledgor. In connection with any
sale or other disposition of the Pledged Property, Pledgee is hereby authorized
by Pledgor to complete the appropriate instruments(s) of transfer executed and
delivered by Pledgor with respect to the Pledged Property in such manner as
Pledgee shall deem appropriate to effectuate such sale or other disposition. All
of Pledgee's rights and remedies, including, but not limited to, the foregoing,
shall be cumulative and not exclusive and shall be enforceable alternatively,
successively or concurrently, as Pledgee may deem expedient. The proceeds of any
such collection, redemption, recovery, receipt, appropriation, realization, sale
or other disposition, after deducting all costs and expenses of every kind
incurred relative thereto or incidental to the care, safekeeping or otherwise of
any and all Pledged Property or in any way relating to the rights of Pledgee
hereunder (including, without limitation, reasonable attorneys' fees and legal
expenses, including, without limitation, a reasonable estimate of the allocated
cost of Pledgee's in-house counsel and legal staff) shall be applied first to
the satisfaction of the Obligations (in such order as Pledgee may elect) and
then to the payment of any other amounts required by applicable law, including
Section 9.504(a)(3) of the Texas Business and Commerce Code, Pledgor to be and
remain liable to Pledgee for any deficiency. Pledgor agrees that ten (10) days
prior notice by Pledgee, sent by certified mail, postage prepaid, designating
the date after which a private sale may take place or a public auction may be
held, is reasonable notification of such matters.
(c) Pledgor recognizes that Pledgee may be unable to effect a public
sale of all or part of the Pledged Property by reason of certain prohibitions
contained in the Securities Act of l933, as amended, as now or hereafter in
effect or in applicable Blue Sky or other state securities law, as now or
hereafter in effect, but may be compelled to resort to one or more private sales
to a restricted group of purchasers who will be obliged to agree, among other
things, to acquire such Pledged Property for their own account for investment
and not with a view to the distribution or resale thereof. If at the time of any
sale of the Pledged Property or any part thereof the same shall not, for any
reason whatsoever, be effectively registered (if required) under the Securities
Act of 1933 (or other applicable state securities law), as then in effect,
Pledgee in its sole and absolute discretion is authorized to sell such Pledged
Property or such part thereof by private sale in such manner and under such
circumstances as Pledgee or its counsel may deem necessary or advisable in order
that such sale may legally be effected without registration. Pledgor agrees that
private sales so made may be at prices and on terms less favorable to the seller
than if such Pledged Property were sold at public sale, and that Pledgee has no
obligation to delay the sale of any such Pledged Property for the period of time
necessary to permit Issuer, even if Issuer would agree, to register such Pledged
Property for public sale under such applicable securities laws. Pledgor agrees
that any private sales made under the foregoing circumstances shall be deemed to
have been made in a commercially reasonable manner.
(d) All of the Pledgee's rights and remedies, including but not
limited to the foregoing and those otherwise arising under this Pledge
Agreement, the Loan Agreement, the instruments and securities comprising the
Pledged Property, applicable law or otherwise, shall be cumulative and not
exclusive and shall be enforceable alternatively, successively or concurrently
PLEDGE AGREEMENT - Page 6
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<PAGE>
as Pledgee may deem expedient. No failure or delay on the part of Pledgee in
exercising any of its options, powers or rights or partial or single exercise
thereof, shall constitute a waiver of such option, power or right.
6. Further Assurances
------------------
Pledgor agrees that at any time and from time to time upon the written
request of Pledgee, Pledgor will execute and deliver such further documents,
including but not limited to irrevocable proxies or stock powers, in form
satisfactory to counsel for Pledgee, and will take or cause to be taken such
further acts as Pledgee may reasonably request in order to effect the purposes
of this Pledge Agreement and perfect or continue the perfection of the security
interest in the Pledged Property granted to Pledgee hereunder.
7. Miscellaneous
-------------
(a) Beyond the exercise of reasonable care to assure the safe custody
of the Pledged Property while held by Pledgee hereunder, as provided in Section
-------
3(e) hereof, Pledgee or Pledgee's agent or bailee shall have no duty or
- ----
liability to protect or preserve any rights pertaining thereto and shall be
relieved of all responsibility for the Pledged Property upon surrendering it to
Pledgor or foreclosure with respect thereto. Pledgee shall have no obligation
or duty to return or release its security interest in the Pledged Property,
except upon the written request of Pledgor, at the sole expense of Pledgor and
only after all Obligations are indefeasibly paid in full.
(b) No course of dealing between Pledgor and Pledgee, nor any failure
or delay by Pledgee to exercise any right, power or privilege under this Pledge
Agreement, the Loan Agreement or under any other agreements, instruments and
documents executed and delivered in connection therewith, shall operate as a
waiver hereof or thereof; nor shall any single or partial exercise of any right,
power or privilege hereunder or thereunder preclude any other or further
exercise thereof or the exercise of any other right, power or privilege. No
waiver of any provision of this Pledge Agreement shall be effective unless the
same shall be in writing and signed by Pledgee, and then such waiver shall be
effective only in the specific instance and for the purpose for which given.
(c) This Pledge Agreement may not be changed, modified or amended, in
whole or in part, except by a writing signed by Pledgor and Pledgee.
(d) The provisions of this Pledge Agreement and the Loan Agreement
are severable, and if any clause or provision hereof or thereof shall be held
invalid or unenforceable in whole or in part in any jurisdiction, then such
invalidity or unenforceability shall attach only to such clause or provision in
any such jurisdiction or part thereof, and shall not in any manner affect such
clause or provision in any other jurisdiction or any other clause or provision
in this Pledge Agreement or the Loan Agreement in any jurisdiction.
PLEDGE AGREEMENT - Page 7
- ----------------
<PAGE>
(E) THE PARTIES HERETO WAIVE TRIAL BY JURY IN ANY ACTION OR
PROCEEDING OF ANY KIND OR NATURE IN ANY COURT WHETHER ARISING OUT OF, UNDER OR
BY REASON OF THIS PLEDGE AGREEMENT, THE PLEDGED PROPERTY, THE LOAN AGREEMENT OR
ANY MATTER OR PROCEEDING RELATING THERETO.
(f) This Pledge Agreement shall inure to the benefit of Pledgee and
its successors and assigns, and shall be binding upon Pledgor and its successors
and assigns.
8. Counterparts
------------
This Pledge Agreement may be signed in any number of counterparts with
the same effect as if the signatures were upon the same instrument.
9. Governing Law
-------------
THIS PLEDGE AGREEMENT, THE LOAN AGREEMENT AND ANY OTHER AGREEMENT,
INSTRUMENT OR DOCUMENT DELIVERED IN CONNECTION HEREWITH, AND THE OBLIGATIONS OF
THE PARTIES HEREUNDER OR THEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED AND
INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS.
10. Jurisdiction
------------
(a) Pledgor hereby irrevocably submits to the jurisdiction of any
Texas State or Federal court sitting in Dallas County in any action or
proceeding arising out of or relating to this Pledge Agreement to which Pledgor
is a party, and Pledgor hereby irrevocably agrees that all claims in respect of
such action or proceeding may be heard and determined in such Texas State court
or in such Federal court. Pledgor hereby irrevocably waives, to the fullest
extent it may effectively do so, the defense of an inconvenient forum to the
maintenance of such action or proceeding. Pledgor irrevocably consents to the
service of copies of the summons and complaint and any other process which may
be served in any such action or proceeding by the mailing of copies of such
process to Pledgor at 2001 Bryan Tower, Suite 600, Dallas, Texas 75201. Pledgor
agrees that a final judgment in any such action or proceeding shall be
conclusive and may be enforced in other jurisdictions by suit on the judgment or
in any other manner provided by law.
(b) Nothing in this paragraph 10 shall affect the right of Pledgee to
serve legal process in any other manner permitted by law or affect the right of
the Pledgee to bring any action or proceeding against the Pledgor or its
property in the courts of other jurisdictions.
PLEDGE AGREEMENT - Page 8
- ----------------
<PAGE>
IN WITNESS WHEREOF, the undersigned has caused these presents to be
duly executed and delivered on the day and year first above written.
JAYHAWK ACCEPTANCE
CORPORATION,
a Texas corporation
By:______________________________
Name:____________________________
Title:___________________________
PLEDGE AGREEMENT - Page 9
- ----------------
<PAGE>
EXHIBIT A
---------
PLEDGED SECURITIES
------------------
All of Pledgor's now owned or hereafter acquired right, title and interest in
and to all shares of equity and beneficial interests issued by Jayhawk Funding
Trust I, a Delaware limited purpose business trust, and all investment property,
stocks, bonds or other securities and personal property, cash, proceeds,
increases, and profits now existing or hereafter arising therefrom or relating
thereto, together with any passbook, receipts, participations, or certificates
which may from time to time evidence the same, and together with all moneys now
or hereafter on deposit therein, both principal and interest, all proceeds and
products thereof, and all of Pledgor's right, title and interest therein.
EXHIBIT A - Page 1
- ---------
<PAGE>
EXHIBIT F
---------
to
Settlement Agreement
Plan
----
[Attached.]
EXHIBIT F - PAGE 1
- ---------
<PAGE>
Harry A. Perrin
Candace S. Schiffman
WEIL, GOTSHAL & MANGES LLP
700 Louisiana, Suite 1600
Houston, Texas 77002-2784
(713)546-5000
and
Stephen A. Youngman
Kelli M. Walsh
WEIL, GOTSHAL 7 MANGES LLP
100 Crescent Court, Suite 1300
Dallas, Texas 75201-6950
(214) 746-7700
ATTORNEYS FOR THE DEBTOR
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF TEXAS
DALLAS DIVISION
______________________________________
(S)
In re: (S) Case No. 397-31261-SAF-11
(S)
JAYHAWK ACCEPTANCE CORPORATION, (S) Chapter 11
a Texas Corporation, (S)
(S)
Debtor. (S)
______________________________________
DEBTOR'S PLAN OF REORGANIZATION
UNDER CHAPTER 11 OF THE BANKRUPTCY CODE
---------------------------------------
Dated: April 18, 1997
Dallas, Texas
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I.
DEFINITIONS AND CONSTRUCTION OF TERMS.......................... 1
1.1. Administrative Expense Claim.......................................... 2
1.2. Allowed............................................................... 2
1.3. Amended ByLaws........................................................ 2
1.4. Amended Articles of Incorporation..................................... 2
1.5. Allowed Secured Fleet Claim........................................... 2
1.6. Ballot................................................................ 2
1.7. Bankruptcy Code....................................................... 2
1.8. Bankruptcy Court...................................................... 3
1.9. Bankruptcy Rules...................................................... 3
1.10. Business Day.......................................................... 3
1.11. Cash Collateral Orders................................................ 3
1.12. Cash.................................................................. 3
1.13. Causes of Action...................................................... 3
1.14. Chapter 11 Case....................................................... 3
1.15. Claim................................................................. 3
1.16. Class................................................................. 3
1.17. Class 6 Election Payment.............................................. 3
1.18. Collateral............................................................ 3
1.19. Commencement Date..................................................... 4
1.20. Confirmation Date..................................................... 4
1.21. Contract.............................................................. 4
1.22. Confirmation Hearing.................................................. 4
1.23. Confirmation Order.................................................... 4
1.24. Creditors' Committee.................................................. 4
1.25. Dealer................................................................ 4
1.26. Dealer Agreement...................................................... 4
1.27. Dealer Claims......................................................... 4
1.28. Debtor................................................................ 4
1.29. Debtor in Possession.................................................. 4
1.30. Disclosure Statement.................................................. 4
1.31. Disputed.............................................................. 4
1.32. Disputed Claim Amount................................................. 5
1.33. Effective Date........................................................ 5
1.34. Equity Interest....................................................... 5
1.35. Final Distribution Date............................................... 5
1.36. Final Order........................................................... 5
1.37. Fleet................................................................. 5
1.38. Initial Distribution Date............................................. 5
</TABLE>
i
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<TABLE>
<S> <C>
1.39. Insured Claim......................................................... 5
1.40. Jayhawk............................................................... 5
1.41. Jaymed................................................................ 5
1.42. Jaymed Claim.......................................................... 6
1.43. Jaymed Preferred Stock................................................ 6
1.44. Lien.................................................................. 6
1.45. New Fleet Documents................................................... 6
1.46. New Fleet Note........................................................ 6
1.47. Other Priority Claim.................................................. 6
1.48. Other Secured Claim................................................... 6
1.49. Plan.................................................................. 6
1.50. Plan Supplements...................................................... 6
1.51. Priority Tax Claim.................................................... 6
1.52. Prudential............................................................ 6
1.53. Released Director or Officer.......................................... 6
1.54. Reorganized Debtor.................................................... 7
1.55. Reorganized Jayhawk................................................... 7
1.56. Schedules............................................................. 7
1.57. Secured Claim......................................................... 7
1.58. Secured Fleet Claim................................................... 7
1.59. Secured Prudential Claim.............................................. 7
1.60. Tort Claim............................................................ 7
1.61. Unsecured Claim....................................................... 7
1.62. Westcott.............................................................. 7
1.63. Westcott Guaranty..................................................... 7
1.64. Westcott Release...................................................... 7
1.65. Interpretation; Application of Definitions and Rules of Construction.. 7
ARTICLE II.
TREATMENT OF ADMINISTRATIVE
EXPENSE CLAIMS AND PRIORITY TAX CLAIMS......................... 8
2.1. Administrative Expense Claims......................................... 8
2.2. Professional Compensation and Reimbursement Claims.................... 8
2.3. Priority Tax Claims................................................... 9
ARTICLE III.
CLASSIFICATION OF CLAIMS AND EQUITY INTERESTS..................... 9
ARTICLE IV.
TREATMENT OF CLAIMS AND EQUITY INTERESTS........................ 10
4.1. CLASS 1 -- OTHER PRIORITY CLAIMS...................................... 10
(a) Impairment and Voting.......................................... 10
(b) Distributions.................................................. 10
4.2. CLASS 2 -- SECURED FLEET CLAIM........................................ 10
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
(a) Impairment and Voting.......................................... 10
(b) Distribution................................................... 10
4.3. CLASS 3 -- SECURED PRUDENTIAL CLAIM................................... 13
(a) Impairment and Voting.......................................... 13
(b) Distribution................................................... 13
4.4. CLASS 4 -- OTHER SECURED CLAIMS....................................... 14
(a) Impairment and Voting.......................................... 14
(b) Distributions/Reinstatement of Claims.......................... 14
4.5. CLASS 5 -- UNSECURED CLAIMS........................................... 15
(a) Impairment and Voting.......................................... 15
(b) Distributions.................................................. 15
4.6. CLASS 6 -- DEALER CLAIMS.............................................. 15
(a) Impairment and Voting.......................................... 15
(b) Distributions/Reinstatement.................................... 15
(c) Cure Payments/Contract Payments................................ 16
(d) Class 6 - Buyout Election...................................... 16
4.7. CLASS 7 -- JAYMED CLAIM............................................... 16
(a) Impairment and Voting.......................................... 16
(b) Distributions.................................................. 16
4.8. CLASS 8 -- EQUITY INTERESTS........................................... 16
(a) Impairment and Voting.......................................... 16
(b) Retention of Equity Interests.................................. 17
ARTICLE V.
PROVISIONS REGARDING VOTING AND DISTRIBUTIONS
UNDER THE PLAN AND TREATMENT OF DISPUTED,
CONTINGENT AND UNLIQUIDATED ADMINISTRATIVE
EXPENSE CLAIMS AND CLAIMS............................... 17
5.1. Voting of Claims...................................................... 17
5.2. Nonconsensual Confirmation............................................ 17
5.3. Subtraction and Addition of Classes and Subclasses.................... 17
(a) Deletion of Classes and Subclasses............................... 17
(b) Addition of Classes and Subclasses............................... 17
5.4. Method of Distributions Under the Plan................................ 17
(a) In General....................................................... 17
(b) Distributions of Cash............................................ 18
(c) Timing of Distributions.......................................... 18
(d) Minimum Distributions............................................ 18
(e) Unclaimed Distributions.......................................... 18
5.5. Disputed Claims....................................................... 18
(a) Distributions Upon Allowance of Disputed Claims Other Than
Disputed Unsecured Claims........................................ 18
(b) Distributions Upon Allowance of Disputed Unsecured Claims........ 18
(c) Tort Claims...................................................... 18
</TABLE>
iii
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<TABLE>
<S> <C>
5.6. Objections to and Resolution of Disputed Administrative Expense
Claims and Disputed Claims............................................ 19
5.7. Distributions Relating to Allowed Insured Claims...................... 19
5.8. Cancellation and Surrender of Existing Securities and Agreements...... 19
ARTICLE VI.
EXECUTORY CONTRACTS AND UNEXPIRED LEASES.............................. 20
6.1. Assumption or Rejection of Executory Contracts and Unexpired Leases... 20
(a) Executory Contracts and Unexpired Leases......................... 20
(b) Schedules of Rejected Executory Contracts and Unexpired Leases;
Inclusiveness.................................................... 20
(c) Insurance Policies............................................... 21
(d) Approval of Assumption or Rejection of Executory Contracts and
Unexpired Leases................................................. 21
(e) Cure of Defaults................................................. 21
(f) Bar Date for Filing Proofs of Claim Relating to Executory
Contracts and Unexpired Leases Rejected Pursuant to the Plan..... 21
6.2. Indemnification Obligations........................................... 22
6.3. Compensation and Benefit Programs..................................... 22
6.4. Retiree Benefits...................................................... 22
ARTICLE VII.
COMPROMISE OF DISPUTES................................. 22
7.1. Compromise and Settlement of Claims Against Fleet..................... 22
7.2. Compromise and Settlement with Richard B. Hoffmann..................... 23
ARTICLE VIII.
PROVISIONS REGARDING CORPORATE
GOVERNANCE OF THE REORGANIZED DEBTOR.......................... 23
8.1. General............................................................... 23
8.2. Meetings of Reorganized Jayhawk Stockholders.......................... 23
8.3. Directors and Officers of Reorganized Debtor.......................... 24
(a) Board of Directors............................................... 24
(b) Officers......................................................... 24
8.4. Amended Bylaws and Amended Articles of Incorporation.................. 24
8.5. Issuance of New Promissory Note and Conversion of Jaymed Preferred
Stock................................................................. 24
ARTICLE IX.
IMPLEMENTATION AND EFFECT OF CONFIRMATION OF PLAN................... 24
9.1. Term of Bankruptcy Injunction or Stays................................ 24
</TABLE>
iv
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<TABLE>
<S> <C>
9.2. Revesting of Assets................................................... 24
9.3. Causes of Action...................................................... 25
9.4. Discharge of Debtor................................................... 25
9.5. Injunction............................................................ 25
ARTICLE X.
EFFECTIVENESS OF THE PLAN............................... 26
10.1. Conditions Precedent to Effectiveness................................. 26
10.2. Waiver of Conditions.................................................. 26
ARTICLE XI.
RETENTION OF JURISDICTION............................... 27
ARTICLE XII.
MISCELLANEOUS PROVISIONS................................ 28
12.1. Effectuating Documents and Further Transactions....................... 28
12.2. Corporate Action...................................................... 28
12.3. Exemption from Transfer Taxes......................................... 28
12.4. Debtor's Limited Release of Directors and Officers.................... 28
12.5. Claim Holders' Release of Directors and Officers from Claims and
Liabilities........................................................... 29
12.6. Exculpation........................................................... 29
12.7. Termination of Committee.............................................. 29
12.8. Post-Confirmation Date Fees and Expenses.............................. 29
12.9. Payment of Statutory Fees............................................. 30
12.10. Amendment or Modification of the Plan................................. 30
12.11. Severability.......................................................... 30
12.12. Revocation or Withdrawal of the Plan.................................. 30
12.13. Binding Effect........................................................ 30
12.14. Notices............................................................... 30
12.15. Governing Law......................................................... 31
12.16. Withholding and Reporting Requirements................................ 31
12.17. Plan Supplements...................................................... 31
12.18. Headings.............................................................. 32
12.19. Exhibits.............................................................. 32
12.20. Filing of Additional Documents........................................ 32
</TABLE>
v
<PAGE>
Harry A. Perrin
Candace S. Schiffman
WEIL, GOTSHAL & MANGES LLP
700 Louisiana, Suite 1600
Houston, Texas 77002-2784
(713) 546-5000
and
Stephen A. Youngman
Kelli M. Walsh
WEIL, GOTSHAL & MANGES LLP
100 Crescent Court, Suite 1300
Dallas, Texas 75201-6950
(214) 746-7700
ATTORNEYS FOR THE DEBTOR
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF TEXAS
DALLAS DIVISION
___________________________________
(S)
In re: (S) Case No. 397-31261-SAF-11
(S)
JAYHAWK ACCEPTANCE CORPORATION, (S) Chapter 11
a Texas Corporation, (S)
(S)
Debtor. (S)
(S)
___________________________________
DEBTOR'S PLAN OF REORGANIZATION
UNDER CHAPTER 11 OF THE BANKRUPTCY CODE
---------------------------------------
Jayhawk Acceptance Corporation, a Texas corporation, proposes the
following plan of reorganization under section 1121(a) of title 11 of the United
States Code.
ARTICLE I.
DEFINITIONS AND CONSTRUCTION OF TERMS
--------------------------------------
Definitions. As used herein, the following terms have the respective
-----------
meanings specified below, unless the context otherwise requires:
<PAGE>
1.1. Administrative Expense Claim means any right to payment constituting
----------------------------
a cost or expense of administration of the Chapter 11 Case under sections 503(b)
and 507(a)(1) of the Bankruptcy Code, including, without limitation, any actual
and necessary costs and expenses of preserving the estate of the Debtor, any
actual and necessary costs and expenses of operating the business of the Debtor,
any indebtedness or obligations incurred or assumed by the Debtor in Possession
in connection with the conduct of its business, including, without limitation,
for the acquisition or lease of property or an interest in property or the
rendition of services, all compensation and reimbursement of expenses to the
extent Allowed by the Bankruptcy Court under section 330 or 503 of the
Bankruptcy Code, and any fees or charges assessed against the estate of the
Debtor under section 1930 of chapter 123 of title 28 of the United States Code.
1.2. Allowed means any Claim against the Debtor (a) which has been listed
-------
by the Debtor in its Schedules, as such Schedules may be amended by the Debtor
from time to time in accordance with Bankruptcy Rule 1009, as liquidated in
amount and not disputed or contingent and for which no contrary proof of claim
has been filed, (b) which is allowed hereunder, (c) which is not Disputed or (d)
if Disputed, (i) which has been allowed by Final Order or (ii) as to which,
pursuant to the Plan or a Final Order of the Bankruptcy Court, the liability of
the Debtor and the amount thereof are determined by final order of a court of
competent jurisdiction other than the Bankruptcy Court; provided, however, that
-------- -------
any Claims allowed solely for the purpose of voting to accept or reject the Plan
pursuant to an order of the Bankruptcy Court shall not be considered "Allowed
Claims" hereunder. Unless otherwise specified herein or by order of the
Bankruptcy Court, "Allowed Administrative Expense Claim," or "Allowed Claim"
shall not, for purposes of computation of distributions under the Plan, include
interest on such Administrative Expense Claim or Claim from and after the
Commencement Date.
1.3. Amended ByLaws means the amended and restated ByLaws of Reorganized
--------------
Jayhawk, which shall be in substantially the form contained in the Plan
Supplement (Volume II).
1.4. Amended Articles of Incorporation means the amended and restated
---------------------------------
Articles of Incorporation of Reorganized Jayhawk, which shall be in
substantially the form contained in the Plan Supplement (Volume II).
1.5. Allowed Secured Fleet Claim means the Claim described in Section 4.2
---------------------------
of this Plan.
1.6. Ballot means the form distributed to each holder of an impaired Claim
------
on which is to be indicated acceptance or rejection of the Plan.
1.7. Bankruptcy Code means title 11 of the United States Code, as amended
---------------
from time to time, as applicable to the Chapter 11 Case.
1.8. Bankruptcy Court means the United States District Court for the
----------------
Northern District of Texas, Dallas Division having jurisdiction over the Chapter
11 Case and, to the extent of any reference under section 157 of title 28 of the
United States Code, the unit of such District Court under section 151 of title
28 of the United States Code.
2
<PAGE>
1.9. Bankruptcy Rules means the Federal Rules of Bankruptcy Procedure as
----------------
promulgated by the United States Supreme Court under section 2075 of title 28 of
the United States Code, and any Local Rules of the Bankruptcy Court.
1.10. Business Day means any day other than a Saturday, Sunday or any
------------
other day on which commercial banks in Dallas, Texas are required or authorized
to close by law or executive order.
1.11. Cash Collateral Orders mean the Interim Order Authorizing the Use of
----------------------
Cash Collateral and Providing for Adequate Protection, the Second Interim Order
Authorizing the Use of Cash Collateral and Providing for Adequate Protection,
the Third Interim Order Authorizing the Use of Cash Collateral and Providing for
Adequate Protection (and the Supplement thereto), and the Joint Stipulation and
Agreed Final Order Authorizing the Use of Cash Collateral and Providing for
Adequate Protection.
1.12. Cash means legal tender of the United States of America and
----
equivalents thereof.
1.13. Causes of Action means, without limitation, any and all actions,
----------------
causes of action (including causes of action arising under any section of the
Bankruptcy Code), liabilities, obligations, rights, suits, debts, sums of money,
damages, judgments, claims and demands whatsoever, whether known or unknown, in
law, equity or otherwise.
1.14. Chapter 11 Case means the case under chapter 11 of the Bankruptcy
---------------
Code commenced by the Debtor, styled In re Jayhawk Acceptance Corporation,
Chapter 11 Case No. 397-31261-SAF-11, currently pending in the Bankruptcy Court.
1.15. Claim has the meaning set forth in section 101 of the Bankruptcy
-----
Code.
1.16. Class means a category of holders of Claims or Equity Interests as
-----
set forth in Article III of the Plan.
1.17. Class 6 Election Payment means the amount that is sixty percent
------------------------
(60%) of the estimated amount as of December 31, 1996 of all distributions that
are payable or will become payable to a Dealer arising out of or related to a
Dealer Agreement.
1.18. Collateral means any property or interest in property of the estate
----------
of the Debtor subject to a Lien to secure the payment or performance of a Claim,
which Lien is not subject to avoidance under the Bankruptcy Code or otherwise
invalid under the Bankruptcy Code or applicable state law.
1.19. Commencement Date means February 7, 1997, the date on which the
-----------------
Debtor commenced the Chapter 11 Case.
1.20. Confirmation Date means the date on which the Clerk of the
-----------------
Bankruptcy Court enters the Confirmation Order on the docket.
3
<PAGE>
1.21. Contract means a written agreement pursuant to which a Person agrees
--------
to purchase from a Dealer a new or used automobile and to pay for same on an
installment basis, with interest, over a period of months.
1.22. Confirmation Hearing means the hearing held by the Bankruptcy Court
--------------------
to consider confirmation of the Plan pursuant to section 1129 of the Bankruptcy
Code, as such hearing may be adjourned or continued from time to time.
1.23. Confirmation Order means the order of the Bankruptcy Court
------------------
confirming the Plan pursuant to section 1129 of the Bankruptcy Code.
1.24. Creditors' Committee means the statutory committee of unsecured
--------------------
creditors appointed in the Chapter 11 Case pursuant to section 1102 of the
Bankruptcy Code.
1.25. Dealer means a Person engaged in the business of selling new or used
------
automobiles pursuant to Contracts.
1.26. Dealer Agreement means an agreement governing the relationship
----------------
between the Debtor and each Dealer from which the Debtor purchases Contracts.
1.27. Dealer Claims means those claims arising under the Dealer
-------------
Agreements.
1.28. Debtor means Jayhawk Acceptance Corporation, a Texas corporation.
------
1.29. Debtor in Possession means the Debtor in its capacity as debtor in
--------------------
possession in the Chapter 11 Case pursuant to sections 1101, 1107(a) and 1108 of
the Bankruptcy Code.
1.30. Disclosure Statement means the disclosure statement relating to the
--------------------
Plan, including, without limitation, all exhibits and schedules thereto, as
approved by the Bankruptcy Court pursuant to section 1125 of the Bankruptcy
Code.
1.31. Disputed means any Claim proof of which was timely and properly
--------
filed and which has been or hereafter is listed on the Schedules as
unliquidated, disputed or contingent, and in either case or in the case of an
Administrative Expense Claim, any Administrative Expense Claim or Claim as to
which the Debtor or, if not prohibited by the Plan, any other party in interest
has interposed a timely objection and/or request for estimation in accordance
with section 502(c) of the Bankruptcy Code and Bankruptcy Rule 3018, which
objection and/or request for estimation has not been withdrawn or determined by
a Final Order, and any Claim proof of which was required to be filed by order of
the Bankruptcy Court but as to which a proof of claim was not timely or properly
filed.
1.32. Disputed Claim Amount means the amount set forth in the proof of
---------------------
claim relating to a Disputed Claim or, if the amount of a Disputed Claim is not
specified in the proof of claim or is unliquidated, in whole or in part, an
amount estimated in accordance with section 502(c) of
4
<PAGE>
the Bankruptcy Code and Bankruptcy Rule 3018 for purposes of, inter alia,
----- ----
Section 5.4 of the Plan pursuant to an order of the Bankruptcy Court.
1.33. Effective Date means the first Business Day on which the conditions
--------------
specified in Section 10.1 of the Plan have been satisfied or waived.
1.34. Equity Interest means any share of common stock or other instrument
---------------
evidencing an ownership interest in the Debtor, whether or not transferable, and
any option, warrant or right, contractual or otherwise, to acquire any such
interest.
1.35. Final Distribution Date means the one hundred eightieth day
-----------------------
subsequent to the Effective Date, or as soon thereafter as is practicable.
1.36. Final Order means an order of the Bankruptcy Court as to which the
-----------
time to appeal, petition for certiorari, or move for reargument or rehearing has
----------
expired and as to which no appeal, petition for certiorari, or other proceedings
----------
for reargument or rehearing shall then be pending or as to which any right to
appeal, petition for certiorari, reargue, or rehear shall have been waived in
----------
writing in form and substance satisfactory to the Debtor or the Reorganized
Debtor or, in the event that an appeal, writ of certiorari, or reargument or
----------
rehearing thereof has been sought, such order of the Bankruptcy Court shall have
been determined by the highest court to which such order was appealed, or
certiorari, reargument or rehearing shall have been denied and the time to take
- ----------
any further appeal, petition for certiorari or move for reargument or rehearing
----------
shall have expired; provided, however, that the possibility that a motion under
-------- -------
Rule 59 or Rule 60 of the Federal Rules of Civil Procedure, or any analogous
rule under the Bankruptcy Rules, may be filed with respect to such order shall
not cause such order not to be a Final Order.
1.37. Fleet means Fleet Capital Corporation, a Rhode Island corporation.
-----
1.38. Initial Distribution Date means the date that is ninety days
-------------------------
subsequent to the Effective Date, or as soon thereafter as is practicable.
1.39. Insured Claim means any Claim arising from an incident or occurrence
-------------
that is covered under the Debtor's insurance policies.
1.40. Jayhawk means Jayhawk Acceptance Corporation, a Texas corporation.
-------
1.41. Jaymed means Jayhawk Medical Acceptance Corporation, a wholly-owned
------
subsidiary of Jayhawk.
1.42. Jaymed Claim means the Claim of Jaymed against the Debtor in the
------------
principal amount of $7,100,000, exclusive of interest, as of the Commencement
Date.
1.43. Jaymed Preferred Stock means the Series A Redeemable, Convertible
----------------------
Preferred Stock, par value $.01 per share of Jaymed.
5
<PAGE>
1.44. Lien has the meaning set forth in section 101 of the Bankruptcy
----
Code.
1.45. New Fleet Documents means the New Fleet Note, the Loan and Security
-------------------
Agreement between Reorganized Jayhawk and Fleet which shall be in the form
contained in the Plan Supplement (Volume I), the Pledge and Security Agreement
(Beneficial Interests), which shall be in the form contained in the Plan
Supplement (Volume I), and all other instruments and agreements referred to in
any of the foregoing or to be executed by Reorganized Jayhawk pursuant thereto,
or as may be modified in writing by Fleet and the Debtor.
1.46. New Fleet Note means the Secured Promissory Note to be issued
--------------
pursuant to the Plan to Fleet, which shall be in the form contained in the Plan
Supplement (Volume I) or as may be modified in writing by Fleet and the Debtor,
and shall be in an amount equal to the sum of the Secured Fleet Claim as of the
Commencement Date less payments received and applied to principal during the
----
Chapter 11 Case, plus accrued but unpaid interest at the non-default rate, plus
---- ----
attorneys fees and costs to the extent allowed by the Bankruptcy Code.
1.47. Other Priority Claim means any Claim, other than an Administrative
--------------------
Expense Claim or a Priority Tax Claim, entitled to priority in right of payment
under section 507(a) of the Bankruptcy Code.
1.48. Other Secured Claim means any Secured Claim, other than the Secured
-------------------
Fleet Claim and the Secured Prudential Claim.
1.49. Plan means this chapter 11 plan of reorganization, including,
----
without limitation, the Plan Supplements (Volumes I and II) and all exhibits,
supplements, appendices and schedules hereto, either in its present form or as
same may be altered, amended or modified from time to time.
1.50. Plan Supplements means the forms of documents specified in Section
----------------
12.17 of the Plan.
1.51. Priority Tax Claim means any Claim of a governmental unit of the
------------------
kind specified in sections 502(i) and 507(a)(8) of the Bankruptcy Code.
1.52. Prudential means Prudential Securities Capital Corporation.
----------
1.53. Released Director or Officer shall have the meaning set forth in
----------------------------
Section 12.5 of the Plan.
1.54. Reorganized Debtor means Reorganized Jayhawk.
------------------
1.55. Reorganized Jayhawk means Jayhawk Acceptance Corporation or any
-------------------
successor thereto by merger, consolidation or otherwise, on and after the
Effective Date.
6
<PAGE>
1.56. Schedules means the schedules of assets and liabilities, the list of
---------
holders of Equity Interests, and the statements of financial affairs filed by
the Debtor under section 521 of the Bankruptcy Code and Bankruptcy Rule 1007,
and all amendments and modifications thereto through the Confirmation Date.
1.57. Secured Claim means any Claim, to the extent reflected in the
-------------
Schedules or a proof of claim as a Secured Claim, which is secured by a Lien on
Collateral to the extent of the value of such Collateral, as determined in
accordance with section 506(a) of the Bankruptcy Code, or, in the event that
such Claim is subject to setoff under section 553 of the Bankruptcy Code, to the
extent of such setoff.
1.58. Secured Fleet Claim means all Claims and Liens arising under or
-------------------
related to that certain Loan and Security Agreement dated as of April 4, 1995,
as amended, between Shawmut Capital Corporation, predecessor-in-interest to
Fleet, and the Debtor, or any instrument or agreement referred to therein or
executed by the Debtor pursuant thereto.
1.59. Secured Prudential Claim means all Claims and Liens arising under or
------------------------
related to that certain Trust Shares Pledge Agreement dated December 23, 1996
between Prudential and the Debtor, or any instrument or agreement referred to
therein or executed by the Debtor pursuant thereto.
1.60. Tort Claim means any Claim relating to personal injury, property
----------
damage or products liability or other similar Claim asserted against the Debtor
that has not previously been compromised or settled or otherwise resolved.
1.61. Unsecured Claim means any Claim that is not a Secured Claim,
---------------
Administrative Expense Claim, Priority Tax Claim, Other Priority Claim, Dealer
Claim or Jaymed Claim.
1.62. Westcott means Carl H. Westcott.
--------
1.63. Westcott Guaranty means the Guaranty of Westcott to Fleet pursuant
-----------------
to which Westcott will guarantee certain obligations of Reorganized Jayhawk to
Fleet which shall be in the form contained in the Plan Supplement (Volume I).
1.64. Westcott Release means the release to be executed and delivered by
----------------
Westcott to Fleet dated as of the Effective Date, which shall be in the form
contained in the Plan Supplement (Volume I).
1.65. Interpretation; Application of Definitions and Rules of
-------------------------------------------------------
Construction. Wherever from the context it appears appropriate, each term stated
- ------------
in either the singular or the plural shall include both the singular and the
plural and pronouns stated in the masculine, feminine or neuter gender shall
include the masculine, feminine and neuter. Unless otherwise specified, all
section, article, schedule or exhibit references in the Plan are to the
respective Section in, Article of, Schedule to, or Exhibit to, the Plan. The
words "herein," "hereof," "hereto," "hereunder" and other words of similar
import refer to the Plan as a whole and not to any particular section,
7
<PAGE>
subsection or clause contained in the Plan. The rules of construction contained
in section 102 of the Bankruptcy Code shall apply to the construction of the
Plan. A term used herein that is not defined herein, but that is used in the
Bankruptcy Code, shall have the meaning ascribed to that term in the Bankruptcy
Code. The headings in the Plan are for convenience of reference only and shall
not limit or otherwise affect the provisions of the Plan.
ARTICLE II.
TREATMENT OF ADMINISTRATIVE
EXPENSE CLAIMS AND PRIORITY TAX CLAIMS
--------------------------------------
2.1. Administrative Expense Claims. Except to the extent that any entity
-----------------------------
entitled to payment of any Allowed Administrative Expense Claim agrees to a
different treatment, each holder of an Allowed Administrative Expense Claim
shall receive Cash in an amount equal to such Allowed Administrative Expense
Claim on the later of the Effective Date and the date such Administrative
Expense Claim becomes an Allowed Administrative Expense Claim, or as soon
thereafter as is practicable; provided, however, that Allowed Administrative
-------- -------
Expense Claims representing liabilities incurred in the ordinary course of
business by the Debtor in Possession or liabilities arising under loans or
advances to or other obligations incurred by the Debtor in Possession, to the
extent authorized and approved by the Bankruptcy Court if such authorization and
approval was required under the Bankruptcy Code, shall be paid in full and
performed by the Reorganized Debtor in the ordinary course of business in
accordance with the terms and subject to the conditions of any agreements
governing, instruments evidencing or other documents relating to, such
transactions.
2.2. Professional Compensation and Reimbursement Claims. All entities
--------------------------------------------------
seeking an award by the Bankruptcy Court of compensation for services rendered
or reimbursement of expenses incurred through and including the Confirmation
Date under sections 503(b)(2), 503(b)(3), 503(b)(4) or 503(b)(5) of the
Bankruptcy Code (a) shall file their respective final applications for
allowances of compensation for services rendered and reimbursement of expenses
incurred through the Confirmation Date by the date that is forty-five days after
the Effective Date or such other date as may be fixed by the Bankruptcy Court
and, if granted such an award by the Bankruptcy Court, (b) shall be paid in full
in such amounts as are Allowed by the Bankruptcy Court (i) on the date such
Administrative Expense Claim becomes an Allowed Administrative Expense Claim or
(ii) upon such other terms as may be mutually agreed upon between such holder of
an Administrative Expense Claim and the Debtor in Possession or, on and after
the Effective Date, the Reorganized Debtor.
2.3. Priority Tax Claims. Except to the extent that a holder of an
-------------------
Allowed Priority Tax Claim has been paid by the Debtor prior to the Effective
Date or agrees to a different treatment, each holder of an Allowed Priority Tax
Claim shall receive, at the sole option of Reorganized Debtor, (a) Cash in an
amount equal to such Allowed Priority Tax Claim on the later of the Effective
Date and the date such Priority Tax Claim becomes an Allowed Priority Tax Claim,
or as soon thereafter as is practicable, or (b) equal annual Cash payments in an
aggregate amount equal to such Allowed Priority Tax Claim, together with
interest at a fixed annual rate equal to
8
<PAGE>
eight and one-quarter percent (8 1/4%), over a period through the sixth
anniversary of the date of assessment of such Allowed Priority Tax Claim, or
upon such other terms determined by the Bankruptcy Court to provide the holder
of such Allowed Priority Tax Claim deferred Cash payments having a value, as of
the Effective Date, equal to such Allowed Priority Tax Claim.
ARTICLE III.
CLASSIFICATION OF CLAIMS AND EQUITY INTERESTS
---------------------------------------------
Claims, other than Administrative Expense Claims and Priority Tax Claims,
and Equity Interests are classified for all purposes, including voting,
confirmation and distribution pursuant to the Plan, as follows:
<TABLE>
<CAPTION>
Class Status
- ----- ------
<S> <C>
Class 1 -- Other Priority Claims..........................Unimpaired
Class 2 -- Secured Fleet Claim............................ Impaired
Class 3 -- Secured Prudential Claim....................... Impaired
Class 4 -- Other Secured Claims...........................Unimpaired
Class 5 -- Unsecured Claims............................... Impaired
Class 6 -- Dealer Claims..................................Unimpaired
Class 7 -- Jaymed Claim................................... Impaired
Class 8 -- Equity Interests...............................Unimpaired
</TABLE>
9
<PAGE>
ARTICLE IV.
TREATMENT OF CLAIMS AND EQUITY INTERESTS
----------------------------------------
4.1. CLASS 1 -- OTHER PRIORITY CLAIMS.
--------------------------------
(a) Impairment and Voting. Class 1 is unimpaired by the Plan.
---------------------
Each holder of an Allowed Other Priority Claim is conclusively presumed to have
accepted the Plan and is not entitled to vote to accept or reject the Plan.
(b) Distributions. Each holder of an Allowed Other Priority
-------------
Claim shall receive Cash in an amount equal to such Allowed Other Priority Claim
on the later of the Effective Date and the date such Allowed Other Priority
Claim becomes an Allowed Other Priority Claim, or as soon thereafter as is
practicable.
4.2. CLASS 2 -- SECURED FLEET CLAIM.
------------------------------
(a) Impairment and Voting. Class 2 is impaired by the Plan. The
---------------------
holder of an Allowed Secured Fleet Claim is entitled to vote to accept or reject
the Plan.
(b) Distribution. Upon the Effective Date and pursuant to the
------------
terms of the New Fleet Documents, the holder of the Allowed Secured Fleet Claim
shall be treated as follows:
(1) Deemed Allowance. Upon the Effective Date, the Allowed
----------------
Secured Fleet Claim shall be treated as an allowed,
fully secured claim that is payable from and after the
Effective Date pursuant to the terms hereof and the New
Fleet Documents, without defense, offset or
counterclaim.
(2) Interest. Accrued interest will continue to be paid on
--------
the Allowed Secured Fleet Claim monthly, in arrears, on
the first day of the month, at the rate of interest
provided in the New Fleet Documents.
(3) Monthly Principal Amortization. The outstanding
------------------------------
principal balance of the Allowed Secured Fleet Claim
shall be due and payable from and after the Effective
Date to the holder of the Allowed Secured Fleet Claim
Fleet in monthly installments, the aggregate amount of
which during any particular month shall be not less
than the amount specified for such month as set forth
below:
10
<PAGE>
<TABLE>
<CAPTION>
Per Month
Month Installment Agreement
----- ---------------------
<S> <C>
May through July, 1997 $4,000,000
August, 1997 $3,500,000
September, 1997 $3,250,000
October and November, 1997 $3,000,000
December, 1997 $2,750,000
January, 1998 $2,500,000
February, 1998 $2,000,000
March through August, 1998 $3,000,000
</TABLE>
The remaining unpaid balance on the New Fleet Note
shall be due and payable on September 1, 1998.
(4) Mandatory Prepayments. In addition to the principal
---------------------
payments provided for above, mandatory prepayments of
principal will be due and payable from and after the
Effective Date on a quarterly basis, on the 15th day of
each March, June, September and December, beginning
June 15, 1997, based on fifty percent (50%) of Excess
Cash Flow as defined in the New Fleet Documents, and in
accordance with the New Fleet Documents.
(5) The Reorganized Debtor shall be bound from and after
the Effective Date, for each calendar month, to achieve
Collections (as defined in the New Fleet Documents) for
the three (3)-month period consisting of the calendar
month then ended plus the immediately preceding two
calendar months (i.e., a rolling three (3)-month
period), of not less than eighty-five percent (85%) of
Projected Gross Collections for the same rolling three
(3)-month period, all as more fully provided in the New
Fleet Documents.
(6) Upon the Effective Date, and as more fully provided
under the New Fleet Documents, the holder of the
Allowed Secured Fleet Claim will retain all of its
liens on all of its pre-petition collateral and post-
petition collateral to secure repayment and performance
of the Obligations (as defined in the New Fleet
Documents) and be entitled to all of its rights,
protections, benefits and priorities granted to Fleet
in the prior Cash Collateral Orders entered in the
Chapter 11 Case, except as specifically modified by the
terms of the New Fleet Documents.
11
<PAGE>
(7) Upon the Effective Date, the holder of the Allowed
Secured Fleet Claim will be entitled indefeasibly to
all of the adequate protection payments received under
the prior Cash Collateral Orders entered by the
Bankruptcy Court, with such payments being credited to
the calculation of the Allowed Secured Fleet Claim.
(8) Upon the Effective Date, and as more fully provided
under the New Fleet Documents, the holder of the
Allowed Secured Fleet Claim will be granted a lien upon
the Debtor's legal and beneficial ownership interest in
the Trust to secure the payment of the Allowed Secured
Fleet Claim.
(9) Upon the Effective Date, and as more fully provided in
this Plan, all pre-petition, post-petition and
bankruptcy related claims (i.e., those claims arising
----
under any section of the Bankruptcy Code), if any, that
the Debtor (or any person by, through, or under the
Debtor) may have or assert against Fleet or its
participant, or any affiliate, or officer, director, or
agent, representative, attorney of any of the foregoing
parties, will be deemed released.
(10) Upon the Effective Date, and pursuant to the terms of
the New Fleet Documents, the holder of the Allowed
Secured Fleet Claim shall release its lien on all
accumulated cash balances and on all auto contracts
funded by the Debtor from and after March 1, 1997,
exclusive of the Additional Fleet Contracts (as defined
hereafter). "Additional Fleet Contracts" shall mean
--------------------------
auto contracts which the Debtor reported in Fleet's
Borrowing Base as Fleet's collateral as of February 7,
1997, but which the Debtor had not purchased as of
February 7, 1997, and that are estimated by the Debtor
as of February 7, 1997 to be in the amount of $10
million, less $3.4 million of such auto contracts later
unwound by the Debtor, together with auto contracts
purchased by the Debtor from the Commencement Date
through and including February 28, 1997.
(11) Notwithstanding anything else contained in this Plan,
or any amendments thereto, the holder of the Allowed
Secured Fleet Claim shall be paid and treated in
accordance with the terms of the New Fleet Documents.
To the extent that the terms providing for payment and
12
<PAGE>
treatment of the Allowed Secured Fleet Claim in this
Plan, or any amendment thereto, conflicts with the
terms providing for payment and treatment of the
Allowed Secured Fleet Claim in the New Fleet Documents,
the terms of the New Fleet Documents shall control.
4.3. CLASS 3 -- SECURED PRUDENTIAL CLAIM.
-----------------------------------
(a) Impairment and Voting. Class 3 is impaired by the Plan. The
---------------------
holder of an Allowed Secured Prudential Claim is entitled to vote to accept or
reject the Plan.
(b) Distribution. The holder of an Allowed Secured Prudential
------------
Claim shall receive the treatment of the Allowed Secured Prudential Claim and
payment of such Claim as provided below.
(1) The Debtor shall direct the Managing Trustees of
Jayhawk Funding Trust I, a Delaware business trust (the
"Trust") to pay all distributions attributable to the
Debtor's existing beneficial interest in the Trust (the
"Trust Shares") to Prudential as such distributions or
proceeds become available to be applied against the
Allowed Secured Prudential Claim. Further, those funds
held by the Debtor, representing the "Remainder
Distribution" (as defined in that certain Final Order
Authorizing Debtor's Limited Use of Cash Collateral of
Prudential Securities Credit Corporation) previously
received by the Debtor from the Trust, shall also be
applied against the Allowed Secured Prudential Claim.
(2) The Debtor and Prudential agree and stipulate that
Prudential is owed not less than $4,995,029.08 as of
the Commencement Date, plus post-petition interest at
the non-default rate, attorneys' fees and other costs
accruing under the Trust Shares Pledge Agreement and
related loan documents (the "Prudential Loan
Documents");
(3) Prudential shall retain a first lien and security
interest on the Trust Shares as well as all proceeds or
other distributions attributable to Contracts secured
by the Series 1996 A Notes and the Series 1996 B Notes
held by the Trust as provided in the Prudential Loan
Documents; and
(4) The entire principal balance, as well as all accrued
interest thereon, of the Allowed Secured Prudential
Claim shall become due and payable on December 31,
1997.
13
<PAGE>
(5) In the event that the Allowed Prudential Secured Claim
is not paid in full on or prior to the Effective Date,
the Debtor shall execute the New Prudential Note as
well as new loan and security documents (the "New
Prudential Security Documents") to evidence
Prudential's first lien and security interest in the
Trust Shares, as well as all proceeds and distributions
therefrom, in a form acceptable to counsel for
Prudential. Accrued interest will continue to be paid
on the Allowed Prudential Secured Claim at a rate of
interest provided in the New Prudential Security
Documents.
(6) Upon the Effective Date, the Allowed Prudential Secured
Claim shall be treated as an allowed, fully secured
Claim payable pursuant to the terms hereof without any
offset, defense or counterclaim.
(7) Upon the Effective Date, as more fully provided in the
Plan, any prepetition, postpetition or bankruptcy
related claims (or any claims arising under any
provision of the Bankruptcy Code), if any, that the
Debtor or any person asserting by, through or under the
Debtor may have or assert against Prudential or any
affiliate, officer, director, agent, representative,
attorney of any of the foregoing parties, shall be
deemed withdrawn or released.
4.4. CLASS 4 -- OTHER SECURED CLAIMS.
-------------------------------
(a) Impairment and Voting. Class 4 is unimpaired by the Plan.
---------------------
Each holder of an Allowed Other Secured Claim is conclusively presumed to have
accepted the Plan and is not entitled to vote to accept or reject the Plan.
(b) Distributions/Reinstatement of Claims. Except to the extent
-------------------------------------
that a holder of an Allowed Other Secured Claim agrees to a different treatment,
at the sole option of Reorganized Debtor, (i) each Allowed Other Secured Claim
shall be reinstated and rendered unimpaired in accordance with section 1124(2)
of the Bankruptcy Code, notwithstanding any contractual provision or applicable
nonbankruptcy law that entitles the holder of an Allowed Other Secured Claim to
demand or receive payment of such Claim prior to its stated maturity from and
after the occurrence of a default, (ii) each holder of an Allowed Other Secured
Claim shall receive Cash in an amount equal to such Claim, including any
interest on such Claim required to be paid pursuant to section 506(b) of the
Bankruptcy Code, on the later of the Effective Date and the date such Claim
becomes an Allowed Other Secured Claim, or as soon thereafter as is practicable
or (iii) each holder of an Allowed Other Secured Claim shall receive the
Collateral securing its Claim in full and complete satisfaction of such Claim on
the later of the Effective Date and the date such Claim becomes an Allowed Other
Secured Claim, or as soon thereafter as is practicable.
14
<PAGE>
4.5. CLASS 5 -- UNSECURED CLAIMS.
---------------------------
(a) Impairment and Voting. Class 5 is impaired by the Plan.
---------------------
Each holder of an Allowed Unsecured Claim is entitled to vote to accept or
reject the Plan.
(b) Distributions. Each holder of an Allowed Unsecured Claim
-------------
shall receive payment in full of such Allowed Unsecured Claim, together with
interest thereon at a rate of interest equal to the prime lending rate
prevailing from time to time as published in The Wall Street Journal in two
-----------------------
equal installments, the first such installment (the "Initial Class 5
Distribution") on the Initial Distribution Date and the last such installment
(the "Final Class 5 Distribution") on the Final Distribution Date.
4.6. CLASS 6 -- DEALER CLAIMS.
------------------------
(a) Impairment and Voting. Class 6 is unimpaired by the Plan.
---------------------
Each holder of an Allowed Class 6 Dealer Claim is
conclusively presumed to have accepted the Plan and is not
entitled to vote to accept or reject the Plan.
(b) Distributions/Reinstatement. Except to the extent that a
---------------------------
holder of an Allowed Class 6 Dealer Claim elects the
treatment provided in section 4.6(d) below, each Allowed
Class 6 Dealer Claim shall be reinstated and rendered
unimpaired in accordance with section 1124(2) of the
Bankruptcy Code, notwithstanding any contractual provision
or applicable nonbankruptcy law that entitles the holder of
an Allowed Class 6 Dealer Claim to demand or receive payment
of such Claim prior to its stated maturity from and after
the occurrence of a default.
(c) Cure Payments/Contract Payments. To the extent that the
-------------------------------
holder of an Allowed Class 6 Dealer Claim was entitled to a
payment under a Dealer Agreement as of the Commencement Date
and during any month following the Commencement Date through
the Effective Date, Reorganized Jayhawk shall distribute
such payments to any such Dealers within twenty (20) days
after the Effective Date. Following the Effective Date,
Reorganized Jayhawk shall make any payments required under
any Dealer Agreement to the Dealer in the ordinary course of
its business as required under the Dealer Agreements.
(d) Class 6 - Buyout Election. Each holder of a Class 6 Dealer
-------------------------
Claim may elect to receive the Class 6 Election Payment in
full payment, satisfaction and release of any Claims that
such electing Class 6 Dealer Claimant has or may have
arising out of or related to the Dealer Agreements, which
distribution shall be made on the later
15
<PAGE>
of the Effective Date or the date such Class 6 Dealer Claim
becomes an Allowed Claim. The election shall be made on a
separate election form. If no election is made, the holder
of an Allowed Class 6 Dealer Claim shall receive the
treatment provided in paragraphs 4.6(b) and (c) above.
Notwithstanding the foregoing, the Class 6 Buyout Election
shall be withdrawn by the Debtor if as a result of the Class
6 Buyout Elections, the total of the Class 6 Election
Payments plus all cure payments due under paragraphs 4.6(b)
and (c) above exceeds $5,500,000.
4.7. CLASS 7 -- JAYMED CLAIM.
-----------------------
(a) Impairment and Voting. Class 7 is impaired by the Plan. The
---------------------
holder of an Allowed Jaymed Claim is entitled to vote to accept or reject the
Plan.
(b) Distributions. The Allowed Jaymed Claim shall be payable in
-------------
two (2) installments of principal, together with accrued and unpaid interest
through each principal payment date at a rate of interest equal to the prime
lending rate prevailing from time to time as published in The Wall Street
---------------
Journal, with the first installment occurring on the Initial Distribution Date
- -------
and the final installment occurring on the Final Distribution Date.
4.8. CLASS 8 -- EQUITY INTERESTS.
---------------------------
(a) Impairment and Voting. Class 8 is unimpaired by the Plan.
---------------------
Each holder of an Equity Interest is conclusively presumed to have accepted the
Plan as a holder of an Equity Interest, and is not entitled to vote to accept or
reject the Plan.
(b) Retention of Equity Interests. Each holder of an Equity
-----------------------------
Interest shall continue to hold such Equity Interests on the Effective Date.
ARTICLE V.
PROVISIONS REGARDING VOTING AND DISTRIBUTIONS
UNDER THE PLAN AND TREATMENT OF DISPUTED,
CONTINGENT AND UNLIQUIDATED ADMINISTRATIVE
EXPENSE CLAIMS AND CLAIMS
-------------------------
5.1. Voting of Claims. Each holder of an Allowed Claim in an impaired
----------------
Class of Claims shall be entitled to vote separately to accept or reject the
Plan as provided in such order as is entered by the Bankruptcy Court
establishing certain procedures with respect to the solicitation and tabulation
of votes to accept or reject the Plan, or any other order or orders of the
Bankruptcy Court.
5.2. Nonconsensual Confirmation. If any impaired class of Claims entitled
--------------------------
to vote shall not accept the Plan by the requisite statutory majorities provided
in section 1126(c) of the
16
<PAGE>
Bankruptcy Code, the Debtor reserves the right to amend the Plan in accordance
with Section 12.10 hereof or undertake to have the Bankruptcy Court confirm the
Plan under section 1129(b) of the Bankruptcy Code or both.
5.3. Subtraction and Addition of Classes and Subclasses.
--------------------------------------------------
(a) Deletion of Classes and Subclasses. Any class or subclass
----------------------------------
of Claims that does not contain as an element thereof an Allowed Claim or a
Claim temporarily allowed under Bankruptcy Rule 3018 as of the date of the
commencement of the Confirmation Hearing shall be deemed deleted from this Plan
for purposes of voting to accept or reject this Plan and for purposes of
determining acceptance or rejection of this Plan by such class or subclass under
section 1129(a)(8) of the Bankruptcy Code.
(b) Addition of Classes and Subclasses. In the event that any
----------------------------------
subclass of Class 4 (Other Secured Claims) would contain as elements thereof two
or more Secured Claims collateralized by different properties or interests in
property or collateralized by Liens against the same property or interest in
property having different priority, such Claims shall be divided into separate
subclasses of Class 4 (Other Secured Claims).
5.4. Method of Distributions Under the Plan.
--------------------------------------
(a) In General. Subject to Bankruptcy Rule 9010, all
----------
distributions under the Plan shall be made by Reorganized Debtor to the holder
as of the Confirmation Date of each Allowed Claim at the address of such holder
as listed on the Schedules unless the Debtor or Reorganized Debtor has been
notified in writing of a change of address, including, without limitation, by
the filing of a proof of Claim by such holder that provides an address for such
holder different from the address reflected on the Schedules for such holder.
The Debtor or the Reorganized Debtor shall have no obligation to recognize any
transfer of a Claim occurring after the Confirmation Date and shall be entitled
instead to recognize and deal for all purposes herein with only those holders
listed on the Schedules or on the register of proofs of claim maintained by the
Clerk of the Bankruptcy Court or the agent of the Clerk of the Bankruptcy Court
appointed for such purpose in the Chapter 11 Case as of the close of business on
the Confirmation Date.
(b) Distributions of Cash. Any payment of Cash made by
---------------------
Reorganized Debtor pursuant to the Plan shall be made by check drawn on a
domestic bank.
(c) Timing of Distributions. Any payment or distribution
-----------------------
required to be made under the Plan on a day other than a Business Day shall be
made on the next succeeding Business Day.
(d) Minimum Distributions. No payment of Cash less than $50
---------------------
shall be made by Reorganized Debtor to any holder of an Unsecured Claim unless a
request therefor is made in writing to Reorganized Debtor.
17
<PAGE>
(e) Unclaimed Distributions. Any distributions pursuant to the
-----------------------
Plan, including cash, interest or other amounts earned thereon, that are
unclaimed for a period of one year after distribution thereof shall be revested
in Reorganized Debtor and any entitlement of any holder of any Claim to such
distributions shall be extinguished and forever barred.
5.5. Disputed Claims.
---------------
(a) Distributions Upon Allowance of Disputed Claims Other Than
----------------------------------------------------------
Disputed Unsecured Claims. The holder of a Disputed Claim other than a Disputed
- -------------------------
Unsecured Claim that becomes an Allowed Claim subsequent to the Effective Date
shall receive payment of its Allowed Claim within ten (10) Business Days
following allowance of its Claim.
(b) Distributions Upon Allowance of Disputed Unsecured Claims.
---------------------------------------------------------
The holder of a Disputed Unsecured Claim that becomes an Allowed Claim
subsequent to the Initial Distribution Date shall receive both the Initial Class
5 Distribution and the Final Class 5 Distribution on the Final Distribution
Date. The holder of a Disputed Unsecured Claim that becomes an Allowed Claim
subsequent to the Final Distribution Date shall receive distributions of Cash in
an amount equal to the Allowed Claim within thirty days after the date such
Disputed Unsecured Claim becomes an Allowed Claim pursuant to a Final Order.
(c) Tort Claims. All Tort Claims are Disputed Claims. Any Tort
-----------
Claim as to which a proof of claim was timely filed in the Chapter 11 Case shall
be determined and liquidated (i) in the Bankruptcy Court or, in the case of
personal injury tort, in the District Court or, if the District Court so orders,
in the United States District Court for the judicial district in which the Claim
arose, or (ii) if the District Court or the Bankruptcy Court abstains from
exercising jurisdiction over the Claim, in the administrative or judicial
tribunal(s) in which it is pending on the Effective Date or, if no action was
pending on the Effective Date, in any administrative or judicial tribunal of
appropriate jurisdiction, or (iii) in accordance with any alternative dispute
resolution or similar proceeding as same may be approved by order of the
Bankruptcy Court. Any Tort Claim determined and liquidated (x) pursuant to a
judgment obtained in accordance with this Section 5.5(c) and applicable
nonbankruptcy law which is no longer appealable or subject to review, or (y) in
any alternative dispute resolution proceeding or similar proceeding as same may
be approved by order of the Bankruptcy Court, shall be deemed an Allowed
Unsecured Claim in such liquidated amount and satisfied in accordance with the
Plan. Nothing contained in this Section 5.5(c) shall constitute or be deemed a
waiver of any Cause of Action that the Debtor may hold against any entity,
including, without limitation, in connection with or arising out of any Tort
Claim.
5.6. Objections to and Resolution of Disputed Administrative Expense
---------------------------------------------------------------
Claims and Disputed Claims. Except as to applications for allowances of
- --------------------------
compensation and reimbursement of expenses under sections 330 and 503 of the
Bankruptcy Code, the Debtor or Reorganized Debtor shall have the exclusive right
to make and file objections to Administrative Expense Claims and Claims
subsequent to the Confirmation Date. All objections shall be litigated to Final
Order; provided, however, that the Reorganized Debtor shall have the authority
-------- -------
to compromise, settle, otherwise resolve or withdraw any objections, without
approval of the
18
<PAGE>
Bankruptcy Court. Unless otherwise ordered by the Bankruptcy Court, the Debtor
or Reorganized Debtor shall file all objections to Administrative Expense Claims
(other than to applications for allowances of compensation and reimbursement of
expenses) and Claims and serve such objections upon the holder of the
Administrative Expense Claim or Claim as to which the objection is made as soon
as is practicable, but in no event later than ninety days after the Effective
Date or such later date as may be approved by the Bankruptcy Court.
5.7. Distributions Relating to Allowed Insured Claims. Distributions
------------------------------------------------
under the Plan to each holder of an Allowed Insured Claim shall be in accordance
with the treatment provided under the Plan for the Class in which such Allowed
Insured Claim is classified, but solely to the extent that such Allowed Insured
Claim is not satisfied from proceeds payable to the holder thereof under any
pertinent insurance policies and applicable law. Nothing contained in this
Section 5.7 shall constitute or be deemed a waiver of any Cause of Action that
the Debtor or any entity may hold against any other entity, including, without
limitation, insurers under any policies of insurance.
5.8. Cancellation and Surrender of Existing Securities and Agreements.
----------------------------------------------------------------
(a) On the Effective Date, the promissory notes and other
instruments evidencing any Claim shall be deemed canceled without further act or
action under any applicable agreement, law, regulation, order or rule and the
obligations of the Debtor under the agreements and indentures governing such
Claim shall be discharged.
(b) Each holder of a promissory note or other instrument
evidencing a Claim shall surrender such promissory note or instrument to the
Reorganized Debtor. No distribution of property hereunder shall be made to or on
behalf of any such holders unless and until such promissory note or instrument
is received by the Reorganized Debtor or the unavailability of such promissory
note or instrument is established to the reasonable satisfaction of the
Reorganized Debtor. The Reorganized Debtor may require any holder that is unable
to surrender or cause to be surrendered any such promissory notes or instruments
to deliver an affidavit of loss and indemnity and/or furnish a bond in form and
substance (including, without limitation, with respect to amount) reasonably
satisfactory to the Reorganized Debtor. Any holder that fails within the later
of one year after the Confirmation Date and the date its Claim is Allowed (i) to
surrender or cause to be surrendered such promissory note or instrument, (ii) if
requested, to execute and deliver an affidavit of loss and indemnity reasonably
satisfactory to the Reorganized Debtor, and (iii) if requested, to furnish a
bond reasonably satisfactory to the Reorganized Debtor, shall be deemed to have
forfeited all rights, claims and Causes of Action against the Debtor and the
Reorganized Debtor and shall not participate in any distribution hereunder.
19
<PAGE>
ARTICLE VI.
EXECUTORY CONTRACTS AND UNEXPIRED LEASES
----------------------------------------
6.1. Assumption or Rejection of Executory Contracts and Unexpired Leases.
-------------------------------------------------------------------
(a) Executory Contracts and Unexpired Leases. Pursuant to
----------------------------------------
sections 365(a) and 1123(b)(2) of the Bankruptcy Code, all executory contracts
and unexpired leases that exist between the Debtor and any person shall be
deemed assumed by the Reorganized Debtor as of the Effective Date except for any
executory contract or unexpired lease (i) which has been assumed pursuant to an
order of the Bankruptcy Court entered prior to the Confirmation Date, (ii) which
has been rejected pursuant to an order of the Bankruptcy Court entered prior to
the Confirmation Date, (iii) as to which a motion for approval of the rejection
of such executory contract or unexpired lease has been filed and served prior to
the Confirmation Date or (iv) which is set forth in Schedule 6.1(a)(x)
(executory contracts) or Schedule 6.1(a)(y) (unexpired leases), which Schedules
shall be included in the Plan Supplement. The listing of a document on Schedules
6.1(a)(x) and 6.1(a)(y) shall not constitute an admission by the Debtor or
Reorganized Debtor that such document is an executory contract or an unexpired
lease or that the Debtor or Reorganized Debtor has any liability thereunder.
(b) Schedules of Rejected Executory Contracts and Unexpired
-------------------------------------------------------
Leases; Inclusiveness. Each executory contract and unexpired lease listed or to
- ---------------------
be listed on Schedules 6.1(a)(x) or 6.1(a)(y) that relates to the use or
occupancy of real property shall be deemed to include (i) modifications,
amendments, supplements, restatements, or other agreements made directly or
indirectly by any agreement, instrument, or other document that in any manner
affects such executory contract or unexpired lease, without regard to whether
such agreement, instrument or other document is listed on Schedules 6.1(a)(x) or
6.1(a)(y), and (ii) executory contracts or unexpired leases appurtenant to the
premises listed on Schedules 6.1(a)(x) or 6.1(a)(y), including, without
limitation, all easements, licenses, permits, rights, privileges, immunities,
options, rights of first refusal, powers, uses, usufructs, reciprocal easement
agreements, vault, tunnel or bridge agreements or franchises, and any other
interests in real estate or rights in rem relating to such premises to the
-- ---
extent any of the foregoing are executory contracts or unexpired leases, unless
any of the foregoing agreements have been assumed previously.
(c) Insurance Policies. The Debtor's insurance policies and any
------------------
agreements, documents or instruments relating thereto, including, without
limitation, any retrospective premium rating plans relating to such policies,
are treated as executory contracts under the Plan. Notwithstanding the
foregoing, distributions under the Plan to any holder of a Claim covered by any
of such insurance policies and related agreements, documents or instruments that
are assumed hereunder, shall be in accordance with the treatment provided under
Article IV and Section 5.7 of the Plan. Nothing contained in this Section
6.1(c) shall constitute or be deemed a waiver of any Cause of Action that the
Debtor may hold against any entity, including, without limitation, the insurer
under any of the Debtor's policies of insurance.
20
<PAGE>
(d) Approval of Assumption or Rejection of Executory Contracts and
--------------------------------------------------------------
Unexpired Leases. Entry of the Confirmation Order shall constitute (i) the
- ----------------
approval, pursuant to sections 365(a) and 1123(b)(2) of the Bankruptcy Code, of
the assumption of the executory contracts and unexpired leases assumed pursuant
to Section 6.1(a) hereof, (ii) the extension of time, pursuant to section
365(d)(4) of the Bankruptcy Code, within which the Debtor may assume or reject
the unexpired leases specified in Section 6.1(a) hereof through the date of
entry of an order approving the assumption or rejection of such unexpired
leases, and (iii) the approval, pursuant to sections 365(a) and 1123(b)(2) of
the Bankruptcy Code, of the rejection of the executory contracts and unexpired
leases rejected pursuant to Section 6.1(a) hereof.
(e) Cure of Defaults. Except as may otherwise be agreed to by the
----------------
parties, within sixty days after the Effective Date or as soon thereafter as is
practicable, the Reorganized Debtor shall cure any and all undisputed defaults
under any executory contract or unexpired lease assumed pursuant to the Plan in
accordance with section 365(b)(1) of the Bankruptcy Code. All disputed defaults
that are required to be cured shall be cured either within thirty days of the
entry of a Final Order determining the amount, if any, of the Debtor's or
Reorganized Debtor's liability with respect thereto, or as may otherwise be
agreed to by the parties.
(f) Bar Date for Filing Proofs of Claim Relating to Executory
---------------------------------------------------------
Contracts and Unexpired Leases Rejected Pursuant to the Plan. Claims arising
- ------------------------------------------------------------
out of the rejection of an executory contract or unexpired lease pursuant to
this Section 6.1 of the Plan must be filed with the Bankruptcy Court no later
than thirty days after the later of (i) notice of entry of an order approving
the rejection of such executory contract or unexpired lease, and (ii) notice of
entry of the Confirmation Order. Any Claims not filed within such time will be
forever barred from assertion against the Debtor, its estate and its property.
Unless otherwise ordered by the Bankruptcy Court, all Claims arising from the
rejection of executory contracts and unexpired leases shall be treated as
Unsecured Claims under the Plan.
6.2. Indemnification Obligations. For purposes of the Plan, the
---------------------------
obligations of the Debtor to indemnify, reimburse or limit the liability of its
present and any former directors, officers or employees that were directors,
officers or employees, respectively, on or after the Commencement Date against
any obligations pursuant to the Debtor's certificates of incorporation or
bylaws, applicable state law or specific agreement, or any combination of the
foregoing, shall survive confirmation of the Plan, remain unaffected thereby,
and not be discharged irrespective of whether indemnification, reimbursement or
limitation is owed in connection with an event occurring before, on, or after
the Commencement Date.
6.3. Compensation and Benefit Programs. Except as provided in Section
---------------------------------
6.1(a) of the Plan, all employment and severance practices and policies, and all
compensation and benefit plans, policies, and programs of the Debtor, if any,
applicable to its directors, officers or employees, including, without
limitation, all savings plans, retirement plans, health care plans, severance
benefit plans, incentive plans, workers' compensation programs and life,
disability and other insurance plans are treated as executory contracts under
the Plan and are hereby assumed pursuant to sections 365(a) and 1123(b)(2) of
the Bankruptcy Code.
21
<PAGE>
6.4. Retiree Benefits. Payments, if any, due to any person for the
----------------
purpose of providing or reimbursing payments for retired employees and their
spouses and dependents for medical, surgical, or hospital care benefits, or
benefits in the event of sickness, accident, disability, or death under any
plan, fund, or program (through the purchase of insurance or otherwise)
maintained or established in whole or in part by the Debtor prior to the
Commencement Date shall be continued for the duration of the period the Debtor
has obligated itself to provide such benefits.
ARTICLE VII.
COMPROMISE OF DISPUTES
----------------------
7.1. Compromise and Settlement of Claims Against Fleet. The Secured
-------------------------------------------------
Fleet Claim shall be deemed an Allowed Secured Fleet Claim in the amount stated
in the New Fleet Note. The Reorganized Debtor shall execute and deliver the New
Fleet Documents to Fleet, which documents, among other things, shall on the
Effective Date operate to compromise and settle any Causes of Action that the
Debtor and Debtor in Possession could have asserted against Fleet, Fleet's loan
participant, Texas Commerce Bank, National Association and any director, officer
or agent of either of them (the "Fleet Released Parties"), including Causes of
Action arising out of or relating to any transaction or occurrence, act,
activity or event, failure to act, or otherwise relating to any loans made by
the Fleet Released Parties to the Debtor occurring before the Effective Date.
In consideration of the release provided for in this section of the Plan, Fleet
has agreed to the treatment of the Secured Fleet Claim under section 4.2 of the
Plan which treatment shall be deemed a compromise and settlement as of the
Effective Date pursuant to section 1123 of the Bankruptcy Code and Bankruptcy
Rule 9019 of any Causes of Action that the Debtor has or may have had against
the Fleet Released Parties. As of the Effective Date, the Fleet Released Parties
shall be and hereby are released from any and all claims and Causes of Action
that the Debtor, Debtor-in-Possession or Reorganized Debtor may at any time have
or be able to assert against any of the Fleet Released Parties and that arise
out of or relate to any transaction or occurrence, act, activity or event,
failure to act, or otherwise relate to any loan made by any of the Fleet
Released Parties to the Debtor, before the Effective Date. Nothing in this
section 7.1 shall release the Fleet Released Parties from any of its obligations
under, or otherwise affect any party's rights pursuant to the Plan or the New
Fleet Documents.
7.2. Compromise and Settlement with Richard B. Hoffmann. In January,
--------------------------------------------------
1996, the Debtor entered into an employment contract with Richard B. Hoffmann
("Hoffmann"), which contract, among other things, provided that in the event
Hoffmann's employment terminated for any reason other than cause (as defined in
the contract), Hoffmann would receive $250,000 (the "Severance Payment"). As of
the Commencement Date, the Debtor and Hoffmann agreed that Hoffmann's employment
would terminate and Hoffmann agreed to withdraw his demand for the Severance
Payment. In exchange therefor, the Debtor agreed to pay Hoffmann two months'
salary, extend medical benefits to Hoffmann through July 31, 1997 and make
voice-mail available to Hoffmann until the earlier of August 31, 1997 or the
date Hoffmann secures alternative employment. This Plan shall constitute a
motion to the Bankruptcy Court seeking approval of the Debtor's compromise with
Hoffmann, and the Confirmation Order shall
22
<PAGE>
constitute an order of the Bankruptcy Court approving the compromise as fair and
equitable and within the bounds of reasonableness.
ARTICLE VIII.
PROVISIONS REGARDING CORPORATE
GOVERNANCE OF THE REORGANIZED DEBTOR
------------------------------------
8.1. General. On the Effective Date, the management, control and
-------
operation of the Reorganized Debtor shall become the general responsibility of
the Board of Directors of the Reorganized Debtor, who shall, thereafter, have
the responsibility for the management, control and operation of the Reorganized
Debtor.
8.2. Meetings of Reorganized Jayhawk Stockholders. In accordance with the
--------------------------------------------
Amended Articles of Incorporation and the Amended Bylaws, as the same may be
amended from time to time, the first annual meeting of the stockholders of
Reorganized Jayhawk shall be held on a date in 1998 selected by the Board of
Directors of Reorganized Jayhawk, and subsequent meetings of the stockholders of
Reorganized Debtor shall be held at least once annually each year thereafter.
8.3. Directors and Officers of Reorganized Debtor.
--------------------------------------------
(a) Board of Directors. The initial Board of Directors of
------------------
Reorganized Jayhawk shall consist of eight individuals whose names shall be
disclosed prior to the Confirmation Hearing. Each of the members of such initial
Board of Directors shall serve until the first annual meeting of stockholders of
Reorganized Jayhawk or their earlier resignation or removal in accordance with
the Amended Articles of Incorporation or Amended Bylaws, as the same may be
amended from time to time.
(b) Officers. The officers of the Debtor immediately prior to
--------
the Effective Date shall serve as the initial officers of the Reorganized Debtor
on and after the Effective Date. Such officers shall serve in accordance with
any employment agreement with the Reorganized Debtor and applicable
nonbankruptcy law.
8.4. Amended Bylaws and Amended Articles of Incorporation. The Amended
----------------------------------------------------
Bylaws and Amended Articles of Incorporation shall be amended and restated as of
the Effective Date to the extent necessary (a) to prohibit the issuance of
nonvoting equity securities as required by section 1123(a)(6) of the Bankruptcy
Code, subject to further amendment of such articles of incorporation and bylaws
as permitted by applicable law, and (b) to effectuate the provisions of the
Plan, in each case without any further action by the stockholders or directors
of the Debtor, the Debtor in Possession or the Reorganized Debtor.
8.5. Issuance of New Promissory Note and Conversion of Jaymed Preferred
------------------------------------------------------------------
Stock. The issuance of the New Fleet Note by Reorganized Jayhawk is authorized
- -----
without further act or action under applicable law, regulation, order or rule.
Reorganized Jayhawk shall exchange
23
<PAGE>
shares of its common stock for shares of Jaymed Preferred Stock in accordance
with that certain Preferred Stock Purchase Agreement dated April 14, 1997
between Westcott and Jaymed.
ARTICLE IX.
IMPLEMENTATION AND EFFECT OF CONFIRMATION OF PLAN
-------------------------------------------------
9.1. Term of Bankruptcy Injunction or Stays. Unless otherwise provided
--------------------------------------
herein, all injunctions or stays provided for in the Chapter 11 Case under
sections 105 or 362 of the Bankruptcy Code, or otherwise, and in existence on
the Confirmation Date, shall remain in full force and effect until the Effective
Date.
9.2. Revesting of Assets.
-------------------
(a) The property of the Debtor's estate shall revest in the
Reorganized Debtor on the Effective Date, subject to all liens and security
interests provided for in this Plan.
(b) From and after the Effective Date, the Reorganized Debtor
may operate its business, and may use, acquire and dispose of property free of
any restrictions imposed under the Bankruptcy Code.
(c) As of the Effective Date, all property of the Debtor and
Reorganized Debtor shall be free and clear of all liens, claims and interests of
holders of Claims and Equity Interests, except as provided in this Plan.
9.3. Causes of Action. Pursuant to section 1123(b)(3)(B) of the
----------------
Bankruptcy Code, as of the Effective Date any Causes of Action accruing to the
Debtor and Debtor in Possession, including, without limitation, avoidance or
recovery actions under sections 544, 545, 547, 548, 549, 550, 551 and 553 of the
Bankruptcy Code, that are not compromised, settled or satisfied prior thereto or
in this Plan, shall become assets of the Reorganized Debtor, and the Reorganized
Debtor shall have the authority to prosecute such Causes of Action for the
benefit of the Debtor's estate. The Reorganized Debtor shall have the authority
to compromise and settle, otherwise resolve, discontinue, abandon or dismiss all
such Causes of Action without approval of the Bankruptcy Court.
9.4. Discharge of Debtor. The rights afforded herein and the treatment of
-------------------
all Claims and Equity Interests herein shall be in exchange for and in complete
satisfaction, discharge, and release of Claims of any nature whatsoever,
including any interest accrued on such Claims from and after the Commencement
Date, against the Debtor and the Debtor in Possession, or any of their assets or
properties. Except as otherwise provided herein, (a) on the Effective Date, all
such Claims against the Debtor shall be satisfied, discharged, and released in
full, and (b) all persons shall be precluded from asserting against the
Reorganized Debtor, its successors, or its assets or properties any other or
further Claims based upon any act or omission, transaction or other activity of
any kind or nature that occurred prior to the Confirmation Date.
24
<PAGE>
9.5. Injunction. Except as otherwise expressly provided in the Plan or
----------
the Confirmation Order, all entities who have held, hold or may hold Claims
against the Debtor, are permanently enjoined, on and after the Effective Date,
from (a) commencing or continuing in any manner any action or other proceeding
of any kind with respect to any such Claim, (b) the enforcement, attachment,
collection or recovery by any manner or means of any judgment, award, decree or
order against the Debtor on account of any such Claim, (c) creating, perfecting
or enforcing any encumbrance of any kind against the Debtor or against the
property or interests in property of the Debtor on account of any such Claim or
Equity Interest, and (d) asserting any right of setoff, subrogation or
recoupment of any kind against any obligation due from the Debtor or against the
property or interests in property of the Debtor on account of any such Claim.
Such injunction shall extend to successors of the Debtor (including, without
limitation, the Reorganized Debtor) and their respective properties and
interests in property.
ARTICLE X.
EFFECTIVENESS OF THE PLAN
-------------------------
10.1. Conditions Precedent to Effectiveness. The Plan shall not become
-------------------------------------
effective unless and until the following conditions shall have been satisfied:
(a) the Confirmation Order, in form and substance satisfactory
to the Debtor, shall have become a Final Order;
(b) all actions, documents and agreements necessary to implement
the Plan shall have been effected or executed;
(c) the Debtor shall have received all authorizations, consents,
regulatory approvals, rulings, letters, no-action letters, opinions or documents
that are determined by the Debtor to be necessary to implement the Plan,
including, without limitation, no-action letters from the Securities and
Exchange Commission and letter or other rulings from the Internal Revenue
Service;
(d) the Debtor shall have executed and delivered to Fleet all of
the New Fleet Documents;
(e) Westcott shall have executed and delivered to Fleet the
Westcott Guaranty and the Westcott Release; and
(f) Fleet shall have accepted, executed and delivered the New
Fleet Documents, and all conditions precedent thereunder have been satisfied or
waived by Fleet, in writing.
10.2. Waiver of Conditions. The Debtor may waive, by a writing signed by
--------------------
an authorized representative of the Debtor and subsequently filed with the
Bankruptcy Court, one or more of the conditions precedent to effectiveness of
the Plan set forth in Section 10.1 of the Plan,
25
<PAGE>
except the Debtor may not waive the conditions in paragraphs (a), (d), (e) and
(f) of Section 10.1 without Fleet's prior written consent.
ARTICLE XI.
RETENTION OF JURISDICTION
-------------------------
The Bankruptcy Court shall have exclusive jurisdiction of all
matters arising out of, and related to, the Chapter 11 Case and the Plan
pursuant to, and for the purposes of, sections 105(a) and 1142 of the Bankruptcy
Code and for, among other things, the following purposes:
(a) To hear and determine pending applications for the
assumption or rejection of executory contracts or unexpired leases, if any are
pending, and the allowance of Claims resulting therefrom;
(b) To determine any and all adversary proceedings, applications
and contested matters;
(c) To hear and determine any objection to Administrative
Expense Claims or Claims;
(d) To enter and implement such orders as may be appropriate in
the event the Confirmation Order is for any reason stayed, revoked, modified or
vacated;
(e) To issue such orders in aid of execution and consummation of
the Plan, to the extent authorized by section 1142 of the Bankruptcy Code;
(f) To consider any amendments to or modifications of the Plan,
to cure any defect or omission, or reconcile any inconsistency in any order of
the Bankruptcy Court, including, without limitation, the Confirmation Order;
(g) To hear and determine all applications for compensation and
reimbursement of expenses of professionals under sections 330, 331 and 503(b) of
the Bankruptcy Code and the Plan;
(h) To hear and determine disputes arising in connection with
the interpretation, implementation or enforcement of the Plan;
(i) To recover all assets of the Debtor and property of the
Debtor's estate, wherever located;
(j) To hear and determine matters concerning state, local and
federal taxes in accordance with sections 346, 505 and 1146 of the Bankruptcy
Code;
(k) To hear any other matter not inconsistent with the
Bankruptcy Code; and
26
<PAGE>
(l) To enter a final decree closing the Chapter 11 Case.
ARTICLE XII.
MISCELLANEOUS PROVISIONS
------------------------
12.1. Effectuating Documents and Further Transactions. The Debtor or the
-----------------------------------------------
Reorganized Debtor, through its Chief Executive Officer, President, or its Chief
Financial Officer, is authorized to execute, deliver, file or record such
contracts, instruments, releases, indentures and other agreements or documents
and take such actions as may be necessary or appropriate to effectuate and
further evidence the terms and conditions of the Plan and any notes issued
pursuant to the Plan.
12.2. Corporate Action. On the Effective Date, all matters provided for
----------------
under the Plan that would otherwise require approval of the stockholders or
directors of the Debtor or Reorganized Debtor, including, without limitation,
the effectiveness of the Amended Articles of Incorporation, the Amended Bylaws,
the election or appointment, as the case may be, of directors and officers of
the Debtor or Reorganized Debtor pursuant to the Plan, and the authorization and
approval of employment agreements or amended employment agreements, shall be
deemed to have occurred and shall be in effect from and after the Effective Date
pursuant to the applicable general corporation laws of the State of Texas
without any requirement of further action by the stockholders or directors of
the Debtor or Reorganized Debtor. On the Effective Date or as soon thereafter
as is practicable, the Reorganized Debtor shall, if required, file the Amended
Articles of Incorporation with the Secretary of State of Texas, in accordance
with the applicable general corporation law of the State of Texas.
12.3. Exemption from Transfer Taxes. Pursuant to section 1146(c) of the
-----------------------------
Bankruptcy Code, the issuance, transfer or exchange of notes under the Plan, the
creation of any mortgage, deed of trust or other security interest, the making
or assignment of any lease or sublease, or the making or delivery of any deed or
other instrument of transfer under, in furtherance of, or in connection with the
Plan, including, without limitation, any merger agreements or agreements of
consolidation, deeds, bills of sale or assignments executed in connection with
any of the transactions contemplated under the Plan shall not be subject to any
stamp, real estate transfer, mortgage recording or other similar tax.
12.4. Debtor's Limited Release of Directors and Officers. As of the
---------------------------------------------------
Effective Date, the Debtor shall be deemed to have waived and released its
present and former directors and officers who were directors and officers,
respectively, during the Chapter 11 Case and on or before the Commencement Date
from any and all claims of the Debtor, including, without limitation, claims
which the Debtor otherwise has legal power to assert, compromise or settle in
connection with the Chapter 11 Case; provided, however, that this Section 12.4
-------- -------
shall not operate as a waiver or release of any claim (i) in respect of any
loan, advance or similar payment by the Debtor to any such person, and (ii) in
respect of any contractual obligation owed by such person to the Debtor.
27
<PAGE>
12.5. Claim Holders' Release of Directors and Officers from Claims and
----------------------------------------------------------------
Liabilities. As of the Effective Date, each of the Debtor's present and former
- -----------
directors and officers who were directors and officers, respectively, during the
Chapter 11 Case and on or before the Commencement Date (a "Released Director or
Officer") shall be released and discharged from any and all claims, obligations,
rights, Causes of Action and liabilities which any holder of a Claim against the
Debtor may be entitled to assert, whether or not derivative from or through the
Debtor, whether known or unknown, foreseen or unforeseen, existing or hereafter
arising, based in whole or in part upon any act or omission or other event
occurring on or at any time prior to the Effective Date in any way relating to
the Debtor, the Chapter 11 Case or this Plan; provided, however, that this
-------- -------
Section 12.5 shall not operate as a waiver or release of any claim (i) in
respect of any loan, advance or similar payment by any holder of a Claim to a
Released Director or Officer, (ii) in respect of any contractual obligation owed
by a Released Director or Officer to a holder of a Claim, or (iii) in respect of
the Westcott Guaranty; provided further, however, that nothing contained in this
-------- ------- -------
Section 12.5 shall affect the rights of a Released Director or Officer to assert
and prosecute (x) any direct claim, counterclaim, cross-claim, separate action
or similar claim against any entity which maintains that it has a Cause of
Action of the kind described in this Section 12.5 against a Released Director or
Officer that has not been released and discharged hereunder or (y) any claim for
indemnification, contribution or otherwise, however denominated, against any
entity relating to any Cause of Action against a Released Director or Officer
that has not been released and discharged hereunder. Each holder of a Claim
shall be deemed to have agreed to the provisions of this Section 12.5, and shall
be bound thereby, by reason of, among other things, its acceptance of this Plan
and its receipt of any distributions hereunder.
12.6. Exculpation. Subject to Sections 12.4 and 12.5 of the Plan, neither
-----------
the Reorganized Debtor nor any of its officers, directors, employees, advisors
or agents shall have or incur any liability to any holder of a Claim or Equity
Interest for any act or omission in connection with, or arising out of, the
filing of the Chapter 11 Case, the pursuit of confirmation of the Plan, the
consummation of the Plan or the administration of the Chapter 11 Case or the
Plan or the property to be distributed under the Plan, except for willful
misconduct or gross negligence, and, in all respects, the Reorganized Debtor,
and each of its officers, directors, employees, advisors and agents shall be
entitled to rely upon the advice of counsel with respect to their duties and
responsibilities under the Plan.
12.7. Termination of Committee. The appointment of the Creditors'
------------------------
Committee shall terminate on the later of the Effective Date and the date of the
hearing to consider applications for final allowances of compensation and
reimbursement of expenses.
12.8. Post-Confirmation Date Fees and Expenses. From and after the
----------------------------------------
Confirmation Date, the Debtor and Reorganized Debtor shall, in the ordinary
course of business and without the necessity for any approval by the Bankruptcy
Court, pay the reasonable fees and expenses of professional persons thereafter
incurred by the Debtor and Reorganized Debtor, including, without limitation,
those fees and expenses incurred in connection with the implementation and
consummation of the Plan.
28
<PAGE>
12.9. Payment of Statutory Fees. All fees payable pursuant to section
-------------------------
1930 of the title 28 of the United States Code, as determined by the Bankruptcy
Court at the Confirmation Hearing, shall be paid on the Effective Date.
12.10. Amendment or Modification of the Plan. Alterations, amendments or
-------------------------------------
modifications of the Plan may be proposed in writing by the Debtor at any time
prior to the Confirmation Date, provided that the Plan, as altered, amended or
modified, satisfies the conditions of sections 1122 and 1123 of the Bankruptcy
Code, and the Debtor shall have complied with section 1125 of the Bankruptcy
Code. The Plan may be altered, amended or modified at any time after the
Confirmation Date and before substantial consummation, provided that the Plan,
as altered, amended or modified, satisfies the requirements of sections 1122 and
1123 of the Bankruptcy Code and the Bankruptcy Court, after notice and a
hearing, confirms the Plan, as altered, amended or modified, under section 1129
of the Bankruptcy Code and the circumstances warrant such alterations,
amendments or modifications. A holder of a Claim that has accepted the Plan
shall be deemed to have accepted the Plan, as altered, amended or modified, if
the proposed alteration, amendment or modification does not materially and
adversely change the treatment of the Claim of such holder. Notwithstanding the
foregoing, the Debtor may alter, amend or modify the treatment of Claims and
Equity Interests provided for under the Plan provided that the holders of Claims
or Equity Interests affected thereby agree or consent to any such alteration,
amendment or modification.
12.11. Severability. In the event that the Bankruptcy Court determines,
------------
prior to the Confirmation Date, that any provision in the Plan is invalid, void
or unenforceable, such provision shall be invalid, void or unenforceable with
respect to the holder or holders of such Claims or Equity Interests as to which
the provision is determined to be invalid, void or unenforceable. The
invalidity, voidness or unenforceability of any such provision shall in no way
limit or affect the enforceability and operative effect of any other provision
of the Plan.
12.12. Revocation or Withdrawal of the Plan. The Debtor reserves the
------------------------------------
right to revoke or withdraw the Plan prior to the Confirmation Date. If the
Debtor revokes or withdraws the Plan prior to the Confirmation Date, then the
Plan shall be deemed null and void. In such event, nothing contained herein
shall constitute or be deemed a waiver or release of any claims by or against
the Debtor or any person or to prejudice in any manner the rights of the Debtor
or any person in any further proceedings involving the Debtor.
12.13. Binding Effect. The Plan shall be binding upon and inure to the
--------------
benefit of the Debtor, the holders of Claims and Equity Interests, and their
successors and assigns, including, without limitation, the Reorganized Debtor.
12.14. Notices. All notices, requests and demands to or upon the Debtor
-------
or the Reorganized Debtor to be effective shall be in writing (including by
facsimile transmission) and, unless otherwise expressly provided herein, shall
be deemed to have been duly given or made when actually delivered or, in the
case of notice by facsimile transmission, when received and telephonically
confirmed, addressed as follows:
29
<PAGE>
If to the Debtor:
Jayhawk Acceptance Corporation
2001 Bryan Tower, Suite 600
Dallas, Texas 75201
Attn: Jack T. Smith
Telephone: (214) 754-1000
Facsimile: (800) 307-4295
with a copy to:
Weil, Gotshal & Manges LLP
700 Louisiana, Suite 1600
Houston, Texas 77002-2784
Attn: Harry A. Perrin
Telephone: (713) 546-5000
Facsimile: (713) 224-9511
12.15. Governing Law. Except to the extent the Bankruptcy Code,
-------------
Bankruptcy Rules or other federal law is applicable, or to the extent an Exhibit
to the Plan or Plan Supplement provides otherwise, the rights and obligations
arising under this Plan shall be governed by, and construed and enforced in
accordance with, the laws of the State of Texas, without giving effect to the
principles of conflicts of law of such jurisdiction.
12.16. Withholding and Reporting Requirements. In connection with the
--------------------------------------
consummation of the Plan, the Debtor or the Reorganized Debtor, as the case may
be, shall comply with all withholding and reporting requirements imposed by any
federal, state, local or foreign taxing authority and all distributions
hereunder shall be subject to any such withholding and reporting requirements.
12.17. Plan Supplements. Forms of the documents relating to the Amended
----------------
Articles of Incorporation, Amended By Laws, the New Fleet Documents, and
Schedules 6.1(a)(x) and 6.1(a)(y) referred to herein shall be contained in the
Plan Supplements (Volumes I and II) and filed with the Clerk of the Bankruptcy
Court as follows: the Plan Supplement (Volume I) containing the New Fleet
Documents, the Westcott Guaranty and the Westcott Release shall be filed
concurrently with the filing of this Plan, and the Plan Supplement (Volume II)
containing the Amended Articles of Incorporation, Amended ByLaws, and Schedules
6.1(a)(x) and 6.1(a)(y) shall be filed at least ten days prior to the last day
upon which holders of Claims may vote to accept or reject the Plan. Upon their
filing with the Bankruptcy Court, the Plan Supplements may be inspected in the
office of the Clerk of the Bankruptcy Court during normal court hours. Holders
of Claims or Equity Interests may obtain a copy of the Plan Supplements upon
written request to the Debtor in accordance with Section 12.14 of the Plan.
30
<PAGE>
12.18. Headings. Headings are used in the Plan for convenience and
--------
reference only, and shall not constitute a part of the Plan for any other
purpose.
12.19. Exhibits. All Exhibits to the Plan, including the Plan Supplement,
--------
are incorporated into and are a part of the Plan as if set forth in full herein.
12.20. Filing of Additional Documents. On or before substantial
------------------------------
consummation of the Plan, the Debtor shall file with the Bankruptcy Court such
agreements and other documents as may be necessary or appropriate to effectuate
and further evidence the terms and conditions of the Plan.
Dated: April 18, 1997
Dallas, Texas
JAYHAWK ACCEPTANCE CORPORATION,
a Texas corporation
By: ____________________________________________
Name: Jack T. Smith
Title: President and Chief Operating Officer
31
<PAGE>
EXHIBIT G
---------
to
Settlement Agreement
Settlement Motion
-----------------
[Attached.]
EXHIBIT G - PAGE 1
- ---------
<PAGE>
Harry A. Perrin
Candace S. Schiffman
WEIL, GOTSHAL & MANGES LLP
700 Louisiana, Suite 1600
Houston, Texas 77002-2784
(713) 546-5000
and
Stephen A. Youngman
Kelli M. Walsh
WEIL, GOTSHAL & MANGES LLP
100 Crescent Court, Suite 1300
Dallas, Texas 75201-6950
(214) 746-7700
ATTORNEYS FOR THE DEBTOR
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF TEXAS
DALLAS DIVISION
- -----------------------------------
In re: (S) Case No. 397-31261-SAF-11
(S)
JAYHAWK ACCEPTANCE CORPORATION, (S) Chapter 11
a Texas Corporation, (S)
(S)
Debtor. (S)
- -----------------------------------
MOTION OF THE DEBTOR FOR AN ORDER PURSUANT TO
SECTION 363 OF THE BANKRUPTCY CODE APPROVING
THE SETTLEMENT AGREEMENT BY AND AMONG THE DEBTOR,
CARL H. WESTCOTT AND FLEET CAPITAL CORPORATION
-----------------------------------------------
TO THE HONORABLE STEVEN A. FELSENTHAL,
UNITED STATES BANKRUPTCY JUDGE:
Jayhawk Acceptance Corporation ("Jayhawk" or the "Debtor"), as debtor
and debtor-in-possession, respectfully represents:
<PAGE>
JURISDICTION
------------
1. This Court has jurisdiction to consider this Motion pursuant to 28
U.S.C. (S)(S) 157 and 1334. This matter is a core proceeding pursuant to 28
U.S.C. (S) 157(b)(2)(A) and (O). Venue is proper before this Court pursuant to
28 U.S.C. (S)(S) 1408 and 1409.
BACKGROUND
----------
2. On February 7, 1997 (the "Petition Date"), the Debtor filed a
voluntary petition for relief under chapter 11 of title 11 of the United States
Code (the "Bankruptcy Code"). Jayhawk is operating its business and managing
its properties as a debtor-in-possession pursuant to sections 1107(a) and 1108
of the Bankruptcy Code.
3. The Debtor is a specialized financial services company, primarily
engaged in the business of serving automobile dealers in the subprime credit
market by providing an indirect financing source to buyers of used vehicles with
limited access to traditional sources of consumer credit. In August 1996, the
Debtor, through its wholly-owned subsidiary Jayhawk Medical Acceptance
Corporation ("Jaymed"), expanded its business into the elective health care
market by offering an indirect financing source for elective health care
procedures.
4. As of the Petition Date, the Debtor owed its revolving credit
lender, Fleet Capital Corporation ("Fleet"), approximately $60 million, which
was secured by substantially all of the Debtor's assets and was guaranteed up to
$10 million by Carl H. Westcott ("Westcott").
5. Concurrently with the filing of this Motion, the Debtor filed a
plan of reorganization (the "Plan") pursuant to section 1121 of the Bankruptcy
Code, Plan Supplement (Volume I) that includes the proposed Fleet loan documents
attached thereto as exhibits, and a disclosure statement (the "Disclosure
Statement") accompanying the Plan. The terms of the Plan
2
<PAGE>
contemplate, among other things, that the Debtor will restructure its
obligations with Fleet. In furtherance of such restructure, the Debtor intends
to execute various agreements documenting the terms of the restructured
obligations, to be effective as of the Effective Date of the Plan. In connection
therewith, the Debtor has entered into an agreement with Westcott and Fleet (the
"Settlement Agreement"), which is annexed hereto as Exhibit A and is
---------
incorporated herein for all purposes. Because the issue of the necessity of this
Court's approval is not free from doubt, and because the Debtor is required to
use its best efforts to obtain approval of the Settlement Agreement as provided
pursuant to the terms of the Settlement Agreement, the Debtor seeks this Court's
approval pursuant to section 363 of the Bankruptcy Code of the Debtor's entry
into the Settlement Agreement.
6. Pursuant to the terms of the Settlement Agreement, Fleet and
Westcott agree to support and vote for the Plan, subject to compliance with
applicable laws. Essentially, the Settlement Agreement is a consent agreement.
The relevant terms of the Settlement Agreement include: (1) the Debtor will seek
to obtain confirmation of the Plan not later than July 31, 1997; (2) Fleet will
support and vote for the Plan, subject to the provisions of the Settlement
Agreement and compliance with applicable laws; (3) Jaymed will support and vote
for the Plan; (4) the Debtor and Fleet will support and seek approval of the
Final Cash Collateral Order/1/; (5) the Collateral securing the payment of the
Obligations as provided in the Plan will consist of all property described in
the Loan Documents; (6) the Debtor will continue to comply with its reporting
obligations as required by the Cash Collateral Orders and the Loan Documents;
________________
1. All capitalized terms not defined herein shall have the same meaning
ascribed to such terms in the Settlement Agreement.
3
<PAGE>
(7) the Debtor will execute the Loan Documents prior to, but effective on, the
Effective Date; and (8) Westcott will execute the New Guaranty and the Westcott
Release prior to, but effective on, the Effective Date.
7. Additionally, the Settlement Agreement contains several conditions
precedent to Fleet's agreement to support and vote for the Plan, including: (1)
the Court shall have entered the Final Cash Collateral Order on or before April
30, 1997; (2) the Debtor shall have filed the Plan on or before April 18, 1997;
(3) the Plan may not be amended or modified without Fleet's prior consent; (4)
the Disclosure Statement shall have been filed on or before April 18, 1997; (5)
the Debtor shall have filed this Motion concurrently with its filing of the Plan
and shall have diligently and in good faith sought to obtain entry of an order
approving the Settlement Agreement; (6) Fleet shall have approved the Final Cash
Collateral Order between the Debtor and Prudential Securities Credit Corporation
("PSCC"); (7) no liens or encumbrances, other than those favoring Fleet and
PSCC, shall have been created on the Collateral securing the Obligations; and
(8) Westcott or Jaymed, or any assignee of Jaymed's claim (including Westcott),
shall have voted for and supported the Plan.
8. Fleet's claim is not deemed allowed under the Settlement Agreement.
---
Only after the Disclosure Statement has been approved and the Plan has been
confirmed will Fleet's claim be deemed allowed as of the Effective Date of the
Plan.
RELIEF REQUESTED
----------------
9. By this Motion, and pursuant to section 363 of the Bankruptcy
Code, the Debtor requests an order approving the terms of the Settlement
Agreement. The Debtor also
4
<PAGE>
seeks authorization to take any additional actions that may be necessary or
appropriate to consummate the Settlement Agreement.
LEGAL AUTHORITY
---------------
10. Critical to the success of any reorganization plan is a consent
agreement between the Debtor and Fleet as a major secured creditor. Once such
an agreement is reached, the claims of other creditors can be resolved more
efficiently. Section 363(b)(1) of the Bankruptcy Code permits a debtor to enter
into transactions outside of the ordinary course of business after notice and a
hearing. The only court to address the issue whether a consent agreement
required compliance with section 363(b)(1) of the Bankruptcy Code was the
bankruptcy court for the Southern District of New York in Trans World Airlines,
---------------------
Inc. v. Texaco Inc. (In re Texaco Inc.), 81 B.R. 813 (Bankr. S.D.N.Y. 1988).
- ------------------- -----------------
According to the Texaco court, a consent agreement is not subject to section
------
363(b)(1) because it does not involve a debtor's right to use, sell, or lease
property of the estate, and such an agreement is conditioned upon [the] court's
approval of the plan." Id. at 816. Thus, "prior approval of negotiations
---
leading to a confirmation is not required because a debtor is encouraged to
negotiate with interested parties in accordance with the exclusivity conferred
under 11 U.S.C. (S) 1121(b)." Id.
---
11. Notwithstanding the foregoing, the Debtor is concerned that
certain covenants set forth in the Settlement Agreement may involve transactions
outside of the ordinary course of the Debtor's business and thus require this
Court's approval. The factors to be considered by the Court under section
363(b)(1) include (1) business justification and (2) relationship of the
agreement to the plan approval process. See, e.g. In re Crowthers McCall
--- ---- ----------------------
Pattern, Inc., 114 B.R. 877 (Bankr. S.D.N.Y. 1990) (holding that an agreement
- -------------
allowing a
5
<PAGE>
chapter 11 debtor to merge with another entity if the plan of reorganization is
confirmed was amply supported by the debtor's reasonable business judgment and
was a step necessary to achieve the plan).
12. Courts have consistently recognized that free and open negotiation
is crucial for parties to prepare a consensual plan of reorganization. As long
as parties do not unequivocally solicit votes prior to the distribution of a
court-approved disclosure statement, parties may negotiate to reach an
agreement. For example, a party may distribute drafts of different plans for
comments from creditors. In re Snyder, 51 B.R. 432, 436 (Bankr. D. Utah 1985).
------------
A party may also meet with other parties to discuss plan options. Id. (court
---
held that a meeting conducted pursuant to debtor's communication with various
creditors was not a solicitation under section 1125(b)). In addition, a debtor-
in-possession and a creditors' committee may enter into "a transaction to form
the basis of a plan" prior to confirmation of a plan of reorganization. In re
-----
Crowthers McCall Pattern, Inc., 114 B.R. 877, 877 (Bankr. S.D.N.Y. 1990).
- ------------------------------
Finally, a party "may transmit additional materials to creditors and other
interested parties to induce their votes . . . so long as such extrajudicial
material and solicitation does not contradict the court-approved disclosure
statement, or contain mischaracterizations or misstatements of material fact
that might unfairly influence solicitees." In re Kellogg Square Partnership, 160
--------------------------------
B.R. 336, 341 (Bankr. D. Minn. 1993).
13. In addition, policy reasons abound for courts to uphold consent
agreements. One of these reasons is that "the law should favor settlements."
In re Kellogg Square Partnership, 160 B.R. at 339. Another reason is that
- --------------------------------
courts should encourage consensual, negotiated plans early in a case. Id. at
---
340. Otherwise, the bankruptcy process could "create
6
<PAGE>
unwarranted delays in the confirmation process at the expense of virtually
everyone concerned." In re Gilbert, 104 B.R. 206, 214 (Bankr. W.D. Mo. 1989). In
-------------
addition, since "there is no principled or predicable difference (between
permissible negotiations and prohibited solicitations), . . . any definition
would tend to chill creditors' negotiations." Id. (citing Century Glove, Inc. v.
--- ----------------------
First Am. Bank (In re Century Glove, Inc.), 860 F.2d 94, 101-02 (3d Cir. 1988)).
- -------------- -------------------------
14. The Debtor has located only three decisions addressing challenges
to consent agreements, In re Texaco Inc., In re Kellogg Square Partnership, and
----------------- --------------------------------
In re Circle K. Corp., et al., No. CIV. 93-1222 (D. Ariz. April 11, 1994). In
- -----------------------------
each of these cases, the court upheld the agreement as a permissible negotiation
and not an impermissible solicitation because the purpose of the agreement was
not to solicit votes directly, rather the agreement contained various
affirmative and negative covenants relating to the parties' support for the
final reorganization plan.
15. In In re Texaco Inc., the bankruptcy court held that a $3 billion
-----------------
dollar settlement agreement executed prior to the court's approval of a
disclosure statement between the debtor Texaco Inc. and its creditor Pennzoil
was not a solicitation in violation of 11 U.S.C. (S) 1125(b). Texaco negotiated
a settlement with Pennzoil that formed the basis of Texaco's reorganization
plans. Paying particular attention to the necessity of the consent agreement,
the court noted that
the settlement had to be binding on Texaco and Pennzoil before Texaco
could submit its plan of reorganization. If Pennzoil were free to
support another plan while Texaco's plan was still capable of being
approved, the negotiations between Texaco and Pennzoil would be
meaningless. Pennzoil's support of Texaco's proposed plan is
fundamental to Texaco's efforts to effect a confirmable plan of
reorganization. Texaco's willingness to forego further litigation with
Pennzoil for
7
<PAGE>
a payment of $3 billion is predicated on the fact that Pennzoil's
support will enable Texaco to propose a confirmable plan.
In re Texaco Inc., 81 B.R. at 815. Similarly, Fleet's support of the Debtor's
- -----------------
Plan is fundamental to the Debtor's ability to effect a confirmable plan of
reorganization.
16. Further, the Texaco court noted that certain affirmative and
------
negative covenants in the agreement did not amount to vote solicitation in
violation of 11 U.S.C. (S) 1125(b). First, the consent agreement between the
two parties did not commit Pennzoil to a vote prior to the dissemination of a
court-approved disclosure statement. Id. The court stated that "[t]he proposal
---
in the Joint Plan for the settlement of Pennzoil's claim for $3 billion dollars
is not effective unless accepted by the requisite majority of shareholders and
approved by this court." Id. at 816. The Court further stated that "[u]nless
---
the requisite majority of shareholders first consent to the plan, followed by a
confirmation hearing which requires this Court's approval, there will be no
effective settlement pursuant to which Texaco would be obligated to pay, and
Pennzoil would be entitled to receive a $3 billion amount." Id. Similarly, the
---
Settlement Agreement by and among the Debtor, Fleet, and Westcott will not be
effective unless the Disclosure Statement is approved, the Plan is confirmed,
and there is compliance with all other applicable laws. Second, Pennzoil's
covenant not to "vote for, consent to, support or participate in the formulation
of any other plan" or modifications of the plan did not require Pennzoil to
accept the plan or cast a ballot. Id. In fact, as is the case with the Debtor's
---
Settlement Agreement with Fleet, the Texaco court noted that "[t]he solicitation
------
of Pennzoil's vote must await the approval of the disclosure statement. Indeed,
Pennzoil is not required to cast any ballot at all." Id. at 815. Additionally,
--
such a covenant did not violate section 1125(b) where there was "no
8
<PAGE>
other plan on file which would require a disclosure statement." Id. Third, the
---
affirmative covenant, that the parties would use their "best efforts" to support
the plan, did not amount to a direct solicitation of votes in favor of the final
plan. Id. Each of these provisions is similar to the provisions contained in the
---
Settlement Agreement.
17. Next, the court in In re Kellogg Square Partnership referred to In
-------------------------------- --
re Texaco Inc. in its decision to uphold a consent agreement as a permissible
- --------------
negotiation under section 1125(b) of the Bankruptcy Code. The debtor, Kellogg
Square Partnership ("Kellogg") entered into an agreement with a creditor,
District Energy St. Paul ("District Energy") to switch from hot water to natural
gas to heat its building prior to the dissemination of a court-approved
disclosure statement. The agreement amounted to a savings of $269,000 for
Kellogg, and reduced its previous contract term with District Energy by ten
years. A major creditor, Prudential Insurance Company of America ("Prudential")
objected to the agreement on the basis that it violated section 1125(b) of the
Bankruptcy Code. In addition, Prudential alleged that Kellogg, in violation of
section 1125(b), solicited District Energy's vote with preliminary drafts of its
amended disclosure statement./2/
18. The court upheld the consent agreement on the following grounds:
(1) the agreement was executory until final approval by the creditors of the
disclosure statement, (2) policy favored settlement, and (3) courts should
define solicitation narrowly. The agreement provided that District Energy's
acceptance of the final plan "remained executory until District Energy actually
filed its accepting ballot with the clerk of this Court." In re Kellogg Square
--------------------
________________
2. On this separate issue, the court held that parties may convey additional
materials as long as the extrajudicial materials do not contradict the
disclosure statement or contain mischaracterizations or misstatements of
material fact that might unfairly influence solicitees. In re Kellogg Square
--------------------
Partnership, 160 B.R. at 341.
- -----------
9
<PAGE>
Partnership, 160 B.R. at 340. Additionally, the "agreement did not purport to
- -----------
exempt the debtor from its statutory obligation to present District Energy with
a court-approved disclosure statement." Id. Furthermore, the Kellogg Square
--- --------------
court stated that courts should encourage "consensual arrangements" that further
reorganization plans. Id. at 339. The court also defined `solicitation'
---
narrowly, referring to Century Glove, Inc. as the leading case on the issue.
-------------------
Id. at 340. Finally, the court stated that, "[a]s a matter of these basic
- ---
principles, then, the Debtor's negotiations with District Energy did not
constitute `solicitation' within the contemplation of (S) 1125." Id. (emphasis
---
added).
19. In In re Circle K Corp., et al., one of four major creditor
-------------------- ------
groups, the Debenture Holders (the "Debenture Committee"), initially brought
suit in bankruptcy court by preliminary injunction claiming that the consent
agreements signed by various creditors after extensive negotiations violated 11
U.S.C. (S) 1125(b) of the Bankruptcy Code. Specifically, the Debenture Committee
stated that the agreements "illegally [made] a demand, prior to dissemination of
an approved disclosure statement, that the senior Creditors agree to vote in
favor of the Debtors' Plan and against any other competing plan." In re Circle
------------
K. Corp., et al., No. CIV 93-1222, slip op. at 7 (D. Ariz. April 11, 1994). The
- -------- ------
Debenture Committee received a zero distribution under the debtors' plan, which
was approved and confirmed by the bankruptcy court over the Debenture
Committee's objection.
20. The Bankruptcy Court initially denied the Debenture Committee's
complaint. On appeal, the District Court for the District of Arizona, relying
upon In re Texaco, Inc., noted that, because the consent agreement contained
------------------
affirmative and negative covenants, the creditors were not unequivocally
required to vote in favor of the Circle K Plan. Two covenants
10
<PAGE>
in the consent agreement formed the basis of the court's analogy to In re Texaco
------------
Inc.: (1) the ability of signatories to withdraw from the agreement if the
- ----
disclosure statement was not materially consistent with the agreement, and (2)
signatories to the agreement could withdraw if not doing so would constitute a
breach of fiduciary duty. In re Circle K Corp., et al., No. CIV 93-1222, slip
-------------------- ------
op. at 10 (D. Ariz. April 11, 1994). These "outs," the court determined, "put
the agreement in question within the protections of the Texaco case." The
Settlement Agreement among the Debtor, Fleet, and Westcott contains similar
features in the form of conditions precedent.
21. Moreover, the Circle K court noted that the signatories to the
--------
agreement, consistent with congressional intent, based their decision upon
adequate information, engaged in open negotiation, and were sufficiently
sophisticated to protect their interests. In re Circle K Corp., et al., No. CIV
-------------------- ------
93-1222, slip op. at 11 (D. Ariz. April 11, 1994) referring to In re Gilbert,
-------------
104 B.R. at 215; In re Allegheny Intern., Inc., 118 B.R. 282, 294 (Bankr. W.D.
-----------------------
Pa. 1990)). These factors were also present in negotiations between the Debtor,
Fleet, and Westcott. Indeed, the Settlement Agreement is the product of
extensive negotiations, spanning many weeks, and multiple drafts and revisions.
CONCLUSION
----------
22. Courts have consistently held consent agreements enforceable as
permissible negotiations if they contain affirmative and negative covenants that
do not request a direct vote in favor of a final plan prior to when the parties
receive a court-approved disclosure statement. Examples of affirmative and
negative covenants held by courts to be enforceable in a consent agreement
include promises to "support" or use "best efforts" to support the final plan;
11
<PAGE>
provisions that the agreement will remain executory until parties cast their
final ballot after court approval and dissemination of the disclosure statement;
and promises not to accept another plan or modify the current plan. Based on
the foregoing, to the extent such approval is required under section 363(b)(1)
of the Bankruptcy Code, the Court should approve the Settlement Agreement and
authorize the Debtor to take any actions necessary to consummate the
transactions contemplated therein.
NOTICE
------
23. No trustee or examiner has been appointed in this case. Notice of
this Motion has been given to the Office of the United States Trustee, counsel
to the statutory committee of unsecured creditors, counsel to Fleet, counsel to
Prudential Securities Capital Corporation, counsel to Westcott, and those
persons and entities known to the Debtor who have requested notices in this
case. The Debtor submits that no other notice need be given.
WHEREFORE the Debtor respectfully requests entry of an order granting the
relief requested herein and such other and further relief as is just.
Dated: April 18, 1997
Dallas, Texas
------------------------------
Harry A. Perrin
Candace S. Schiffman
WEIL, GOTSHAL & MANGES LLP
700 Louisiana, Suite 1600
Houston, Texas 77002
TELEPHONE: (713) 564-5000
FACSIMILE: (713) 224-9511
-and-
Stephen A. Youngman
12
<PAGE>
Kelli M. Walsh
WEIL, GOTSHAL & MANGES LLP
100 Crescent Court, Suite 1300
Dallas, Texas 75201-6950
(214) 746-7700
(214) 746-7777
ATTORNEYS FOR THE DEBTOR
13
<PAGE>
EXHIBIT H
---------
to
Settlement Agreement
Settlement Order
----------------
[Attached.]
EXHIBIT H - PAGE 1
- ---------
<PAGE>
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF TEXAS
DALLAS DIVISION
- ------------------------------------
In re: (S) Case No. 397-31261-SAF-11
(S)
JAYHAWK ACCEPTANCE CORPORATION, (S) Chapter 11
a Texas Corporation, (S)
(S)
Debtor. (S)
- ------------------------------------
ORDER PURSUANT TO SECTION 363 OF THE BANKRUPTCY CODE
APPROVING THE SETTLEMENT AGREEMENT BY AND AMONG THE DEBTOR,
CARL H. WESTCOTT AND FLEET CAPITAL CORPORATION
----------------------------------------------
Upon the Motion of Jayhawk Acceptance Corporation ("Jayhawk" or the
"Debtor"), as debtor-in-possession, for an order pursuant to section 363 of
title 11 of the United States Code (the "Bankruptcy Code") approving the
Settlement Agreement (the "Settlement Agreement") by and among the Debtor, Fleet
Capital Corporation ("Fleet"), and Carl H. Westcott ("Westcott"), which is
attached to the Motion as Exhibit A; and good and sufficient notice of the
---------
Motion having been given to the Office of the United States Trustee, counsel for
the Creditors' Committee, counsel to Fleet, counsel to Prudential Securities
Capital Corporation, counsel to Westcott, and each person known to the Debtor as
of the date of the Motion who had previously filed a notice of appearance in
this case, as evidenced by an affidavit of service previously filed
<PAGE>
with the Court; and, to the extent necessary, the Court having held a hearing to
consider the Motion and any and all objections or responses to the Motion; and
it appearing that the relief requested in the Motion is in the best interests of
the Debtor, its creditors, and other parties in interest; and after due
deliberation and sufficient cause appearing therefor, it is
ORDERED that the Settlement Agreement is approved pursuant to Section
363 of the Bankruptcy Code; and it is further
ORDERED that Jayhawk is authorized to take all actions that may be
necessary or appropriate to consummate the Settlement Agreement.
SIGNED this _______ day of ___________________________, 1997.
____________________________________
HONORABLE STEVEN A. FELSENTHAL
UNITED STATES BANKRUPTCY JUDGE
2
<PAGE>
EXHIBIT I
---------
to
Settlement Agreement
Westcott Release
----------------
[Attached.]
EXHIBIT I - PAGE 1
- ---------
<PAGE>
RELEASE
-------
This Release (this "Release") is entered into effective the ___ day of
-------
_____, 1997, by Carl H. Westcott (the "Guarantor") in favor of Fleet Capital
---------
Corporation ("Fleet") and Texas Commerce Bank National Association ("TCB").
----- ---
R E C I T A L S :
A. Jayhawk Acceptance Corporation (the "Debtor"), Guarantor and Fleet
------
have entered into that certain Settlement Agreement (the "Settlement
--------------------
Agreement"), dated the date hereof, to settle all disputes among the parties
thereto, including, but not limited to those arising from the Debtor's cash
collateral motion and Fleet's objections thereto, and to resolve issues
addressed in the Settlement Agreement regarding Debtor's plan of reorganization.
B. Pursuant to the terms of the Settlement Agreement, Guarantor has
entered into this Release.
A G R E E M E N T S :
NOW THEREFORE, in consideration of the premises stated above, and other
good and valuable consideration, the receipt and sufficiency of which are
acknowledged and confessed hereby, Guarantor agrees as follows:
1. Definitions. For purposes of this Settlement Agreement, the following
-----------
terms shall have the definitions set forth below:
"Bankruptcy Court" shall mean the United States Bankruptcy Court for
----------------
the Northern District of Texas, Dallas Division.
"Bankruptcy Case" shall mean the bankruptcy case commenced by the
---------------
Debtor filing its Chapter 11 voluntary petition pursuant to 11 U.S.C. (S) 101 et
seq. as Case No. 397-31261-SAF-11 in the Bankruptcy Court.
"Collateral" shall mean the property of Debtor described in the Pre-
----------
Petition Loan Documents that secures the obligations of Debtor to Fleet.
"Effective Date" shall mean the first business day on which the Plan
--------------
becomes effective, pursuant to the terms of the order of the Bankruptcy Court
confirming the Plan.
"Plan" shall mean a plan of reorganization of Debtor in the Bankruptcy
----
Case.
"Post-Petition Loan Documents" shall mean any and all of the documents
----------------------------
executed in connection with or as security for the Term Note in the form annexed
to the Settlement Agreement as Exhibit D, including, but not limited to, the
---------
Loan and Security
RELEASE - Page 1
- -------
<PAGE>
Agreement, Pledge Agreement and Limited Guaranty, forms of which are annexed to
the Settlement Agreement as Exhibits B, C and D, respectively.
---------- - -
"Pre-Petition Loan Agreement" shall mean that certain Loan and
---------------------------
Security Agreement, dated April 4, 1995, as amended by various amendments
numbered First through Seventh, by and between the Debtor and Fleet.
2. Release of Claims. Guarantor, on behalf of Guarantor and his heirs,
-----------------
legal and personal representatives, successors, and assigns, agrees to and
hereby does RELEASE, ACQUIT and FOREVER DISCHARGE Fleet, TCB (including, without
limitation, all affiliated entities, subsidiaries, direct and indirect parent
corporations and holding companies of each of Fleet and TCB) and their
respective officers, directors, employees, agents and attorneys, past and
present (the "Indemnified Parties"), from all Claims as defined in Paragraph 3
------------------- -----------
below; and Guarantor hereby agrees to indemnify the Indemnified Parties and hold
them harmless from any and all claims, losses, causes of action, costs and
expenses of every kind or character, including, without limitation, attorneys'
fees and expenses, arising out of, connected with, related to, or concerning in
any way the breach of this Release or any agreement of Guarantor contained
herein.
3. Claims. As used in Paragraph 2 above, the term "Claims" means any and
------ -----------
all possible claims, disputes, obligations, demands, actions, causes of action,
costs, expenses and liabilities whatsoever, known or unknown, at law or in
equity, originating in whole or in part, on or before the Effective Date, which
Guarantor may now or hereafter have against Fleet or any of the Indemnified
Parties, if any, and irrespective of whether any such Claims arise out of
contract, tort, violation of laws, or regulations, or otherwise, which arise out
of, are connected with, related to, or concern in any way any of the (i) Pre-
Petition Loan Agreement, (ii) the Collateral, (iii) any documents (the "Pre-
---
Petition Loan Documents") executed in connection with or as security for any
- -----------------------
transaction or any series of transactions that was evidenced, renewed, extended
or modified by the Pre-Petition Loan Agreement, or (iv) the Bankruptcy Case, or
which arise out of, are connected with, related to, or concern in any way any
action, inaction, performance, non-performance, representation, transaction, or
occurrence involving or in any way related to the Pre-Petition Loan Agreement,
the Collateral, the Pre-Petition Loan Documents or the Bankruptcy Case.
4. Excluded Claims. As used in Paragraph 2 above, the term "Claims"
--------------- -----------
specifically excludes any and all claims, disputes, obligations, demands,
actions, causes of action, costs, expenses and liabilities whatsoever, known or
unknown, at law or in equity, originating after the Effective Date; and
5. No Admission by Fleet or TCB. This Release shall not be construed as
----------------------------
an admission of liability on the part of Fleet or TCB.
6. Owner of Claims. Guarantor hereby represents and warrants that
---------------
Guarantor is the current legal and beneficial owner of any and all Claims
released hereby, if any, and has not assigned, pledged or contracted to assign
or pledge any of such Claims to any other person.
RELEASE - Page 2
- -------
<PAGE>
7. Covenant Not to Sue. Guarantor further hereby agrees that neither
-------------------
Guarantor nor any of its agents, employees, heirs, personal representatives,
successors or assigns, will bring, commence, institute, maintain, or prosecute
any action at law or proceeding in equity, or any legal proceeding whatsoever,
any claim for damages or relief whatsoever, against Fleet or any of the other
Indemnified Parties, which is based in whole or in part on any matter released
hereunder. Guarantor additionally hereby agrees that this Release may be
pleaded as a full and complete defense to, and may be used as a basis for an
injunction against, any action, suit or other proceeding that may be instituted,
prosecuted or attempted by Guarantor or any or all of its agents, employees,
independent contractors, heirs, personal representatives, successors or assigns
in breach of any of the provisions set forth in this Release.
8. VALUE RECEIVED. GUARANTOR ACKNOWLEDGES THAT FLEET IS RELYING THE
--------------
AGREEMENTS, REPRESENTATIONS AND WARRANTIES CONTAINED IN THIS RELEASE IN ENTERING
INTO THE POST-PETITION LOAN DOCUMENTS WITH DEBTOR AND WOULD NOT ENTER INTO THE
POST-PETITION LOAN DOCUMENTS OR OTHER DOCUMENTS CONTEMPLATED BY THE POST-
PETITION LOAN DOCUMENTS BUT FOR SUCH AGREEMENTS, REPRESENTATIONS AND WARRANTIES.
EXECUTED EFFECTIVE the day and year first written above.
_____________________________
Carl H. Westcott
RELEASE - Page 3
- -------
<PAGE>
CERTIFICATE OF ACKNOWLEDGMENT
THE STATE OF TEXAS (S)
(S)
COUNTY OF DALLAS (S)
BEFORE ME on this day personally appeared Carl H. Westcott, known to me to
be the person whose name is subscribed to the foregoing instrument and
acknowledged to me that he executed the same for purposes and consideration
therein expressed.
Given under my hand and seal of office this ____ day of ___________, 1997.
____________________________________
Notary Public
My Commission Expires:
____________________
RELEASE - Page 4
- -------
<PAGE>
EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
SEVEN MONTHS
YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31,
-------------------------------------------------------- --------------------
1996 1995 1994 1993
----------------- ------------------- ------------------ --------------------
<S> <C> <C> <C> <C>
PRIMARY:
Net income (loss).................................. $ (49,739,000) $ 4,900,000 $(2,482,000) $(1,504,000)
================= =================== ================== ====================
Shares as adjusted:
Weighted average common shares outstanding.... 22,931,389 16,809,725 12,408,943 11,279,650
Assumed conversion of Series A convertible
preferred stock.............................. -- 1,610,919 2,694,915 2,694,915
Incremental shares from outstanding stock
options as determined under the treasury
stock method................................. -- 311,716 241,549 241,549
----------------- ------------------- ------------------ --------------------
Shares as adjusted................................. 22,931,389 18,732,360 15,345,407 14,216,114
================= =================== ================== ====================
Net income (loss) per share........................ $ (2.17) $ .26 $ (.16) $ (.11)
================= =================== ================== ====================
FULLY DILUTED:
Net income (loss).................................. $ (49,739,000) $ 4,900,000 $(2,482,000) $(1,504,000)
================= =================== ================== ====================
Shares as adjusted:
Weighted average common shares outstanding.... 22,931,389 16,809,725 12,408,943 11,279,650
Assumed conversion of Series A convertible
preferred stock.............................. -- 1,610,919 2,694,915 2,694,915
Incremental shares from outstanding stock
options as determined under the treasury
stock method................................. -- 307,929 241,549 241,549
----------------- ------------------- ------------------ --------------------
Shares as adjusted................................. 22,931,389 18,728,573 15,345,407 14,216,114
================= =================== ================== ====================
Net income (loss) per share........................ $ (2.17) $ .26 $ (.16) $ (.11)
================= =================== ================== ====================
</TABLE>
<PAGE>
EXHIBIT 21
LIST OF SUBSIDIARIES
Jayhawk Medical Acceptance Corporation, a Texas corporation
Jayhawk Services, Inc., a Nevada corporation
Jayhawk Funding Trust I, a special purpose Delaware business trust
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Forms S-8) pertaining to Jayhawk Acceptance Corporation's Amended and Restated
1994 Stock Option and Restricted Stock Plan, Jayhawk Acceptance Corporation's
Amended and Restated Non-Employee Stock Option Plan and Jayhawk Acceptance
Corporation's Employee Stock Purchase Plan of our report dated April 17, 1997,
with respect to the consolidated financial statements of Jayhawk Acceptance
Corporation included in the Annual Report (Form 10-K/A-1) for the year ended
December 31, 1996.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Dallas, Texas
April 17, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000919988
<NAME> JAYHAWK ACCEPTANCE CORPORATION
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> DEC-31-1996 DEC-31-1995
<CASH> 6,605<F1> 120
<SECURITIES> 0 0
<RECEIVABLES> 373,740 167,491
<ALLOWANCES> 73,635 2,308
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 14,310 6,350
<DEPRECIATION> 3,765 1,346
<TOTAL-ASSETS> 322,567 173,373
<CURRENT-LIABILITIES> 51,372<F2> 7,982
<BONDS> 66,153<F3> 32,386
0 0
0 0
<COMMON> 89,009 47,666
<OTHER-SE> (48,825) 914
<TOTAL-LIABILITY-AND-EQUITY> 322,567<F4> 173,373
<SALES> 0 0
<TOTAL-REVENUES> 53,566 21,788
<CGS> 0 0
<TOTAL-COSTS> 25,852 12,138
<OTHER-EXPENSES> 1,310 0
<LOSS-PROVISION> 71,062 2,243
<INTEREST-EXPENSE> 6,268 6,320
<INCOME-PRETAX> (50,926) 6,087
<INCOME-TAX> (1,187) 1,187
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (49,739) 4,900
<EPS-PRIMARY> (2.17) .26
<EPS-DILUTED> (2.17) .26
<FN>
<F1>INCLUDES RESTRICTED CASH OF $6,352
<F2>INCLUDES SECURITIZED NOTES OF $37,507
<F3>REVOLVING CREDIT FACILITIES WHICH PERMIT BORROWINGS OF $65 MILLION AND $15
MILLION AT VARIABLE RATE OF INTEREST (8.25% AND 8.0%, RESPECTIVELY AT DECEMBER
31, 1996).
<F4>INCLUDES DEALER HOLDBACKS OF $159,075.
</FN>
</TABLE>
