<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 14, 1998
REGISTRATION NO. 333-49199
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------
PDS FINANCIAL CORPORATION
(Name of small business issuer in its charter)
<TABLE>
<S> <C> <C>
MINNESOTA 6159 41-1695870
(State or jurisdiction of (Primary Standard (I.R.S. Employer
incorporation or Industrial Identification
organization) Classification Code Number) No.)
</TABLE>
6171 MCLEOD DRIVE
LAS VEGAS, NEVADA 89120
(702) 736-0700
(Address and telephone number of registrant's principal
executive offices and principal place of business)
JOHAN P. FINLEY, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
6171 MCLEOD DRIVE
LAS VEGAS, NEVADA 89120
(702) 736-0700
(Name, address and telephone number of agent for service)
------------------------------
COPIES OF COMMUNICATIONS TO:
<TABLE>
<S> <C>
JOHN T. KRAMER DANIEL A. YARANO
Dorsey & Whitney L.L.P. Fredrikson & Byron, P.A.
Pillsbury Center South 1100 International Centre
220 South Sixth Street 900 Second Avenue South
Minneapolis, MN 55402 Minneapolis, MN 55402
612-340-8702 612-347-7149
Facsimile 612-340-8738 Facsimile 612-347-7077
</TABLE>
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
------------------------------
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE
SECURITIES TO BE REGISTERED BE REGISTERED(1) PER UNIT(2)
<S> <C> <C>
Investment Units consisting of: 11,500 Units $1,000
(a) 10% Senior subordinated notes due July 1, 2004
(b) Warrants to purchase one share of Common Stock
10% Senior subordinated note due July 1, 2004 11,500 Notes $950
Warrants to purchase one share of Common Stock 575,000 Warrants $1
Common Stock, par value $.01 per share 575,000 shares $7.3125
Underwriter's Warrant 50,000 Warrants
Common Stock, par value $.01 per share 50,000 shares $7.3125
<CAPTION>
TITLE OF EACH CLASS OF AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(2) REGISTRATION FEE
<S> <C> <C>
Investment Units consisting of: $11,500,000 $3,393
(a) 10% Senior subordinated notes due July 1, 2004
(b) Warrants to purchase one share of Common Stock
10% Senior subordinated note due July 1, 2004 $10,925,000 N/A(3 )
Warrants to purchase one share of Common Stock $575,000 N/A(3 )
Common Stock, par value $.01 per share $4,240,688 $1,241
Underwriter's Warrant $50 $1
Common Stock, par value $.01 per share $365,625 $108
</TABLE>
(1) Includes 1,500 Units, 1,500 Notes and 75,000 Warrants subject to the
Underwriter's over-allotment option. These securities will be sold in Units,
each consisting of a $1,000 Note and 50 Warrants.
(2) Estimated solely for purposes of calculating the Registration Fee, pursuant
to Rule 457(c) under the Securities Act, the offering price of the Common
Stock is based on the high and low sales prices of the Common Stock quoted
on The Nasdaq National Market on March 27, 1998.
(3) The registration fee is being paid and accounted for in the registration fee
calculation relating to the Investment Units. The $1,000 offering price per
Investment Unit is being allocated $950 to the 10% Senior Subordinated Note
due July 1, 2004 and $50 to the Warrants.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED APRIL 13, 1998
PROSPECTUS
10,000 INVESTMENT UNITS
PDS FINANCIAL
CORPORATION
$10,000,000 10% SENIOR SUBORDINATED NOTES, DUE JULY 1, 2004 AND
WARRANTS TO PURCHASE 500,000 SHARES OF COMMON STOCK
---------------------
Each investment unit (the "Unit") offered hereby consists of a 10% Senior
Subordinated Note, due July 1, 2004, in the principal amount of $1,000 (the
"Note") of PDS Financial Corporation (the "Company" or "PDS") and detachable
warrants (the "Warrants") to purchase 50 shares of the Company's common stock,
$.01 par value (the "Common Stock"). Interest on the Notes is payable on the
first day of each calendar quarter, beginning October 1, 1998. Each year,
beginning on July 1, 2000, the Trustee shall select by lot, or other similar
method, Notes having an aggregate principal amount of $1,500,000 ($1,725,000 if
the over-allotment option is exercised in full) for mandatory redemption. Notes
selected for mandatory redemption shall be redeemed in full at par plus accrued
interest. In addition to mandatory redemptions, the Company also has the option
to redeem the Notes, in whole or in part, at any time on or after July 1, 1998
at par plus accrued interest and any premium, if applicable. The entire unpaid
principal balance of, and interest on, the Notes is due and payable on July 1,
2004. See "Description of Units--Notes." The Notes will be issued only in fully
registered form and in denominations of $1,000 and integral multiples thereof.
The Notes are unsecured general obligations of the Company and will be
subordinated to all existing and future "Senior Debt" (as defined in the
Indenture) of the Company. At December 31, 1997, the Company's Senior Debt was
$17,325,501.
The Notes and Warrants are immediately detachable and the Warrants are
immediately exercisable upon closing of the Offering. The Warrants expire on the
fifth anniversary of the date of this Prospectus. The exercise price of each
Warrant shall be $ (125% of the average of the last reported sale prices of
the Company's Common Stock on The Nasdaq National Market (symbol "PDSF") for the
ten trading days immediately prior to the date of this Prospectus). After the
first anniversary of the date of this Prospectus, the Warrants are subject to
optional redemption by the Company at $.01 per Warrant upon 30 days notice,
provided that the closing price for the Common Stock for a period of 20
consecutive trading days prior to such notice is at least 250% of the exercise
price of the Warrants.
Prior to this offering there has been no market for the Units, the Notes and
the Warrants, and there can be no assurance that an active trading market will
develop. Although the Underwriter has advised the Company that it intends
initially to make a market in the Units, the Notes and the Warrants, the
Underwriter has no obligation to do so. The Company has applied to list the
Warrants on The Nasdaq National Market. The Units and the Notes will not be
listed on any securities exchange or on the Nasdaq System. See "Underwriting."
The approval of each of the Nevada and Mississippi Gaming Commissions is
required before the Company may sell the Units.
SEE "RISK FACTORS" FOR INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE
INVESTORS BEGINNING ON PAGE 7.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO PUBLIC DISCOUNTS(1) COMPANY(2)
<S> <C> <C> <C>
Per Unit................................................. $1,000.00 6.5% $935.00
Total Units, (10,000) (3)................................ $10,000,000 $650,000 $9,350,000
</TABLE>
(1) In connection with this Offering, the Company has agreed to sell to Miller &
Schroeder Financial, Inc. (the "Underwriter") a five-year warrant (the
"Underwriter's Warrant") to purchase 50,000 shares of the Company's Common
Stock. The Company has also agreed to pay the Underwriter a 1% management
fee and a 2% fee as a nonaccountable expense allowance and to indemnify the
Underwriter against certain liabilities. See "Underwriting."
(2) Before deducting offering expenses (including the 1% management fee and 2%
nonaccountable expense allowance payable to the Underwriter) payable by the
Company estimated at $500,000.
(3) The Company has granted to the Underwriter a 45-day option to purchase up to
1,500 additional Units to cover over-allotments. See "Underwriting." If the
option is exercised in full, the total Price to Public, Underwriting
Discount, 1% management fee payable to the Underwriter, 2% nonaccountable
expense allowance payable to the Underwriter and Proceeds to Company will be
$11,500,000, $747,500, $115,000, $230,000 and $10,752,500, respectively.
The Units are offered by the Underwriter subject to prior sale, withdrawal,
cancellation or modification of the offer without notice, to delivery to and
acceptance by the Underwriter, and to its right to reject any order in whole or
in part and to certain other conditions. It is expected that delivery of the
Units will be made against payment therefor on or about , 1998, in
Minneapolis, Minnesota.
MILLER & SCHROEDER FINANCIAL, INC.
THE DATE OF THIS PROSPECTUS IS , 1998.
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE UNITS, INCLUDING OVER-
ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH SECURITIES. FOR A
DESCRIPTION OF THESE ACTIVITIES SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING INFORMATION IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS, INCLUDING INFORMATION UNDER
"RISK FACTORS." CERTAIN STATEMENTS SET FORTH BELOW CONSTITUTE "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995 (THE "REFORM ACT"). SEE "FORWARD-LOOKING STATEMENTS" FOR FACTORS
RELATING TO SUCH STATEMENTS. EXCEPT AS OTHERWISE NOTED, ALL INFORMATION IN THIS
PROSPECTUS RELATING TO THE UNITS ASSUMES NO EXERCISE OF THE UNDERWRITER'S
OVER-ALLOTMENT OPTION. SEE "UNDERWRITING." AS USED HEREIN, UNLESS THE CONTEXT
REQUIRES OTHERWISE, THE TERMS THE "COMPANY" OR "PDS" MEAN PDS FINANCIAL
CORPORATION AND PDS'S WHOLLY OWNED SUBSIDIARIES, PDS FINANCIAL
CORPORATION--NEVADA ("PDS NEVADA"), PDS FINANCIAL CORPORATION--MISSISSIPPI
("PDS-MISSISSIPPI"), PDS CASINOS INTERNATIONAL, INC. AND TRANSCANADA 2
CORPORATION.
THE COMPANY
PDS engages in the business of financing and leasing gaming equipment and
supplying reconditioned gaming machines to casino operators. The gaming
equipment financed by the Company consists mainly of slot machines, video gaming
machines and other gaming devices. In addition, the Company finances furniture,
fixtures and other gaming related equipment, including gaming tables and chairs,
restaurant and hotel furniture, vehicles, security and surveillance equipment,
computers and other office equipment. In 1996, the Company introduced SlotLease,
a specialized operating lease program for slot machines and other electronic
gaming devices. In 1997, the Company established PDS Slot Source, a
reconditioned gaming machine sales and distribution program, to complement its
leasing and financing activities.
In order to offer its SlotLease and PDS Slot Source programs, the Company
must be licensed to own and distribute gaming devices in each jurisdiction in
which it conducts business. As part of the licensing process, each gaming
jurisdiction performs a thorough investigation of each applicant and certain of
its directors, officers, key employees and significant shareholders. The Company
currently is licensed in Nevada, New Jersey, Colorado, Iowa and Minnesota. The
Company also has license applications pending in Mississippi and Indiana. The
Company believes its gaming licenses, as well as its experience in the gaming
industry, provides a significant competitive advantage, enabling the Company to
offer financing packages and services that meet the needs of this industry more
effectively than traditional financing.
The Company believes SlotLease, its operating lease program, has been well
received by casino operators since its introduction in 1996 because it offers
casino operators lower monthly payments and off-balance sheet financing. The
Company retains ownership of the gaming equipment under an operating lease. At
the end of the applicable lease term, the Company offers the customer an option
to purchase the gaming equipment at its then-determined fair market value or to
extend the lease term. Returned gaming machines are inventoried for lease or
resale by the Company through the PDS Slot Source program.
In May 1997, the Company introduced PDS Slot Source, its reconditioned
gaming machine sales and distribution program. The Company believes that the
secondary market for gaming machines is fragmented, underdeveloped and
represents a significant opportunity for growth. The Company obtains used gaming
machines either from its customers at the end of an applicable lease term or in
the marketplace. These gaming machines are refurbished by the Company prior to
resale or are occasionally sold "as is" to a customer. The Company believes its
ability to recondition and distribute used gaming machines enhances the market
value of gaming machines at the end of an operating lease and facilitates
additional financing transactions.
In addition to offering operating leases through its SlotLease program, the
Company also provides financing to its customers in the form of capital leases
or collateralized loans. Such financing transactions are either originated
directly by the Company with the casino operator or are structured jointly with
a gaming equipment manufacturer or distributor. Under both of these types of
transactions substantially all of the benefits and risks of ownership are borne
by the lessee/borrower. Under a capital lease, the
3
<PAGE>
customer is required to pay the Company the purchase price of the gaming
equipment either throughout the term of the lease or, if the lease payments are
not sufficient to cover the purchase price of the gaming equipment, the customer
is required to pay the Company a balloon payment at the end of the lease term.
Most of the Company's equipment financing transactions range from $500,000 to
$2.5 million. The Company generally obtains the funds necessary for its capital
lease or note originations by selling all or a portion of its interest in the
payment stream to one or more institutional investors, often simultaneously with
the origination of such financing transactions.
The Company generally targets established medium-sized casino operators that
are opening new casinos or expanding existing casinos, as well as new casino
operators that the Company believes have acceptable credit quality. The Company
is currently focusing its primary efforts on the traditional gaming markets of
Nevada and New Jersey.
The principal executive offices of PDS are located at 6171 McLeod Drive, Las
Vegas, Nevada 89120; its telephone number is (702) 736-0700.
THE OFFERING
<TABLE>
<S> <C>
Securities Offered................ 10,000 Units at a price of $1,000 per Unit, each Unit
consisting of a 10% Senior Subordinated Note, due July
1, 2004, in the principal amount of $1,000 and five-year
Warrants to purchase 50 shares of the Company's Common
Stock at an exercise price per share of $ (125% of
the average of the last reported sale prices of the
Company's Common Stock for the ten trading days
immediately prior to the date of this Prospectus). See
"Description of Units."
Use of Proceeds................... The net proceeds from the sale of the Units, estimated
to be $8,850,000 ($10,207,500 if the Underwriter's
over-allotment option is exercised in full), will be
used primarily to purchase gaming equipment to be leased
to casino operators. See "Use of Proceeds."
THE NOTES
Interest payments................. Interest on the Notes will be paid quarterly, at the
rate of 10% per annum, on the first day of each January,
April, July and October, beginning on October 1, 1998
(each an "Interest Payment Date"). Interest is payable
until final maturity or prior redemption of the Notes.
See "Description of Units--Notes."
Mandatory redemptions............. Each year, beginning on July 1, 2000, the Trustee shall
select by lot, or other similar method, Notes having an
aggregate principal amount of $1,500,000 ($1,725,000 if
the over-allotment option is exercised in full) for
mandatory redemption. Notes selected for mandatory
redemption shall be redeemed in full at par plus accrued
interest. The Company may surrender to the Trustee Notes
purchased in the open market or Notes redeemed pursuant
to optional redemption to be applied to mandatory
redemptions. On or before July 1, 2004, the Company will
pay to the Trustee cash sufficient to redeem all
remaining outstanding Notes. See "Description of
Units--Notes."
Optional redemptions.............. In addition to mandatory redemptions, some or all of the
Notes may be redeemed at any time, on or after July 1,
1998, at the
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
option of the Company, at par plus accrued interest plus
the applicable premium, if any. Notes shall be selected
for optional redemption by the Trustee by lot or other
similar method. In the event of an optional redemption
of the Notes prior to July 1, 2001, a 6% premium will be
due. The premium will decline to 4% for optional
redemptions on or after July 1, 2001 and prior to July
1, 2002, and will further decline to 2% for optional
redemptions on or after July 1, 2002 and prior to July
1, 2003. No premium is payable with respect to optional
redemptions on or after July 1, 2003. See "Description
of Units--Notes."
Subordination..................... The Notes will be unsecured general obligations of the
Company and junior, subordinate and subject in right of
payment to the prior payment of all Senior Debt (as
defined herein), whether outstanding at the closing of
the Offering or created thereafter. The Notes are senior
in right of payment to the Convertible Subordinated
Debentures of the Company and any Subordinated Debt held
by an affiliate of the Company. See "Description of
Units--Notes."
Trustee........................... The Notes will be issued pursuant to an indenture (the
"Indenture") between the Company and First Trust
National Association, St. Paul, Minnesota, as trustee
(the "Trustee").
Covenants......................... The Indenture, among other things, requires the Company
to maintain a minimum net worth of $6,000,000 and
restricts or limits the Company, under certain
circumstances, from paying dividends or repurchasing
capital stock, engaging in transactions with affiliates
and effecting mergers, consolidations or transfers of
substantially all of its assets. See "Description of
Units--Notes."
THE WARRANTS
Exercise price.................... Each Warrant entitles the holder to purchase one share
of Common Stock at an exercise price per share of $
(125% of the average of the last reported sales prices
of the Company's Common Stock for the ten trading days
immediately prior to the date of this Prospectus). See
"Description of Units--Warrants."
Exercise period................... The Warrants are immediately detachable from the Notes
and are immediately exercisable for registered shares of
Common Stock of the Company upon the closing of this
Offering. The exercise period of the Warrants will
expire on the fifth anniversary of the date of this
Prospectus. See "Description of Units--Warrants."
Redemption right.................. After the first anniversary of the date of this
Prospectus, the Warrants are subject to optional
redemption by the Company, upon 30 days prior notice, at
$.01 per Warrant, provided that the closing price for
the Common Stock for a period of 20 consecutive trading
days prior to such notice is at least 250% of the
exercise price of the Warrants. See "Description of
Units--Warrants--Redemption."
Listing........................... The Company has applied to list the Warrants on The
Nasdaq National Market.
</TABLE>
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The following table sets forth summary consolidated financial and operating
data of the Company for the periods indicated. This information should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's consolidated financial statements
and related notes included elsewhere in this Prospectus:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996
------------- -------------
<S> <C> <C>
INCOME STATEMENT DATA:
Total revenues..................................................................... $ 47,613,259 $ 6,360,494
Total costs and expenses........................................................... 46,094,404 5,876,175
------------- -------------
Income before income taxes......................................................... 1,518,855 484,319
Provision for income taxes......................................................... 577,000 179,000
------------- -------------
Net income......................................................................... $ 941,855 $ 305,319
------------- -------------
------------- -------------
CASH FLOW DATA:
Cash provided by (used in):
Operating activities............................................................. $ 12,810,361 $ 9,327,171
Investing activities............................................................. 3,557,077 (19,663,150)
Financing activites.............................................................. (17,262,170) 12,226,070
OTHER DATA:
Ratio of earnings to fixed charges(1).............................................. 1.35 1.34
EBITDA(2).......................................................................... $ 14,367,562 $ 4,041,720
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------
ACTUAL AS ADJUSTED(3)
------------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Investment in notes and leasing operations.................................... $ 33,734,722 $ 42,584,722(4)
Total assets.................................................................. 39,963,832 48,813,832(4)
Non-recourse debt............................................................. 10,121,389 10,121,389
10% Senior Subordinated Notes................................................. -- 8,350,000(4)
Other recourse debt........................................................... 17,414,618 17,414,618
Total stockholders' equity.................................................... 8,629,346 9,129,346(4)
</TABLE>
- ------------------------
(1) Ratio of earnings to fixed charges is computed by dividing income before
income taxes before fixed charges by fixed charges. Fixed charges consists
of interest expense and the portion of rental expense considered
representative of interest.
(2) EBITDA consists of earnings before interest, income taxes, depreciation and
amortization. EBITDA is presented as additional information because it is
commonly used in the industry, and PDS believes it to be a useful indicator
of a company's ability to meet its debt service requirements. It is not,
however, intended as an alternative measure of operating results or cash
flow from operations (as determined in accordance with generally accepted
accounting principles).
(3) Adjusted to reflect the sale of the 10,000 Units offered hereby and the
application of the Company's estimated net proceeds therefrom.
(4) For accounting purposes, the gross sales price of the Units will be
allocated $9,500,000 to the Notes and $500,000 to stockholders' equity to
reflect the estimated value of the Warrants.
6
<PAGE>
RISK FACTORS
THE UNITS OFFERED BY THIS PROSPECTUS INVOLVE CERTAIN RISKS. THE FOLLOWING
FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING AN INVESTMENT IN THE
COMPANY. CERTAIN STATEMENTS SET FORTH BELOW CONSTITUTE "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF THE REFORM ACT. SEE "FORWARD-LOOKING
STATEMENTS" FOR FACTORS RELATING TO SUCH STATEMENTS.
STRICT REGULATION BY GAMING AUTHORITIES. Financing gaming equipment and
supplying reconditioned gaming machines to casino operators in the United States
are subject to strict regulation under various state, county and municipal laws.
The Company and its required directors, officers and shareholders have received
the necessary licenses, permits and authorizations required to own and
distribute gaming machines in Nevada, New Jersey, Colorado, Iowa and Minnesota
and have license applications pending in Mississippi and Indiana. Failure of the
Company or any of its key personnel to obtain or maintain the requisite
licenses, permits and authorizations would have a material adverse effect on the
Company. Expansion of the Company's activities may be hindered by delays in
obtaining requisite state licenses. No assurance can be given as to the term for
which the Company's license will be renewed in a particular jurisdiction or as
to what license conditions, if any, may be imposed by such jurisdiction in
connection with any future renewals. The Company cannot predict the effects that
adoption of and changes in gaming laws, rules and regulations might have on its
future operations. See "Business--Government Regulation."
COMPETITION. In recent years, the Company has focused solely on providing
financing to the gaming industry and, since late 1997, supplying reconditioned
gaming machines to casino operators in the United States. In the gaming
equipment financing market, the Company competes primarily with equipment
manufacturers and, to a lesser extent, with leasing companies, commercial banks
and other financial institutions. Certain of the Company's competitors are
significantly larger and have substantially greater resources than the Company.
With respect to the sales of reconditioned gaming machines, the Company competes
primarily against equipment manufacturers and smaller distributors. It is
possible that new competitors may engage in gaming equipment financing or the
distribution of reconditioned gaming machines, some of which may have licenses
to own or sell gaming equipment and have greater financial resources than the
Company. Significant competition encountered by the Company may have a material
adverse effect on the Company. There can be no assurance that the Company will
be able to compete successfully against current and future competitors. See
"Business--Competition."
DEMAND FOR THE COMPANY'S PRODUCTS AND SERVICES. The Company believes that
its ability to increase revenues, cash flow and profitability will depend, in
part, upon continued market acceptance of the Company's products and services,
particularly SlotLease and PDS Slot Source. There can be no assurance that the
market acceptance of the Company's products and services will continue. Changes
in market conditions in the gaming industry and in the financial condition of
casino operators, such as consolidation within the industry or other factors,
could limit or diminish market acceptance of these products and services.
Historically, the Company has experienced significant nonrecurring revenues in
connection with its financings and sales of gaming equipment to casino
operators. The Company has attracted new customers to replace these nonrecurring
revenues. Insufficient market acceptance of the Company's products and services
could have a material adverse effect on the Company's business, financial
condition and results of operations.
CONTINUED AVAILABILITY OF ADEQUATE FINANCING. The amount and number of
financing transactions that can be originated by the Company are directly
dependent upon and limited by its ability to fund such transactions, either
through the sale of such transactions to institutional investors or through the
Company's working capital, lines of credit or other financing sources. In
addition, the Company desires to expand its lines of credit to allow it to hold
a greater volume of transactions, particularly leases, in its portfolio. There
is no assurance that the Company's present funding sources will be willing to
purchase future transactions, expand existing lines of credit or continue to
provide the Company with a source of funds. Further, there can be no assurance
that the Company would be able to locate new funding sources,
7
<PAGE>
if needed. As a result, funding for the Company's transactions may not be
available on acceptable terms or on a timely basis, if at all. The inability of
the Company to obtain suitable and timely funding for its transactions could
have a material adverse effect on the Company's operations.
ABILITY TO RECOVER INVESTMENT IN EQUIPMENT. The gaming equipment leased
under operating leases by the Company and the inventory of reconditioned gaming
machines represents a substantial portion of the Company's capital. Under the
operating leases offered through the SlotLease program, the Company retains
title to the gaming equipment and assumes the risk of not recovering its entire
investment in the gaming equipment through either re-leasing or selling the
gaming equipment. At the inception of each operating lease, the Company
estimates the residual value of the leased equipment, which is the estimated
market value of the equipment at the end of the initial lease term. The actual
residual value realized may differ from the estimated residual value, resulting
in a gain or loss when the leased equipment is sold or re-leased at the end of
the lease term. The inability to re-lease or sell the gaming equipment on
favorable terms could have a material adverse effect on the Company.
The Company also engages in the purchase, reconditioning and resale of used
gaming machines. There can be no assurances that the Company will be able to
recover its cost for such gaming machines, and the failure to do so could have a
material adverse effect on the Company.
RISKS RELATING TO PDS SLOT SOURCE. The PDS Slot Source program, which the
Company established in 1997, has a limited operating history and is subject to
various risks, including the inability to find adequate sources of used gaming
machines, the inability to obtain or delays in obtaining parts necessary to
refurbish used gaming machines, competitors' control over the supply of certain
parts and changes in market conditions relating to refurbished gaming machines,
the occurrence of any of which could have a material adverse effect on the
Company.
RISKS RELATING TO FINANCING TRANSACTIONS. The Company has funded selected
gaming equipment transactions entirely with its own working capital or with
borrowed funds rather than immediately selling the transactions to institutional
investors. In certain situations, the Company retains a portion of the
transactions it originates. This approach requires substantial capital and
places the Company at risk for its investment in the transactions, which may
subject the Company to greater loss in the event of a default by the lessee or
borrower, or an inability to sell the transactions to institutional investors
after a period of temporary investment by the Company. In connection with its
financing transactions, the Company's level of risk depends primarily on the
creditworthiness of the lessee or borrower and the underlying collateral.
In addition, the Company has provided, and may provide in the future,
financing to Indian tribes. Indian tribes in the United States generally enjoy
sovereign immunity from lawsuits, similar to that of the United States
government. Although the Company generally obtains a waiver of sovereign
immunity, there can be no assurance that a tribe will not assert sovereign
immunity, even if such right has been waived. The law regarding sovereign
immunity is unsettled. If any Indian tribe defaults and successfully asserts its
right of sovereign immunity, the Company's ability to recover its investment and
originate and sell future Indian gaming transactions could be materially
adversely affected.
No assurance can be given that the Company will not incur significant losses
with respect to financing transactions in the future or that such losses will
not have a material adverse effect on the Company's financial condition. See
"Business--Structure of Financing Transactions."
SUBORDINATION; ABSENCE OF SECURITY. The Notes offered hereby are unsecured
and subordinated in right of payment to all Senior Indebtedness of the Company
as defined in the Indenture. Therefore, in the event of a liquidation or
reorganization of the Company, amounts due pursuant to the Notes will be paid
only after all Senior Indebtedness, including interest thereon, has been paid in
full. Accordingly, in such circumstances, sufficient assets may not be available
to pay amounts due on the Notes. As of December 31, 1997, the aggregate
principal amount of Senior Indebtedness outstanding was $17.3 million. The
Company may incur additional Senior Indebtedness. See "Description of
Units--Notes."
8
<PAGE>
DEPENDENCE ON CURRENT MANAGEMENT. The Company's success is largely
dependent on the efforts of Johan P. Finley, its founder, President and Chief
Executive Officer. Although the Company maintains $2 million of "key person"
term life insurance and has an employment agreement with Mr. Finley, the loss of
Mr. Finley's services could have a material adverse effect on the Company's
business. See "Management."
LIMITED MARKET FOR UNITS, NOTES AND WARRANTS. Prior to this Offering, there
has been no public market for the Units, the Notes or the Warrants. Although the
Company has applied to list the Warrants on The Nasdaq National Market, there
can be no assurance that an active public market for the Warrants will develop
or can be sustained. The Units and the Notes will not be listed on any
securities exchange or the Nasdaq system and there can be no assurance that a
market for the Units or the Notes will develop. While the Underwriter has
advised the Company that it intends initially to make a market in the Units,
Notes and Warrants, it has no obligation to do so. Any market that may develop
for such securities is expected to be of a limited nature. As a result, an
investment in the Units may not be suitable for investors who do not wish, or
who are not financially able, to remain as investors for a substantial period of
time. See "Underwriting."
EFFECTIVE FEDERAL AND STATE REGISTRATIONS REQUIRED TO EXERCISE WARRANTS;
POSSIBLE REDEMPTION OF WARRANTS. Purchasers of the Units will be able to
exercise the Warrants only if a registration statement covering the Common Stock
underlying the Warrants is then in effect under the Securities Act of 1933, as
amended (the "Securities Act") or an exemption from registration under the
Securities Act is available, and only if such Common Stock is qualified for sale
or exempt from qualification under applicable securities laws of the states in
which the holders of the Warrants reside. Although the Company will use its best
efforts (i) to maintain the effectiveness of the registration statement covering
the Common Stock underlying the Warrants pursuant to the Securities Act and (ii)
to maintain the registration of such Common Stock under the securities laws of
the states in which the Company initially qualifies the Units for sale in this
Offering, there can be no assurance that the Company will be able to do so. The
Company will not be able to issue shares of Common Stock to those persons
desiring to exercise the Warrants if a registration statement is not kept
effective under the Securities Act or an exemption from registration under the
Securities Act is not available, or if the Common Stock underlying the Warrants
is not qualified or exempt from qualification in the states where the holders of
the Warrants reside. In such a case, a holder of the Warrants might not be able
to exercise the Warrants when such holder desires and, as a result, could be
required to hold the Warrants for a period of time until a registration
statement is effective or an exemption from registration is available or sell
the Warrants. See "Risk Factors--Limited Market for Units, Notes and Warrants"
and "Description of Units--Warrants."
After the first anniversary of the date of this Prospectus, the Warrants are
subject to redemption at any time by the Company at a price of $.01 per Warrant
on 30 days prior written notice if the closing price of the Common Stock exceeds
250% of the exercise price of the Warrants for each of the 20 consecutive
trading days prior to such notice. If the Warrants are redeemed, holders of such
Warrants will lose their right to exercise the Warrants, except during such
30-day period. Redemption of the Warrants could force the holders to exercise
the Warrants at a time when it may be disadvantageous for the holders to do so
or to sell the Warrants at the then current market price or accept the
redemption price, which will be substantially less than the market value of the
Warrants at the time of redemption. See "Description of Units--Warrants."
POTENTIAL FLUCTUATIONS IN RESULTS. The Company's quarterly results have
historically fluctuated due to the timing of completion of large financing
transactions, as well as the timing of recognition of the resulting fee income
upon subsequent sale of a transaction, which can occur several months after the
date such transaction was originated by the Company. These transactions can be
in the negotiation and documentation stage for several months, and recognition
of the resulting fee income by the Company is difficult to predict and may
fluctuate greatly from quarter to quarter. Thus, the results of any quarter are
not necessarily indicative of the results that may be expected for any other
interim period. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
9
<PAGE>
CONTROL BY CURRENT MANAGEMENT. Johan P. Finley, the Company's founder,
President, and Chief Executive Officer, owns approximately 31% of the Company's
outstanding Common Stock. In addition, Mr. Finley's wife and child own an
aggregate of approximately 10% of the Company's outstanding Common Stock. Thus,
Mr. Finley effectively controls the election of all members of the Company's
Board of Directors and determines all corporate actions. Such ownership may
discourage acquisition of large blocks of the Company's securities and may
depress the price of the Common Stock and have an anti-takeover effect. See
"Principal Stockholders" and "Description of Securities--Common Stock."
ANTI-TAKEOVER PROVISIONS; PREFERRED STOCK. The Company's Amended and
Restated Articles of Incorporation provide that no investor may become a holder
of 5% or more of the Company's stock without first agreeing to consent to a
background investigation, provide a financial statement and respond to questions
from gaming regulators. In addition, investors holding less than 5% of the
Company's stock may be subject to the same requirements by regulatory agencies
which license the Company. Such ownership limitations may discourage acquisition
of large blocks of the Company's equity securities, may depress the price of the
Company's Common Stock and have an anti-takeover effect.
The Company's Amended and Restated Articles of Incorporation authorize its
Board of Directors to issue preferred stock and establish the rights and
preferences of such shares without stockholder approval. The voting rights of
the preferred stock may be greater than the voting rights of the Common Stock in
certain circumstances, and thus the issuance of preferred stock may diminish the
voting power of holders of the Common Stock and make it more difficult for a
third party to acquire the Company. See "Description of Securities."
The Company's directors are subject to investigation and review by gaming
regulators in jurisdictions in which the Company is licensed or has applied for
a license. Such investigation and review of the Company's directors may have an
anti-takeover effect. See "Business--Government Regulation."
As a Minnesota corporation, the Company is subject to certain
"anti-takeover" provisions of the Minnesota Business Corporation Act. These
provisions and the power to issue additional stock and to establish separate
classes or series of stock may, in certain circumstances, deter or discourage
takeover attempts and other changes in control of the Company not approved by
the Board. See "Description of Securities--Certain Provisions Having
Anti-Takeover Effects."
FORWARD-LOOKING STATEMENTS
Certain statements under the captions "Prospectus Summary," "Risk Factors,"
"Use of Proceeds," "Management's Discussion and Analysis of Financial Condition
and Results of Operation" and "Business" and elsewhere in this Prospectus
constitute "forward-looking statements" within the meaning of the Reform Act.
Such forward-looking statements may be identified by the use of terminology such
as "believe," "may," "will," "expect," "anticipate," "intend," "designed,"
"estimate," "should" or "continue" or the negatives thereof or other variations
thereon or comparable terminology. Such forward-looking statements involve known
or unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company, or industry results, to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among other things, the following: strict regulation by gaming authorities;
competition the Company faces or may face in the future; uncertainty of market
acceptance of the SlotLease program and PDS Slot Source program; the ability of
the Company to continue to obtain adequate financing; the ability of the Company
to recover its investment in gaming equipment leased under operating leases as
well as its investment in used gaming machines purchased for refurbishment and
resale to customers; the risks relating to the PDS Slot Source program; the risk
of default with respect to the Company's financing transactions; the
subordination of the Notes; the Company's dependence on key employees; potential
fluctuations in the Company's quarterly results; general economic and business
conditions; and other factors referenced in this Prospectus. See "Risk Factors."
10
<PAGE>
USE OF PROCEEDS
The net proceeds from the sale of the Units offered by the Company hereby,
after deduction of the selling and estimated offering expenses, are estimated to
be $8,850,000 ($10,207,500 if the Underwriter's over-allotment option is
exercised in full). The Company intends to use the net proceeds to purchase
gaming machines from gaming equipment manufacturers to be leased to casino
operators and the remaining proceeds for general corporate purposes.
Depending upon the nature and timing of the purchase described above and
other leasing transactions, some of the proceeds may be used to temporarily
reduce amounts owed by the Company under three of its revolving credit
facilities with banks. Borrowings under all of these revolving credit facilities
bear interest at a rate equal to the prime rate plus 1%. Borrowings outstanding
under the first revolving credit facility are due upon the earlier of demand by
the bank or August 15, 1998. Borrowings outstanding under the second and third
revolving credit facilities are due on May 1, 1998 and April 9, 2000,
respectively. Borrowings under the first revolving credit facilities were used
for working capital, borrowings under the second credit facility were used to
purchase gaming equipment held for sale or lease and borrowings under the third
revolving credit facility were used to purchase gaming equipment for lease to
casino operators. If the Company uses some or all of the net proceeds to
temporarily reduce amounts owed under the three credit facilities, the Company
will subsequently borrow from such facilities to purchase the gaming machines
described above. See "Forward-Looking Statements," "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
PRICE RANGE OF COMMON STOCK
The Company's Common Stock trades on the Nasdaq National Market under the
symbol "PDSF." The following table sets forth the high and the low sale prices
of the Company's Common Stock as reported by the Nasdaq National Market for each
of the quarters in the two year period ended December 31, 1997.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
1996
First Quarter.............................................................. $ 3.000 $ 1.375
Second Quarter............................................................. 2.875 1.875
Third Quarter.............................................................. 2.625 1.875
Fourth Quarter............................................................. 2.500 1.750
1997
First Quarter.............................................................. 3.375 1.750
Second Quarter............................................................. 5.000 2.625
Third Quarter.............................................................. 6.375 3.875
Fourth Quarter............................................................. 8.500 6.000
</TABLE>
As of December 31, 1997, there were approximately 60 stockholders of record
of the Company's Common Stock.
DISTRIBUTIONS AND DIVIDEND POLICY
The Board of Directors presently expects to retain all earnings for
operating purposes and does not expect to pay dividends on the Common Stock for
the foreseeable future. In addition, the Indenture prohibits the payment of
dividends for so long as any of the Notes are outstanding, and the Company's
revolving credit agreements place restrictions on the Company's ability to pay
dividends or make other distributions on its Common Stock. The payment by the
Company of dividends, if any, on its Common Stock in the future is subject to
the discretion of the Board of Directors and will depend on the Company's
earnings, financial condition, capital requirements and other relevant factors.
11
<PAGE>
CAPITALIZATION
The following table sets forth the debt and capitalization of the Company as
of December 31, 1997 and as adjusted to give effect to the sale of the 10,000
Units offered by the Company hereby and the application of the estimated net
proceeds of such sale. See "Use of Proceeds."
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------------------
AS
ACTUAL ADJUSTED(1)(2)
------------- ----------------
<S> <C> <C>
Non-recourse indebtedness....................................................... $ 10,121,389 $ 10,121,389
Other recourse debt............................................................. 17,325,501 17,325,501
Convertible subordinated debentures............................................. 89,117 89,117
10% Senior Subordinated Notes(3)................................................ -- 8,350,000
------------- ----------------
Total debt.................................................................... 27,536,007 35,886,007
------------- ----------------
Preferred Stock, 2,000,000 shares authorized;
no shares issued and outstanding.............................................. -- --
Common Stock, $.01 par value, 20,000,000 shares authorized;
3,523,972 shares issued and outstanding(2).................................... 35,240 35,240
Additional paid-in capital(3)................................................... 9,695,056 10,195,056
Retained earnings (accumulated deficit)......................................... (1,100,950) (1,100,950)
------------- ----------------
Total stockholders' equity.................................................... 8,629,346 9,129,346
------------- ----------------
Total capitalization.......................................................... $ 36,165,353 $ 45,015,353
------------- ----------------
------------- ----------------
</TABLE>
- ------------------------
(1) Adjusted to reflect the sale of the 10,000 Units offered by the Company
hereby and the anticipated application of the net proceeds.
(2) Does not include (i) 552,454 shares of Common Stock issuable upon exercise
of outstanding stock options, (ii) up to 21,000 shares of Common Stock
issuable upon conversion of the Convertible Subordinated Debentures, (iii)
164,200 shares issuable upon the exercise of outstanding warrants, (iv)
500,000 shares issuable upon the exercise of the Warrants that are a part of
the 10,000 Units offered hereby, or (v) 50,000 shares issuable to the
Underwriter upon exercise of the Underwriter's Warrant issued in connection
with this offering. See "Management--Stock Option Plan," "Description of
Securities--Convertible Subordinated Debentures" and "Underwriting."
(3) For accounting purposes, the gross sales price of the Units will be
allocated $9,500,000 to the Notes and $500,000 to stockholders' equity to
reflect the estimated value of the Warrants.
12
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth summary consolidated financial and operating
data of the Company for the periods indicated. This information should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's consolidated financial statements
and related notes included elsewhere in this Prospectus:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996
------------- -------------
<S> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Equipment Sales.................................................................. $ 17,481,986
Revenue from sales-type leases................................................... 14,480,372
Rental revenue on operating leases............................................... 11,405,648 $ 2,938,477
Fee income....................................................................... 2,669,798 2,486,366
Finance income................................................................... 1,575,466 798,324
Other............................................................................ 137,327
------------- -------------
Total revenues................................................................. 47,613,259 6,360,494
------------- -------------
Costs and expenses:
Equipment sales.................................................................. 15,225,203
Sales-type leases................................................................ 13,654,086
Depreciation on operating leases................................................. 8,588,611 2,203,476
Selling, general and administrative.............................................. 4,126,232 2,318,774
Interest......................................................................... 4,260,096 1,353,925
Other............................................................................ 240,176
------------- -------------
Total costs and expenses....................................................... 46,094,404 5,876,175
------------- -------------
Income before income taxes......................................................... 1,518,855 484,319
Provision for income taxes......................................................... 577,000 179,000
------------- -------------
Net income..................................................................... $ 941,855 $ 305,319
------------- -------------
------------- -------------
Earnings per share(1):
Basic............................................................................ $ .30 $ .10
Diluted.......................................................................... $ .28 $ .10
Number of shares used to compute per share data(1):
Basic............................................................................ 3,183,536 3,119,816
Diluted.......................................................................... 3,619,837 3,126,848
BALANCE SHEET DATA:
Investment in notes and leasing operations......................................... $ 33,734,722 $ 30,698,481
Total assets....................................................................... 39,963,832 40,561,727
Non-recourse debt.................................................................. 10,121,389 17,917,461
Other recourse debt................................................................ 17,414,618 7,723,756
Total stockholders' equity......................................................... 8,629,346 5,737,325
</TABLE>
- ------------------------
(1) See Note 1 of Notes to Consolidated Financial Statements for the method used
to determine the number of shares used to compute per share amounts.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF THE COMPANY SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS.
CERTAIN STATEMENTS SET FORTH BELOW CONSTITUTE "FORWARD-LOOKING STATEMENTS"
WITHIN THE MEANING OF THE REFORM ACT. SEE "FORWARD-LOOKING STATEMENTS" FOR
FACTORS RELATING TO SUCH STATEMENTS.
GENERAL
The Company engages in the business of financing and leasing gaming
equipment and supplying reconditioned gaming machines to casino operators. The
gaming equipment financed by the Company consists mainly of slot machines, video
gaming machines and other gaming devices. In addition, the Company finances
furniture, fixtures and other gaming related equipment, including gaming tables
and chairs, restaurant and hotel furniture, vehicles, security and surveillance
equipment, computers and other office equipment. In 1996, the Company introduced
SlotLease, a specialized operating lease program for slot machines and other
electronic gaming devices.
The Company believes it is currently the only independent leasing company
licensed in the states of Nevada, New Jersey, Colorado, Iowa and Minnesota to
provide this financing alternative. In 1997, the Company established PDS Slot
Source, a reconditioned gaming machine sales and distribution program, to
complement its leasing and financing activities.
The Company's strategy is to increase both its portfolio of assets under
lease and its reconditioned gaming machine sales and thereby increase revenues
and cash flow. In addition to its leasing activities, the Company also
originates note transactions, which it generally sells to institutional
investors. In some of its transactions, the Company holds the leases or notes
for a period of time after origination or retains a partial ownership interest
in the leases or notes. The Company believes its ability to recondition and
distribute used gaming machines enhances the market value of gaming machines at
the end of an operating lease and facilitates additional financing transactions.
The Company's quarterly operating results, including net income, have
historically fluctuated due to the timing of completion of large financing
transactions, as well as the timing of recognition of the resulting fee income
upon subsequent sale. These transactions can be in the negotiation and
documentation stage for several months, and recognition of the resulting fee
income by the Company may fluctuate greatly from quarter to quarter. Thus, the
results of any quarter are not necessarily indicative of the results that may be
expected for any other period. The Company believes that the development of its
lease portfolio will lead to increased recurring rental revenues, which will
tend to lessen the fluctuations of its operating results.
ACCOUNTING FOR COMPANY ACTIVITIES
The accounting treatment for the Company's financing activities varies
depending upon the underlying structure of the transaction. The majority of the
Company's equipment transactions are structured as either notes receivable or
direct finance leases in which substantially all benefits and risks of ownership
are borne by the borrower or lessee. In accordance with the Statement of
Financial Accounting Standards (SFAS) No. 13, direct finance leases are afforded
accounting treatment similar to that for notes receivable. In 1996, the Company
began structuring some of its gaming equipment financings as operating leases
under which the Company retains substantially all of the benefits and risks of
ownership. In the third quarter of 1997, the Company began structuring certain
of its gaming equipment transactions as sales-type leases. Consistent with the
Company's strategy to increase its leasing activities, the 1996 and 1997
originations involve a greater mix of operating leases, which generate revenues
throughout the lease term, as opposed to notes or direct finance leases, which
generate revenues primarily upon sale.
14
<PAGE>
The Company's revenue generating activities can be categorized as follows:
(i) EQUIPMENT SALES; (ii) REVENUE FROM SALES-TYPE LEASES; (iii) RENTAL REVENUE
ON OPERATING LEASE ACTIVITY; (iv) FEE INCOME, resulting principally from the
sale of lease or note receivable transactions; and (v) FINANCE INCOME, resulting
from financing transactions in which the direct finance lease or note receivable
is retained by the Company.
The types of income are further described below:
EQUIPMENT SALES. In mid-1997, the Company established a reconditioned
gaming machine sales and distribution program, PDS Slot Source. Used gaming
machines are obtained by the Company either from its customers at the end of an
applicable lease term or in the marketplace. The cost of this equipment is
recorded in the consolidated balance sheet as equipment held for sale or lease.
At the time of sale, the Company records revenue equal to the selling price of
the related asset. Upon selling reconditioned gaming machines, the Company
removes the underlying asset from its consolidated balance sheet. Equipment
sales also includes the sale of equipment which may occur during the term of an
operating lease.
REVENUE FROM SALES-TYPE LEASES. Beginning in the third quarter of 1997, the
Company structured certain of its gaming equipment transactions as sales-type
leases. Sales-type leases, like direct-finance leases, transfer substantially
all the benefits and risks of ownership of the leased asset to the lessee.
Unlike direct finance leases, sales-type leases also include dealer profit
resulting from the Company leasing equipment which was purchased at a discount
that is not available to the lessee. This dealer profit is recognized at the
inception of the lease in the consolidated income statement as the difference
between income from sales-type leases and sales-type lease cost. Revenue from
sales-type leases is the present value of the future minimum lease payments.
Sales-type lease cost is the Company's equipment cost, net of any discounts.
Upon selling a sales-type lease to a third party, the Company removes the
underlying asset from its consolidated balance sheet.
RENTAL REVENUE ON OPERATING LEASES. Operating leases are defined as those
leases in which substantially all the benefits and risks of ownership of the
leased asset are retained by the Company. Revenue from operating leases consists
of monthly rentals and is reflected in the consolidated income statement evenly
over the life of the lease as rental revenue on operating leases. The cost of
the related equipment is depreciated on a straight-line basis over the lease
term to the Company's estimate of residual value. This depreciation is reflected
on the consolidated income statement as depreciation on operating leases.
For operating leases, the cost of equipment, less accumulated depreciation,
is recorded in the consolidated balance sheet as EQUIPMENT UNDER OPERATING
LEASES, NET.
FEE INCOME. The Company funds much of the direct finance lease and note
transactions it originates through a sale of such transactions (i.e., the sale
of all of the Company's right, title and interest in the future payment stream
from the related leases or notes). A sale may occur simultaneously with the
origination or several months thereafter. At the time of sale, the Company
records fee income equal to the difference between the selling price and the
carrying value of the related financial asset. The calculation of fee income
reflects many factors, including the credit quality of the borrowers or lessees,
the type of underlying equipment, credit enhancements, if any and ultimately,
the terms under which the transaction was both originated and sold. Fee income
also includes commissions earned for arranging financing in which the Company is
not a party to the transaction.
Upon the sale of a lease or note, the Company removes the underlying asset
from its consolidated balance sheet.
FINANCE INCOME. For the period during which the Company holds a note
receivable or direct finance lease, finance income is recognized over the term
of the underlying lease or note in a manner which produces a constant percentage
rate of return on the asset carrying cost.
15
<PAGE>
For those direct finance leases held by the Company, the present value of
the future minimum lease payments are recorded in the consolidated balance sheet
as DIRECT FINANCE LEASES.
RESULTS OF OPERATIONS FOR YEARS ENDED DECEMBER 31, 1997 AND 1996
Revenues totaled $47.4 million in 1997, a significant increase from $6.4
million in 1996. The increase in revenues is primarily attributable to equipment
sales, sales-type leases of new gaming equipment as well as the Company's
expanded lease portfolio. Revenues have also benefited from the Company becoming
licensed to own gaming equipment in Nevada and other jurisdictions in 1997.
Gross originations of financing transactions in 1997 totaled $84.4 million
compared to $73.8 million in 1996, an increase of 14%.
EQUIPMENT SALES totaled $17.5 million in 1997. The Company did not sell
equipment in 1996. The Company has obtained its gaming equipment distributor
licenses in Nevada, New Jersey, Colorado, Iowa and Minnesota and, in 1997,
established its reconditioned gaming machine sales and distribution program, PDS
Slot Source. The 1997 equipment sales include both equipment which had been
under operating leases, and used gaming machines which the Company purchased in
the marketplace and reconditioned prior to sale. The cost of equipment sold was
$15.2 million.
REVENUE FROM SALES-TYPE LEASES was $14.5 million in 1997, resulting from the
Company's first sales-type leases of new gaming equipment. Consistent with the
growth of the distribution business described above, the Company intends to
continue to offer this type of lease. The Company did not originate sales-type
leases during 1996. The related cost of these sales-type leases was $13.7
million in 1997.
RENTAL REVENUE ON OPERATING LEASES increased significantly, consistent with
the Company's strategy. The Company's average operating lease portfolio grew
substantially to $27.7 million during 1997, compared to $9.1 million during
1996. Rental revenue on operating leases increased to $11.4 million during 1997
from $2.9 million during 1996. Related depreciation also increased to $8.6
million from $2.2 million. These leases are expected to generate revenues
throughout their lease terms, which range from 24 months to 48 months and are
typically 36 months.
FEE INCOME was $2.7 million related to the sale of transactions with a basis
of $74.5 million during 1997, compared to fee income of $2.5 million on the sale
of transactions with a basis of $52.9 million during 1996.
FINANCE INCOME increased to $1.6 million in 1997 from $0.8 million in 1996.
The increase primarily reflects the larger portfolio of notes receivable held by
the Company in 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES in 1997 increased to $4.1
million from $2.3 million in 1996, primarily attributable to higher payroll and
occupancy costs associated with the expansion of the sales activities and the
formation of the reconditioned gaming machine program in Las Vegas, Nevada in
1997.
INTEREST EXPENSE increased to $4.3 million from $1.4 million due to higher
levels of borrowing directly related to the larger investment in equipment for
leasing beginning in the second half of 1996.
OTHER EXPENSE in 1997 primarily reflects the loss on the sale of certain
marketable securities.
INCOME BEFORE INCOME TAXES increased $1.0 million to $1.5 million for 1997,
compared with $0.5 million for 1996. The improvement in 1997 reflects the profit
contributions from equipment sales, sales-type leases and operating lease
activities, partially offset by higher related costs and expenses, as described
above.
INCOME TAXES The Company's effective income tax rate in 1997 was
approximately 38%, compared to approximately 37% in 1996. Both effective rates
are higher than the federal statutory rate of 34%, due primarily to state income
taxes.
16
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The funds necessary to support the Company's activities have been provided
by cash flows generated primarily from the operating activities described above
and various forms of recourse and non-recourse borrowings. The Company's
strategy to increase its leasing activities involves a higher level of
investment in equipment under operating leases and equipment held for sale or
lease, financed through discounted lease rentals and notes payable. The Company
expects its lease portfolio to generate recurring cash flow from operations
throughout the lease term.
The Company's cash and cash equivalents totaled $1.9 million at December 31,
1997, a decrease of $0.9 million from December 31, 1996. During 1997, cash flow
provided by operating activities totaled $12.8 million, an increase of $3.4
million from 1996. The higher level of cash provided by operating activities in
1997, when compared with 1996, primarily results from the Company's expanded
leasing activities. The cash provided by investing activities in 1997 primarily
reflects $14.7 million in proceeds from the sale of leased equipment, partially
offset by $11.0 million of new investment in equipment for leasing. The majority
of the proceeds from the sale of equipment under operating leases were used to
pay related borrowings, primarily discounted lease rentals. The higher level of
proceeds from, and payments on, notes payable in 1997 reflect the utilization of
the Company's new revolving credit and working capital facilities. The greater
magnitude of operating and financing activities in 1997 reflects the higher
level of originations and larger lease portfolio, as discussed above.
At December 31, 1997 total borrowings were $27.5 million, up from $25.6
million at December 31, 1996. The majority of the proceeds from borrowings were
invested in equipment in the Company's leasing operations. The Company's
recourse debt to equity ratio was 2.0:1 at December 31, 1997 compared with 1.3:1
at December 31, 1996. The following summarizes the significant borrowing
activities of the Company.
DEBT FINANCING
DISCOUNTED LEASE RENTALS. Subsequent to origination of certain leases, the
Company discounts the remaining leases payments with various financial
institutions in return for a cash payment based on the present value of such
payments. Proceeds from discounting are recorded in the Company's consolidated
balance sheet as discounted lease rentals. The discounted lease rentals are
generally non-recourse to the Company. As lessees make payments, rental revenue
on operating leases is recorded by the Company with an offsetting charge to
interest expense and a reduction in the discounted lease rentals utilizing the
interest method. Total discounted lease rentals decreased to $5.9 million as of
December 31, 1997 from $18.0 million as of December 31, 1996. The net decrease
of $12.1 million is primarily the result of principal payments of $18.3 million,
partially offset by cash proceeds from discounting of $4.7 million and non-cash
borrowings of $1.5 million.
NOTES PAYABLE. Total notes payable increased to $21.5 million as of
December 31, 1997 from $5.8 million as of December 31, 1996 in part as a result
of advances under new revolving borrowing agreements, described in the
accompanying Notes to Consolidated Financial Statements. The net increase of
approximately $15.7 million is primarily the result of additional net non-cash
borrowings of $19.1 million, cash proceeds of $10.5 million, partially offset by
payments of $13.9 million. The non-cash borrowings are described in Note 2 of
Notes to Consolidated Financial Statements.
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CAPITAL RESOURCES
At December 31, 1997, the Company's revolving borrowing capability is $34.0
million compared with $26.0 million at December 31, 1996. Advances under these
agreements aggregated $8.4 million at December 31, 1997.
The Company's current financial resources, including estimated cash flows
from operations, the revolving credit and working capital facilities, and the
proceeds from the sale of Units in this offering are expected to be sufficient
to fund the Company's anticipated working capital needs. In addition to the
borrowing activities described above, the Company has developed a network of
financial institutions to which it sells financial transactions on a regular
basis. The Company is, from time to time, dependent upon the need to liquidate
or externally finance transactions originated and held in its investment
portfolio. The Company continues to explore other possible sources of capital,
however, there is no assurance that additional debt financing if required, can
be obtained or will be available on terms acceptable to the Company.
Inflation has not been a significant factor in the Company's operations.
YEAR 2000 ISSUE
The Company is currently evaluating the potential impact of the situation
referred to as the "Year 2000 Issue." The Year 2000 Issue concerns the inability
of computer software programs to properly recognize and process date sensitive
information relating to the Year 2000. The Company has begun evaluating its
major automated systems to determine if they are Year 2000 compliant and has
contacted the suppliers of certain of those systems to inquire about Year 2000
compliance. The Company believes that its major automated systems are Year 2000
compliant.
The Company also has electronic interfaces with certain of its suppliers.
The Company has made inquiries and received assurances from such suppliers with
respect to Year 2000 issues.
The Company believes that any costs associated with and the potential impact
of the Year 2000 Issue will not be material. However, there can be no guarantee
that the systems of other companies on which the Company's systems rely will be
timely converted, or that a failure to convert by another company, or a
conversion that is incompatible with the Company's systems would not have a
material adverse effect on the Company.
RECENT ACCOUNTING DEVELOPMENTS:
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 130, a new standard for reporting and displaying comprehensive income. This
new standard will be adopted in the first quarter of 1998. The Company does not
expect the adoption of this new standard to have a material affect on its
financial position or results of operations.
In June 1997, the FASB issued SFAS No. 131, a new standard for reporting
segment information in financial statements. The new standard will be effective
for the Company's annual financial statements in 1998. Management of the Company
is currently evaluating this standard and has not yet determined its impact on
the Company's disclosures.
The Company capitalizes certain costs of computer software developed or
obtained for internal use. The amounts capitalized are not significant and the
Company's policy for the capitalization of these costs is consistent with the
guidelines included in the American Institute of Certified Public Accountants'
recent Statement of Position for accounting for costs of computer software
developed or obtained for internal use.
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BUSINESS
CERTAIN STATEMENTS SET FORTH BELOW CONSTITUTE "FORWARD-LOOKING STATEMENTS"
WITHIN THE MEANING OF THE REFORM ACT. SEE "FORWARD-LOOKING STATEMENTS" FOR
FACTORS RELATING TO SUCH STATEMENTS.
BACKGROUND
The Company engages in the business of financing and leasing gaming
equipment and supplying reconditioned gaming machines to casino operators. The
gaming equipment financed by the Company consists mainly of slot machines, video
gaming machines and other gaming devices. In addition, the Company finances
furniture, fixtures and other gaming related equipment, including gaming tables
and chairs, restaurant and hotel furniture, vehicles, security and surveillance
equipment, computers and other office equipment. In 1996, the Company introduced
SlotLease, a specialized operating lease program for slot machines and other
electronic gaming devices. In 1997, the Company established PDS Slot Source, a
reconditioned gaming machine sales and distribution program, to complement its
leasing and financing activities.
The Company was founded in 1988 as a leasing company, specializing in
vehicle and general equipment leasing transactions. The Company began providing
equipment financing for new Indian gaming facilities in the Upper Midwest in
early 1991. Since 1994, all of the Company's gross originations have resulted
from transactions in the gaming industry. In 1996, the Company established a
sales office in Las Vegas, Nevada, which became the Company's principle
executive office in 1997.
The Company generally targets established medium-sized casino operators that
are opening new gaming facilities or expanding existing gaming facilities, as
well as new casino operators that the Company believes have acceptable credit
quality or credit enhancements provided by equipment manufacturers. Most of the
Company's equipment financing transactions range from $500,000 to $2.5 million.
The Company is currently focusing its primary efforts on the traditional gaming
markets of Nevada and New Jersey.
GAMING INDUSTRY
The casino industry in the United States, and the gaming industry in
general, have experienced substantial growth in recent years. Prior to 1979,
high stakes gaming activities were limited to Nevada. In 1979, casino gaming was
legalized in New Jersey. Between 1979 and 1988, gaming activities by various
Indian tribes developed, leading to the federal enactment of the Indian Gaming
Regulatory Act of 1988. The growth of Indian gaming served as a catalyst for
certain jurisdictions to consider non-Indian casino gaming because of its
potential as a source of government revenue. Since 1989, various forms of casino
gaming have been legalized in Colorado, Illinois, Indiana, Iowa, Louisiana,
Michigan, Mississippi, Missouri and South Dakota. In addition, gaming facilities
operate on cruise ships sailing out of California, Florida, Georgia, Hawaii and
Puerto Rico. Several other states have approved or are considering approval of
some form of casino gaming. No assurance can be given as to whether any
additional states will adopt legislation permitting casino gaming in the future
or the nature, timing and extent of casino development in any state.
According to data compiled from gaming commission reports, in 1996 there
were approximately 372,000 total slot machines installed in the United States,
compared with approximately 237,000 total slot machines installed in the United
States in 1993 and approximately 156,000 total slot machines installed in the
United States in 1990. According to data compiled from gaming commission
reports, in 1996 there were approximately 86,000 slot machines shipped in the
United States, compared with approximately 69,000 slot machines shipped in the
United States in 1993 and approximately 16,000 slot machines shipped in the
United States in 1990, which represents machines shipped to replace older
machines or new installations of machines.
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COMPANY STRATEGY
The Company believes that the gaming industry in general has entered into a
gaming equipment replacement cycle, which provides increased opportunities for
the Company's products and services. The Company believes its ability to offer
casino operators gaming devices under operating lease structures provides a
competitive advantage over financial institutions who do not possess gaming
licenses. The Company's strategy is to increase both its portfolio of assets
under lease and its reconditioned gaming machine sales, and thereby increase its
revenues and cash flow. Recently the Company has increased its focus on the
Nevada and New Jersey gaming markets, and the Company intends to further expand
its presence in those markets.
Because it is licensed to own and distribute gaming machines in key states,
the Company believes it is able to offer a wider variety of gaming equipment
financing structures, such as operating leases, which are especially important
for small to medium-sized casino operators that may be subject to financing
covenants that restrict indebtedness. While gaming equipment manufacturers and
distributors may offer financing to casino operators, this financing may not be
on the most favorable terms to casino operators, and the manufacturers and
distributors generally do not offer sufficient financing for other necessary
furniture, fixtures and equipment. The Company believes its experience in and
knowledge of the gaming industry, as well as its licenses, allow it to offer
financing packages and services that meet the needs of the gaming industry in a
more effective manner than traditional financing and leasing sources and
equipment manufacturers and distributors.
THE SLOTLEASE PROGRAM
The Company believes SlotLease, its operating lease program, has been well
received by casino operators since its introduction in 1996 because it offers
casino operators lower monthly payments and off-balance sheet financing. The
Company believes that the SlotLease program promotes its strategic objective of
increasing recurring revenues. The Company retains ownership of the gaming
equipment under operating lease, and at the end of the applicable lease term the
Company offers the casino operator an option to purchase the gaming equipment at
its then determined fair market value or extend the lease term. The Company
receives rental income under a non-cancelable lease, which ranges from 24 to 48
months and typically has a term of 36 months. The casino operator incurs rental
expense and avoids reflecting an asset and related liability on its balance
sheet. Returned gaming machines are inventoried for lease or resale by the
Company through the PDS Slot Source program.
PDS SLOT SOURCE
In May 1997, the Company introduced PDS Slot Source, its reconditioned
gaming machine sales and distribution program. The Company believes that the
secondary market for gaming machines is fragmented, underdeveloped and
represents a significant opportunity for growth. The Company obtains used gaming
machines either from its customers at the end of an applicable lease term or in
the market from distributors, brokers or operators. These gaming machines are
refurbished by the Company prior to resale or occasionally are sold "as is" to a
customer. The Company believes its ability to recondition and distribute used
gaming machines enhances the market value of gaming machines at the end of an
operating lease and facilitates additional financing transactions.
STRUCTURE OF EQUIPMENT FINANCING TRANSACTIONS
In addition to offering operating leases through its SlotLease program, the
Company also provides financing in the form of capital leases or collateralized
loans. Such financing transactions are either originated directly by the Company
with the casino operator or are structured jointly with the gaming equipment
manufacturer or distributor. Both of these types of transactions transfer
substantially all of the benefits and risks of ownership to the lessee/borrower.
Under a capital lease, the lessee is required to pay
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the Company the purchase price of the gaming equipment either throughout the
term of the lease or, if the lease payments are not sufficient to cover the
purchase price of the gaming equipment, the lessee is required to pay the
Company a balloon payment at the end of the lease term. Most of the Company's
equipment financing transactions range from $500,000 to $2.5 million. The
Company generally obtains the funds necessary for its capital lease or
collateralized loan originations by selling all or a portion of its interest in
the payment stream to one or more institutional investors, often simultaneously
with its origination of financing transactions. The sale price of a financing
transaction is based upon the discounted present value of the payment stream.
The Company's ability to locate investors to purchase its financing transactions
depends on many factors, including the credit quality of the borrowers or
lessees, the type of underlying equipment, credit enhancements, if any, and the
terms under which the transaction was both originated and sold. See "Risk
Factors--Dependence on Availability of Funding."
MARKETING
The Company's marketing strategy has been to develop working relationships
with casino operators and owners, key equipment manufacturers and distributors,
as well as relationships with investment banking firms and other sources of
financing. Management believes that the cultivation of such ongoing
relationships creates financing opportunities for the Company. While the Company
is negotiating further informal and formal commitments from other casino
operators and owners, equipment manufacturers, distributors and financial
institutions, there can be no assurance that any further agreements can be
reached or that manufacturers, distributors, or any other vendor will refer
their transactional business to the Company.
The Company's customers are primarily medium sized casinos operating mainly
in the traditional gaming markets of Nevada and New Jersey. Many of the
Company's customers have a presence in more than one geographic market. In all
of its markets, the Company generally targets established medium-sized casino
operators that are opening new gaming facilities or are expanding or
retrofitting existing facilities, as well as new casino operators that the
Company believes have acceptable credit quality or credit enhancements provided
by equipment manufacturers.
The Company advertises its products and services by participating in the
World Gaming Conference & Expo, which is held every fall in Las Vegas, Nevada.
The Company also advertises in trade magazines and occasionally sends direct
mail advertisements to medium sized casino operators.
COMPETITION
The finance industry is highly competitive. In the gaming equipment
financing market, the Company competes primarily with equipment manufacturers
and to a lesser extent with leasing companies, commercial banks and other
financial institutions. Certain of the Company's competitors are significantly
larger and have substantially greater resources than the Company. The Company
sometimes jointly markets its financing services with gaming equipment
manufacturers who may be competitors of the Company. The Company believes its
ability to offer casino operators gaming devices under operating lease
structures provides a competitive advantage over financial institutions who do
not possess gaming licenses.
The Company competes on the basis of offering flexibility in structuring
leases and other financial transactions, commitment to prompt attention to
customer needs, creative solutions to non-traditional financing requests, and
immediate reactions to changes in the financial marketplace. In addition to
financing gaming equipment, the Company finances substantially all other types
of furniture, fixture and equipment used in a casino operation.
With respect to the sales of reconditioned gaming machines, the Company
competes primarily against equipment manufacturers and smaller distributors. It
is possible that new competitors may engage in gaming equipment financing or the
distribution of reconditioned gaming machines, some of which may have licenses
to own or sell gaming equipment and have greater financial resources than the
Company.
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PRINCIPAL CUSTOMERS
Historically, the Company has experienced significant nonrecurring revenues
in connection with the completion of large gaming equipment financing
transactions. Revenues from the Company's five principal customers were 37%,
18%, 11%, 2% and 7% of total revenues during 1997 and 20%, 0%, 16%, 20% and 14%
of total revenues during 1996. The Company does not expect revenues from certain
of these customers to represent a significant percentage of its total revenues
in 1998. Due to the nature of its large gaming equipment financing transactions,
the Company believes that a significant percentage of its total revenues may be
derived from one or several of its customers in 1998.
GOVERNMENT REGULATION
Gaming is a highly regulated industry. The Company's gaming equipment
financing activities are subject to federal and state regulation and oversight.
In order to offer its SlotLease and PDS Slot Source programs, the Company must
be licensed to own and distribute gaming devices in each jurisdiction where it
conducts business. As part of the licensing process, each gaming jurisdiction
performs a thorough investigation of each applicant, its directors and certain
of its officers, key employees and significant shareholders. The Company
currently is licensed as a gaming equipment distributor under Nevada, New
Jersey, Colorado, Iowa and Minnesota gaming laws. The Company has gaming license
applications pending in Mississippi and Indiana, which were filed in 1997.
Expansion of the Company's activities may be hindered by delays in obtaining
requisite state licenses or other approvals.
No investor may become a holder of 5% or more of the Company's stock without
first agreeing to consent to a background investigation, provide a financial
statement and respond to questions from gaming regulators. See "Description of
Securities--General." In addition, investors holding less than 5% of the
Company's stock may be subject to the same requirements by regulatory agencies
which license the Company.
Gaming on Indian land is further regulated by tribal governments. Changes in
federal, state or tribal laws or regulations may limit or otherwise materially
affect the types of gaming that may be conducted on Indian land. In addition,
numerous lawsuits nationwide seek to limit or expand Indian gaming activities.
The outcome of such litigation cannot be predicted.
The following references to material statutes and regulations affecting the
Company are brief summaries thereof and do not purport to be complete, and are
qualified in their entirety by reference to such statutes and regulations. Any
change in applicable law or regulation may have a material effect on the
business of the Company.
NEVADA. The ownership, operation, sale and distribution of gaming devices
in Nevada is subject to the Nevada Gaming Control Act and the regulations
promulgated thereunder (collectively, the "Nevada Act") and various local
regulations. Generally, gaming activities (including the sale and lease of
gaming devices) may not be conducted in Nevada unless licenses are obtained from
the Nevada Gaming Commission (the "Nevada Commission") and appropriate county
and city licensing agencies. The Nevada Commission, the Nevada State Gaming
Control Board (the "Nevada Board") and the various county and city licensing
agencies are collectively referred to herein as the "Nevada Gaming Authorities."
The laws, regulations and supervisory procedures of the Nevada Gaming
Authorities are based upon declarations of public policy which are concerned
with, among other things: (i) the prevention of unsavory or unsuitable persons
from having a direct or indirect involvement with gaming at any time or in any
capacity; (ii) the establishment and maintenance of responsible accounting
practices and procedures; (iii) the maintenance of effective controls over the
financial practices of licensees, including the establishment of minimum
procedures for internal fiscal affairs and the safeguarding of assets and
revenues, providing reliable record keeping and requiring the filing of periodic
reports with the Nevada Gaming Authorities; (iv) the prevention of cheating and
fraudulent practices; and (v) providing a source of state
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and local revenues through taxation and licensing fees. Change in such laws,
regulations and procedures could have an adverse effect on the Company's
operations.
PDS Nevada, a Nevada corporation and wholly owned subsidiary of the Company,
is required to be licensed as a distributor by the Nevada Gaming Authorities.
The gaming license requires the periodic payment of fees and taxes and is not
transferable. The Company is registered by the Nevada Commission as a publicly
traded corporation ("Registered Corporation") and as such, it is required
periodically to submit detailed financial and operating reports to the Nevada
Commission and furnish any other information which the Nevada Commission may
require. No person may become a stockholder of, or receive any percentage of
profits from, the Company or PDS Nevada without first obtaining licenses and
approvals from the Nevada Gaming Authorities. The Company and PDS Nevada have
obtained from the Nevada Gaming Authorities the various registrations,
approvals, permits and licenses required to engage in gaming activities in
Nevada.
The Company may not make a public offering of its securities without the
prior approval of the Nevada Commission if the securities or proceeds therefrom
are intended to be used to construct, acquire, or finance gaming facilities in
Nevada, or to retire or extend obligations incurred for such purposes. "Gaming
facilities" has been interpreted by the Nevada Gaming Authorities to include the
acquisition or financing of gaming devices in Nevada. The Company has applied
for approval by the Nevada Commission of this Offering and received such
approval on . Furthermore, any such approval, if granted, does
not constitute a finding, recommendation, or approval by the Nevada Commission
or the Nevada Board as to the accuracy or adequacy of the prospectus or the
investment merits of the securities offered. Any representation to the contrary
is unlawful.
The Nevada Gaming Authorities may investigate any individual who has a
material relationship to, or material involvement with, the Company or PDS
Nevada in order to determine whether such individual is suitable or should be
licensed as a business associate of a gaming licensee. Officers, directors and
certain key employees of PDS Nevada must file applications with the Nevada
Gaming Authorities and may be required to be licensed or found suitable by the
Nevada Gaming Authorities. Officers, directors, and key employees of the Company
who are actively and directly involved in gaming activities of PDS Nevada may be
required to be licensed or found suitable by the Nevada Gaming Authorities. The
Nevada Gaming Authorities may deny an application for licensing for any cause
which they deem reasonable. A finding of suitability is comparable to licensing,
and both require submission of detailed personal and financial information
followed by a thorough investigation. The applicant for licensing or a finding
of suitability must pay all the costs of the investigation incurred by the
Nevada Gaming Authorities. Changes in licensed positions must be reported to the
Nevada Gaming Authorities, and in addition to their authority to deny an
application for a finding of suitability or licensure, the Nevada Gaming
Authorities have jurisdiction to disapprove a change in corporate position.
If the Nevada Gaming Authorities were to find an officer, director, or key
employee unsuitable for licensing or unsuitable to continue having a
relationship with the Company or PDS Nevada, the company involved would have to
sever all relationships with such person. In addition, the Nevada Commission may
require the Company or PDS Nevada to terminate the employment of any person who
refuses to file appropriate applications. Determinations of suitability or of
questions pertaining to licensing are not subject to judicial review in Nevada.
The Company and PDS Nevada are required to submit detailed financial and
operating reports to the Nevada Commission. Substantially all material loans,
leases, sales of securities and similar financial transactions by PDS Nevada
must be reported to, or approved by, the Nevada Commission.
If it were determined that the Nevada Act was violated by PDS Nevada, the
gaming licenses it holds could be limited, conditioned, suspended or revoked,
subject to compliance with certain statutory and regulatory procedures. In
addition, PDS Nevada, the Company, and the persons involved could be subject to
substantial fines for each separate violation of the Nevada Act at the
discretion of the Nevada
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Commission. Limitation, conditioning or suspension of any gaming license could
(and revocation of any gaming license would) materially adversely affect the
Company's gaming operations.
Any beneficial holder of the Company's voting securities, regardless of the
number of shares owned, may be required to file an application, be investigated
and have his suitability as a beneficial holder of the Company's voting
securities determined if the Nevada Commission has reason to believe that such
ownership would otherwise be inconsistent with the declared policies of the
State of Nevada. The applicant must pay all costs of investigation incurred by
the Nevada Gaming Authorities in conducting any such investigation.
The Nevada Act requires any person who acquires more than five percent of
the Company's voting securities to report the acquisition to the Nevada
Commission. The Nevada Act requires beneficial owners of more than 10 percent of
the Company's voting securities to apply to the Nevada Commission for a finding
of suitability within 30 days after the chairman of the Nevada Board mails the
written notice requiring such filing. Under certain circumstances, an
"institutional investor," as defined in the Nevada Act, which acquires more than
10 percent, but not more than 15 percent, of the Company's voting securities may
apply to the Nevada Commission for a waiver of such finding of suitability if
such institutional investor holds the voting securities for investment purposes
only. An institutional investor shall not be deemed to hold voting securities
for investment purposes unless the voting securities were acquired and are held
in the ordinary course of business as an institutional investor and not for the
purpose of causing, directly or indirectly, the election of a majority of the
members of the board of directors of the Company, any change in the Company's
corporate charter, bylaws, management, policies, or operations of the Company,
or any of its gaming affiliates, or any other action which the Nevada Commission
finds to be inconsistent with holding the Company's voting securities for
investment purposes only. Activities which are not deemed to be inconsistent
with holding voting securities for investment purposes only include: (i) voting
on all matters voted on by stockholders; (ii) making financial and other
inquiries of management of the type normally made by securities analysts for
informational purposes and not to cause a change in its management, policies or
operations; and (iii) such other activities as the Nevada Commission may
determine to be consistent with such investment intent. If the beneficial holder
of voting securities who must be found suitable is a corporation, partnership or
trust, it must submit detailed business and financial information including a
list of beneficial owners. The applicant is required to pay all costs of the
investigation incurred by the Nevada Gaming Authorities.
Any person who fails or refuses to apply for a finding of suitability or a
license within 30 days after being ordered to do so by the Nevada Commission or
the Chairman of the Nevada Board, may be found unsuitable. A record owner may
also be found unsuitable if the record owner fails to identify the beneficial
owner within 30 days of a request by the Nevada Commission or Chairman of the
Nevada Board. Any stockholder found unsuitable and who holds, directly or
indirectly, any beneficial ownership of the common stock of a Registered
Corporation beyond such period of time as may be prescribed by the Nevada
Commission may be guilty of a criminal offense. The Company is subject to
disciplinary action if, after it receives notice that a person is unsuitable to
be a stockholder or to have any other relationship with the Company or PDS
Nevada, the Company (i) pays that person any dividend or interest upon voting
securities of the Company, (ii) allows that person to exercise, directly or
indirectly, any voting right conferred through securities held by that person,
(iii) pays remuneration in any form to that person for services rendered or
otherwise, or (iv) fails to pursue all lawful efforts to require such unsuitable
person to relinquish his voting securities for cash at fair market value.
The Nevada Commission may, in its discretion, require the holder of any debt
security of a Registered Corporation to file applications, be investigated, and
be found suitable to own the debt security of a Registered Corporation. If the
Nevada Commission determines that a person is unsuitable to own such security,
then pursuant to the Nevada Act, the Registered Corporation can be sanctioned,
including the loss of its approvals, if without the prior approval of the Nevada
Commission, it: (i) pays to the unsuitable person any dividend, interest, or any
distribution whatsoever; (ii) recognizes any voting right by such
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unsuitable person in connection with such securities; (iii) pays the unsuitable
person remuneration in any form; or (iv) makes any payment to the unsuitable
person by way of principal, redemption, conversion, exchange, liquidation or
similar transaction.
The Company is required to maintain a current stock ledger in Nevada which
may be examined by the Nevada Gaming Authorities at any time. If any securities
are held in trust by an agent or by a nominee, the record holder may be required
to disclose the identity of the beneficial owner to the Nevada Gaming
Authorities. A failure to make such disclosure may be grounds for finding the
record holder unsuitable. The Company is also required to render maximum
assistance in determining the identity of the beneficial owner. The Nevada
Commission has the power to require the Company's stock certificates to bear a
legend indicating that the securities are subject to the Nevada Act. However, to
date, the Nevada Commission has not imposed such a requirement on the Company.
Changes in control of the Company through merger, consolidation, stock or
asset acquisitions, management or consulting agreements, or any act or conduct
by a person whereby he obtains control, may not occur without the prior approval
of the Nevada Commission. Entities seeking to acquire control of a Registered
Corporation must satisfy the Nevada Board and Nevada Commission under a variety
of stringent standards prior to assuming control of such Registered Corporation.
The Nevada Commission may also require controlling stockholders, officers,
directors and other persons having a material relationship or involvement with
the entity proposing to acquire control, to be investigated and licensed as part
of the approval process relating to the transaction.
The Nevada legislature has declared that some corporate acquisitions opposed
by management, repurchases of voting securities and corporate defense tactics
affecting Nevada gaming licensees, and Registered Corporations that are
affiliated with those operations, may be injurious to stable and productive
corporate gaming. The Nevada Commission has established a regulatory scheme to
ameliorate the potentially adverse effects of these business practices upon
Nevada's gaming industry and to further Nevada's policy to: (i) assure the
financial stability of corporate gaming operators and their affiliates; (ii)
preserve the beneficial aspects of conducting business in the corporate form;
and (iii) promote a neutral environment for the orderly governance of corporate
affairs. Approvals are, in certain circumstances, required from the Nevada
Commission before the Company can make exceptional repurchases of voting
securities above the current market price thereof and before a corporate
acquisition opposed by management can be consummated. The Nevada Act also
requires prior approval of a plan of recapitalization proposed by the Company's
Board of Directors in response to a tender offer made directly to the Registered
Corporation's stockholders for the purposes of acquiring control of the
Registered Corporation.
License fees and taxes, computed in various ways depending on the type of
gaming or activity involved, are payable to the State of Nevada and to the
counties and cities in which the Nevada licensee's respective operations are
conducted. Depending upon the particular fee or tax involved, these fees and
taxes are payable either monthly, quarterly, or annually. Nevada licensees that
hold a license as an operator of a slot route, or a manufacturer's or
distributor's license, also pay certain fees and taxes to the State of Nevada.
Any person who is licensed, required to be licensed, registered, required to
be registered or is under common control with such persons (collectively,
"Licensees"), and who proposes to become involved in a gaming venture outside of
Nevada is required to deposit with the Nevada Board, and thereafter maintain, a
revolving fund in the amount of $10,000 to pay the expenses of investigation of
the Nevada Board of their participation in such foreign gaming. The revolving
fund is subject to increase or decrease at the discretion of the Nevada
Commission. Thereafter, Licensees are required to comply with certain reporting
requirements imposed by the Nevada Act. A Licensee is also subject to
disciplinary action by the Nevada Commission if it knowingly violates any laws
of the foreign jurisdiction pertaining to the foreign gaming operation, fails to
conduct the foreign gaming operation in accordance with the standards of honesty
and
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integrity required of Nevada gaming operations, engages in activities that are
harmful to the State of Nevada or its ability to collect gaming taxes and fees,
or employs a person in the foreign operation who has been denied a license or
finding of suitability in Nevada on the ground of personal unsuitability.
NEW JERSEY. The Company and certain of its owners, officer, directors and
employees are currently required to be licensed under the New Jersey Casino
Control Act (the "New Jersey Act") as a gaming-related casino service industry
qualified to sell its products to casinos in New Jersey. The sale and
distribution of gaming equipment to casinos in New Jersey is also subject to the
New Jersey Act and the regulations promulgated thereunder by the New Jersey
Casino Control Commission (the "NJCCC"). The NJCCC has broad discretion in
promulgating and interpreting regulations under the New Jersey Act. Amendments
and supplements to the New Jersey Act, if any, may be of material nature, and
accordingly may adversely affect the ability of the Company or its employees to
obtain any required licenses, permits, and approvals from the NJCCC, or any
renewals thereof.
The current regulations govern licensing requirements, standards for
qualification, persons required to be qualified, disqualification criteria,
competition, investigation of supplementary information, duration of licenses,
record keeping, causes for suspension, standards for renewals or revocation of
licenses, equal employment opportunity requirements, fees and exemptions. In
deciding to grant a license, the NJCCC may consider, among other things, the
financial stability, integrity, responsibility, good character, reputation for
honesty, business ability and experience of the Company and its directors,
officers, management, and supervisory personnel, principal employees and
stockholders as well as the adequacy of the financial resources of the Company.
Pursuant to the New Jersey Act, NJCCC regulations and precedent, no entity
may hold a gaming-related casino service industry license unless each owner of
the entity who directly or indirectly holds any beneficial interest or ownership
in excess of 5% of the entity, each director of the entity (except that a
director who, in the opinion of the NJCCC is not significantly involved in or
connected with the management or ownership of the entity shall not be required
to qualify), each officer of the entity who is significantly involved in or has
authority over the conduct of business directly related to gaming activity and
each officer whom the NJCCC may consider appropriate, the management employee
supervising the regional or local office which employs the sales representative
who will deal with the casino licensees, each employee who acts as a sales
representative of who regularly engages in the solicitation of business from
casino licensees, and any person whom the NJCCC may consider appropriate for
approval or qualification, obtains and maintains qualification approval from the
NJCCC.
The NJCCC may require all financial backers, investors, mortgagees,
bondholders and holders of notes or other evidence of indebtedness, either in
effect or proposed, which bears any relation to the gaming devices being
distributed in New Jersey, publicly traded securities of an entity which holds a
casino license or is an entity qualifier, subsidiary or holding company of a
casino licensee (all of the above are collectively the "Regulated Company") to
qualify as financial sources.
An institutional investor ("Institutional Investors") is defined by the New
Jersey Act as any retirement fund administered by a public agency for the
exclusive benefit of federal, state, or local public employees; investment
company registered under the Investment Company Act of 1940; collective
investment trust organized by banks under Part Nine of the Rules of the
Comptroller of the Currency; closed end investment trust; chartered or licensed
life insurance company or property and casualty insurance company; banking or
other chartered or licensed lending institution; investment advisor registered
under the Investment Advisers Act of 1940; and such other persons as the NJCCC
may determine for reasons consistent with the policies of the New Jersey Act.
An Institutional Investor shall be granted a waiver by the NJCCC from
financial source or other qualification requirements applicable to a holder of
publicly-traded securities, in the absence of a prima facie showing by the New
Jersey Division of Gaming Enforcement that there is any cause to believe that
the Institutional Investor may be found unqualified, on the basis of the NJCCC
findings that: (a) its
26
<PAGE>
holdings were purchased for investment purposes only and, upon request by the
NJCCC, it files a certified statement to the effect that it has no intention of
influencing or affecting the affairs of the issuer, the licensee or its holding
or intermediary companies; provided, however, that the Institutional Investor
will be permitted to vote on matters put to the vote of the outstanding security
holders; and (b) if (i) the securities are debt securities of a licensee or a
licensee's holding or intermediary companies or other subsidiary company of the
licensee's holding or intermediary companies which is related in any way to the
financing of the licensee and represent either (x) 20% or less of the total
outstanding debt of the company, or (y) 50% or less of any issue of outstanding
debt of the company, (ii) the securities are under 10% of the equity securities
of a licensee or a licensee's holding or intermediary companies, or (iii) if the
securities so held exceed such percentages, upon a showing of good cause. The
NJCCC may grant a waiver of qualification to an Institutional Investor holding a
higher percentage of such securities upon a showing of good cause and if the
conditions specified above are met.
Generally, the NJCCC requires each institutional holder seeking waiver of
qualification to execute a certification to the effect that (i) the holder has
reviewed the definition of Institutional Investor under the New Jersey Act and
believes that it meets the definition of Institutional Investor; (ii) the
securities are those of a publicly traded corporation; (iii) the holder
purchased the securities for investment purposes only and holds them in the
ordinary course of business; (iv) the holder has no involvement in the business
activities of, and no intention of influencing or affecting the affairs of the
issuer, the licensee, or any affiliate; and (v) if the holder subsequently
determines to influence or affect the affairs of the issuer, the licensee of any
affiliate, it shall provide not less than 30 days' prior notice of such intent
and shall file with the NJCCC an application for qualification before taking any
such action. If an Institutional Investor changes its investment intent, or if
the NJCCC finds reasonable cause to believe that it may be found unqualified,
the Institutional Investor may take no action with respect to the security
holdings, other than to divest itself such holdings.
The New Jersey Act imposes certain restrictions upon the issuance,
ownership, and transfer of securities of a Regulated Company and defines the
term "security" to include instruments which evidence a direct or indirect
beneficial ownership or creditor interest in a Regulated Company including but
not limited to, mortgages, debentures, security agreements, notes and warrants.
If the NJCCC finds that a holder of such securities is not qualified under
the New Jersey Act, if has the right to take any remedial action it may deem
appropriate, including the right to force divestiture by such disqualified
holder of such securities. In the event that certain disqualified holders fail
to divest themselves of such securities, the NJCCC has the power to revoke or
suspend the casino service industry license of the Regulated Company which
issued the securities. If a holder is found unqualified, it is unlawful for the
holder (i) to exercise, directly or through any trustee or nominee, any right
conferred by such securities, or (ii) to receive any dividends or interest upon
any such securities or any renumeration in any form, from the licensee for
service rendered or otherwise.
If, as a result of transfer of publicly-traded securities of a Regulated
Company or a financial entity of a Regulated Company, any person is required to
qualify under the New Jersey Act, that person is required to file an application
for licensure or qualification within 30 days after the NJCCC determines that
qualification is required or declines to waive qualification.
New Jersey gaming-related casino service industry licenses are granted for a
period of two or four years, depending on the length of time a company has been
licensed, and are renewable. The NJCCC may impose such conditions upon licensing
as it deems appropriate. Licenses are also subject to suspension, revocation or
refusal for sufficient cause, including the violation of any law. In addition,
licensees are also subject to monetary penalties for violations of the New
Jersey Act or the regulations of the NJCCC.
MISSISSIPPI. The ownership, operation, sale and distribution of gaming
devices are subject to extensive state and local regulation, but primarily the
licensing and regulatory control of the Mississippi Gaming
27
<PAGE>
Commission and the regulatory control of the Mississippi State Tax Commission
(the "Mississippi Gaming Authorities").
The Mississippi Gaming Control Act (the "Mississippi Act"), which legalized
dockside casino gambling in Mississippi, was enacted on June 29, 1990. Although
not identical, the Mississippi Act is similar to the Nevada Gaming Control Act.
The Mississippi Gaming Commission has adopted regulations which are also similar
in many respects to the Nevada gaming regulations.
The laws, regulations and supervisory procedures of the Mississippi Gaming
Authorities are based upon declarations of public policy which are concerned
with, among other things: (i) the prevention of
unsavory or unsuitable persons from having direct or indirect involvement with
gaming at any time or in any capacity; (ii) the establishment and maintenance of
responsible accounting practices and procedures; (iii) the maintenance of
effective controls over the financial practices of licensees, including the
establishment of minimal procedures for internal fiscal affairs and the
safeguarding of assets and revenues, providing reliable record keeping and
requiring the filing of periodic reports with the Mississippi Gaming
Authorities; (iv) the prevention of cheating and fraudulent practices; and (v)
providing a source of state and local revenues through taxation and licensing
fees. The regulations are subject to amendment and interpretation by the
Mississippi Gaming Commission. Changes in such laws, regulations and procedures
could have an adverse affect on the Company's operations.
PDS-Mississippi is required to be licensed as a distributor by the
Mississippi Gaming Authorities. PDS-Mississippi is an applicant for a
distributor license. As an applicant, it is permitted to conduct business in
Mississippi prior to licensure in Mississippi. Distributor licenses are
nontransferable and are initially issued for a two year period and must be
periodically renewed thereafter. The license requires the periodic payment of
fees and taxes and is not transferable. The Company is an applicant for
registration with the Mississippi Gaming Commission as a publicly traded
corporation ("Registered Corporation") and as such, it will be required
periodically to submit detailed financial and operating reports to the
Mississippi Gaming Commission and furnish any other information which the
Mississippi Gaming Commission may require. PDS-Mississippi, as applicant for a
distributor license, and the Company, as an applicant as a registered
corporation, are subject to the licensing and regulatory control of the
Mississippi Gaming Authorities. If after licensure and registration,
PDS-Mississippi and the Company do not continue to satisfy the requirements of
the Mississippi Gaming Authorities, PDS-Mississippi could no longer conduct
business in Mississippi. Furthermore, if PDS-Mississippi fails to obtain
licensure and the Company fails to obtain registration, PDS-Mississippi could no
longer do business in Mississippi.
Certain officers and employees of the Company and officers, directors and
certain employees of PDS-Mississippi must be found suitable by the Mississippi
Gaming Commission. The Company believes it has applied for all necessary
findings of suitability with respect to such persons associated with the Company
or PDS-Mississippi, although the Mississippi Gaming Commission, in its
discretion may require additional persons to file applications for finding of
suitability. In addition, any persons having a material relationship or
involvement with the Company may be required to be found suitable for licensure,
in which case those persons must pay the costs and fees associated with such
investigation. The Mississippi Gaming Commission may deny an application for
licensure or finding of suitability for any cause that it deems reasonable.
Substantially all loans, leases, sales of securities and similar financial
transactions by PDS-Mississippi must be reported to or approved by the
Mississippi Gaming Commission. The Company may not make an issuance or a public
offering of its securities without the prior approval of the Mississippi Gaming
Commission if any part of the proceeds of the offering is to be used to finance
the construction, acquisition or operation of gaming facilities in Mississippi
or to retire or extend obligations incurred for one or more such purposes.
"Gaming facilities" has been interpreted by the Mississippi Gaming Commission to
include the acquisition or financing of gaming devices in Mississippi. The
Company has applied for approval by the Mississippi Gaming Commission of this
offering and received such an approval on . Such approval, if
given, does not constitute a recommendation or approval of the investment merits
of the securities subject to the offering. Any representation to the contrary is
unlawful.
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<PAGE>
If the Mississippi Gaming Commission decides that PDS-Mississippi violated a
gaming law or regulation, the Mississippi Gaming Commission could limit,
condition, suspend or revoke the license of PDS-Mississippi. In addition,
PDS-Mississippi, the Company and the persons involved could be subject to
substantial fines for each separate violation, limitation, conditioning,
suspension or revocation of any distributor license would materially adversely
affect the Company's and the PDS-Mississippi's operations.
At any time, the Mississippi Gaming Commission has the power to investigate
and require the finding of suitability of any record or beneficial owner of the
Company's shares of Common Stock. Mississippi law requires any person who
acquires more than 5% of the Company's Common Stock to report the acquisition to
the Mississippi Gaming Commission, and such person may be required to be found
suitable. Also, any person who becomes a beneficial owner of more than 10% of
the Company's Common Stock, as reported to the Commission, must apply for a
finding of suitability by the Mississippi Gaming Commission and must pay the
costs and fees the Mississippi Gaming Commission incurs conducting the
investigation. The Mississippi Gaming Commission has generally exercised its
discretion to require a finding of suitability of any beneficial owner of more
than 5% of a public company's common stock. If a stockholder who must be found
suitable is a corporation, partnership, or trust, it must submit detailed
business and financial information including a list of beneficial owners. The
Mississippi Gaming Commission has adopted a policy with respect to certain
institutional investors which may permit such investors to purchase and hold up
to 10% of a public company's common stock without a suitability finding. Such
institutional investors may be required to file certain information with the
Mississippi Gaming Commission under the policy and the Mississippi Gaming
Commission retains discretion to require finding of suitability at any time. To
date, all stockholders of the Company required to be suitable by the Mississippi
Gaming Commission have been found suitable.
Any person who fails or refuses to apply for a finding of suitability or
license within 30 days after being ordered to do so by the Mississippi Gaming
Commission may be found unsuitable. Management believes that compliance by the
Company with the licensing procedures and regulatory requirements of the
Mississippi Gaming Commission will not affect the marketability of its
securities. Any person found unsuitable and who holds, directly or indirectly,
any beneficial ownership of the securities of the Company beyond such time as
the Mississippi Gaming Commission prescribes, may be guilty of a misdemeanor.
The Company is subject to disciplinary action if, after receiving notice that a
person is unsuitable to be a stockholder or to have any other relationship with
the Company or its Mississippi Gaming Subsidiaries, the Company: (i) pays the
unsuitable person any dividend or other distribution upon the voting securities
of the Company; (ii) recognizes the exercises, directly or indirectly, of any
voting rights conferred by securities held by the unsuitable person; (iii) pays
the unsuitable person any renumeration in any form for services rendered or
otherwise, except in certain and specific circumstances; or (iv) fails to pursue
all lawful efforts to require the unsuitable person to divest himself of the
securities, including, if necessary, the immediate purchase of the securities
for cash at a fair market value.
The Company may be required to disclose to the Mississippi Gaming
Commission, upon request, the identities of the security holders including
holders of debt securities of the Company. In addition, the Mississippi Gaming
Commission under the Mississippi Act may, in its discretion, require holders of
debt securities of registered corporations to file applications, investigate
such holders, and require such holders to be found suitable to own such debt
securities. Although the Mississippi Gaming Commission does not require the
individual holders of obligations such as notes to be investigated and found
suitable, the Mississippi Gaming Commission retains the discretion to do so for
any reason, including but not limited to a default or where the holder of the
debt instrument exercises a material influence over the gaming operations of the
entity in question. Any holder of debt securities required to apply for a
finding of suitability must pay all investigative fees and costs of the
Mississippi Gaming Commission in connection with such an investigation. If the
Mississippi Gaming Commission determines that a person is unsuitable to own such
a security, then it is unlawful for the unsuitable person: (i) to receive any
dividend or interest whatsoever from the Company; (ii) to exercise any voting
right conferred by such securities or interest; or (iii) to receive any
renumeration in any form from the Company.
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<PAGE>
The Mississippi Gaming Commission has the power to require that the
Company's securities bear legend to the general effect that such securities are
subject to the Mississippi Act and the regulations of the Mississippi Gaming
Commission. The Mississippi Gaming Commission has applied power, through the
power to regulate licensees, to impose additional restrictions on the holders of
the Company's securities at any time. The Company has applied for a waiver from
the legend requirement in connection with the licensing of PDS-Mississippi.
OTHER JURISDICTIONS. The Company currently is also licensed to operate as a
distributor of gaming equipment in Colorado, Iowa and Minnesota and has a
license application pending in Indiana. Although the regulations in these
jurisdictions are not identical, their material attributes are substantially
similar, as described below.
The manufacture, sale and distribution of gaming devices and the ownership
and operation of gaming facilities in each jurisdiction are subject to various
state, county and/or municipal laws, regulations and ordinances, which are
administered by the relevant regulatory agency or agencies in that jurisdiction
(the "Gaming Regulators"). These laws, regulations and ordinances primarily
concern the responsibility, financial stability and character of gaming
equipment owners, distributors, sellers and operators, as well as persons
financially interested or involved in gaming or liquor operations.
In many jurisdictions, selling or distributing gaming equipment may not be
conducted unless proper licenses are obtained. An application for a license may
be denied for any cause which the Gaming Regulators deem reasonable. In order to
ensure the integrity of manufacturers and suppliers of gaming supplies, most
jurisdictions have the authority to conduct background investigations of a
company, its key personnel, significant stockholders, and others. The Gaming
Regulators may at any time revoke, suspend, condition, limit or restrict a
license for any cause deemed reasonable by the Gaming Regulators. Fines for
violation of gaming laws or regulations may be levied against the holder of a
license and persons involved. The Company and its key personnel have obtained
all licenses necessary for the conduct of the Company's business in the
jurisdictions in which it sells, distributes and finances gaming equipment.
Suspension or revocation of such licenses could have a material adverse effect
on the Company's operations.
LITIGATION
The Company is not a party to any significant pending legal proceedings.
EMPLOYEES
As of December 31, 1997, the Company employed 27 persons, including 6 in
direct sales and marketing, 7 in warehousing/refurbishing and 14 in general and
administrative functions. All of these persons are full-time employees. The
Company is highly dependent upon the services of Johan P. Finley, the Company's
founder, President and Chief Executive Officer, and the loss of his services
could have a material adverse effect on the Company. The Company maintains $2.0
million of "key person" term life insurance on Mr. Finley. The Company has an
employment agreement with Mr. Finley, as well as employment agreements with
Peter D. Cleary, the Company's Chief Financial Officer, Robert M. Mann, the
Company's Executive Vice President, and Lona M.B. Finley, the Company's
Treasurer. See "Management."
FACILITIES
The Company's corporate offices and warehouse are located in approximately
30,000 square feet of leased space in Las Vegas, Nevada. The Company pays
monthly rent of $20,000 pursuant to a lease expiring on January 31, 2005. The
Company has additional offices located in approximately 6,000 square feet of
leased space in Eden Prairie, Minnesota. The Company pays monthly rent of $8,000
pursuant to a lease expiring on January 14, 2000. The Company considers the
facilities as adequate and suitable for the purposes they serve.
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<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are:
<TABLE>
<CAPTION>
NAME AGE TITLE
- ---------------------------------------- --- ---------------------------------------------
<S> <C> <C>
Johan P. Finley(2)...................... 36 President, Chief Executive Officer and
Chairman of the Board
Peter D. Cleary(3)...................... 40 Vice President, Chief Financial Officer and
Secretary
Robert M. Mann.......................... 47 Executive Vice President
Lona M.B. Finley(3)..................... 33 Treasurer
Charles R. Patterson(2)................. 55 Director
Joel M. Koonce (1)(2)................... 59 Director
James L. Morrell(1)(3).................. 44 Director
David R. Mylrea......................... 40 Director
</TABLE>
- ------------------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
(3) Member of the Compliance Committee
JOHAN P. FINLEY is the founder of the Company and has been its President,
Chief Executive Officer and Chairman of the Board of Directors of the Company
since its inception in February 1988. In addition, Mr. Finley was the President
and Chief Executive Officer of RCM Inc. and Home Products, Inc. from 1991 to
1994. Mr. Finley is the spouse of Lona M.B. Finley.
PETER D. CLEARY has been Secretary of the Company since January 1998, Vice
President and Chief Financial Officer of the Company since September 1995 and
has been a Director of the Company since January 1996. From 1980 to 1995, Mr.
Cleary served in various positions with Coopers & Lybrand L.L.P., most recently
as Audit Manager. Coopers & Lybrand L.L.P. provides accounting services to the
Company.
ROBERT M. MANN has been the Executive Vice President of the Company since
March 1995. He is responsible for managing the credit review and administration,
credit and operations and marketing functions of the Company, as well as
developing and maintaining banking relationships and alternative financing
sources for the Company's activities. Mr. Mann began his career in equipment
financing and leasing in 1974. Prior to joining PDS, Mr. Mann was Senior Vice
President of the Capital Finance Division of ITT Commercial Finance, where his
responsibilities included the development of securitization product and
financing programs for the gaming industry, as well as the oversight of a $1.5
billion portfolio. During his 15 years with ITT, Mr. Mann also served in a
variety of capacities including Manager-Portfolio Control and Senior
Analyst-Portfolio Control.
LONA M.B. FINLEY has been the Treasurer of the Company since December 1993.
Prior to becoming Treasurer, Ms. Finley served in various other positions, most
recently as Controller with the Company since 1988. Her current duties also
include human resource and personnel functions. Ms. Finley is the spouse of
Johan P. Finley.
CHARLES R. PATTERSON has served as President of The Walman Optical Co., a
Minnesota manufacturer and distributor of eyeglasses, accessories and ophthalmic
examination equipment since 1992. He has served in various capacities with
Walman Optical since 1971. Mr. Patterson is a member of the Board of Directors
of F.B. Optical Manufacturing, Inc., a Minnesota optical company, and also
serves as a member of the Regional Board of the Optical Laboratory Association
of the United States. Mr. Patterson has been a member of the Company's Board of
Directors since March 1994.
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<PAGE>
JOEL M. KOONCE has served as Chief Financial and Administrative Officer of
CENEX, Inc., a distributor of petroleum and agronomy products and other farm
supplies located in St. Paul, Minnesota, since December 1986. Prior to joining
CENEX, Mr. Koonce served in various management positions with Land O'Lakes, most
recently as Vice President of Administration and Planning for Agricultural
Services. Mr. Koonce served in various management positions for General Mills
from 1965 to 1981. He is Chairman of the Board of Directors of the St. Paul Bank
for Cooperatives and has been a member of the Company's Board of Directors since
April 1994.
JAMES L. MORRELL is an independent business consultant. From 1986 to 1995,
Mr. Morrell was employed by Dain Bosworth Incorporated, where he held a number
of management positions, most recently Managing Director, Corporate Finance. Mr.
Morrell has been a member of the Company's Board of Directors since March 1996.
DAVID R. MYLREA is an independent business consultant. From July 1994 to
November 1997, Mr. Mylrea was General Counsel and Secretary of the Company. Mr.
Mylrea has been engaged in the practice of law in Minneapolis, Minnesota since
1984. He was a partner of the law firm of Parsinen, Bowman and Levy, P.A. from
1989 to 1993. Mr. Mylrea is a director of Edwards Sales Corporation. Mr. Mylrea
has been a member of the Company's Board of Directors since January 1994.
Directors of the Company are elected to serve until their successors are
duly elected and qualified. Each non-employee Board member receives an annual
cash retainer of $2,500 and a fee of $1,000 for each Board meeting attended.
Upon election to the Board of Directors, each non-employee director is
automatically granted a non-qualified option to purchase 10,000 shares of the
Company's Common Stock at its fair market value on the date of grant. These
options have a term of ten years and become exercisable as to 2,500 shares on
the date of each Annual Meeting of Stockholders at which the director is
re-elected or is serving an unexpired term. Messrs. Patterson and Koonce each
received 10,000 such options in March 1994 and April 1994, respectively, which
have an exercise price of $5.00 per share. Mr. Morrell received 10,000 such
options in March 1996 with an exercise price of $2.50 per share. The Company
reimburses officers and directors for their authorized expenses.
EXECUTIVE COMPENSATION
The following table sets forth the annual compensation for the fiscal years
ending December 31, 1997, 1996 and 1995 for the Chief Executive Officer, the
Executive Vice President, the Chief Financial Officer and the Chief Operating
Officer of the Company:
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------------- ------------- ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS COMPENSATION
- -------------------------------------------------- ---------- ---------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Johan P. Finley .................................. 1997 $ 210,000 $ -- -- $ 153,104(1)
President and Chief Executive Officer 1996 159,135 35,145 -- 44,154(1)
1995 154,500 -- 16,620(1)
Robert M. Mann ................................... 1997 $ 137,207 $ 21,006 -- $ 9,550(2)
Executive Vice President 1996 127,764 20,508 -- 7,677(2)
1995 98,800 9,360 54,000 33,740(2)
Peter D. Cleary .................................. 1997 $ 100,000 $ 15,500 -- $ 3,534(3)
Chief Financial Officer 1996 85,744 12,862 -- --
1995(3) 23,805 -- 54,000 --
David R. Mylrea .................................. 1997 $ 103,184 $ 51,137 -- $ 58,473(4)
Chief Operating Officer and Secretary(4) 1996 110,210 16,893 -- 19,460(4)
1995 107,000 9,360 7,500 10,020(4)
</TABLE>
- ------------------------
(1) Consists of Company contributions to a 401(k) profit sharing plan in the
amount of $4,750, $4,500 and $4,620 in 1997, 1996 and 1995, respectively, an
automobile allowance of $1,984 in 1997 and $12,000 in
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<PAGE>
1996 and 1995, fees in the amount of $70,000 and $27,654 paid for personally
guaranteeing bank lines of credit in 1997 and 1996, respectively, personal
use of a Company automobile and reimbursement for moving and temporary
living expenses in the amount of $76,370 in 1997.
(2) Consists of Company contributions to a 401(k) profit sharing plan in the
amount of $4,750 and $2,877 in 1997 and 1996, an annual automobile allowance
of $4,800, $4,800 and $3,800 in 1997, 1996 and 1995, respectively, and
reimbursement for moving and temporary living expenses in the amount of
$29,940 in 1995.
(3) Mr. Cleary joined the Company in September 1995. Consists of Company
contributions to a 401(k) profit sharing plan in the amount of $2,267 in
1997 and reimbursement for moving and temporary living expenses in the
amount of $1,267 in 1997.
(4) Mr. Mylrea terminated his employment with the Company in November 1997.
Consists of Company contributions to a 401(k) profit sharing plan in the
amount of $3,748, $4,060 and $4,620 in 1997, 1996 and 1995, respectively, an
annual automobile allowance of $4,725, $5,400 and $5,400 in 1997, 1996 and
1995, respectively, severance pay in the amount of $50,000 in 1997 and a
transaction-related fee in the amount of $10,000 in 1996.
In September 1993, the Company entered into a five-year employment agreement
with Johan P. Finley as President and Chief Executive Officer. The Company
expects to renew this agreement prior to September 1998. Mr. Finley is entitled
to an annual bonus during the term of his agreement of up to 7% of the Company's
pre-tax income. The agreement provides that Mr. Finley is entitled to a payment
in the amount of two times his base salary in effect upon a termination of his
employment by the Company, change in control of the Company, or a sale of the
majority of the Company's assets. The agreement will automatically renew for
additional one-year periods at the expiration of the term, provided that either
Mr. Finley or the Company may prevent the renewal by written notice at least 30
days prior to the expiration of the term.
In February 1995, the Company entered into a five-year employment agreement
with Robert M. Mann to serve as Executive Vice President. In accordance with an
income-based formula, Mr. Mann is eligible to earn a bonus of up to 16% of his
base salary. Under his employment agreement, Mr. Mann may receive an annual
discretionary bonus of up to 15% of his base salary.
In September 1995, the Company entered into an employment agreement with
Peter D. Cleary to serve as Chief Financial Officer and Vice President. This
contract automatically renewed for an another year in September 1997. In
accordance with an income-based formula, Mr. Cleary is eligible to earn an
annual bonus of up to 32.5% of his base salary. Under his employment agreement,
Mr. Cleary may receive an annual discretionary bonus of up to 15% of his base
salary.
In January 1994, the Company entered into a five-year employment agreement
with David R. Mylrea to serve as Chief Operating Officer, General Counsel and
Secretary. In accordance with an income-based formula, Mr. Mylrea was eligible
to earn a bonus of up to 55% of his base salary. Under his employment agreement,
Mr. Mylrea could receive an annual discretionary bonus of up to 15% of his base
salary. Mr. Mylrea terminated his employment with the Company in November 1997.
In March 1994, the Company entered into a three-year employment agreement
with Lona M.B. Finley. This contract automatically renewed for an additional
year. In accordance with an income-based formula, Ms. Finley is eligible to earn
a bonus of up to 55% of her base salary. Under her employment agreement, she may
receive an annual discretionary bonus of up to 15% of her base salary. The
agreement provides that Ms. Finley is entitled to a payment in the amount of two
times her base salary then in effect upon a termination of her employment by the
Company, a change in control of the Company or a sale of a majority of the
Company's assets.
Each employment agreement is subject to earlier termination for cause or
upon disability or death. In the case of disability, the Company has agreed to
continue salary payments for a six-month term.
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<PAGE>
Mr. Finley has agreed not to compete with the Company following termination of
employment for a period of one year, and Messrs. Mylrea, Mann and Cleary are
subject to two-year non-compete provisions.
The Company has a 401(k) profit-sharing plan for its employees and may adopt
additional bonus, pension, profit-sharing, retirement, or similar plans in the
future.
STOCK OPTION PLAN
The Company's 1993 Stock Option Plan, as amended, (the "Option Plan")
reserves 1,100,000 shares of Common Stock for issuance pursuant to options
("Options") granted or to be granted to certain key employees, officers,
directors and consultants of the Company. The Company will increase the shares
of Common Stock reserved for issuance under the Option Plan to 1,350,000 shares
of Common Stock if a majority of the Company's shareholders approve the increase
at the Company's annual meeting on May 14, 1998. Options granted under the
Option Plan may be either Options that qualify as "incentive stock options"
within the meaning of Section 422 of the Internal Revenue Code of 1986
("Incentive Options"), or those that do not qualify as "incentive stock options"
("Non-Statutory Options"). The Option Plan is administered by the Board of
Directors and the compensation committee (the "Committee"), which determines the
persons who are to receive Options, the terms and the number of shares subject
to each Option and whether the Option is an Incentive Option or a Non-Statutory
Option.
As of the date of this Prospectus, options to purchase 537,681 shares of
Common Stock are outstanding, with exercise prices ranging from $1.50 per share
to $7.88 per share, to 39 employees, 278,772 of which are currently exercisable.
In addition, pursuant to the Option Plan, newly elected non-employee directors
of the Company each receive an automatic grant of a Non-Statutory Option to
purchase 10,000 shares on the date they first become a director. See "Directors
and Executive Officers" above.
Incentive Options may not be granted at a purchase price less than the fair
market value of the Common Stock on the date of the grant (or, for an option
granted to a person holding more than 10% of the Company's voting stock, at less
than 110% of fair market value) and Non-Statutory Options may not be granted at
a purchase price less than 85% of fair market value. Aside from the maximum
number of shares of Common Stock reserved under the Option Plan, there is no
minimum or maximum number of shares that may be subject to Options. However, the
aggregate fair market value of the stock subject to Incentive Options granted to
any Optionee that are exercisable for the first time by an Optionee during any
calendar year may not exceed $100,000. Incentive Options generally expire when
the Optionee is no longer an employee of the Company.
Options may not be transferred other than by will or the laws of descent and
distribution, and during the lifetime of an Optionee may be exercised only by
the Optionee. The term of each Option, which is fixed by the Committee at the
time of grant, may not exceed 10 years from the date the Option is granted
(except that an Incentive Option granted to a person holding more than 10% of
the Company's voting stock may be exercisable only for 5 years). Options may be
made exercisable in whole or in installments, as determined by the Committee. In
addition, the Committee may grant a bonus to an Optionee upon the grant or
exercise of a Non-Statutory Option. In the event of a proposed merger or
consolidation of the Company (an "Event"), unless appropriate arrangements have
been made to issue (a) substitute options to optionees, or (b) stock having an
aggregate value equal to the excess of the fair market value of the optioned
shares at such time over the aggregate stock option exercise price, then
optionees shall be entitled to receive, in connection with such Event, an amount
of cash per optioned share equal to the aggregate consideration per share
received by shareholders over the option exercise price.
No Options were granted to officers of the Company in 1997.
The following table sets forth the number and dollar value of all exercises
of options in 1997 and the number and aggregate dollar value of all unexercised
options held by the named executive officers as of the end of 1997. The value of
each unexercised, in-the-money option was determined by multiplying (i) the
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<PAGE>
difference between (a) the market price of a share of Common Stock as of the end
of 1997 ($6.75), and (b) the exercise price of the option, by (ii) the number of
shares subject to the option.
<TABLE>
<CAPTION>
NUMBER OF SHARES SUBJECT TO VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE- MONEY OPTIONS AT
DECEMBER 31, 1997 DECEMBER 31, 1997
SHARES ACQUIRED VALUE ---------------------------- ---------------------------
NAME ON EXERCISE (#) REALIZED ($) EXERCISABLE NONEXERCISABLE EXERCISABLE NONEXERCISABLE
- ------------------------- --------------- ------------ ----------- --------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Johan P. Finley.......... -- -- -- -- -- --
Robert M. Mann........... -- -- 24,000 30,000 $ 55,480 $ 52,500
Peter D. Cleary.......... -- -- 24,000 30,000 $ 105,480 $ 127,500
David R. Mylrea.......... 152,955 $ 1,214,080 -- -- -- --
</TABLE>
INDEMNIFICATION AND LIMITATION ON LIABILITY OF DIRECTORS
The Company's Amended and Restated Articles of Incorporation limit the
liability of its directors to the fullest extent permitted by the Minnesota
Business Corporation Act. Specifically, directors of the Company will not be
personally liable for monetary damages for breach of fiduciary duty as
directors, except for liability for (a) any breach of the duty of loyalty to the
Company or its stockholders, (b) acts or omissions not in good faith or that
involve intentional misconduct or a knowing violation of the law, (c) dividends
or other distributions of corporate assets that are in contravention of certain
statutory or contractual restrictions, (d) violations of certain Minnesota
securities laws, or (e) any transaction from which the director derives an
improper personal benefit. Liability under federal securities law is not limited
by the Amended and Restated Articles. Section 302A.521 of the Minnesota Business
Corporation Act provides that a Minnesota business corporation shall indemnify
any director, officer, employee or agent of the corporation made or threatened
to be made a party to a proceeding, by reason of the former or present official
capacity (as defined therein) of the person, against judgments, penalties,
fines, settlements and reasonable expenses incurred by the person in connection
with the proceeding if certain statutory standards are met. "Proceeding" means a
threatened, pending or completed civil, criminal, administrative, arbitration or
investigative proceeding, including one by or in the right of the Company.
Article VII of the Company's Amended and Restated By-Laws provides that the
Company shall indemnify persons to the fullest extent permissible by the
Minnesota Business Corporation Act. Section 302A.521 contains detailed terms
regarding such right of indemnification and reference is made thereto for a
complete statement of such indemnification rights. Insofar as indemnification
for liabilities arising under the Securities Act may be permitted to directors,
officers, and controlling persons of the Company pursuant to the foregoing
provisions, or otherwise, the Company has been advised that in the opinion of
the Securities and Exchange Commission (the "Commission") such indemnification
is against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of the Company's outstanding Common Stock as of December
31, 1997 by (i) each person known by the Company to beneficially hold five
percent (5%) or more of the outstanding Common Stock, (ii) each director of the
Company, (iii) each executive officer of the Company, and (iv) all executive
officers and directors as a group. Except as otherwise noted, the Company
believes that all of the persons and groups shown below, based on information
furnished by such owners, have sole voting and investment power with respect to
the shares indicated.
<TABLE>
<CAPTION>
SHARES OWNED
-------------------
<S> <C> <C>
PERCENT
OF
NAME NUMBER(4) CLASS
- ---------------------------------------------------------------- ---------- -------
Johan P. Finley(1)(2)........................................... 1,086,486 31%
Peter D. Cleary(1).............................................. 24,600 *
Robert M. Mann(1)............................................... 34,000 *
Lona M.B. Finley(1)(3).......................................... 377,577 10%
Charles R. Patterson ........................................... 11,000 *
801 12th Avenue North
Minneapolis, MN 55411
Joel M. Koonce ................................................. 13,500 *
5500 Cenex Drive
Inver Grove Heights, MN 55077
David R. Mylrea ................................................ 1,093 *
8824 Windsor Terrace
Brooklyn Park, MN 55077
James L. Morrell ............................................... 7,500 *
1323 Waterford Road
Woodbury, MN 55125
All officers and directors as a group (8 persons)............... 1,555,754 41.8%
</TABLE>
- ------------------------
* Less than 1%
(1) The address of each such person is 6171 McLeod Drive, Las Vegas, Nevada
89120.
(2) Includes 11,200 held as co-trustee for minor child also claimed by spouse as
co-trustee. Mr. Finley disclaims beneficial ownership of the shares held by
Lona M.B. Finley, his spouse.
(3) Includes 5,000 shares held by Ms. Finley as custodian for her son and 11,200
shares held as co-trustee for minor child also claimed by spouse as
co-trustee. Ms. Finley disclaims beneficial ownership of the shares held by
Johan P. Finley, her spouse.
(4) Includes shares of Common Stock issuable to the following persons upon
exercise of options that are currently exercisable or that will become
exercisable within 60 days of the date of this Prospectus: Peter D. Cleary,
24,000 shares; Robert M. Mann, 34,000 shares; Lona M.B. Finley, 116,591
shares; Charles R. Patterson, 10,000 shares; Joel M. Koonce, 10,000 shares;
James L. Morrell, 7,500 shares; all executive officers and directors as a
group, 202,091 shares.
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<PAGE>
CERTAIN TRANSACTIONS
Johan P. Finley, the Company's President, Chief Executive Officer,
controlling stockholder and Chairman of the Board, received a fee in the amount
of $70,000 and $27,654 in exchange for giving a personal guarantee of amounts
loaned to the Company under its bank lines of credit in 1997 and 1996,
respectively.
David R. Mylrea, a director of the Company, entered into an agreement to
provide certain legal services to the Company during 1998. The Company expects
to pay total fees of approximately $120,000 in 1998 to Mr. Mylrea pursuant to
this agreement. This agreement will terminate in the event Mr. Mylrea accepts
full-time employment elsewhere.
DESCRIPTION OF UNITS
Each Unit offered hereby consists of a 10% Senior Subordinated Note, due
July 1, 2004, in the principal amount of $1,000 and detachable Warrants to
purchase 50 shares of Common Stock of the Company.
NOTES
GENERAL. The Notes will be issued under an Indenture (the "Indenture")
dated as of , 1998 between the Company and the Trustee. A copy of the
form of the Indenture is filed as an exhibit to the Registration Statement of
which this Prospectus is a part. The following statements are summaries of
certain provisions of the Indenture and are subject to and qualified in their
entirety by reference to all of the provisions of the Indenture, including the
definitions therein of certain terms not defined herein.
The Notes offered by the Company under the Indenture will be limited to
$11,500,000 aggregate principal amount (assuming exercise of the Underwriter's
over-allotment option). The Notes will mature July 1, 2004, unless redeemed
earlier. Interest on the Notes will accrue at a rate of 10% per annum. Interest
is payable quarterly on the first day of each January, April, July and October
(each an "Interest Payment Date"), beginning on October 1, 1998 to the person in
whose name the Note is registered at the close of business on the Regular Record
Date, which is the first day of the calendar month preceding each Interest
Payment Date.
Principal, premium, if any, and interest on the Notes will be payable by
wire transfer, check or draft drawn upon the Trustee mailed on each payment date
to the holders thereof as such appear on the Note register as of the close of
business on the first day of the calendar month preceding such payment date at
the addresses of the holders as they appear on the Note register.
The Notes will be issued only in registered form, without a coupon, in
denominations of $1,000 each and any integral multiple of $1,000. The Notes are
exchangeable and transferable and transfers will be registered without charge
thereof, but the Company may require payment of a sum sufficient to cover any
tax or other governmental charge payable in connection therewith. Holders may
transfer the Notes by surrendering them for transfer at the office of the
Trustee.
The Company intends to furnish annual reports to the holders of the Notes.
SUBORDINATION. When issued, the Notes will be junior, subordinate and
subject to right of payment to the prior payment of all the Company's Senior
Debt, but will be senior in right of payment to any Subordinated Debt and to any
debt (other than the Notes) held by an affiliate of the Company or a subsidiary
of the Company, whether outstanding at the closing of this offering or created
thereafter.
As of December 31, 1997, there was $17,325,501 of Senior Debt outstanding.
MANDATORY REDEMPTIONS. The Notes are subject to mandatory redemptions. Each
year beginning on July 1, 2000 and through July 1, 2004, the Trustee shall
select, by lot or other similar method, Notes having
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<PAGE>
an aggregate principal amount of $1,500,000 ($1,725,000 if the over-allotment
option is exercised in full) for mandatory redemption. Notes selected for
mandatory redemption shall be redeemed in full at par plus accrued interest.
Notes purchased in the open market or redeemed pursuant to optional redemption
by the Company may be used, at the Company's option, at the principal amount
thereof, to reduce the amount of any subsequent mandatory redemption payment. On
or before July 1, 2004, the Company will pay to the Trustee cash sufficient to
redeem all outstanding Notes.
OPTIONAL REDEMPTIONS. The Notes will be subject to redemption at the option
of the Company, in whole or in part, from time to time, commencing on July 1,
1998, at the Redemption Prices established for the Notes, together in each case
with interest accrued to the date fixed for redemption (subject to the right of
a holder on the Regular Record Date for an interest payment to receive such
interest). The Redemption Prices for the Notes (expressed as a percentage of the
principal amount) shall be as follows for Notes redeemed in the 12-month periods
beginning on the July 1 of each of the following years:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---------------------------------------------------------------------------------- -----------
<S> <C>
1998.............................................................................. 106%
1999.............................................................................. 106%
2000.............................................................................. 106%
2001.............................................................................. 104%
2002.............................................................................. 102%
2003 and thereafter............................................................... 100%
</TABLE>
The Company may elect to redeem less than all of the Notes. If the Company
elects to redeem less than all of the Notes, the Trustee will select which Notes
to redeem by lot or any similar method which is deemed fair and appropriate.
DEFINITIONS
"Consolidated Tangible Net Worth" means, with respect to any Person at any
date of determination, the Consolidated stockholders' equity represented by the
shares of such Person's capitalized stock (other than Disqualified Stock)
outstanding at such date, as determined on a Consolidated basis in accordance
with generally accepted accounting principals ("GAAP") less any portion of such
stockholders' equity attributable to intangible assets as determined in
accordance with GAAP.
"Material Subsidiary" means any Subsidiary which represents 10% or more of
the Company's Consolidated gross revenues or Consolidated total assets.
"Restricted Payment" means the purchase, redemption or other acquisition or
retirement for value of any capital stock of the Company or any Subsidiary. If a
Restricted Payment is made in other than cash, the value of any such payment
shall be determined in good faith by the Board of Directors, whose determination
shall be conclusive and evidenced by a Company Resolution to be filed with the
Trustee. For purposes of this definition, "Restricted Payment" shall not include
(a) payments made in the form of the Company's common stock, (b) mandatory
repurchase obligations by the Company with respect to shares issued by any
employee stock ownership plan of the Company, or (c) purchases of common stock
of a Wholly Owned Subsidiary of the Company.
"Senior Debt" means the principal of, premium (if any) and interest on (i)
any and all Consolidated Debt of the Company (other than the Notes and
Subordinated Debt) incurred in connection with the borrowing of money from or to
banks, trust companies, insurance companies and other financial institutions,
including all Consolidated Debt to such institutions and seller-financed
acquisitions to the extent it is secured by real estate and/or assets of the
Company or any Subsidiary, evidenced by bonds, debentures, mortgages, notes or
other securities or other instruments, incurred or assumed by the Company or any
Subsidiary before, at or after the date of execution of this Indenture, and (ii)
all renewals, extensions and
38
<PAGE>
refundings thereof; provided that any Consolidated Debt shall not be Senior Debt
if the instrument creating or evidencing any such Consolidated Debt or pursuant
to which such Consolidated Debt is outstanding, provides that such Consolidated
Debt, or such renewal, extension or refunding thereof, is junior or is not
superior in right of payment to the Notes.
"Subordinated Debt" means any and all Consolidated Debt of the Company or
any Subsidiary created, incurred, assumed or guaranteed by the Company or any
Subsidiary before, at or after the date of execution of this Indenture which, by
the terms of the instrument (or any supplemental instrument) creating or
evidencing such Consolidated Debt or pursuant to which such Consolidated Debt is
outstanding it is provided that such Consolidated Debt, or any renewal,
extension, or refunding thereof, is expressly subordinate and junior in right of
payment to the Notes (whether or not subordinated to any other Consolidated Debt
of the Company). "Subordinated Debt" shall include any Consolidated Debt of the
Company to Affiliates of the Company or any Subsidiary (after giving effect to
any intercompany eliminations).
MODIFICATION OF THE INDENTURE. With the consent of the holders of not less
than a majority of the aggregate principal amount of the Notes then outstanding,
the Trustee and the Company may execute a supplemental Indenture to add
provisions to, or change in any manner or eliminate any provisions of, the
Indenture or modify in any manner the rights of the holders of the Notes,
provided that, without the consent of the holder of each outstanding Note so
affected, no such supplemental Indenture and no such amendment will: (i) change
the maturity date of the principal or interest rate payable on any Note, or
reduce the principal amount thereof or the rate of interest thereon or any
premium payable upon the redemption thereof; (ii) reduce the percentage of the
holders of the Notes whose consent is required for the authorization of any such
supplemental Indenture; (iii) modify any provisions of Section 513, 902 or 1012
of the Indenture, except to increase any such percentage or to provide that
certain other provisions of the Indenture cannot be waived or modified without
the consent of the holder of each outstanding Note; or (iv) modify any provision
of the Indenture relating to the subordination of the Notes in a manner adverse
to the holders of the Notes.
RESTRICTIVE COVENANTS
LIMITATION ON RESTRICTED PAYMENTS. The Indenture provides that the Company
shall not and shall not permit its Subsidiaries to make any Restricted Payments
(as defined above under "Definitions") (i) if at the time of such action an
Event of Default shall have occurred and be continuing, after giving effect to
such Restricted Payment; or (ii) if, immediately after giving effect to such
Restricted Payment, the aggregate of all Restricted Payments declared or made
from the date of the Indenture, through and including the date of such
Restricted Payment (the "Base Period") exceeds the sum of 25% of Consolidated
Net Income (or in the event Consolidated Net Income is a deficit, minus 100% of
such deficit) during the Base Period.
LIMITATION ON TRANSACTIONS WITH AFFILIATES. The Indenture will provide that
the Company shall not, and shall not permit, cause or suffer any Subsidiary of
the Company to, conduct any business or enter into any transaction or series of
transactions with or for the benefit of any Affiliate or Subsidiary of the
Company or any holder of 5% or more of any class of Capital Stock of the Company
(each an "Affiliate Transaction"), except (i) in good faith and on terms that
are, in the aggregate, no less favorable to the Company or such Subsidiary, as
the case may be, than those that could have been obtained in a comparable
transaction on an arms-length basis from a Person not an Affiliate of the
Company or such Subsidiary or (ii) transactions between the Company and any of
its wholly owned Subsidiaries or between any wholly owned Subsidiaries of the
Company.
NET WORTH. The Indenture provides that the Company will at all times during
the term of the Notes keep and maintain a Consolidated Tangible Net Worth of at
least $6,000,000 plus 15% of positive Consolidated Net Income earned after
January 1, 1998.
39
<PAGE>
CONSOLIDATION, MERGER, TRANSFER OR LEASE. The Company will not consolidate
with, or merge with or into, or transfer all or substantially all of its assets
in one transaction or a series of related transactions, to another Person unless
(i) the successor corporation is a corporation organized and existing under the
laws of the United States or any state thereof or the District of Columbia, (ii)
the successor corporation (if other than the Company) assumes all of the
obligations of the Company under the Notes and Indenture, and (iii) immediately
after giving effect to such transaction (a) no Default or Event of Default shall
have occurred and be continuing, and (b) the net worth of the successor
corporation is not less than that of the Company immediately prior to such
merger, consolidation or transfer.
EVENTS OF DEFAULT. The Indenture defines the following acts, among them, to
be events of default: (a) default in the payment of any installment of interest
upon any of the Notes as and when the same shall become due and payable, and
continuance of such default for a period of 15 days; or (b) default in the
payment of the principal of any of the Notes as and when the same shall become
due and payable; or (c) failure on the part of the Company duly to observe or
perform any other of the conditions or covenants on its part and continuance of
such failure for 15 or 30 days, as the case may be; or (d) with certain limited
exceptions, a default under any bond, debenture, note or other evidence of
Indebtedness in excess of $500,000 of the Company now or hereafter outstanding
shall happened and continue and the holders of such indebtedness shall have the
right to accelerate the maturity of such indebtedness; or (e) a decree or order
by a court of competent jurisdiction shall have been entered, either (i)
adjudging the Company or any Material Subsidiary a bankrupt or insolvent, or
(ii) approving a petition seeking reorganization of the Company or any Material
Subsidiary under the Bankruptcy Act or any other similar applicable federal or
state law, or (iii) appointing a receiver or liquidator or trustee or assignee
in bankruptcy or insolvency of the Company or any Material Subsidiary or a
receiver of all or any substantial portion of the property, or (iv) directing
the winding up or liquidation of its affairs, and any such decree or order shall
have continued in force undischarged or unstayed for a period of 60 days; (f)
the Company or any Material Subsidiary shall institute proceedings to be
adjudicated a voluntary bankrupt, or shall consent to the filing of a bankruptcy
petition against it, or shall file a petition or answer or consent seeking
reorganization under the Bankruptcy Act or any other similar applicable federal
or state law, or shall consent to the filing of any such petition; or shall
consent to the appointment of a receiver or liquidator or trustee or assignee in
bankruptcy or insolvency of it or of all or substantially all of its property,
or shall make a general assignment for the benefit of creditors, or shall admit
in writing its inability to pay its debts generally as they become due, or
corporate action shall be taken by the Company or any Material Subsidiary in
furtherance of any of the aforesaid purposes or (g) the rendering of a final
judgment or judgments (not subject to appeal) for the payment of money against
the Company or any Subsidiary not fully insured against in an aggregate amount
in excess of $500,000 by a court or courts of competent jurisdiction, which
judgment or judgments remain unsatisfied for a period of 30 days after the right
to appeal all such judgments has expired or otherwise terminated.
In each and every such case, so long as such Event of Default shall not have
been remedied, unless the principal of all the Notes shall not have already
become due and payable, either the Trustee or the holders of not less than
twenty-five percent (25%), in aggregate principal amount of the Notes then
outstanding, by notice in writing to the Company (and to the Trustee if given by
the Noteholders) may declare the principal of all the Notes then outstanding to
be due and payable immediately; and, upon any such declaration, the same shall
become and be immediately due and payable.
GOVERNING LAW. The Indenture and each Note shall be deemed to be a contract
made under the laws of the State of Minnesota and for all purposes shall be
governed and construed in accordance with the laws of the State of Minnesota.
THE TRUSTEE. The obligations of the Trustee are only those set out in the
Indenture. Upon the occurrence and during the continuance of any Event of
Default, the Trustee is required to apply only the degree of care and skill in
fulfilling its obligations as a prudent person would exercise or use in the
40
<PAGE>
circumstances in the conduct of such person's own affairs. The Trustee must not
conduct its duties under the Indenture in any way that would be a negligent act,
or a negligent failure to act, or willful misconduct. The Trustee is not liable
for any error in judgment made in good faith and the Trustee will not be liable
with respect to any action taken or omitted to be taken by it in good faith in
accordance with the direction of the holders of a majority in aggregate
principal amount of the Notes at the time outstanding, relating to the time,
method and place of conducting any proceeding for any remedy available to the
Trustee, or of exercising any trust or power conferred upon the Trustee, under
the Indenture.
WARRANTS
GENERAL. Each Unit consists of a $1,000 10% Senior Subordinated Note Due
July 1, 2004, together with Warrants to purchase 50 shares of Common Stock. The
Note and Warrants are immediately detachable. Up to an aggregate of 575,000
Warrants (including 75,000 that may be issued pursuant to the Underwriters
over-allotment option) may be issued pursuant to a Warrant Agreement (the
"Warrant Agreement") dated as of , 1998 between the Company and
Norwest Bank Minnesota, N.A., Minneapolis, Minnesota as warrant agent (the
"Warrant Agent"). A copy of the form of the Warrant Agreement is filed as an
exhibit to the Registration Statement of which this Prospectus is a part. The
following statements are summaries of certain provisions of the Warrant
Agreement and are subject to, and qualified in, their entirety by reference to
all of the provisions of the Warrant Agreement.
Each Warrant entitles the holder thereof to purchase one share of Common
Stock of the Company, par value $.01 per share (the "Warrant Shares"), at an
exercise price per share equal to $ (125% of the average of the last reported
sales prices of the Company's Common Stock for the ten days immediately prior to
the date of this Prospectus). The Warrants expire at 5:00 p.m., Minneapolis
time, on the fifth anniversary of the date of this Prospectus (the "Expiration
Date"). Certificates for the Warrants are in registered form only, and each
certificate is exchangeable for similar certificates of different denominations
at the office of the Warrant Agent.
EXERCISE. The Warrants are immediately detachable from the Notes and the
Warrants are immediately exercisable upon the closing of this Offering. The
exercise period of the Warrants will expire on the fifth anniversary of the date
of this Prospectus. The Company has agreed to use its best efforts, at all times
the Warrants are exercisable, to maintain effective a registration statement
relating to the Warrant Shares.
Warrants may be surrendered for exercise at any time after they become
exercisable on or prior to the Expiration Date (or earlier Redemption Date) by
submitting to the Warrant Agent a Warrant certificate signed by the
Warrantholder indicating such Warrantholder's election to exercise all or a
portion of the Warrants evidenced by such certificate. Surrendered Warrant
certificates must be accompanied by payment of the aggregate exercise price of
the Warrants to be exercised, which payment may be made in the form of cash or
by certified check payable to the order of the Company.
REDEMPTION. The Warrants are redeemable by the Company, in whole or in
part, at $.01 per Warrant at any time on or after the first anniversary of the
effective date of this Prospectus, following a period of 20 consecutive trading
days where the per share closing sale price of the Common Stock as reported by
The Nasdaq National Market is equal to or greater than $ (250% of the
exercise price of a Warrant) and provided an effective registration statement
relating to the Warrant Shares is available to the Warrantholders. Notice of
redemption will be given by the Company to the Warrant Agent at least 30 days
prior to the date scheduled for such redemption (the "Redemption Date") and by
the Warrant Agent to the holders of the Warrants not less than 30 days prior to
and including the Redemption Date. Notices to holders of Warrants will be sent
to their respective addresses appearing on the books of the Warrant Agent. Each
registered holder of a Warrant will continue to have the right to exercise such
Warrant until the close of business on the Redemption Date, and the Warrants
will continue to be subject to adjustment until such exercise or redemption.
41
<PAGE>
ANTIDILUTION. The exercise price and the number of Warrant Shares
purchasable upon the exercise of each Warrant are subject to adjustment to
protect Warrantholders against dilution upon the occurrence of certain events,
including the issuance of a stock dividends, stock splits, reclassification of
any combination of the Common Stock, or the merger, consolidation or disposition
of substantially all of the assets of the Company. No adjustment in the exercise
price of the Warrants and the number of Warrant Shares purchasable upon the
exercise of each Warrant will be required until cumulative adjustments reach
$.01 per share. No fractional shares will be issued upon exercise of Warrants,
but the Company will pay an amount in cash equal to the same fraction of the
fair market value of a Warrant Share.
Warrantholders are not entitled, in their capacity as Warrantholders, to
receive dividends or to consent or receive notice as stockholders in respect of
any meeting of stockholders for the election of directors of the Company or any
other matter, or to vote at any such meeting, or to exercise any rights
whatsoever as stockholders of the Company.
42
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
Under presently existing provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), Treasury Regulations promulgated thereunder, applicable
judicial decisions and administrative rulings, all of which are subject to
change, which changes may be retroactive, the federal income tax consequences
described below may arise in connection with this offering of Units. Due to the
complexity of the Code, the following merely states general tax principles and
likely tax consequences to the extent presently determinable and such statements
may not be authoritative in individual cases or where special rules or elections
may apply. The discussion of original issue discount is based in part on final
Treasury Regulations promulgated under the Code (the "OID Regulations").
Investors should consult their own tax advisors concerning this Offering.
Investors should also consult their own tax advisors as to the tax treatment
arising from the application of foreign, state and local tax laws and
regulations.
NOTES
GENERAL. As a general rule, interest paid or accrued on the Notes, as well
as market discount and original issue discount, if any, will be treated as
ordinary income to the holders thereof. A holder of Notes using the accrual
method of accounting for federal income tax purposes is required to include
interest paid or accrued thereon in ordinary income as such interest accrues,
while a holder using the cash receipts and disbursements method of accounting
for federal income tax purposes must include such interest in ordinary income
when payments are received (or made available for receipt) by such holder.
Generally, principal payments on the Notes will be treated as return of capital
to the extent of a holder's basis therein. However, the character of the income
and the timing of its recognition are both subject to the original issue
discount and market discount rules, as described below.
ORIGINAL ISSUE DISCOUNT. The Notes will be deemed to be issued with
"original issue discount" within the meaning of Section 1273(a)(1) of the Code
if, as expected, the "stated redemption price at maturity" exceeds the "issue
price" of the Notes. The original issue discount with respect to the Notes will
be considered to be zero if it is less than 0.25% of the Notes' stated
redemption price at maturity multiplied by the number of complete years from the
date of issue of the Notes to their maturity date.
The "stated redemption price at maturity" of the Notes will be equal to the
principal amount thereof ($1,000). Although under certain circumstances the
Notes are subject to redemption by the Company for an amount in excess of their
principal amount, the Company believes that based on the OID Regulations, this
excess need not be considered when determining the Notes' stated redemption
price at maturity. Noteholders should consult with their own advisors regarding
the subject of the mandatory redemption feature of the Notes.
In general, the "issue price" of a Note is determined by allocating the
"issue price" of a Unit to the Note and Warrants comprising such Unit on the
basis of the proportion which the fair market value of each such element of a
Unit bears to the fair market value of both elements of a Unit. The "issue
price" of a Unit is the initial offering price to the public at which a
substantial amount of Units are first sold. The OID Regulations also provide
that the Company may make a reasonable allocation of the "issue price" of a Unit
to the Note and Warrants, and such allocation is generally binding on all
Unitholders. The Company's allocation of the $1,000 Unit price is $950 to the
Note, representing its "issue price" and the remaining $50 to the Warrants to
purchase 50 shares ($1.00 per Warrant). The Company's allocation of the issue
price of the Units is binding on all holders of Units unless a holder explicitly
discloses that such holder's allocation of the "issue price" of the Unit is
different from the Company's allocation. Such disclosure must be made on a form
prescribed by the Internal Revenue Service and attached to such holder's timely
filed federal income tax return for the holder's taxable year that includes the
acquisition date of the Unit.
A holder of a debt instrument issued with original issue discount must
generally include the original issue discount in ordinary gross income for
federal income tax purposes as it accrues in advance of the receipt of any cash
attributable to such income. The amount of original issue discount required to
be
43
<PAGE>
included in a Noteholder's ordinary gross income for federal income tax purposes
in any taxable year will accrue on a daily basis under a constant-yield method
that takes into account the compounding of interest. One effect of this method
is that a relatively smaller portion of the original issue discount is included
in income in the earlier years and a relatively large portion in later years.
A subsequent purchaser of a Note will also be required to include in such
purchaser's ordinary gross income for federal income tax purposes the original
issue discount, if any, accruing with respect to such Note unless the price
equals or exceeds the Note's principal amount. If the price paid by such a
purchaser of a Note exceeds the sum of the Note's issue price plus the aggregate
amount of original issue discount accrued with respect thereto, but does not
equal or exceed the principal amount of the Note, the amount of original issue
discount to be accrued will be reduced in accordance with the formula set forth
in Section 1272(a)(7)(B) of the Code.
In addition to reporting interest paid on the Notes, the Company will report
annually to the Internal Revenue Service and holders of record of the Notes
information with respect to the original issue discount accruing thereon.
It is possible that the Notes, which are expected to be issued with original
issue discount, may be affected by the "applicable high yield discount
obligation" provisions of the Code. If the rules of Section 163(e)(5) of the
Code otherwise apply and the yield of the Notes is at least five percentage
points above the "applicable Federal rate," then the Company would not be able
to deduct any original issue discount accruing with respect thereto until such
interest is actually paid. In addition, if Section 163(e)(5) of the Code
otherwise applies and the yield of the Notes is more than six percentage points
above the "applicable Federal rate," then a portion of such interest
corresponding to the yield in excess of six percentage points above the
applicable Federal rate would not be deductible by the Company at any time. The
applicability of these "applicable high yield discount obligation" provisions of
the Code to the Notes depends upon the Notes' yield to maturity, which would be
affected by the determination of the "issue price" of the Notes, as discussed
above, and whether the Notes have "significant original issue discount" within
the meaning of the Code. Furthermore, if Section 163(e)(5) of the Code applies
to the Notes, and the yield on the Notes exceeds the applicable Federal rate by
more than six percentage points, then a corporate holder would be entitled to
treat the portion of the interest that is not deductible by the Company as a
dividend, which may then qualify for the dividends received deduction provided
for by the Code. In such event, a corporate holder of Notes should consult with
their own tax advisors as to the applicability of the dividends received
deduction.
MARKET DISCOUNT. The Notes, whether or not issued with original issue
discount, will be subject to the "market discount rules" of Section 1276 of the
Code. In general, these rules provide that if the holder of a Note purchases a
Note at a market discount (that is, a discount from its original issue price
plus any accrued original issue discount, as described above) and thereafter
recognizes gain upon a disposition or redemption, the lesser of such gain or the
accrued market discount will be taxed as ordinary interest income. Generally,
the accrued market discount will be the total market discount on a Note
multiplied by a fraction, the numerator of which is the number of days the
holder held the Note and the denominator of which is the number of days from the
date the holder acquired the Note until its maturity date. The holder may elect,
however, to determine accrued market discount under the constant-yield method.
Limitations imposed by the Code that are intended to match deductions with
the taxation of income may defer deductions for interest on indebtedness
incurred or continued, or short-sale expenses incurred, to purchase or carry a
Note with accrued market discount. A holder of a Note may elect to include
market discount in gross income as it accrues, and a holder making such an
election is exempt from this rule. This election to include market discount in
income currently, once made, applies to all market discount obligations acquired
on or after the first taxable year to which the election applies and may not be
revoked without the consent of the Internal Revenue Service. The adjusted basis
of a Note subject to such election
44
<PAGE>
will be increased to reflect market discount included in gross income, thereby
reducing any gain or increasing any loss on a sale or taxable disposition.
PREMIUM. In general, if a holder of a Note purchased such Note at a
premium, that is, an amount in excess of the amount payable upon the maturity
thereof, such excess will be treated as "amortizable bond premium." In such
case, a holder may elect, under Section 171 of the Code, to deduct the
amortizable bond premium as it accrues under a constant-yield method that is
similar to the method used for the accrual of original issue discount. The
holder's tax basis in the Note then decreases by the amount of the amortizable
bond premium deducted. An election under Section 171 of the Code is available
only if a Note is held as a capital asset. Noteholders should consult with their
own tax advisors regarding special rules that apply for determining the amount
of, and method for amortizing, bond premium with respect to Notes that may be
redeemed prior to maturity.
SALE OF THE NOTES. If a Note is sold, the seller will recognize gain or
loss equal to the difference between the amount realized from the sale and the
seller's adjusted basis in the Note. Such adjusted basis generally will equal
the cost of the Note to the seller, increased by any original issue discount
included in the seller's ordinary gross income with respect to the Note and
reduced by any principal payments on the Note previously received by the seller
and by any amortizable bond premium deducted by the seller. Except as discussed
with respect to market discount or to the extent cash received is attributable
to accrued interest, any gain or loss recognized upon a sale, exchange,
retirement or other disposition of a Note will be capital gain if the Note is
held as a capital asset. Any such capital gain would be taxed at long-term rates
if the Note is held for more than 18 months, at mid-term rates if held more than
12 but not more than 18 months and at short-term rates if held for not more than
12 months.
If, however, the Internal Revenue Service were to determine that the Company
intended on the date of issue of the Notes to redeem all or any portion of the
Notes prior to their stated maturity, within the meaning of Section
1271(a)(2)(A) of the Code, any gain realized upon a sale, exchange, retirement
or other disposition of the Notes would be considered ordinary income to the
extent it does not exceed the unrecognized portion of the original issue
discount, if any, with respect to the Notes. It is uncertain how this rule will
be applied to the Notes since the provisions regarding mandatory and optional
redemption may be considered evidence of an intention at the time the Notes were
issued to call them before the stated maturity thereof.
WITHHOLDING TAXES AND REPORTING REQUIREMENTS. Interest payments, original
issue discount and cash proceeds of a sale, exchange or redemption of the Notes
will be reported to the extent required by the Code to the holders thereof and
the Internal Revenue Service. Such amounts will ordinarily not be subject to
withholding of United States federal income tax. However, a backup withholding
tax at a rate of 31% may be required by reason of the events specified by
Section 3406 of the Code and regulations promulgated thereunder, which include
failure of a holder to supply the Company or its agent with such holder's
taxpayer identification number. Such withholding may also apply to a holder who
is otherwise exempt from such withholding, such as a foreign corporation, if
such person fails to document properly its status as an exempt recipient.
Foreign persons should consult with their own tax advisors as to the United
States withholding tax, if any, applicable to their particular circumstances.
WARRANTS
SALE OF WARRANTS. As described above, the basis for federal income tax
purposes of the Warrants included in a Unit is determined by allocating the
"issue price" of a Unit to the Note and Warrant comprising such Unit on the
basis of the proportion which the fair market value of each such element of a
Unit bears to the fair market value of both elements of a Unit. Upon a sale of
Warrants, a holder thereof will recognize long-term or short-term capital gain
or loss, assuming such a holder is not a dealer in Warrants and assuming the
Common Stock of the Company is, or would be when acquired, a capital asset in
the hands of the holder. The amount of gain or loss will be the difference
between the amount realized
45
<PAGE>
and the tax basis, as adjusted, of the Warrants sold. The redemption of a
Warrant may also be considered a sale or exchange so that any gain or loss
recognized as a result thereof may also be a capital gain or loss. Any loss
realized by a holder of a Warrant due to the failure to exercise prior to the
expiration date will be treated as a capital loss. Any such capital gain would
be taxed at long-term rates if the Warrant is held for more than 18 months, at
mid-term rates if held more than 12 but not more than 18 months and at
short-term rates if held for not more than 12 months.
EXERCISE OF WARRANTS. Generally, a holder of Warrants will not recognize
any gain or loss on the purchase of Common Stock of the Company for cash upon
exercise of the Warrants. The tax basis of the Common Stock of the Company
received will be equal to the tax basis, as adjusted, in the Warrants so
exercised, plus the cash exercise price. The holding period of the Common Stock
of the Company received upon exercise of a Warrant for cash will not include the
period during which the Warrant was held; it shall commence only upon the
exercise date of the Warrant.
Section 305 of the Code and the applicable Treasury Regulations provide that
in certain circumstances a change in the exercise price for the Warrants will be
treated as a deemed distribution of an increased interest in the assets or
earnings and profits of the Company, which in turn will produce ordinary
dividend income for a holder of Warrants. The amount of such deemed dividend
will be equal to the fair market value of any additional shares of Common Stock
and cash in lieu of fractional shares received as a result of the change in the
exercise price of the Warrants. In certain other circumstances, Section 305 of
the Code and the applicable Treasury Regulations provide that the absence of
appropriate adjustments in the conversion price for the Warrants will produce
dividend income for the holders of the Company's Common Stock.
LAPSE. Upon the lapse of a Warrant, a holder will recognize a capital loss
equal to such holder's adjusted tax basis in the Warrant.
OTHER TAX CONSEQUENCES. No advice has been received by the Company as to
local, income, franchise, personal property or other taxation in any state or
locality or as to the tax effect of ownership of Notes or Warrants in any state
or locality. Unitholders are advised to consult their own tax advisors with
respect to any state or local income, franchise, personal property or other tax
consequences arising out of their ownership of Notes or Warrants.
THE DISCUSSION OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES SET FORTH ABOVE IS
INCLUDED FOR GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A
UNITHOLDER'S PARTICULAR TAX SITUATION. PROSPECTIVE PURCHASERS SHOULD CONSULT
THEIR OWN TAX ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE
PURCHASE, OWNERSHIP AND DISPOSITION OF UNITS, NOTES OR WARRANTS, INCLUDING THE
TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE
EFFECTS OF CHANGES IN FEDERAL OR OTHER TAX LAWS.
DESCRIPTION OF SECURITIES
GENERAL
The authorized capital stock of the Company consists of 22,000,000 shares,
divided into 20,000,000 shares of Common Stock, $.01 par value per share, and
2,000,000 shares of preferred stock, $.01 par value per share.
The Board of Directors has the authority, without approval of the Company's
stockholders, to authorize the issuance of shares of preferred stock of the
Company from time to time in one or more series. Each series shall have a
distinctive designation or title and the number of shares as shall be fixed by
the Board of Directors prior to the issuance of any shares. Each series of
preferred stock shall have voting
46
<PAGE>
powers, full or limited, or no voting powers and such preferences and relative,
participating, optional, or other special rights and qualifications,
limitations, or restrictions thereof, as adopted by the Board of Directors prior
to the issuance of any shares. The Board of Directors is also authorized to
increase or decrease (but not below the number of shares then outstanding) the
number of shares of any series of preferred stock subsequent to the issuance of
shares of that series. The Company has no present plan to establish any such
class or series.
The Company's Amended and Restated Articles of Incorporation provide that no
person or entity may become the beneficial owner of 5% or more of the Company's
shares unless such person or entity agrees to provide personal background and
financial information to gaming authorities, consent to a background
investigation, and respond to questions from gaming authorities. The Company may
redeem, at fair market value, shares held by any person or entity whose status
as a stockholder, in the opinion of the Board of Directors of the Company,
jeopardizes the approval, continued existence, or renewal by any gaming
authority, including the Nevada Gaming Authorities, state gaming regulators, the
Bureau of Indian Affairs or the National Indian Gaming Commission, of any
contract or lease with a casino, casino management firm, or casino owner, or on
or related to casino property, or any other tribal, federal, or state license or
franchise held or to be acquired by the Company. These restrictions will be
contained in a legend on each certificate issued evidencing shares of Common
Stock.
COMMON STOCK
As of the date hereof, there are 3,575,974 shares of Common Stock
outstanding. All outstanding shares of Common Stock are fully paid and
nonassessable. The holders of Common Stock are entitled to one vote for each
share held of record on all matters voted upon by stockholders and may not
cumulate votes for the election of directors. Thus, the owners of a majority of
the shares of Common Stock outstanding may elect all of the directors, if they
choose to do so, and the owners of the balance of such shares would not be able
to elect any directors. Johan P. Finley, the Company's founder, President and
Chief Executive Officer, owns approximately 31% of the Company's outstanding
Common Stock and effectively controls the election of all the directors and
thereby controls the Company's affairs.
Each share of outstanding Common Stock is entitled to participate equally in
any distribution of net assets made to the stockholders in liquidation of the
Company and is entitled to participate equally in dividends as and when declared
by the Board of Directors. There are no redemption, sinking fund, conversion, or
preemptive rights with respect to the shares of Common Stock. The absence of
preemptive rights could result in a dilution of the interest of existing
stockholders should additional shares of Common Stock be issued.
CONVERTIBLE SUBORDINATED DEBENTURES
The Company issued unsecured Convertible Subordinated Debentures (the
"Debentures") in 1993, which became convertible into Common Stock of the Company
at a price of $4.25 per share. Since September 1997, $1,165,000 of the principal
balance of the Debentures has been converted into 274,223 shares of Common Stock
of the Company. Approximately $51,000 of the principal balance of the Debentures
remains outstanding and is due on September 30, 1998. The shares of Common Stock
issuable upon conversion of the Debentures have not been registered with the
Commission, however, such shares will be eligible for resale in the public
market in accordance with Rule 144 of the Securities Act at any time subsequent
to conversion.
CERTAIN PROVISIONS HAVING ANTI-TAKEOVER EFFECTS
The Company is governed by the provisions of Sections 302A.671 and 302A.673
of the Minnesota Business Corporation Act, which may deny stockholders the
receipt of a premium on their Common Stock and which may also have a depressive
effect on the market price of the Company's Common Stock. In
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<PAGE>
general, Section 302A.671 provides that the shares of a corporation acquired in
a "control share acquisition" have no voting rights unless voting rights are
approved in a prescribed manner. A "control share acquisition" is an
acquisition, directly or indirectly, of beneficial ownership of shares that
would, when added to all other shares beneficially owned by the acquiring
person, entitle the acquiring person to have voting power of 20% or more in the
election of directors. In general, Section 302A.673 prohibits a public Minnesota
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of four years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner. "Business combination" includes
mergers, asset sales and other transactions resulting in a financial benefit to
the interested stockholder. An "interested stockholder" is a person who is the
beneficial owner, directly or indirectly, of 10% or more of the corporation's
voting stock or who is an affiliate or associate of the corporation and at any
time within four years prior to the date in question was the beneficial owner,
directly or indirectly, of 10% or more of the corporation's voting stock.
TRANSFER AGENT, WARRANT AGENT AND REGISTRAR
The transfer agent, warrant agent and registrar for the Company's Common
Stock is Norwest Bank Minnesota, N.A., Minneapolis, Minnesota.
UNDERWRITING
Under the terms and subject to the conditions contained in the Underwriting
Agreement, Miller & Schroeder Financial, Inc. (the "Underwriter") has agreed to
purchase from the Company and the Company has agreed to sell to the Underwriter,
the 10,000 Units offered hereby at the Price to Public, less the Underwriting
Discount shown on the cover page of this Prospectus. The Company has agreed to
pay the Underwriter a nonaccountable expense allowance and a management fee in
the amount of 2% and 1% respectively, of the gross proceeds of the Offering
including any proceeds resulting from the exercise of the over-allotment option.
The Underwriting Agreement provides that the Underwriter will be obligated
to purchase, subject to the terms and conditions set forth therein, all of the
Units being sold pursuant to the Underwriting Agreement (other than the Units
covered by the over-allotment option) if any of the Units being sold pursuant to
the Underwriting Agreement are purchased.
The Underwriting Agreement provides for reciprocal indemnification between
the Company, the Underwriter and their officers, directors and controlling
persons against civil liabilities in connection with this Offering, including
certain liabilities under the Securities Act. Insofar as indemnification for
liabilities arising under the Securities Act may be permitted pursuant to such
indemnification provisions, the Company has been advised that in the opinion of
the Commission such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
The Underwriter proposes to offer the Units to the public at the Price to
Public set forth on the cover page of this Prospectus and to certain selected
dealers at such price less a concession of $ per Unit. After the initial
public offering, the Price to Public and concessions to dealers may be changed
by the Underwriter. The Underwriter does not intend to confirm sales to any
account over which it has discretionary authority.
The Company has granted to the Underwriter an option, exercisable by the
Underwriter within 45 days after the date of this Prospectus, to purchase up to
an additional 1,500 Units at the Price to Public, less the Underwriting Discount
shown on the cover page of this Prospectus. This option may be exercised in
whole or in part, but only for the purpose of covering any over-allotments in
the sale of the 10,000 Units offered hereby.
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<PAGE>
In connection with this Offering, the Company has agreed to issue and sell
to the Underwriter, for nominal consideration, warrants (the "Underwriter's
Warrants") to purchase 50,000 shares of Common Stock of the Company at $ per
share (120% of the average of the last reported sale prices of the Company's
Common Stock for the ten trading days immediately prior to the effective date of
this Offering). The Underwriter's Warrants contain anti-dilution provisions
providing for appropriate adjustments on the occurrence of certain events. The
Underwriter's Warrants also provides certain demand and participatory rights to
require registration under the Securities Act of the shares underlying the
Underwriter's Warrants. The Underwriter's Warrants will be exercisable
commencing one year from the date of this Prospectus and for a period of four
years thereafter. The Underwriter's Warrants will be restricted from sale,
transfer, assignment or hypothecation except to officers or successors of the
Underwriter. Any profits realized by the Underwriter upon the sale of the
Underwriter's Warrant or the securities issuable upon exercise thereof may be
deemed to constitute additional underwriting compensation.
In order to facilitate the offering of the Units, the Underwriter may engage
in transactions that stabilize, maintain or otherwise affect the price of the
Units. Specifically, the Underwriter may over-allot the Units in connection with
the offering, creating a short position in the Units for its own account. In
addition, to cover over-allotments or to stabilize the price of the Units, the
Underwriter may bid for, and purchase, Units in the open market. The Underwriter
may also reclaim selling concessions allowed to a dealer for distributing Units
in the offering, if the Underwriter repurchases previously distributed Units in
transactions to cover its short positions, in stabilization transactions or
otherwise. Finally, the Underwriter may bid for, and purchase, Units in market
making transactions and impose penalty bids. These activities may stabilize or
maintain the market price of the Units above the market level that may otherwise
prevail. The Underwriter is not required to engage in these activities and may
end any of these activities at any time. Any such activities will be undertaken
in accordance with Regulation M under the Exchange Act, if at all.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. Neither the Company nor the
Underwriter make any representation or prediction as to the direction or
magnitude of any effect that the transactions described above might have on the
price of the Units. In addition, neither the Company nor the Underwriter make
any representations that the Underwriter will engage in such transactions or
that such transactions, once commenced, will not be discontinued without notice.
Prior to the Offering, there has been no public market for the Units, Notes
or Warrants. The Company has applied to list the Warrants on The Nasdaq National
Market. The Company does not intend to list the Units or the Notes on any
securities exchange or include them for quotation on the Nasdaq system. The
Underwriter has advised the Company that it intends initially to make a market
in the Units, Notes and Warrants, but the Underwriter is not obligated to do so
and may discontinue market making at any time without notice.
The foregoing is a summary of the material provisions of the Underwriting
Agreement and the Underwriter's Warrants. Copies of such documents have been
filed as exhibits to the Registration Statement of which this Prospectus is a
part.
James L. Morrell, a member of the Board of Directors of the Company since
March 1996, has also been a member of the nine person board of directors of MI
Acquisition Corp. since August 1997. The Underwriter is a wholly owned
subsidiary of Miller & Schroeder Inc., which is a wholly owned subsidiary of MI
Acquisition Corp. Mr. Morrell does not serve on the board of directors of either
Miller & Schroeder Inc. or the Underwriter and does not serve on any committees
of the Underwriter.
From time to time the Company has engaged the Underwriter and Miller &
Schroeder Investments Corporation, a wholly owned subsidiary of Miller &
Schroeder, Inc. to arrange loans and other financing transactions for the
Company. Currently, Miller & Schroeder Investments Corporation is in the process
of arranging for the Company, on a best efforts basis, a $5 million secured
credit facility. With respect to such
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<PAGE>
efforts, the Company has agreed to pay Miller & Schroeder Investments
Corporation a placement agent fee equal to 3% of the size of the credit facility
arranged. The Company may engage the Underwriter or Miller & Schroeder
Investments Corporation to arrange other loans or financings in the future.
VALIDITY OF NOTES AND WARRANTS
The validity of the Notes and Warrants offered hereby will be passed upon
for the Company by Dorsey & Whitney LLP, Minneapolis, Minnesota. Certain legal
matters for the Underwriter will be passed upon by Fredrikson & Byron, P.A.,
Minneapolis, Minnesota.
EXPERTS
The financial statements of the Company as of December 31, 1997 and 1996,
and for the years then ended, included herein and in the Registration Statement,
have been audited by Coopers & Lybrand L.L.P., independent accountants, whose
report thereon appears elsewhere herein and in the Registration Statement. All
such financial statements are included in reliance upon the authority of such
firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the information requirements of the Exchange Act,
and in accordance therewith files reports, proxy statements and other
information with the Commission. Reports, proxy statements and other information
filed by the Company with the Commission can be inspected and copied at the
public reference facilities maintained by the Commission at 450 Fifth Street,
N.W., Washington, DC 20549, and at the Commission's regional offices at
Northwestern Atrium Center, 500 West Madison, Suite 1400, Chicago, Illinois
60661 and 7 World Trade Center, Suite 1300, New York, New York 10048. Copies of
such material may be obtained at prescribed rates from the Commission's Public
Reference Section at 450 Fifth Street, N.W., Washington, DC 20549. The
Commission maintains a Web site that contains reports, proxy and information
statements and other materials that are filed through the Commission's
Electronic Data Gathering, Analysis and Retrieval system. This Web site can be
accessed at http://www.sec.gov. In addition, material filed by the Company can
be inspected at the offices of the National Association of Securities Dealers,
Inc., at 1735 K Street, N.W., Washington, D.C. 20006.
The Company intends to furnish annual reports to holders of the Units
containing audited financial statements reported on by an independent certified
public accounting firm.
This Prospectus does not contain all of the information set forth in the
Registration Statement of which this Prospectus is a part and which the Company
has filed with the Commission. For further information with respect to the
Company and the securities offered hereby, reference is made to such
Registration Statement and the exhibits thereto. Statements made in this
Prospectus as to the contents of any contract, agreement or other documents
referred to are necessarily summaries of such documents and are not necessarily
complete. With respect to each such contract, agreement or other document filed
as an exhibit to the Registration Statement, reference is made to the exhibit
for a more complete description of the matter involved. The Registration
Statement and exhibits may be inspected without charge and copied at prescribed
rates at the public reference facilities maintained by the Commission at the
address set forth above.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Accountants.......................................................................... F-2
Consolidated Balance Sheet................................................................................. F-3
Consolidated Income Statement.............................................................................. F-4
Consolidated Statement of Stockholders' Equity............................................................. F-5
Consolidated Statement of Cash Flows....................................................................... F-6
Notes to Consolidated Financial Statements................................................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of PDS Financial Corporation:
We have audited the accompanying consolidated balance sheet of PDS Financial
Corporation and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity and cash flows for the
years then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated 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 consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
PDS Financial Corporation and subsidiaries as of December 31, 1997 and 1996, and
the consolidated results of their operations and their cash flows for the years
then ended, in conformity with generally accepted accounting principles.
[SIG]
Minneapolis, Minnesota
March 20, 1998
F-2
<PAGE>
PDS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1997 1996
------------- -------------
<S> <C> <C>
ASSETS
Cash and cash equivalents.......................................................... $ 1,865,468 $ 2,760,200
Accounts receivable, net........................................................... 1,715,154 4,904,861
Notes receivable, net.............................................................. 3,140,964 6,392,194
Net investment in leasing operations:
Equipment under operating leases, net............................................ 18,327,490 20,560,731
Direct finance leases............................................................ 5,976,368 2,121,162
Equipment held for sale or lease................................................. 6,289,900 69,216
Investment in purchased residuals................................................ 1,555,178
Deferred income taxes.............................................................. 824,000 1,032,000
Other assets, net.................................................................. 1,824,488 1,166,185
------------- -------------
Total assets................................................................... $ 39,963,832 $ 40,561,727
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses.............................................. $ 2,094,178 $ 1,465,950
Deferred funds for pending transactions............................................ 775,159 4,975,987
Discounted lease rentals........................................................... 5,919,579 17,986,776
Notes payable...................................................................... 21,527,311 5,791,956
Convertible subordinated debentures................................................ 89,117 1,862,485
Other liabilities.................................................................. 929,142 2,741,248
------------- -------------
Total liabilities.............................................................. 31,334,486 34,824,402
------------- -------------
Stockholders' equity:
Common stock, $.01 par value, 20,000,000 shares authorized, 3,523,972 and
3,119,816 shares issued and outstanding in 1997 and 1996, respectively......... 35,240 31,198
Additional paid-in capital....................................................... 9,695,056 7,748,932
Retained earnings (accumulated deficit).......................................... (1,100,950) (2,042,805)
------------- -------------
Total stockholders' equity......................................................... 8,629,346 5,737,325
------------- -------------
Total liabilities and stockholders' equity......................................... $ 39,963,832 $ 40,561,727
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
PDS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENT
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1997 1996
------------- ------------
<S> <C> <C>
REVENUES
Equipment sales.................................................................... $ 17,481,986
Revenue from sales-type leases..................................................... 14,480,372
Rental revenue on operating leases................................................. 11,405,648 $ 2,938,477
Fee income......................................................................... 2,669,798 2,486,366
Finance income..................................................................... 1,575,455 798,324
Other.............................................................................. 137,327
------------- ------------
Total revenues................................................................... 47,613,259 6,360,494
------------- ------------
COSTS AND EXPENSES
Equipment sales.................................................................... 15,225,203
Sales-type leases.................................................................. 13,654,086
Depreciation on operating leases................................................... 8,588,611 2,203,476
Selling, general and administrative................................................ 4,126,232 2,318,774
Interest........................................................................... 4,260,096 1,353,925
Other.............................................................................. 240,176
------------- ------------
Total costs and expenses......................................................... 46,094,404 5,876,175
------------- ------------
Income before income taxes........................................................... 1,518,855 484,319
Provision for income taxes........................................................... 577,000 179,000
------------- ------------
Net income........................................................................... $ 941,855 $ 305,319
------------- ------------
------------- ------------
Earnings per share:
Basic.............................................................................. $ .30 $ .10
Diluted............................................................................ $ .28 $ .10
Weighted average shares outstanding:
Basic.............................................................................. 3,183,536 3,119,816
Diluted............................................................................ 3,619,837 3,126,848
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
PDS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
RETAINED
ADDITIONAL EARNINGS
COMMON STOCK PAID-IN (ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT) TOTAL
---------- -------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
BALANCES, DECEMBER 31, 1995....................... 3,119,816 $ 31,198 $ 7,952,161 $ (2,348,124) $ 5,635,235
Fair market value adjustments..................... (203,229) (203,229)
Net income........................................ 305,319 305,319
---------- ------- ------------ ------------- ------------
BALANCES, DECEMBER 31, 1996....................... 3,119,816 $ 31,198 $ 7,748,932 $ (2,042,805) $ 5,737,325
Issuance of stock upon conversion of subordinated
debentures...................................... 240,220 2,402 1,018,438 1,020,840
Issuance of stock upon exercise of stock options,
including tax benefit of $296,614............... 163,936 1,640 761,948 763,588
Fair market value adjustments..................... 165,738 165,738
Net income........................................ 941,855 941,855
---------- ------- ------------ ------------- ------------
BALANCES, DECEMBER 31, 1997....................... 3,523,972 $ 35,240 $ 9,695,056 $ (1,100,950) $ 8,629,346
---------- ------- ------------ ------------- ------------
---------- ------- ------------ ------------- ------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
PDS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................................................... $ 941,855 $ 305,319
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization on operating leases............................. 8,588,611 2,203,476
Provision for uncollectible receivables....................................... 628,000 170,000
Deferred income taxes......................................................... 447,000 179,000
Purchases of notes receivable................................................. (1,133,903) (12,817,613)
Purchases of direct finance leases............................................ (36,104,562)
Proceeds from:
Sale of notes receivable.................................................... 8,906,504 14,746,862
Sale of direct finance leases............................................... 33,764,746 424,957
Collection on notes receivable.............................................. 3,276,334 1,699,381
Collection of principal on direct finance leases............................ 2,625,174 1,024,256
Gain on sale of financial assets.............................................. (4,214,376) (1,206,724)
Changes in operating assets and liabilities:
Accounts receivable......................................................... (1,734,423) (508,263)
Equipment held for sale or lease............................................ (2,712,376)
Income taxes receivable..................................................... 1,041,000
Accounts payable and accrued expenses....................................... 677,864 (143,122)
Other liabilities........................................................... (1,463,010) 2,664,629
Other, net.................................................................... 316,923 (455,987)
-------------- --------------
Net cash provided by operating activities................................. 12,810,361 9,327,171
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment for leasing.............................................. (11,040,800) (21,123,740)
Proceeds from sale of equipment under operating leases.......................... 14,717,389 1,529,835
Other........................................................................... (119,512) (69,245)
-------------- --------------
Net cash provided by (used in) investing activities....................... 3,557,077 (19,663,150)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable..................................................... 10,511,260 470,000
Proceeds from discounted lease rentals.......................................... 4,699,634 18,085,906
Principal payments on notes payable............................................. (13,866,948) (3,088,822)
Payments on discounted lease rentals............................................ (18,320,564) (2,331,371)
Principal payments on subordinated debentures................................... (752,526) (909,643)
Proceeds from exercise of stock options......................................... 466,974
-------------- --------------
Net cash provided by (used in) financing activities....................... (17,262,170) 12,226,070
-------------- --------------
Net increase (decrease) in cash and cash equivalents.............................. (894,732) 1,890,091
Cash and cash equivalents at beginning of year.................................... 2,760,200 870,109
-------------- --------------
Cash and cash equivalents at end of year.......................................... $ 1,865,468 $ 2,760,200
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
PDS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS DESCRIPTION:
PDS Financial Corporation (the Company) engages in the leasing and financing
of gaming equipment and supplying reconditioned gaming devices to casino
operators. In 1996, the Company introduced SlotLease, a specialized operating
lease program for slot machines and other electronic gaming devices. In 1997,
the Company established PDS Slot Source, its reconditioned gaming device sales
and distribution division, to compliment its leasing and financing activities.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of PDS Financial
Corporation and its wholly-owned subsidiaries. All significant intercompany
balances and transactions between PDS Financial Corporation and its wholly-owned
subsidiaries have been eliminated in consolidation.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The most
significant areas which require the use of management's estimates relate to
residual values, deferred income tax valuations and allowances for uncollectible
receivables.
CASH AND CASH EQUIVALENTS:
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Cash
equivalents consist of investments in money market accounts. The Company has
cash in checking and savings accounts at various banks. The accounts are insured
by the Federal Deposit Insurance Corporation up to $100,000. At December 31,
1997 and 1996, the Company's uninsured checking and savings account balances
totaled approximately $1.4 million and $2.6 million, respectively.
LEASE ACCOUNTING:
Statement of Financial Accounting Standards (SFAS) No. 13, "Accounting for
Leases", requires that the Company account for its leases by the operating,
direct finance or sales-type method. Operating leases are defined as those
leases in which substantially all of the benefits and risks of ownership of the
leased asset remain with the Company. Direct finance and sales-type leases are
defined as those leases which transfer substantially all of the benefits and
risks of ownership of the asset to the lessee. Sales-type leases also include
dealer profit. After the inception of a lease, the Company may engage in
discounting or selling of lease payments to reduce or recover its cash
investment in the asset. The methods of accounting for leases and the financial
reporting effects of subsequent transactions are described below.
OPERATING LEASES. Lease revenue consists of monthly rentals and is
reflected in the Consolidated Income Statement as "Rental revenue on operating
leases". The cost of equipment is recorded as "Net investment in leasing
operations--equipment under operating leases" in the Consolidated Balance Sheet
and is depreciated on a straight-line basis over the lease term to the Company's
estimate of residual value. Revenue and depreciation are recorded evenly over
the life of the lease.
F-7
<PAGE>
PDS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
DIRECT FINANCE AND SALES-TYPE LEASES. Profit recognition under these two
accounting methods is similar, except that the sales-type classification also
gives rise to dealer profit. This results when the Company leases equipment
purchased at a discount that is not available to the lessee. Under the
sales-type method, dealer profit is recognized at lease inception as the
difference between "Revenue from sales-type leases" and "Sales-type lease"
costs. "Revenue from sales-type leases" consists of the present value of future
minimum lease payments. "Sales-type lease" costs consists of the equipment
carrying value, less the present value of its unguaranteed residual value, if
any. For direct finance leases, the present value of both the future minimum
lease payments and residual values, if any, are recorded in the Consolidated
Balance Sheet as "Net investment in leasing operations--direct finance leases."
Interest income from these leases is recognized as a constant percentage return
on asset carrying values and is reflected in the Consolidated Income Statement
as "Finance income."
EQUIPMENT HELD FOR SALE OR LEASE:
Equipment held for sale or lease, which consists primarily of gaming
devices, is valued at the lower of specific unit cost or net realizable value.
INITIAL DIRECT COSTS:
Initial direct costs related to direct finance and operating leases and
notes receivable are capitalized and recorded in the Consolidated Balance Sheet
as part of the related asset and are amortized over the term of the agreement
using the effective interest method.
RESIDUALS:
Residuals values, representing the estimated value of the asset at the
expiration of the lease, are recorded on a net present value basis in the
consolidated financial statements at the inception of each direct finance lease
originated by the Company. Investments in purchased residual interests are
recorded at cost and are separately presented in the Company's Consolidated
Balance Sheet. The Company periodically reviews residuals for possible
impairment to ensure that they are appropriately valued.
PROPERTY AND EQUIPMENT:
Property and equipment, which consists primarily of furniture, equipment and
leasehold improvements, is stated at cost. Depreciation and amortization are
calculated using the straight-line method over the estimated useful lives of
three to seven years. Expenditures for maintenance and repairs which do not
improve or extend the life of the respective assets are expensed as incurred.
Gains and losses on asset disposals are included in operations.
DEBT ISSUANCE COSTS:
All direct costs incurred in obtaining interest-bearing debt are capitalized
and included in the Consolidated Balance Sheet as part of "Other assets, net",
and are amortized over the term of the underlying financing agreement using the
interest method.
F-8
<PAGE>
PDS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
LICENSING COSTS:
Costs related to obtaining licenses in various states, necessary to own,
possess and distribute gaming devices and associated equipment, are capitalized
and included in "Other assets, net" in the Consolidated Balance Sheet and are
amortized over three years on a straight-line basis.
INVESTMENTS IN EQUITY SECURITIES:
Investments in equity securities are classified as available for sale and
are carried at fair value, with the unrealized gains and losses reported in
stockholders' equity until realized. These fair values are determined using
quoted market prices.
INCOME TAXES:
The Company utilizes the asset and liability method of accounting for income
taxes, under which deferred taxes are determined from the differences in the
financial reporting and tax bases of assets and liabilities using enacted tax
rates applicable to the period in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. Income tax expense is
the tax payable for the period and the change during the period in deferred tax
assets and liabilities.
EQUIPMENT SALES:
Revenue is recognized when title to the equipment is transferred to the
customer. This occurs generally upon a customers' exercise of their purchase
option for equipment under operating leases and upon shipment of reconditioned
gaming devices to customers.
FEE INCOME:
Fee income includes gross profit from the sale to third parties of the
Company's interest in notes receivable and direct finance leases. Upon sale, the
Company records fee income equal to the difference between the sale price and
the carrying value of the related asset. Fee income also includes commissions
earned for arranging financing between unrelated parties.
STOCK-BASED COMPENSATION:
The Company utilizes the intrinsic value method for its stock option plan.
EARNINGS PER SHARE:
Effective with year-end 1997, the Company adopted SFAS No. 128, "Earnings
Per Share," and has retroactively presented basic and diluted earnings per
share. A dilutive effect on earnings results from the assumed exercise of stock
options and warrants and the full conversion of the convertible subordinated
debentures into common shares and elimination of the related interest
requirements, net of income taxes.
F-9
<PAGE>
PDS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
The Company calculated basic and diluted earnings per share as follows for
the years ended December 31.
<TABLE>
<CAPTION>
1997 1996
------------ ----------
<S> <C> <C>
Net income, basic.................................................. $ 941,855 $ 305,319
Interest expense on convertible subordinated debentures, net of
tax.............................................................. 85,776
------------ ----------
Net income, diluted................................................ $ 1,027,631 $ 305,319
------------ ----------
------------ ----------
Weighted average shares outstanding:
Basic (actual shares outstanding).............................. 3,183,536 3,119,816
Effect of dilutive options..................................... 136,990 7,032
Effect of convertible subordinated debentures.................. 299,311
------------ ----------
Diluted.......................................................... 3,619,837 3,126,848
------------ ----------
------------ ----------
Per share amounts:
Basic.......................................................... $ .30 $ .10
Diluted........................................................ $ .28 $ .10
</TABLE>
Options and warrants to purchase 337,200 and 671,364 shares of common stock
at a weighted average price of $5.60 and $4.03 for the years ended December 31,
1997 and 1996, respectively, were not included in the computation of diluted
earnings per share because the exercise price was greater than the average
market price of the common stock. These options and warrants expire at various
dates through 2007. Convertible subordinated debentures (convertible into
573,898 shares of common stock and $176,711 of related interest expense, net of
tax) were not included in the 1996 computation of diluted earnings per share
because the effect would have been antidilutive.
F-10
<PAGE>
PDS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION:
BALANCE SHEET INFORMATION:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Accounts receivable, net:
Accounts receivable............................................. $ 2,030,154 $ 4,904,861
Allowance for uncollectible amounts............................. (315,000)
------------ ------------
$ 1,715,154 $ 4,904,861
------------ ------------
------------ ------------
Other assets, net:
Property and equipment, net..................................... $ 778,508 $ 153,076
Prepaid expense................................................. 274,427 402,639
Debt issuance costs, net........................................ 265,976 43,148
Licensing costs, net............................................ 132,691 110,407
Investments and other........................................... 372,886 456,915
------------ ------------
$ 1,824,488 $ 1,166,185
------------ ------------
------------ ------------
Accounts payable and accrued expenses:
Trade payables.................................................. $ 1,107,160 $ 481,788
Accrued interest payable........................................ 285,572 687,490
Other accrued expenses.......................................... 701,446 296,672
------------ ------------
$ 2,094,178 $ 1,465,950
------------ ------------
------------ ------------
Other liabilities:
Lessee deposits................................................. $ 753,870 $ 2,657,298
Other........................................................... 175,272 83,950
------------ ------------
$ 929,142 $ 2,741,248
------------ ------------
------------ ------------
</TABLE>
F-11
<PAGE>
PDS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION: (CONTINUED)
SUPPLEMENTAL CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
1997 1996
------------ --------------
<S> <C> <C>
Cash paid during the year for:
Interest...................................................... $ 4,393,601 $ 902,298
Income taxes, net of refunds received......................... 24,149 (1,097,819)
Noncash activities:
Transaction closed but not funded at year-end:
Deferred funds for pending transactions..................... 775,159 4,975,987
Increase in accounts receivable from sale of direct finance
lease....................................................... 4,113,500
Increase in notes payable for purchase of equipment for
leasing..................................................... 7,636,125 4,126,916
Increase in notes payable for purchase of notes receivable.... 12,196,978
Operating leases converted to direct finance leases upon
exercise of purchase options................................ 2,675,530
Exchange of notes receivable and purchased residuals for
equipment for leasing and the assumption of discounted lease
rentals..................................................... 5,744,504
Exchange of notes receivable, direct finance leases and
related discounted lease rentals for inventory for sale or
lease....................................................... 5,332,008
Conversion of subordinated debentures into common stock....... 1,020,840
Origination of direct finance lease or notes receivable for
sale of equipment and residuals............................. 3,095,523
</TABLE>
F-12
<PAGE>
PDS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. NOTES RECEIVABLE:
Notes receivable consists of the following:
<TABLE>
<CAPTION>
1997 1996
------------ -------------
<S> <C> <C>
Notes receivable, due in varying monthly installments, stated
and effective interest at rates from 8.0% to 13.2%, through
September 2002, collateralized by casino-related equipment and
furnishings and/or lease agreements between the borrower and a
customer of the borrower...................................... $ 4,423,964 $ 12,521,382
Other........................................................... -- 272,725
Unamortized discount............................................ -- (14,421)
------------ -------------
4,423,964 12,779,686
Impairment allowance............................................ (1,000,000) (6,331,000)
------------ -------------
3,423,964 6,448,686
Unamortized origination fees.................................... -- 16,508
Allowance for uncollectible amounts............................. (283,000) (73,000)
------------ -------------
$ 3,140,964 $ 6,392,194
------------ -------------
------------ -------------
</TABLE>
Included in the notes receivable balances above are certain loans, for which
an impairment allowance for the full amount of the loans has been recognized.
Changes in the allowance for uncollectible receivables, including the impairment
allowance, are as follows:
<TABLE>
<CAPTION>
1997 1996
-------------- ------------
<S> <C> <C>
Balance, beginning of year...................................... $ 6,404,000 $ 6,454,000
-------------- ------------
Charge-offs..................................................... (5,500,000) (237,000)
Recoveries...................................................... 66,000 17,000
-------------- ------------
Net charge-offs................................................. (5,434,000) (220,000)
Provision for uncollectible receivables......................... 313,000 170,000
-------------- ------------
Balance, end of year............................................ $ 1,283,000 $ 6,404,000
-------------- ------------
-------------- ------------
</TABLE>
The estimated fair value of notes receivable approximates their carrying
value. The fair value is estimated using discounted cash flow analysis with
interest rates currently being offered by the Company for notes with similar
terms and credit risk.
F-13
<PAGE>
PDS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. NOTES RECEIVABLE: (CONTINUED)
Scheduled principal maturities for notes receivable based upon the terms
noted above are as follows at December 31, 1997:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31
- --------------------------------------------------------------------------------
<S> <C>
1998.......................................................................... 1,967,995
1999.......................................................................... 1,232,457
2000.......................................................................... 88,020
2001.......................................................................... 18,658
2002.......................................................................... 116,834
------------
$ 3,423,964
------------
------------
</TABLE>
4. NET INVESTMENT IN LEASING OPERATIONS:
Equipment under operating leases consists principally of gaming equipment
the Company leases for periods ranging from 24 to 48 months at which time the
lessee generally has the right to purchase the property at fair value. The
Company may discount the lease rentals with a financial institution. The
components of net investment in equipment under operating leases are as follows:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Operating leased assets........................................ $ 23,773,809 $ 22,382,688
Less accumulated depreciation.................................. (5,446,319) (1,821,957)
------------- -------------
$ 18,327,490 $ 20,560,731
------------- -------------
------------- -------------
</TABLE>
The components of net investment in direct finance leases are as follows:
<TABLE>
<CAPTION>
1997 1996
-------------- ------------
<S> <C> <C>
Minimum lease payments receivable:
To be received by the Company................................. $ 7,432,065 $ 1,730,692
To be received by a financial institution..................... 17,435 752,294
Unearned income............................................... (1,458,132) (346,824)
Allowance for uncollectible receivables....................... (15,000) (15,000)
-------------- ------------
$ 5,976,368 $ 2,121,162
-------------- ------------
-------------- ------------
</TABLE>
F-14
<PAGE>
PDS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. NET INVESTMENT IN LEASING OPERATIONS: (CONTINUED)
At December 31, 1997, future minimum lease payments to be received by the
Company on nondiscounted operating and direct finance leases are as follows:
<TABLE>
<CAPTION>
DIRECT
OPERATING FINANCE
YEAR ENDING DECEMBER 31 LEASES LEASES
- ----------------------------------------------------------------- ------------- ------------
<S> <C> <C>
1998........................................................... $ 3,759,570 $ 1,878,807
1999........................................................... 4,182,898 1,972,880
2000........................................................... 2,867,448 1,928,795
2001........................................................... 1,217,302 1,651,583
------------- ------------
$ 12,027,218 $ 7,432,065
------------- ------------
------------- ------------
</TABLE>
See Note 5 for a summary of operating lease payments that have been
discounted with financial institutions.
5. DISCOUNTED LEASE RENTALS:
The Company utilizes certain of its lease rental receivables and underlying
assets as collateral to borrow from financial institutions at fixed rates on a
nonrecourse basis. In the event of a default by a lessee, the financial
institution has a first lien on the underlying leased asset, with no further
recourse against the Company. As lessees make payments, "Finance income" and
"Rental revenue on operating leases" are recorded along with the recognition of
interest expense on discounted lease rentals. Discounted lease rentals are
reduced by the interest method.
Future minimum lease payments and interest expense on leases that have been
discounted as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
MINIMUM LEASE RENTALS TO BE
RECEIVED BY FINANCIAL INSTITUTIONS
-------------------------------------------------
DIRECT DISCOUNTED FUTURE
FINANCE OPERATING LEASE INTEREST
YEAR ENDING DECEMBER 31 LEASES LEASES RENTALS EXPENSE
- ------------------------------------------ --------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
1998.................................... $ 17,435 $ 3,606,887 $ 3,216,812 $ 407,510
1999.................................... -- 2,606,443 2,480,269 126,174
2000.................................... -- 226,554 222,498 4,056
--------- ------------ ------------ ----------
$ 17,435 $ 6,439,884 $ 5,919,579 $ 537,740
--------- ------------ ------------ ----------
--------- ------------ ------------ ----------
</TABLE>
Interest expense on discounted lease rentals was $1,975,825 and $634,847 in
1997 and 1996, respectively. At December 31, 1997, effective interest rates on
discounted lease rentals ranged from 8% to 10%.
F-15
<PAGE>
PDS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. BORROWINGS:
NOTES PAYABLE:
Notes payable consists of the following:
<TABLE>
<CAPTION>
1997 1996
------------- ------------
<S> <C> <C>
Recourse:
Notes payable to banks, due on demand and in 1998 and 1999,
interest at the prime rate (8.5% at December 31, 1997) plus 1%,
collateralized by certain equipment under operating leases,
equipment held for sale or lease and accounts receivable....... $ 3,489,083
Notes payable to financial institutions, due in 1998 through
2001, interest at 8.8% to 9.1%, collateralized by certain notes
receivable, equipment under operating leases and direct finance
leases......................................................... 4,866,070 $ 1,698,222
Notes payable to manufacturers/distributors due in 1998 through
2001, interest at 8.0% to 10.0% collateralized by certain notes
receivable, equipment under operating leases and direct finance
leases......................................................... 9,012,318 4,050,593
Other............................................................ 202,284
------------- ------------
Total recourse................................................... 17,569,755 5,748,815
Nonrecourse:
Notes payable to manufacturers/distributors due in 1998 through
2001, interest at 8.0% to 10.0%, collateralized by certain
equipment under operating leases and direct finance leases..... 4,088,487
Other............................................................ 148,904 53,245
------------- ------------
Total nonrecourse................................................ 4,237,391 53,245
Less unamortized discount........................................ (279,835) (10,104)
------------- ------------
$ 21,527,311 $ 5,791,956
------------- ------------
------------- ------------
</TABLE>
The Company's established revolving credit and working capital facilities
aggregate $34.0 million. Advances under these agreements with banks and
financial institutions were approximately $8.4 million at December 31, 1997, as
indicated in the table above. The agreements contain covenants which restrict
the payment of dividends and require, among other things, the Company to
maintain a minimum net worth and certain debt to net worth and cash flow ratios,
as defined. Borrowings under a $1.0 million working capital loan are guaranteed
by the principal stockholder of the Company.
CONVERTIBLE SUBORDINATED DEBENTURES:
In 1993, the Company issued unsecured Convertible Subordinated Debentures
(the Debentures) which are subordinate to other borrowings of the Company of
which $89,117 remains outstanding at December 31, 1997. At December 31, 1997,
principal and interest at 11.5% is due in three remaining equal quarterly
installments of $31,430 through September 30, 1998. At the option of the
holders, the unpaid
F-16
<PAGE>
PDS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. BORROWINGS: (CONTINUED)
principal balance of the Debentures may be converted into shares of common stock
of the Company using a per share conversion price of $4.25. During 1997,
$1,020,840 of Debentures were converted into 240,220 shares of common stock.
Principal maturities of notes payable and convertible subordinated
debentures are as follows at December 31, 1997:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31
- -------------------------------------------------------------------------------
<S> <C>
1998......................................................................... 8,593,086
1999......................................................................... 7,783,081
2000......................................................................... 4,184,378
2001......................................................................... 1,051,251
2002......................................................................... 4,632
-------------
$ 21,616,428
-------------
-------------
</TABLE>
The Company estimates that the fair value of its borrowings approximates the
carrying value.
7. INCOME TAXES:
The following summarizes the deferred income tax status as recognized in the
Company's Consolidated Balance Sheet at December 31:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Deferred tax asset................................................ $ 958,500 $ 1,832,000
Deferred tax liability............................................ (134,500) (800,000)
------------ ------------
Net deferred tax asset............................................ $ 824,000 $ 1,032,000
------------ ------------
------------ ------------
</TABLE>
The tax effect of the major temporary differences which give rise to
deferred income taxes at December 31 is as follows:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Net operating loss carryforward................................... $ 672,000 $ 1,718,000
Asset valuation allowances........................................ 251,000 77,700
Lease transactions................................................ (125,000) (787,600)
Other, net........................................................ 26,000 23,900
------------ ------------
Net deferred tax asset............................................ $ 824,000 $ 1,032,000
------------ ------------
------------ ------------
</TABLE>
The net operating loss carryforward will be an available deduction from
future taxable income through 2009. Realization of the net operating loss
carryforward is dependent on generating sufficient taxable income prior to
expiration of the loss carryforward. Although realization is not assured,
management believes it is more likely than not that all of the deferred tax
asset will be realized and therefore no valuation allowance is deemed necessary.
F-17
<PAGE>
PDS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES: (CONTINUED)
The following summarizes the provision for income taxes:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Currently payable..................................................... $ 130,000 $ --
Deferred.............................................................. 447,000 179,000
---------- ----------
Provision for income taxes............................................ $ 577,000 $ 179,000
---------- ----------
---------- ----------
</TABLE>
The difference between the federal statutory tax rate of 34% applied to
income before income taxes and the Company's effective tax rate is:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Income taxes at statutory rate........................................ $ 516,500 $ 164,700
State income taxes, net of federal impact............................. 31,100 10,200
Other, net............................................................ 29,400 4,100
---------- ----------
Provision for income taxes............................................ $ 577,000 $ 179,000
---------- ----------
---------- ----------
</TABLE>
In 1994, the Company entered into a tax indemnification agreement with its
then sole stockholder whereby the Company will indemnify the stockholder for
certain tax liabilities, if any, that may arise with respect to the Company's
operations during the period in which it was an S corporation, prior to 1994.
8. STOCKHOLDERS' EQUITY:
PREFERRED STOCK:
The Company's Articles of Incorporation, as amended, authorize the issuance
of 2,000,000 shares of preferred stock. The rights, preferences and privileges
of the authorized preferred shares (none of which have been issued) may be
established by the Board of Directors without further action by the holders of
the Company's common stock. In 1996, the Board of Directors designated the par
value of the Company's preferred stock at $.01 per share.
STOCK OPTION PLAN:
The Company established the 1993 Stock Option Plan (the Plan) to encourage
stock ownership by employees, officers, directors and other individuals as
determined by the Board of Directors or a committee appointed by the Board of
Directors (the Committee). The Plan provides that options granted thereunder may
be either incentive stock options (ISOs) or nonqualified stock options. At
December 31, 1997, the maximum number of shares of common stock available for
grant under the Plan was 1,100,000. In January 1998, the Board of Directors
passed a resolution to increase the maximum number of shares to 1,350,000,
subject to stockholder approval.
Newly elected nonemployee directors of the Company receive an automatic
grant of nonqualified options to purchase 10,000 shares. Options may have a
maximum term of up to ten years. The exercise price of ISOs granted under the
Plan must be at least equal to the fair value of the common stock on the date of
grant. The exercise price of nonqualified options must be at least equal to 85%
of the fair value of the common stock on the date of grant. If an option
expires, terminates or is canceled, the shares not
F-18
<PAGE>
PDS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCKHOLDERS' EQUITY: (CONTINUED)
purchased thereunder become available for additional option awards under the
Plan. The Plan expires on April 1, 2003.
Option activity is summarized as follows:
<TABLE>
<CAPTION>
PLAN OPTIONS OPTIONS OUTSTANDING
AVAILABLE --------------------------
FOR GRANT ISOS NONQUALIFIED
------------ ------------ ------------
<S> <C> <C> <C>
Balances, December 31, 1995........................ 244,628 76,282 563,819
Increase in available shares....................... 100,000
Granted............................................ (35,000) 15,000 20,000
Canceled........................................... 128,137 (23,409) (104,728)
------------ ------------ ------------
Balances, December 31, 1996........................ 437,765 67,873 479,091
------------ ------------ ------------
Granted............................................ (178,500) 23,500 155,000
Exercised.......................................... (10,555) (152,955)
Canceled........................................... 9,500 (9,500)
------------ ------------ ------------
Balances, December 31, 1997........................ 268,765 71,318 481,136
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Weighted average exercise price per share:
Granted.................................................................... $ 3.66 $ 2.23
Exercised.................................................................. 2.86 --
Canceled................................................................... 3.08 2.46
December 31:
Outstanding................................................................ 3.47 3.22
Exercisable................................................................ 3.23 3.04
</TABLE>
Stock options outstanding at December 31, 1997 had an average remaining
contractual life of 7.5 years. At December 31, 1997, 326,454 options outstanding
had an exercise price of $1.50 to $2.88 with a weighted average exercise price
of $2.57. Of these options, 206,545 were exercisable at December 31, 1997 with a
weighted average exercise price of $2.53. The remaining 226,000 options
outstanding had an exercise price of $3.00 to $7.88 with a weighted average
exercise price of $4.76. Of these options, 71,000 were exercisable at December
31, 1997 with a weighted average exercise price of $5.30.
The exercise prices are equal to the estimated fair value of common stock on
the grant dates. These options are exercisable over vesting periods, typically
five years, through 2002. At December 31, 1997, options to purchase 277,545
shares of common stock are exercisable at prices ranging from $1.50 to $5.75.
F-19
<PAGE>
PDS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCKHOLDERS' EQUITY: (CONTINUED)
Had the Company used the fair value-based method of accounting for the Plan
beginning in 1995 and charged compensation cost against income over the vesting
period based on the fair value of options at the date of grant, net income and
net income per share for 1997 and 1996 would have been adjusted to the following
pro forma amounts:
<TABLE>
<CAPTION>
1997 1996
------------ ----------
<S> <C> <C>
Net income, basic
As reported....................................................... $ 941,855 $ 305,319
Pro forma......................................................... 878,633 269,170
Net income per share, basic
As reported....................................................... $ .30 $ .10
Pro forma......................................................... .28 .09
Net income, diluted
As reported....................................................... $ 1,027,631 305,319
Pro forma......................................................... 964,409 269,170
Net income per share, diluted
As reported....................................................... $ .28 $ .10
Pro forma......................................................... .27 .09
</TABLE>
The pro forma information above only includes stock options granted after
December 31, 1994. Pro forma compensation expense under the fair value-based
method of accounting will generally increase over the next few years as
additional stock option grants are considered.
The weighted-average grant-date fair value of options granted was $2.35 and
$1.46 per option for 1997 and 1996, respectively. The weighted-average
grant-date fair value of options was determined by using the fair value of each
option grant on the date of grant, utilizing the Black-Scholes option-pricing
model and the following key assumptions:
<TABLE>
<S> <C>
Risk-free interest rate............................................ 6.2%
Expected life...................................................... 5 years
Expected volatility................................................ 70%
Expected dividends................................................. 0
</TABLE>
WARRANTS:
In 1994, the Company issued warrants to purchase up to 170,000 shares of its
common stock to the underwriter in connection with the initial public offering
of its common stock and a certain lender in connection with bridge note
financing. At December 31, 1997, warrants to purchase up to 168,200 shares
remain outstanding, are exercisable at an exercise price of $6.00 per share and
expire in 1999.
9. EMPLOYEE MATTERS:
BENEFIT PLAN:
The Company maintains a contributory defined contribution plan which
qualifies under Section 401(k) of the Internal Revenue Code (IRC) and covers
employees who meet certain age and service
F-20
<PAGE>
PDS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. EMPLOYEE MATTERS: (CONTINUED)
requirements subject to IRC limits. Employee contributions are limited to 10% of
their compensation. Company contributions are at the discretion of the Board of
Directors up to 5% of the individual employee earnings. The Company's
contributions to the plan in 1997 and 1996 were approximately $27,000 and
$22,000, respectively.
EMPLOYMENT AGREEMENTS:
The Company has entered into employment agreements with its four officers
for periods ranging from one to five years. Three of the agreements contain
noncompete clauses which continue from one to two years following termination of
employment. The agreements, among other things, provide for initial base
salaries, benefits and payment of both discretionary bonuses and bonuses based
on the attainment of specified profit levels. The agreements are automatically
extended for additional one-year periods unless notice of nonextension is given.
10. COMMITMENT:
The Company leases office and warehouse space under terms of various
noncancelable operating leases expiring through 2004. The agreements require the
Company to pay monthly base rent in varying amounts plus its pro rata share of
the operating expenses. A portion of the office space has been subleased under
an agreement expiring in 2000, which requires monthly payments to the Company
over the sublease term aggregating $154,000. Net rent expense was approximately
$305,000 in 1997 and $164,000 in 1996.
Net future minimum lease payments under these leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31
- --------------------------------------------------------------------------------
<S> <C>
1998............................................................................ $ 328,000
1999............................................................................ 320,000
2000............................................................................ 208,000
2001............................................................................ 211,000
2002............................................................................ 237,000
After 2002...................................................................... 495,000
------------
$ 1,799,000
------------
------------
</TABLE>
11. SIGNIFICANT CUSTOMERS:
Significant customer activity as a percent of the Company's total revenues
in 1997 and 1996 is summarized as follows:
<TABLE>
<CAPTION>
PERCENT OF REVENUES
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Customer A..................................................................... 37% 20%
Customer B..................................................................... 18% --
Customer C..................................................................... 11% 16%
Customer D..................................................................... 2% 20%
Customer E..................................................................... 7% 14%
</TABLE>
F-21
<PAGE>
PDS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. RELATED PARTY TRANSACTIONS:
In 1995, the Company made various loans to a casino industry change cart
manufacturing company. The Company's President, Chief Executive Officer and
principal stockholder held an ownership position in this company and also had
served on its board of directors. In early 1996, a portion of these loans went
into default. In December 1996, the Company charged off the remaining loan
balance of $237,000.
F-22
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, OR ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR
SOLICITATION OF AN OFFER TO BUY THE UNITS, NOTES OR WARRANTS BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL CREATE ANY
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 7
Forward Looking Statements................................................ 10
Use of Proceeds........................................................... 11
Price Range of Common Stock............................................... 11
Distributions and Dividend Policy......................................... 11
Capitalization............................................................ 12
Selected Consolidated Financial Data...................................... 13
Management's Discussion and Analysis of
Financial Condition and Results
of Operations............................................................ 14
Business.................................................................. 19
Management................................................................ 31
Principal Stockholders.................................................... 36
Certain Transactions...................................................... 37
Description of Units...................................................... 37
Certain Federal Income Tax Considerations................................. 43
Description of Securities................................................. 46
Underwriting.............................................................. 48
Validity of Notes and Warrants............................................ 50
Experts................................................................... 50
Additional Information.................................................... 50
Index to Consolidated Financial Statements................................ F-1
</TABLE>
------------------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITER AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
10,000 INVESTMENT UNITS
PDS FINANCIAL
CORPORATION
$10,000,000
10% SENIOR SUBORDINATED NOTES
DUE JULY 1, 2004
AND WARRANTS TO PURCHASE
500,000 SHARES OF COMMON STOCK
---------------------
PROSPECTUS
---------------------
MILLER & SCHROEDER FINANCIAL, INC.
[LOGO]
THE DATE OF THIS PROSPECTUS
IS , 1998.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 302A.521 of the Minnesota Business Corporation Act provides that,
unless prohibited or limited by a corporation's articles of incorporation or
bylaws, a corporation must indemnify its current and former officers, directors,
employees and agents against expenses (including attorneys' fees), judgments,
penalties, fines and amounts paid in settlement and which were incurred in
connection with actions, suits or proceedings in which such person are parties
by reason of the fact that they are or were an officer, director, employee or
agent of the corporation, if they (i) have not been indemnified by another
organization, (ii) acted in good faith, (iii) received no improper personal
benefit, (iv) in the case of a criminal proceeding, had no reasonable cause to
believe the conduct was unlawful, and (v) reasonably believed that the conduct
was in the best interests of the corporation. Section 302A.521 also permits a
corporation to purchase and maintain insurance on behalf of its officers,
directors, employees and agents against any liability which may be asserted
against, or incurred by, such persons in their capacities as officers,
directors, employees and agents of the corporation, whether or not the
corporation would have been required to indemnify the person against the
liability under the provisions of such section.
The Amended and Restated Bylaws of the Registrant provides that the
directors, officers and committee members of the Registrant and other persons
shall have the rights to indemnification provided by Section 302A.521 of the
Minnesota Business Corporation Act.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses to be borne by the
Company in connection with the issuance and distribution of the shares of Common
Stock offered hereby:
<TABLE>
<S> <C>
SEC registration fee.............................................. $ 4,743
NASD and Nasdaq filing fee........................................ 43,675
Legal fees and expenses of the Company............................ 75,000
Accounting fees and expenses...................................... 20,000
Underwriter's fees and expenses................................... 300,000
Blue Sky fees and expenses........................................ 5,000
Printing expenses................................................. 40,000
Trustee and Warrant Agent fees and expenses....................... 10,000
Miscellaneous..................................................... 1,582
---------
TOTAL......................................................... $ 500,000
---------
---------
</TABLE>
Each amount set forth above, except the SEC registration fee and the NASD
filing fees, is estimated.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, the Registrant has sold the following
securities pursuant to exemptions from registration under the Securities Act of
1933, as amended (the "Securities Act"):
(1) The Company issued unsecured Convertible Subordinated Debentures
(the "Debentures") in 1993, which became convertible into Common Stock of
the Company at a price of $4.25 per share. Since September 1997, $1,165,000
of the principal balance of the Debentures has been converted into 274,223
shares of Common Stock of the Company. This transaction was made in reliance
upon the exemptions from registration provided under Section 4(2) and 4(6)
and Rule 144 of the Securities Act. The purchasers of such securities
acquired them for their own account and not with a view to any distribution
thereof to the public. The Debentures bear a legend stating that the
securities may not be
II-1
<PAGE>
offered, sold or transferred other than pursuant to an effective
registration statement under the Securities Act, or an exemption from such
registration requirements.
(2) On December 16, 1997 and March 11, 1998, Terry Stewart exercised a
warrant of PDS and received 426 and 727 shares of Common Stock of the
Company, respectively. The transactions were made in reliance upon the
exemption from registration provided under Sections 4(2) and 4(6) and Rule
144 of the Securities Act.
ITEM 27. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------ --------------------------------------------------------------------------
<C> <S>
*1.1 Form of Underwriting Agreement between the Registrant and the Underwriter
3.1 Amended and Restated Articles of Incorporation, as amended, of the
Registrant(4)
3.2 Articles of Amendment to Articles of Incorporation of the Registrant(4)
3.2 Articles of Amendment of Amended and Restated Articles of Incorporation of
the Registrant(4)
3.3 Articles of Amendment to Articles of Incorporation of the Registrant(4)
3.4 Amended and Restated Bylaws of the Registrant(1)
4.1 Specimen of Common Stock Certificate(1)
4.2 Warrant to Purchase 25,000 shares of Common Stock, dated December 15, 1994
between the Registrant and Miller & Schroeder Financial, Inc.(3)
4.3 Form of Warrant to Purchase 145,000 shares of Common Stock, dated May 24,
1994(1)
4.4 Indenture of Trust between the Registrant and First Trust National
Association, as Trustee, dated as of November 2, 1993(1)
4.5 Revised Form of Indenture of Trust between the Registrant and First Trust
National Association dated as of , 1998
4.6 Form of Note (included as Article Two to Exhibit No. 4.5)
*4.7 Form of Warrant Agreement between the Registrant and Norwest Bank
Minnesota, N.A.
*4.8 Form of Warrant (included in Appendix A to Exhibit No. 4.7)
*5.1 Opinion and Consent of Counsel to the Company
10.1 Industrial Real Estate Lease dated April 29, 1997, between the Registrant,
as Tenant, and Patrick Commerce Center, LLC, as Landlord(4)
10.2 1993 Stock Option Plan(1)
10.3 Form of Incentive Stock Option Agreement(1)
10.4 Form of Non-Qualified Stock Option Agreement(1)
10.5 Employment Agreement between the Registrant and Johan P. Finley(1)
10.6 Employment Agreement between the Registrant and Robert M. Mann(2)
10.7 Employment Agreement between the Registrant and Peter D. Cleary(2)
10.8 Employment Agreement between the Registrant and Lona M.B. Finley (1)
10.9 Employment Agreement between the Registrant and David Mylrea(1)
10.10 Form of Tax Indemnification Agreement between the Registrant and Johan P.
Finley(1)
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------ --------------------------------------------------------------------------
<C> <S>
10.11 Revolving Credit and Security Agreement, dated April 9, 1997 between BNY
Financial Corporation as Lender and as Agent and the Registrant and PDS
Financial Corporation-Nevada as Borrowers(4)
10.12 Loan and Security Agreement, dated June 20, 1997 between Heller Financial,
Inc., as Lender and the Registrant as Borrower(4)
10.13 Loan and Security Agreement, dated June 20, 1997 between Heller Financial,
Inc. as Lender and PDS Financial Corporation-Nevada, as Borrower(4)
10.14 Commercial Security Agreement, dated August 15, 1997 between U.S. Bank, as
Lender and the Registrant as Borrower(4)
10.15 Letter Agreement between the Registrant and David R. Mylrea(4)
*10.16 Letter of Intent, dated February 12, 1998 between the Registrant and
Miller and Schroeder Financial, Inc.
21.1 Subsidiaries of the Registrant(4)
23.1 Consent of Counsel to the Company (included in Exhibit 5.1)
*23.2 Consent of Independent Accountants
*24.1 Powers of Attorney
*25.1 Statement of Eligibility of Trustee
</TABLE>
- ------------------------
* Previously filed
(1) Incorporated by reference to the Registrant's previously filed Registration
Statement on Form SB-2 (File No. 33-76948C), as amended, originally filed
with the Commission on March 25 , 1994
(2) Incorporated by reference to the Registrant's previously filed Form 10-KSB
for the year ended December 31, 1995
(3) Incorporated by reference to the Registrant's previously filed Registration
statement on Form SB-2 (File No. 33-88692)
(4) Incorporated by reference to the Registrant's previously filed Form 10-KSB
for the year ended December 31, 1997
ITEM 28. UNDERTAKINGS
(a) The undersigned small business issuer hereby undertakes to provide
certificates in such denominations and registered in such names as required to
permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, (the "Securities Act") may be permitted to directors,
officers, and controlling persons of the small business issuer pursuant to the
provisions summarized in Item 24 above, or otherwise, the small business issuer
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the small business issuer of expenses
incurred or paid by a director, officer or controlling person of the small
business issuer in the successful defense of any action, suit, or proceeding) is
asserted by such director, officer, or controlling person in connection with the
securities being registered, the small business issuer will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
(c) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4), or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial BONA FIDE offering thereof.
II-3
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, in the City of Las
Vegas, State of Nevada, on April 13, 1998.
<TABLE>
<S> <C> <C> <C>
PDS FINANCIAL CORPORATION
By:
<CAPTION>
/s/ JOHAN P. FINLEY
-----------------------------------------
Johan P. Finley
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
</TABLE>
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement was signed on April 13, 1998 by the following persons in
the capacities stated.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------------------------------ ---------------------------------------------------------
<C> <S>
/s/ JOHAN P. FINLEY
------------------------------------------- President, Chief Executive Officer and Director
Johan P. Finley (principal executive officer)
* Vice President, Chief Financial Officer (principal
------------------------------------------- financial and accounting officer), Secretary and
Peter D. Cleary Director
*
------------------------------------------- Director
David R. Mylrea
*
------------------------------------------- Director
Charles R. Patterson
*
------------------------------------------- Director
Joel M. Koonce
*
------------------------------------------- Director
James L. Morrell
</TABLE>
<TABLE>
<S> <C> <C>
* /s/ JOHAN P. FINLEY
-----------------------------------------
Johan P. Finley
ATTORNEY-IN-FACT
</TABLE>
II-4
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. PAGE NO.
- ------------- -----------
<C> <S> <C>
4.5 Revised Form of Indenture of Trust between the Registrant and First Trust National
Association dated as of , 1998..................................................
4.6 Form of Note (included in Article Two to Exhibit No. 4.5)..................................
</TABLE>
<PAGE>
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
PDS FINANCIAL CORPORATION
As Issuer
AND
US BANK TRUST NATIONAL ASSOCIATION
As Trustee
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INDENTURE
Dated as of [CLOSING DATE], 1998
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10% Senior Subordinated Notes Due July 1, 2004
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TABLE OF CONTENTS
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INDENTURE............................................................. 5
RECITALS.............................................................. 5
ARTICLE ONE........................................................... 6
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION............ 6
SECTION 101. DEFINITIONS........................................ 6
SECTION 102. COMPLIANCE CERTIFICATES AND OPINIONS............... 14
SECTION 103. FORM OF DOCUMENTS DELIVERED TO TRUSTEE............. 14
SECTION 104. ACTS OF HOLDERS.................................... 15
SECTION 105. NOTICES, ETC., TO TRUSTEE AND COMPANY.............. 17
SECTION 106. NOTICE TO NOTEHOLDERS; WAIVER...................... 17
SECTION 107. CONFLICT WITH TRUST INDENTURE ACT........................ 18
SECTION 108. EFFECT OF HEADINGS AND TABLE OF CONTENTS........... 18
SECTION 109. SUCCESSORS AND ASSIGNS............................. 18
SECTION 110. SEPARABILITY CLAUSE................................ 18
SECTION 111. BENEFITS OF INDENTURE.............................. 18
SECTION 112. GOVERNING LAW...................................... 19
SECTION 113. LEGAL HOLIDAYS..................................... 19
SECTION 114. IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS
AND DIRECTORS...................................... 19
ARTICLE TWO........................................................... 20
NOTE FORM.......................................................... 20
SECTION 201. FORM GENERALLY..................................... 20
SECTION 202. FORM OF FACE OF NOTES.............................. 20
SECTION 203. FORM OF REVERSE SIDE OF NOTE....................... 23
SECTION 204. FORM OF CERTIFICATE OF AUTHENTICATION AND FORM OF
ASSIGNMENT......................................... 25
ARTICLE THREE......................................................... 27
THE NOTES.......................................................... 27
SECTION 301. TITLE AND TERMS GENERALLY.......................... 27
SECTION 302. DENOMINATIONS...................................... 28
SECTION 303. EXECUTION, AUTHENTICATION, DELIVERY AND DATING..... 28
SECTION 304. TEMPORARY NOTES.................................... 28
SECTION 305. REGISTRATION, TRANSFER, AND EXCHANGE............... 29
SECTION 306. MUTILATED, DESTROYED, LOST AND STOLEN NOTES........ 30
SECTION 307. PAYMENTS OF PRINCIPAL AND INTEREST; RIGHTS
PRESERVED.......................................... 30
SECTION 308. PERSONS DEEMED OWNERS.............................. 32
SECTION 309. CANCELLATION....................................... 32
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SECTION 310. COMPUTATION OF INTEREST............................ 32
SECTION 311. AUTHENTICATION AND DELIVERY OF ORIGINAL ISSUE...... 32
ARTICLE FOUR.......................................................... 34
SATISFACTION AND DISCHARGE......................................... 34
SECTION 401. SATISFACTION AND DISCHARGE OF INDENTURE............ 34
SECTION 402. APPLICATION OF TRUST MONEY......................... 35
ARTICLE FIVE.......................................................... 36
REMEDIES........................................................... 36
SECTION 501. EVENTS OF DEFAULT.................................. 36
SECTION 502. ACCELERATION OF MATURITY; RESCISSION AND ANNULMENT. 38
SECTION 503. COLLECTION OF INDEBTEDNESS AND SUITS FOR
ENFORCEMENT BY TRUSTEE............................. 39
SECTION 504. TRUSTEE MAY FILE PROOFS OF CLAIM................... 39
SECTION 505. TRUSTEE MAY ENFORCE CLAIMS WITHOUT POSSESSION OF
NOTES.............................................. 40
SECTION 506. APPLICATION OF MONEY COLLECTED..................... 40
SECTION 507. LIMITATION ON SUITS................................ 41
SECTION 508. UNCONDITIONAL RIGHT OF NOTEHOLDERS TO RECEIVE
PRINCIPAL, PREMIUM AND INTEREST.................... 42
SECTION 509. RESTORATION OF RIGHTS AND REMEDIES................. 42
SECTION 510. RIGHTS AND REMEDIES CUMULATIVE..................... 42
SECTION 511. DELAY OR OMISSION NOT WAIVER....................... 42
SECTION 512. CONTROL BY NOTEHOLDERS............................. 43
SECTION 513. WAIVER OF PAST DEFAULTS............................ 43
SECTION 514. UNDERTAKING FOR COSTS.............................. 43
SECTION 515. WAIVER OF STAY OR EXTENSION LAWS................... 43
ARTICLE SIX........................................................... 45
THE TRUSTEE........................................................ 45
SECTION 601. CERTAIN DUTIES AND RESPONSIBILITIES................ 45
SECTION 602. NOTICE OF DEFAULTS................................. 46
SECTION 603. CERTAIN RIGHTS OF TRUSTEE.......................... 46
SECTION 604. NOT RESPONSIBLE FOR RECITALS OR ISSUANCE OF NOTES.. 47
SECTION 605. TRUSTEE MAY HOLD NOTES............................. 47
SECTION 606. MONEY HELD IN TRUST................................ 48
SECTION 607. COMPENSATION AND REIMBURSEMENT..................... 48
SECTION 608. DISQUALIFICATION; CONFLICTING INTERESTS............ 48
SECTION 609. TRUSTEE REQUIRED; ELIGIBILITY...................... 53
SECTION 610. RESIGNATION AND REMOVAL; APPOINTMENT OF SUCCESSOR.. 54
SECTION 611. ACCEPTANCE OF APPOINTMENT BY SUCCESSOR............. 55
SECTION 612. MERGER, CONVERSION, CONSOLIDATION OR SUCCESSION TO
BUSINESS........................................... 55
SECTION 613. PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY.. 56
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SECTION 614. APPOINTMENT OF AUTHENTICATING AGENT................ 59
ARTICLE SEVEN......................................................... 62
NOTEHOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY.............. 62
SECTION 701. COMPANY TO FURNISH TRUSTEE NAMES AND ADDRESSES OF
NOTEHOLDERS........................................ 62
SECTION 702. PRESERVATION OF INFORMATION; COMMUNICATIONS TO
NOTEHOLDERS........................................ 62
SECTION 703. REPORTS BY THE COMPANY............................. 63
SECTION 704. REPORTS BY TRUSTEE................................. 64
ARTICLE EIGHT......................................................... 67
CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE............... 67
SECTION 801. COMPANY MAY CONSOLIDATE, ETC., ONLY ON CERTAIN
TERMS.............................................. 67
SECTION 802. SUCCESSOR SUBSTITUTED.............................. 67
ARTICLE NINE.......................................................... 69
SUPPLEMENTAL INDENTURES............................................ 69
SECTION 901. SUPPLEMENTAL INDENTURES WITHOUT CONSENT OF
NOTEHOLDERS........................................ 69
SECTION 902. SUPPLEMENTAL INDENTURES WITH CONSENT OF NOTEHOLDERS 69
SECTION 903. EXECUTION OF SUPPLEMENTAL INDENTURES............... 70
SECTION 904. EFFECT OF SUPPLEMENTAL INDENTURES.................. 70
SECTION 905. REFERENCE IN NOTES TO SUPPLEMENTAL INDENTURES...... 70
SECTION 906. EFFECT ON SENIOR DEBT.............................. 71
SECTION 907. CONFORMITY WITH TRUST INDENTURE ACT................ 71
ARTICLE TEN........................................................... 72
COVENANTS.......................................................... 72
SECTION 1001. PAYMENT OF PRINCIPAL AND INTEREST................. 72
SECTION 1002. MAINTENANCE OF OFFICE OR AGENCY................... 72
SECTION 1003. MONEY FOR NOTE PAYMENTS TO BE HELD IN TRUST....... 72
SECTION 1004. MAINTENANCE OF CORPORATE EXISTENCE, LICENSING AND
RIGHTS............................................ 74
SECTION 1005. PAYMENT OF TAXES AND ASSESSMENTS.................. 74
SECTION 1006. MAINTENANCE OF PROPERTIES, INSURANCE; BOOKS AND
RECORDS; COMPLIANCE WITH LAW...................... 74
SECTION 1007. Maintenance of Nasdaq Listing..................... 75
SECTION 1008. LIMITATIONS ON RESTRICTED PAYMENTS................ 75
SECTION 1009. LIMITATION ON TRANSACTIONS WITH AFFILIATES........ 75
SECTION 1010. Maintenance of Key Man Insurance.................. 76
SECTION 1011. NET WORTH......................................... 76
SECTION 1012. WAIVER OF CERTAIN COVENANTS....................... 76
SECTION 1013 Prohibition on Restricted Dividends................ 76
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ARTICLE ELEVEN........................................................ 77
MANDATORY AND OPTIONAL REDEMPTION OF NOTES......................... 77
SECTION 1101. Mandatory REDEMPTION.............................. 77
SECTION 1102. OPTIONAL REDEMPTION............................... 77
SECTION 1103. APPLICABILITY OF ARTICLE.......................... 78
SECTION 1104. ELECTION TO REDEEM; NOTICE TO TRUSTEE............. 78
SECTION 1105. SELECTION BY TRUSTEE OF NOTES TO BE REDEEMED...... 78
SECTION 1106. NOTICE OF REDEMPTION.............................. 78
SECTION 1107. DEPOSIT OF REDEMPTION PRICE....................... 79
SECTION 1108. NOTES PAYABLE ON REDEMPTION DATE.................. 79
ARTICLE TWELVE........................................................ 80
SUBORDINATION OF NOTES............................................. 80
SECTION 1201. AGREEMENT TO SUBORDINATE.......................... 80
SECTION 1202. DISTRIBUTION OF ASSETS, ETC....................... 80
SECTION 1203. NO PAYMENT TO NOTEHOLDERS IF SENIOR DEBT IS IN
DEFAULT........................................... 80
SECTION 1204. SUBROGATION....................................... 81
SECTION 1205. OBLIGATION OF COMPANY UNCONDITIONAL............... 81
SECTION 1206. PAYMENTS ON NOTES PERMITTED....................... 82
SECTION 1207. EFFECTUATION OF SUBORDINATION BY TRUSTEE.......... 82
SECTION 1208. KNOWLEDGE OF TRUSTEE.............................. 82
SECTION 1209. RIGHTS OF HOLDERS OF SENIOR DEBT NOT IMPAIRED..... 82
SECTION 1210. TRUSTEE NOT FIDUCIARY FOR HOLDERS OF SENIOR DEBT.. 83
SECTION 1211. RIGHTS OF TRUSTEE AS HOLDER OF SENIOR DEBT........ 83
SECTION 1212. ARTICLE APPLICABLE TO PAYING AGENTS............... 83
SECTION 1213. RIGHTS AND OBLIGATIONS SUBJECT TO POWER OF COURT.. 83
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INDENTURE
THIS INDENTURE, dated as of ______________, 1998, between PDS Financial
Corporation, a Minnesota corporation (the "Company"), having its principal
office at 6171 McLeod Drive, Las Vegas, Nevada 89120 and US Bank Trust National
Association, a national banking association with trust powers (the
"Trustee"), having its principal office at _________________.
RECITALS
WHEREAS, for its lawful corporate purposes, the Company has duly
authorized an issue of its 10% Senior Subordinated Notes (the "Notes") in the
aggregate principal amount of up to Eleven Million Five Hundred Thousand
Dollars ($11,500,000), to be issued as fully registered Notes without
coupons, to be authenticated by the Certificate of the Trustee, to be payable
and to be redeemable all as hereinafter provided; and
WHEREAS, the Trustee has power to enter into this Indenture and to
accept and execute the trusts herein created; and
WHEREAS, the Company represents that all acts and things necessary to
make the Notes, when executed by the Company and authenticated and delivered
by the Trustee as in this Indenture provided and issued, the valid, binding
and legal obligations of the Company, and to constitute this instrument a
valid indenture and agreement according to its terms, have been done and
performed, and the execution of this Indenture and the issue hereunder of the
Notes have in all respects been duly authorized, and the Company, in the
exercise of each and every right and power in it vested, executes this
Indenture and proposes to make, execute, issue and deliver the Notes.
NOW, THEREFORE, THIS INDENTURE WITNESSETH, that, in order to provide for
the payment of the principal of, premium, if any, and interest on the Notes
issued under this Indenture according to their tenor and effect and the
performance and observance of each and all of the covenants and conditions
herein and therein contained, for and in consideration of the premises and of
the purchase and acceptance of the Notes by the respective purchasers thereof
and for other good and valuable consideration, the receipt whereof is hereby
acknowledged, the Company has executed and delivered this Indenture in trust
for the equal and proportionate benefit, security and protection of all of
the Holders of Notes issued or to be issued under and secured by this
Indenture, without preference, priority or distinction as to lien or
otherwise of any of the Notes over any of the others;
THIS INDENTURE FURTHER WITNESSETH, that the Company has agreed and
covenanted with the respective Noteholders from time to time as follows:
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ARTICLE ONE
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
SECTION 101. DEFINITIONS.
For all purposes of this Indenture, except as otherwise expressly
provided or unless the context otherwise requires:
(1) the terms defined in this Article have the meanings assigned to
them in this Article and include the plural as well as the singular;
(2) all other terms used herein which are defined in the Trust
Indenture Act of 1939, as amended (the "TIA"), either directly or by
reference therein, have the meanings assigned to them therein;
(3) all accounting terms not otherwise defined herein have the meanings
assigned to them in accordance with generally accepted accounting principles
and, except as otherwise herein expressly provided, the term "generally
accepted accounting principles" with respect to any computation required or
permitted hereunder shall mean such accounting principles as are generally
accepted at the date of such computation; and
(4) the words "herein," "hereof " and "hereunder" and other words of
similar import refer to this Indenture as a whole and not to any particular
Article, Section or other subdivision.
Certain terms, used principally in Article Six, are defined in that
Article.
"Act," when used with respect to any Holder, has the meaning specified
in Section 104.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any specified Person means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise,
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing. Without limiting the generality of the foregoing, at the date of
this Indenture, the "Affiliates" of the Company include any Subsidiary.
"Authenticating Agent" means any Person authorized by the Trustee to act
on behalf of the Trustee to authenticate Notes.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and
Friday which is not a day on which banking institutions in the city in which
the principal office of the Trustee is located are authorized or obligated by
law or executive order to close.
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"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission, as from time
to time constituted, created under the Exchange Act or, if at any time after
the execution of this instrument such Commission is not existing and
performing the duties now assigned to it under the Trust Indenture Act, then
the body performing such duties at such time.
"Common Stock" means the Company's Common Stock, $.01 par value per
share, authorized at the date this Indenture is executed, whether voting or
non-voting, and shares of any class or classes resulting from any
reclassification or reclassifications thereof which have no preference in
respect of dividends or of amounts payable in the event of any voluntary or
involuntary liquidation, dissolution or winding-up of the Company and also
shall include stock of the Company of any other class, whether now or
hereafter authorized, which ranks, or is entitled to a participation, as to
assets or dividends, substantially on a parity with such Common Stock or
other class of stock into which such Common Stock may have been changed;
provided however, that warrants or other rights to purchase Common Stock will
not be deemed to be Common Stock.
"Company" means PDS Financial Corporation, a Minnesota corporation,
until a successor Person shall have become such pursuant to the applicable
provisions of this Indenture and thereafter "Company" shall mean such
successor Person.
"Company Request" and "Company Order" mean, respectively, a written
request or order signed in the name of the Company by its Chairman of the
Board, its Chief Executive Officer, its President or any Vice President, its
Treasurer, Assistant Treasurer, Secretary or Assistant Secretary, and
delivered to the Trustee.
"Company Resolution" means a copy of a resolution certified by the
Secretary or an Assistant Secretary of the Company to have been duly adopted
by the Board of Directors of the Company and to be in full force and effect
on the date of such certification and delivered to the Trustee. In the event
the Board of Directors shall delegate to any director or officer of the
Company or any group consisting of directors of the Company, officers of the
Company or directors and officers of the Company the authority to take any
action which under the terms of this Indenture may be taken by "Company
Resolution," then any action so taken by, and set forth in a resolution
adopted by, the director, officer or group within the scope of such
delegation shall be deemed to be a "Company Resolution" for purposes of this
Indenture.
"Consolidated" when used in conjunction with any other defined term
means the aggregate amount of the items included within the defined term of
the Company on a consolidated basis in accordance with GAAP, eliminating
inter-company items.
"Consolidated Debt" shall have the meaning assigned to it in accordance
with GAAP.
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"Consolidated Net Income" means, with respect to any Person for any
period, the aggregate of the net income of such Person and its Subsidiaries,
for such period, on a Consolidated basis, determined in accordance with GAAP.
"Consolidated Tangible Net Worth" means, with respect to any Person at
any date of determination, the Consolidated stockholders' equity represented
by the shares of such Person's capitalized stock (other than Disqualified
Stock) outstanding at such date, as determined on a Consolidated basis in
accordance with GAAP less any portion of such stockholders' equity
attributable to intangible assets as determined in accordance with GAAP.
"Corporate Trust Office," when used with respect to the Trustee means
the principal office of the Trustee in the state of Minnesota, at which at
any particular time its corporate trust business shall be principally
administered, which office is on the date of this Indenture located at
_______________, or said office of any successor Trustee.
"Defaulted Interest" has the meaning specified in Section 307.
"Defaulted Principal" has the meaning specified in Section 307.
"Disqualified Stock" means, with respect to any Person, any capital
stock which, by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable), or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or is exchangeable for Indebtedness, or is
redeemable at the option of the holder thereof, in whole or in part, in each
case on or prior to the Stated Maturity of the Notes.
"Dividends" means payments in respect of the Company's Common Stock in
either cash or property, but shall not include payments solely in Common
Stock or distributions in the form of rights to acquire Common Stock.
"Eligible Person" means an employee or agent of the Company.
"Event of Default" has the meaning specified in Section 501.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Financial Statements" means the statement of operations, balance sheet,
and/or statement of cash flows of any Person prepared in accordance with GAAP.
"GAAP" means generally accepted accounting principles, consistently
applied.
"Guaranty" by any Person means any obligations, including letters of
credit, both standby and irrevocable in nature, other than endorsements in
the ordinary course of business of negotiable instruments for deposit or
collection, guaranteeing any Indebtedness, dividend, or
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other obligation of any other Person (the "primary obligor") in any manner,
whether directly or indirectly, including, without limitation, all
obligations incurred through an agreement, contingent or otherwise, by such
Person (i) to purchase such Indebtedness or obligation or any property or
assets constituting security therefor; (ii) to advance or supply funds for
the purchase or payment of such Indebtedness or obligation, or to maintain
working capital or other balance sheet condition, or otherwise to advance or
make available funds for the purchase or payment of such Indebtedness or
obligation; (iii) to lease property or to purchase securities or other
property or services primarily for the purpose of assuring the owner of such
Indebtedness or obligation of the ability of the primary obligor to make
payment of the Indebtedness or obligation; or (iv) otherwise to assure the
owner of the Indebtedness or obligation of the primary obligor against loss
in respect thereof. For the purposes of all computations made under this
definition, a Guaranty in respect of any Indebtedness for borrowed money
shall be deemed to be equal to the principal amount of such Indebtedness
which has been guaranteed, and a Guaranty in respect of any other obligation,
liability, or dividend shall be deemed to be equal to the maximum aggregate
amount of such obligation, liability or dividend.
"Holder" when used with respect to any Note means a Noteholder.
"Indebtedness" means, with respect to any Person at any date, without
duplication, all items of indebtedness which, in accordance with GAAP, would
be included in determining total liabilities as shown on the liabilities side
of a balance sheet of such Person at such date. For the purpose of computing
the "Indebtedness" of any Person, there shall be excluded (i) any particular
Indebtedness to the extent that, upon or prior to the maturity thereof, there
shall have been deposited with the proper depository in trust the necessary
funds, securities, or evidences of such Indebtedness, if permitted by the
instrument creating such Indebtedness, for the payment, redemption, or
satisfaction of such Indebtedness, and thereafter such funds and evidences of
Indebtedness so deposited shall not be included in any computation of the
assets of such Person, and (ii) Indebtedness of a Restricted Subsidiary of
such Person, which is not guaranteed by such Person.
"Indenture" means this instrument as originally executed or as it may
from time to time be supplemented or amended by one or more indentures
supplemental hereto entered into pursuant to the applicable provisions hereof
and shall also include the terms of the Notes established as contemplated by
Section 301.
"Initial Amortization Date" means July 1, 2000, the date of the seventh
(7th) Interest Payment Date.
"Interest Payment Date" means the Stated Maturity of an installment of
interest on the Notes.
"Issue Date" means the date on which the Notes are originally issued in
accordance with the terms of this Indenture.
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"Lien" means any mortgage, lien (statutory or other), pledge, security
interest, encumbrance, hypothecation, assignment for security or other
security agreement of any kind or nature whatsoever. For purposes of this
Indenture, a Person shall be deemed to own subject to a Lien any property
which it has acquired or holds subject to the interest of a vendor or lessor
under any conditional sale agreement, Capital Lease Obligation or other title
retention agreement relating to Indebtedness of such Person.
"Material Subsidiary" means any Subsidiary which represents 10% or more
of the Company's Consolidated gross revenues or Consolidated total assets.
"Maturity" when used with respect to any Note, means the date on which
the principal of such Note becomes due and payable as therein or herein
provided, whether at the Stated Maturity thereof or by declaration of
acceleration, call for redemption or otherwise.
"Note Register" and "Note Registrar" have the respective meanings
specified in Section 305.
"Noteholder" means a Person in whose name a Note is registered on the
Note Register, or the beneficial owner of such Notes if record ownership is
held by a nominee.
"Notes" means the 10% Senior Subordinated Notes due July 1, 2004 issued
pursuant to this Indenture.
"Officers' Certificate" means a certificate signed by the Chairman of
the Board of Directors, Chief Executive Officer, President, Chief Financial
Officer, Executive Vice President or any Vice President, and by the
Treasurer, an Assistant Treasurer, Secretary or an Assistant Secretary of the
Company, and delivered to the Trustee.
"Opinion of Counsel" means a written opinion of counsel, who may be
counsel for the Company, and who shall be acceptable to the Trustee.
"Original Interest Accrual Date" as to any Note, means the date from
which interest shall begin to accrue in connection with the original issuance
of such Note, which shall be [closing date], or with respect to any Note sold
after any quarterly Interest Payment Date, the most recent Interest Payment
Date.
"Outstanding," when used with respect to Notes, means, as of the date of
determination, all Notes theretofore authenticated and delivered under this
Indenture, except: (i) Notes theretofore cancelled by the Trustee or
delivered to the Trustee for cancellation; (ii) Notes for whose payment or
redemption money in the necessary amount has been theretofore deposited with
the Trustee or any Paying Agent (other than the Company) in trust or set
aside and segregated in trust by the Company (if the Company shall act as its
own Paying Agent) for the Holders of such Notes, provided that if such Notes
are to be redeemed notice of such redemption has been duly given pursuant to
this Indenture or provision therefor satisfactory to the Trustee has
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been made; (iii) Notes which have been paid pursuant to Section 306 or in
exchange for or in lieu of which other Notes have been authenticated and
delivered pursuant to this Indenture; provided, however, that in determining
whether the Noteholders of the requisite principal amount of the Outstanding
Notes have given any request, demand, authorization, direction, notice,
consent or waiver hereunder as of any date. Notes owned by the Company or
any other obligor upon the Notes or any Affiliate of the Company or of such
other obligor shall be disregarded and deemed not to be Outstanding, except
that, in determining whether the Trustee shall be protected in relying upon
any such request, demand, authorization, direction, notice, consent or
waiver, only Notes which the Trustee knows to be so owned shall be so
disregarded. Notes so owned which have been pledged in good faith may be
regarded as Outstanding if the pledgee establishes to the satisfaction of the
Trustee the pledgee's right so to act with respect to such Notes and that the
pledgee is not the Company or any other obligor upon the Notes or any
Affiliate of the Company or of such other obligor.
"Paying Agent" means any Person authorized by the Company to pay the
principal of (and premium, if any) or interest on any Notes on behalf of the
Company. Unless otherwise specified in a Company Order, the Paying Agent
shall initially be the Trustee.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, limited liability company, trust,
unincorporated organization or government or any agency or political
subdivision thereof.
"Predecessor Note" of any particular Note means every previous Note
evidencing all or a portion of the same debt as that evidenced by such
particular Note. For purposes of this definition, any Note authenticated and
delivered under Section 306 in exchange for or in lieu of a mutilated,
destroyed, lost or stolen Note shall be deemed to evidence the same debt as
the mutilated, destroyed, lost or stolen Note.
"Principal Payment Date" means the Maturity of the principal on the
Notes.
"Redemption Date," when used with respect to any Note to be redeemed,
means the date fixed for such redemption by or pursuant to this Indenture.
"Redemption Price," when used with respect to any Note to be redeemed,
means the price at which it is to be redeemed pursuant to this Indenture.
"Regular Record Date" for the interest payable on any Interest Payment
Date means the first day (whether or not a Business Day) of the calendar
month next preceding such Interest Payment Date, and "Regular Record Date"
for the principal payable on any Principal Payment Date means the first day
(whether or not a Business Day) of the calendar month next preceding such
Principal Payment Date.
"Responsible Officer," when used with respect to the Trustee, means the
chairman or any vice-chairman of the board of directors, the chairman or any
vice-chairman of the executive
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committee of the board of directors, the chairman of the trust committee, the
president, any executive vice president, any vice president, any assistant
vice president, the secretary, any assistant secretary, the treasurer, any
assistant treasurer, managing director, the cashier, any assistant cashier,
any trust officer or assistant trust officer, or any other employee of the
Trustee customarily performing functions similar to those performed by any of
the above designated officers and also means, with respect to a particular
corporate trust matter, any other officer to whom such matter is referred
because of such person's knowledge of and familiarity with the particular
subject.
"Restricted Dividend" means the declaration or payment of any dividend
or any other distribution on the capital stock of the Company or any
Subsidiary of the Company or any payment made to the direct or indirect
holders (in their capacities as such) of the capital stock of the Company or
any Subsidiary of the Company (other than (x) dividends or distributions
payable solely in capital stock or in options, warrants or other rights to
purchase capital stock, and (y) in the case of any Subsidiary of the Company,
dividends or distributions payable to the Company or to a Subsidiary of the
Company).
"Restricted Payment" means the purchase, redemption or other acquisition
or retirement for value of any capital stock of the Company or any
Subsidiary. If a Restricted Payment is made in other than cash, the value of
any such payment shall be determined in good faith by the Board of Directors,
whose determination shall be conclusive and evidenced by a Company Resolution
to be filed with the Trustee. For purposes of this definition, "Restricted
Payment" shall not include (a) payments made in the form of the Company's
common stock, (b) mandatory repurchase obligations by the Company with
respect to shares issued by any employee stock ownership plan of the Company,
or (c) purchases of common stock of a Wholly Owned Subsidiary of the Company.
"Senior Debt" means the principal of (i) any and all Consolidated Debt
of the Company (other than the Notes and Subordinated Debt) incurred in
connection with the borrowing of money from or to banks, trust companies,
insurance companies and other financial institutions, including all
Consolidated Debt to such institutions and seller-financed acquisitions to
the extent it is secured by real estate and/or assets of the Company or any
Subsidiary, evidenced by bonds, debentures, mortgages, notes or other
securities or other instruments, incurred, assumed or by the Company or any
Subsidiary before, at or after the date of execution of this Indenture, and
(ii) all renewals, extensions and refundings thereof; provided that any
Consolidated Debt shall not be Senior Debt if the instrument creating or
evidencing any such Consolidated Debt or pursuant to which such Consolidated
Debt is outstanding, provides that such Consolidated Debt, or such renewal,
extension or refunding thereof, is junior or is not superior in right of
payment to the Notes.
"Special Record Date" for the payment of any Defaulted Interest or
Defaulted Principal means a date fixed by the Trustee pursuant to Section 307.
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"Stated Maturity," when used with respect to any Note or any installment
of interest thereon, means the date specified in such Note as the fixed date
on which such Note is due and payable or such installment of interest on such
Note is due and payable.
"Subordinated Debt" means any and all Consolidated Debt of the Company
or any Subsidiary created, incurred, assumed or guaranteed by the Company or
any Subsidiary before, at or after the date of execution of this Indenture
which, by the terms of the instrument (or any supplemental instrument)
creating or evidencing such Consolidated Debt or pursuant to which such
Consolidated Debt is outstanding it is provided that such Consolidated Debt,
or any renewal, extension, or refunding thereof, is expressly subordinate and
junior in right of payment to the Notes (whether or not subordinated to any
other Consolidated Debt of the Company or any Subsidiary). "Subordinated
Debt" shall include any Consolidated Debt of the Company to Affiliates of the
Company or any Subsidiary (after giving effect to any intercompany
eliminations).
"Subsidiary" means any corporation, more than 50% of the outstanding
voting stock of which is owned, directly or indirectly, by the Company or by
one or more other Subsidiaries, or by the Company and one or more other
Subsidiaries. For the purposes of this definition, "voting stock" means
stock which ordinarily has voting power for the election of directors whether
at all times or only so long as no senior class of stock has such voting
power by reason of any contingency.
"Trust Estate" means all rights, interest and property which has been
collaterally assigned to the Trustee.
"Trust Indenture Act" means the Trust Indenture Act of 1939 as in force
at the date as of which this instrument was executed; provided, however, that
in the event the Trust Indenture Act of 1939 is amended after such date,
"Trust Indenture Act" means, to the extent required by any such amendment,
the Trust Indenture Act of 1939 as so amended.
"Trustee" means the Person named as the "Trustee" in the first paragraph
of this instrument until a successor Trustee shall have become such pursuant
to the applicable provisions of the Indenture, and thereafter "Trustee" shall
mean such successor Trustee.
"Vice President" when used with respect to the Trustee or the Company,
means any vice president, whether or not designated by a word or words added
before or after the title "vice president."
"Wholly Owned" when used in connection with any Subsidiary, means a
Subsidiary of which all of the issued and outstanding shares of voting stock,
except shares required as directors' qualifying shares, are owned by the
Company and/or one or more of its Wholly Owned Subsidiaries. For purposes of
this definition, "voting stock" shall have the same meaning as in the
definition of Subsidiary.
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SECTION 102. COMPLIANCE CERTIFICATES AND OPINIONS.
Upon any application or request by the Company to the Trustee to take
any action under any provision of this Indenture, the Company shall furnish
to the Trustee, if requested by the Trustee, an Officers' Certificate stating
that all conditions precedent, if any, provided for in this Indenture
relating to the proposed action have been complied with and an Opinion of
Counsel stating that in the opinion of such counsel all such conditions
precedent, if any, have been complied with, except that in the case of any
such application or request as to which the furnishing of such documents is
specifically required by any provision of this Indenture relating to such
particular application or request, no additional certificate or opinion need
be furnished. Every certificate or opinion with respect to compliance with a
condition or covenant provided for in this Indenture shall include:
(1) a statement that each individual signing such certificate or
opinion has read such covenant or condition and the definitions herein
relating thereto;
(2) a brief statement as to the nature and scope of the examination or
investigation upon which the statements or opinions contained in such
certificate or opinion are based;
(3) a statement that, in the opinion of each such individual, such
individual has made such examination or investigation as is necessary to
enable such individual to express an informed opinion as to whether or not
such covenant or condition has been complied with; and
(4) a statement as to whether, in the opinion of each such individual,
such condition or covenant has been complied with.
SECTION 103. FORM OF DOCUMENTS DELIVERED TO TRUSTEE.
In any case where several matters are required to be certified by, or
covered by an opinion of, any specified Person, it is not necessary that all
such matters be certified by, or covered by the opinion of, only one such
Person, or that they be so certified or covered by only one document, but one
such Person may certify or give an opinion with respect to some matters and
one or more other such Persons as to other matters, and any such Person may
certify or give an opinion as to such matters in one or several documents.
Any certificate or opinion of an officer of the Company may be based,
insofar as it relates to legal matters, upon a certificate or opinion of, or
representations by, counsel, unless such officer knows or in the exercise of
reasonable prudence should know that the certificate or opinion or
representations with respect to the matters upon which such officer's
certificate or opinion is based are erroneous. Any such certificate or
Opinion of Counsel may be based, insofar as it relates to factual matters,
upon a certificate or opinion of, or representations by, an officer or
officers of the Company stating that the information with respect to such
factual matters is in the possession of the Company, unless such counsel
knows or in the exercise of reasonable prudence
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<PAGE>
should know that the certificate or opinion or representations with respect
to such matters are erroneous.
Any certificate or opinion of an officer of the Company or any Opinion
of Counsel may be based, insofar as it relates to accounting matters, upon a
certificate, statement or opinion of an accountant or firm of accountants,
unless such officer or counsel, as the case may be, knows or in the exercise
of reasonable prudence should know that the certificate, statement or opinion
with respect to the accounting matters upon which such certificate or opinion
is based is erroneous.
Where any Person is required to make, give or execute two or more
applications, requests, consents, certificates, statements, opinions or other
instruments under this Indenture, they may be consolidated and form one
instrument.
SECTION 104. ACTS OF HOLDERS.
(1) Any request, demand, authorization, direction, notice, consent,
waiver or other action provided by this Indenture to be given or taken by
Noteholders may be embodied in and evidenced by one or more instruments of
substantially similar tenor signed by such Noteholders in person or by an
agent duly appointed in writing. Except as herein or therein otherwise
expressly provided, such action shall become effective when such instrument
or instruments are delivered to the Trustee and, where it is hereby expressly
required, to the Company. Such instrument or instruments (and the action
embodied therein and evidenced thereby) are herein sometimes referred to as
the "Act" of the Noteholders signing such instrument or instruments. Proof of
execution of any such instrument or of a writing appointing any such agent
shall be sufficient for any purpose of this Indenture and (subject to Section
601) conclusive in favor of the Trustee and the Company, if made in the
manner provided in this Section.
(2) The fact and date of the execution by any Person of any such
instrument or writing may be proved by the affidavit of a witness of such
execution or by a certificate of a notary public or other officer authorized
by law to take acknowledgments of deeds, certifying that the individual
signing such instrument or writing acknowledged to such witness, notary
public or other officer the execution thereof. Where such execution is by a
signer acting in a capacity other than such person's individual capacity,
such certificate or affidavit shall also constitute sufficient proof of such
person's authority. The fact and date of the execution of any such instrument
or writing, or the authority of the Person executing the same, may also be
proved in any other manner which the Trustee deems sufficient.
(3) The ownership of Notes shall be proved by the Note Register.
(4) Any request, demand, authorization, direction, notice, consent,
waiver or other Act of the Holder of any Note shall bind every future Holder
of the same Note and the Holder of every Note issued upon the registration of
transfer thereof or in exchange therefor or in lieu thereof in respect of
anything done, omitted or suffered to be done by the Trustee or the Company
in reliance thereon, whether or not notation of such action is made upon such
Note.
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<PAGE>
(5) The Company may set any day as a record date for the purpose of
determining the Holders of Notes entitled to give, make or take any request,
demand, authorization, direction, notice, consent, waiver or other action
provided or permitted by this Indenture to be given, made or taken by Holders
of Notes, provided that the Company may not set a record date for, and the
provisions of this paragraph shall not apply with respect to the giving or
making of any notice, declaration, request or direction referred to in the
next paragraph. Such record date shall be the later of 30 days prior to the
first solicitation of Holders of Notes entitled to give, make or take any
request, demand, authorization, direction, notice, consent, waiver, or other
action or the date of the most recent list of holders furnished to the
Trustee pursuant to Section 701. If any record date is set pursuant to this
paragraph, the Holders of Notes on such record date, and no other Holders
shall be entitled to take relevant action, whether or not such Holders remain
Holders after the record date, and no other Holders shall be entitled to take
the relevant action, whether or not such Holders remain Holders after such
record date; provided that no such action shall be effective hereunder unless
taken on or prior to the applicable Expiration Date by Holders of the
requisition principal amount of outstanding Notes on such record date.
Nothing in this paragraph shall be construed to prevent the Company from
setting a new record date for any action for which a record date has
previously been set pursuant to this paragraph (whereupon the record date
previously set shall automatically and with no action by any Person be
canceled and of no effect), and nothing in this paragraph shall be construed
to render ineffective any action taken by Holders of the requisite principal
amount of Notes on the date such action is taken. Promptly after any record
date is set pursuant to this paragraph, the Company, at its expense, shall
cause notice of such record date, the proposed action by Holders and the
applicable Expiration Date to be given to the Trustee in writing and to each
Holder of Notes in the manner set forth in Section 106.
The Trustee may set any day as a record date for the purpose of
determining the Holders of Notes entitled to join in the giving or making of
(i) any Notice of Default, (ii) any declaration of acceleration referred to
in Section 502, (iii) any request to institute proceedings referred in
Section 507(2) or (iv) any direction referred to in Section 512, in each case
with respect to Notes. If any record date is set pursuant to this paragraph,
the Holders of Notes on such record date, and no other Holders, shall be
entitled to join in such notice, declaration, request or direction, whether
or not such Holders remain Holders after such record date; provided that no
such action shall be effective hereunder unless taken on or prior to the
applicable Expiration Day by Holders of the requisite principal amount of
Notes on such record date. Nothing in this paragraph shall be construed to
prevent the Trustee from setting a new record date for any action for which a
record date has previously been set pursuant to this paragraph (whereupon the
record date previously set shall automatically and with no action by any
Person be canceled and of no effect), and nothing in this paragraph shall be
construed to render ineffective any action taken by Holders of the requisite
principal amount of Notes on the date such action is taken. Promptly after
any record date is set pursuant to this paragraph, the Trustee, at the
Company's expense, shall cause notice of such record date, the proposed
action by the Holders and the applicable Expiration Date to be given to the
Company in writing and to each Holder of Notes in the manner set forth in
Section 106.
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<PAGE>
With respect to any record date set pursuant to this Section, the party
hereto which sets such record date may designate any day as the "Expiration
Date" and from time to time may change the Expiration Date to any earlier or
later day; provided that no Expiration Date shall be later than the 180th day
after the applicable record date; and provided, further, that no such change
shall be effective unless notice of the proposed new Expiration Date is given
to the other party hereto in writing, and to each Holder of Notes in the
manner set forth in Section 106, on or prior to the existing Expiration Date.
If an Expiration Date is not designated with respect to any record date set
pursuant to this Section, the party hereto which set such record date shall
be deemed to have initially designated the 180th day after such record date
as the Expiration Date with respect thereto, subject to its right to change
the Expiration Date as provided in this paragraph.
Without limiting the foregoing, a Holder entitled hereunder to take any
action hereunder with regard to any Note may do so with regard to all or any
part of the principal amount of such Notes or by one or more duly appointed
agents each of which may do so pursuant to such appointment with regard to
all or any part of such principal amount.
SECTION 105. NOTICES, ETC., TO TRUSTEE AND COMPANY.
Any request, demand, authorization, direction, notice, consent, waiver
or Act of Noteholders or other document provided or permitted by this
Indenture to be made upon, given or furnished to or filed with the Trustee by
any Holder or by the Company, or the Company by the Trustee or any Holder,
shall be sufficient for every purpose hereunder (unless otherwise herein
expressly provided) if in writing and delivered personally, transmitted by
facsimile transmission (provided a confirming copy is sent by mail),
delivered by overnight courier or mailed, first-class postage prepaid.
(1) if to the Trustee by any Holder or by the Company at its Corporate
Trust Office, specified in the first paragraph of this instrument, or
(2) if to the Company by the Trustee or by any Holder to the Company
addressed to it at the address of its principal office specified in the first
paragraph of this instrument or at any other address previously furnished in
writing to the Trustee by the Company.
Any communication contemplated herein shall be deemed to have been made,
given, furnished and filed if personally delivered, on the date of delivery,
if transmitted by facsimile transmission, telex or other direct written
electronic means, on the date of transmission, and if transmitted by
registered mail, on the date of receipt.
SECTION 106. NOTICE TO NOTEHOLDERS; WAIVER.
Where this Indenture or any Note provides for notice to Noteholders of
any event, such notice shall be sufficiently given (unless otherwise herein
expressly provided) if in writing and mailed, first-class postage prepaid, to
each Holder, or if the terms herein provide for notice to less than all
Noteholders, then to such Noteholders as to whom notice may be required to be
sent, at
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<PAGE>
each such Holder's address as it appears on the Note Register, not later than
the latest date, if any, and not earlier than the earliest date, if any,
prescribed for the giving of such notice. In any case where notice to
Noteholders is given by mail, neither the failure to mail such notice, nor
any defect in any notice so mailed, to any particular Holder shall affect the
sufficiency of such notice with respect to other Noteholders. Where this
Indenture provides for notice in any manner, such notice may be waived in
writing by the Person entitled to receive such notice, either before or after
the event, and such waiver shall be the equivalent of such notice. Waivers
of notice by Noteholders shall be filed with the Trustee, but such filing
shall not be a condition precedent to the validity of any action taken in
reliance upon such waiver.
In case by reason of the suspension of regular mail service or by reason
of any other cause it shall be impracticable to give such notice by mail,
then such notification as shall be made with the approval of the Trustee
shall constitute notification for every purpose hereunder.
Notwithstanding anything else to the contrary in this Indenture, notice
to Noteholders shall be sufficiently given in all cases if it is given to the
Person in whose name a Note is registered on the Note Register and in no
event shall Notice be required to be given to any Person who is not
registered on the Note Register.
SECTION 107. CONFLICT WITH TRUST INDENTURE ACT.
If any provision of this Indenture limits, qualifies or conflicts with
another provision hereof which is required or deemed to be included in this
Indenture by, or is otherwise governed by, any of the provisions of the Trust
Indenture Act, such other provision shall control; and if any provision
hereof otherwise conflicts with the Trust Indenture Act, the Trust Indenture
Act shall control.
SECTION 108. EFFECT OF HEADINGS AND TABLE OF CONTENTS.
The Article and Section headings herein and the Table of Contents are
for convenience only and shall not affect the construction hereof.
SECTION 109. SUCCESSORS AND ASSIGNS.
All covenants and agreements in this Indenture by the Company shall bind
its successors and assigns, whether so expressed or not.
SECTION 110. SEPARABILITY CLAUSE.
In case any provision in this Indenture or in the Notes shall be
invalid, illegal or unenforceable, the validity, legality and enforceability
of the remaining provisions shall not in any way be affected or impaired
thereby.
SECTION 111. BENEFITS OF INDENTURE.
Nothing in this Indenture or in the Notes, expressed or implied, shall
give to any Person, other than the parties hereto and their successors
hereunder and the Holders of Notes, any benefit or any legal or equitable
right, remedy or claim under this Indenture.
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SECTION 112. GOVERNING LAW.
This Indenture and the Notes shall be governed by and construed in
accordance with the laws of the State of Minnesota, without giving effect to
the conflict of laws principles thereof.
SECTION 113. LEGAL HOLIDAYS.
In any case where any Interest Payment Date, Principal Payment Date,
Redemption Date or Stated Maturity of any Note shall not be a Business Day,
then (notwithstanding any other provision of this Indenture or of the Notes)
payment of interest or principal (and premium, if any) need not be made on
such date, but may be made on the next succeeding Business Day with the same
force and effect as if made on the Interest Payment Date, Principal Payment
Date, Redemption Date, or at the Stated Maturity; provided that no interest
shall accrue for the period from and after any such Interest Payment Date,
Principal Payment Date, Redemption Date or Stated Maturity.
SECTION 114. IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS.
No recourse shall be had for the payment of the principal of, or the
premium, if any, or interest on, any Note, or for any claim based thereon or
otherwise in respect thereof or of the indebtedness represented thereby, or
upon any obligation, covenant or agreement of this Indenture, against any
incorporator, stockholder, employee, officer or director, as such, past,
present or future, of the Company, either directly or through the Company,
whether by virtue of any constitutional provision, statute or rule of law, or
by the enforcement of any assessment or penalty or otherwise. It is expressly
agreed and understood that this Indenture and the Notes are solely corporate
obligations, and that no personal liability whatsoever shall attach to, or be
incurred by, any incorporator, stockholder, officer or director, as such, past,
present or future, of the Company, either directly or through the Company,
because of the incurring of the indebtedness hereby authorized or under or by
reason of any of the obligations, covenants, promises or agreements contained
in this Indenture or in any of the Notes or to be implied herefrom or
therefrom. All liability, if any, of that character against every such
incorporator, stockholder, officer and director, by the acceptance of the Notes
and as a condition of, and as part of the consideration for the execution of
this Indenture and the issue of the Notes, is expressly waived and released.
END OF ARTICLE ONE.
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ARTICLE TWO
NOTE FORM
SECTION 201. FORM GENERALLY.
The Notes and the Trustee's Certificate of Authentication shall be in
substantially the form set forth in this Article, with such appropriate
insertions, omissions, substitutions and other variations as are required or
permitted by this Indenture and may have such letters, numbers or other marks
of identification and such legends or endorsements placed thereon as may be
required to comply with the rules of any securities exchange or as may,
consistently herewith, be determined by the officers executing such Notes, as
evidenced by their execution of the Notes. Any portion of the text of any
Note may be set forth on the reverse thereof, with an appropriate reference
thereto on the face of the Note.
The definitive Notes shall be typewritten, printed, lithographed or
engraved or produced by any combination of these methods on steel engraved
borders or may be produced in any other manner, all as determined by the
officers executing such Notes, as evidenced by their execution of such Notes.
SECTION 202. FORM OF FACE OF NOTES.
PDS FINANCIAL CORPORATION
Incorporated Under the Laws of Minnesota
10% SENIOR SUBORDINATED NOTE DUE JULY 1, 2004
Registered No.: Registered Principal
_______________________ Amount: $1,000
Original Interest Accrual CUSIP: _______
Date: ________________
PDS Financial Corporation, a corporation created under the laws of the
State of Minnesota (herein called the "Company," which term includes any
successor corporation under the Indenture hereinafter referred to), for value
received, hereby promises to pay to ________________________________ or
registered assigns, the principal sum of One Thousand Dollars ($1,000) on
July 1, 2004 (the "Final Maturity Date") and to pay interest hereon from the
Original Interest Accrual Date set forth above, or from the most recent
Interest Payment Date to which interest has been paid or duly provided for,
beginning on October 1, 1998 ("Initial Interest Payment Date") and on the 1st
day of each January, April, July and October thereafter until fully paid
(each such date being an "Interest Payment Date"), at the rate of ten percent
(10%) per annum, until the principal hereof is paid or made available for
payment. The principal hereof is subject to optional and mandatory
redemption, in whole but not in part, as provided in the
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Indenture, and if not so redeemed, shall be due and payable in full on the
Final Maturity Date (any date set for principal payment is the "Principal
Payment Date"). The principal and interest so payable and punctually paid or
duly provided for on any Principal Payment Date or Interest Payment Date, as
provided in the Indenture, will be paid to the Person in whose name this Note
(or one or more Predecessor Notes) is registered (the "Holder") at the close
of business on the Regular Record Date for such principal or interest, which
shall be the first day (whether or not a Business Day) of the calendar month
next preceding such Principal Payment Date or Interest Payment Date. Any
such principal or interest not so punctually paid or duly provided for will
forthwith cease to be payable to the Holder on such Regular Record Date and
may either be paid to the Person in whose name this Note (or one or more
Predecessor Notes) is registered at the close of business on a Special Record
Date for the payment of such Defaulted Principal or Defaulted Interest to be
fixed by the Trustee, notice whereof shall be given to Holders of Notes not
less than 10 days prior to such Special Record Date, or be paid at any time
in any other lawful manner not inconsistent with the applicable requirements
of any securities exchange or market on which the Notes may be listed or
included, and upon such notice as may be required by such exchange or market,
all as more fully provided in the Indenture. Payment of the principal of and
interest (and premium, if any) on this Note will be made at the office or
agency maintained by the Company for such purpose in ___________, Minnesota,
or in such other office or agency as may be selected by the Company in
accordance with the Indenture, in such coin or currency of the United States
of America as at the time of payment is legal tender for payment of public
and private debts, provided, however, that at the option of the Company
payment of interest may be made in United States dollars by check mailed to
the address of the Person entitled thereto as such address shall appear in
the Note Register. THE HOLDER MUST PRESENT THIS NOTE TO COLLECT PRINCIPAL;
AND WHEN FULLY PAID, THE NOTE SHALL BE SURRENDERED AND CANCELLED.
Reference is hereby made to the further provisions of this Note set
forth on the reverse hereof, which further provisions shall for all purposes
have the same effect as if set forth at this place.
Unless the certificate of authentication hereon has been executed by or
on behalf of the Trustee referred to on the reverse hereof by manual
signature, this Note shall not be entitled to any benefit under the Indenture
or be valid or obligatory for any purpose.
No recourse shall be had for the payment of the principal or interest of
this Note against any Company stockholder, officer, director, employee or
agent by virtue of any statute or by enforcement of any assessment or
otherwise; and any and all liability of stockholders, directors, officers,
employees and agents of the Company being released hereby.
IN WITNESS WHEREOF, the Company has caused this 10% Senior Subordinated
Note due July 1, 2004 to be signed in its name by the manual or facsimile
signature of its President and attested to by the manual or facsimile
signature of its Secretary.
Dated:______________ PDS FINANCIAL CORPORATION
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By____________________________________
Johan P. Finley, President
Attest:
____________________________________
Peter D. Cleary, Secretary
[FORM OF CERTIFICATE OF AUTHENTICATION]
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SECTION 203. FORM OF REVERSE SIDE OF NOTE.
This Note is one of a duly authorized issue of 10% Senior Subordinated
Notes of the Company designated as its 10% Senior Subordinated Notes (the
"Notes") in the maximum aggregate principal amount of up to $11,500,000,
issued and to be issued under an Indenture, dated as of ______________, 1998
(the "Indenture"), between the Company and First Trust National Association,
as Trustee (the "Trustee", which term includes any successor Trustee under
the Indenture). Reference is hereby made to the Indenture and all indentures
supplemental thereto for a statement of the respective rights, limitation of
rights, duties and immunities thereunder of the Company, the Trustee and the
Noteholders, and for a statement of the terms upon which the Notes are, and
are to be, authenticated and delivered. Capitalized and certain other terms
used herein and not otherwise defined have the meanings set forth in the
Indenture.
The Notes are general unsecured obligations of the Company. The payment
of the principal of and interest (and premium, if any) on this Note is
expressly subordinated, as provided in the Indenture, to the payment of all
Senior Debt, as defined in the Indenture, and, by the acceptance of this
Note, the Holder hereof agrees, expressly for the benefit of the present and
future holders of Senior Debt, to be bound by the provisions of the Indenture
relating to such subordination and authorizes and appoints as such Holder's
attorney-in-fact the Trustee to take such action on such Holder's behalf as
may be necessary or appropriate to effectuate such subordination.
The Notes are subject to redemption (either at the option of the Company
or upon call by the Trustee) in whole at any time or in part from time to
time. Beginning on the Initial Amortization Date and annually thereafter
until final maturity, the Trustee shall redeem a portion of the Outstanding
Notes equivalent to 15% of the original aggregate principal amount issued,
chosen by lot, at a redemption price equal to par, plus interest accrued to
the date of redemption. The Company may surrender Notes purchased in the
open market or redeemed pursuant to optional redemption to the Trustee to be
applied against the mandatory redemptions. The Company may, at its option,
at any time on or after July 1, 1998, redeem the Notes either as a whole or
from time to time in part in a minimum aggregate principal amount of
$100,000, chosen by lot, at the following Redemption Prices (expressed in
percentages of the principal amount thereof), together with interest accrued
and unpaid thereon to the Redemption Date (which shall be an Interest Payment
Date), if redeemed during the twelve month period beginning July 1 in each of
the following years:
<TABLE>
<CAPTION>
1998 1999 2000 2001 2002 2003 and
---- ---- ---- ---- ---- thereafter
----------
<S> <C> <C> <C> <C> <C> <C>
Redemption
Price: 106% 106% 106% 104% 102% 100%
</TABLE>
Notice of redemption will be mailed at least 30 days, but not more than
60 days, before the Redemption Date to each Holder at the registered address
thereof.
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If this Note shall be redeemed by call for redemption or shall be
accepted for repayment upon the death of the Holder, and payment be duly
provided therefor as specified in the Indenture, interest shall cease to
accrue on this Note.
Interest installments whose Stated Maturity is on or before the
Redemption Date or Repayment Date will be payable to the Holders of such
Notes, or one or more of Predecessor Notes, of record at the close of
business on the relevant Record Date referred to on the face hereof, all as
provided in the Indenture.
If an Event of Default as defined in the Indenture shall occur and be
continuing, the outstanding principal of all the Notes may be declared due
and payable in the manner and with the effect provided in the Indenture. The
Company shall pay all costs of collection, whether or not judicial
proceedings are instituted, in the manner provided in the Indenture. The
Indenture provides that such declaration and its consequences may, in certain
events, be annulled by the Holders of a majority in principal amount of the
Notes Outstanding.
The Indenture permits, with certain exceptions as therein provided, the
amendment thereof and the modification of the rights and obligations of the
Company and the rights of the Noteholders under the Indenture at any time by
the Company and the Trustee with the consent of the Noteholders of two-thirds
in aggregate principal amount of the Notes at the time Outstanding. The
Indenture also contains provisions permitting the Noteholders of specified
percentages in aggregate principal amount of the Notes at the time
Outstanding, on behalf of the Noteholders of all of the Notes, to waive
compliance by the Company with certain provisions of the Indenture and
certain past defaults under the Indenture and their consequences. Any such
consent or waiver by the Holder of this Note shall be conclusive and binding
upon such Holder and upon all future Noteholders of this Note and of any Note
issued upon the registration of transfer hereof or in exchange herefor or in
lieu hereof, whether or not notation of such consent or waiver is made upon
this Note.
No reference herein to the Indenture and no provision of this Note or of
the Indenture or amendment or modification hereof or thereof shall alter or
impair the obligation of the Company to pay the principal of and interest
(and premium, if any) on this Note at the times, place and rate and in the
coin or currency herein prescribed.
In the event of a consolidation or merger of the Company into, or of the
transfer of its assets substantially as an entirety to, a successor
corporation in accordance with the Indenture, such successor corporation
shall assume payment of the Notes and the performance of every covenant of
the Indenture on the part of the Company, and in the event of any such
transfer, the predecessor corporation shall be discharged from all
obligations and covenants in respect of the Notes and the Indenture and may
be dissolved and liquidated, all as more fully set forth in the Indenture.
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The Notes are issuable only in registered form without coupons in
denominations of $1,000 or any integral multiple thereof. As provided in the
Indenture and subject to certain limitations therein set forth, the Notes are
exchangeable for a like aggregate principal amount of Notes of a different
authorized denomination, as requested by the Holder surrendering the same;
and, the transfer of this Note is registerable in the Note Register, upon
surrender of this Note for registration of transfer at the office or agency
of the Company in any place where the principal of and interest on this Note
are payable, duly endorsed by or accompanied by a written instrument of
transfer in the form printed on this Note or in another form satisfactory to
the Company and the Note Registrar duly executed by the Holder hereof or such
Holder's attorney duly authorized in writing, and thereupon one or more new
Notes, of authorized denominations and for the same aggregate principal
amount, will be issued to the designated transferee or transferees. No
service charge shall be made for any such registration of transfer or
exchange, but the Company may require payment of a sum sufficient to cover
any tax or other governmental charge payable in connection therewith.
Prior to due presentment of this Note for registration of transfer, the
Company, the Trustee and any agent of the Company or the Trustee may treat
the Person in whose name this Note is registered as the owner hereof for all
purposes, whether or not this Note be overdue, and neither the Company, the
Trustee nor any such agent shall be affected by notice to the contrary.
This Note shall be governed by and construed in accordance with the laws
of the State of Minnesota, without giving effect to the conflict of law
provisions thereof.
All terms used in this Note which are defined in the Indenture shall
have the meanings assigned to them in the Indenture.
SECTION 204. FORM OF CERTIFICATE OF AUTHENTICATION AND FORM OF ASSIGNMENT.
[Form of Certificate of Authentication]
First Trust National Association, as Trustee, certifies that this Note
is one of the 10% Senior Subordinated Notes due July 1, 2004 issued by PDS
Financial Corporation, a Minnesota corporation, referred to in the
within-mentioned Indenture.
Dated:___________ US BANK TRUST NATIONAL
ASSOCIATION, as Trustee
By_________________________________
Authorized Signature
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[Form of Assignment]
(To be executed by the registered holder if such holder desires to
transfer this Note)
FOR VALUE RECEIVED the undersigned hereby sells, assigns and transfers
unto
____________________________________________________________________________
____________________________________________________________________________
____________________________________________________________________________
(Please print name and address of transferee)
this Note, together with all right, title and interest therein, and does
hereby irrevocably constitute and appoint __________________, as Attorney, to
transfer the within Note on the books kept for registration thereof, with
full power of substitution.
Dated:___________
Signature:_________________________________
(Signature must conform in all
respects to name of holder as
specified on the face of the
Note)
Social Security
or Other Identifying
Number of Transferee: ______________________________
Signature Guaranteed:
END OF ARTICLE TWO.
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ARTICLE THREE
THE NOTES
SECTION 301. TITLE AND TERMS GENERALLY.
The Notes shall be known and designated as the 10% Senior Subordinated
Notes due July 1, 2004 of the Company. The maximum aggregate principal
amount of Notes to be authenticated and delivered under this Indenture is
$11,500,000, excluding accrued interest, except for Notes authenticated and
delivered upon registration of transfer of, or in exchange for, or in lieu
of, other Notes pursuant to Sections 304, 305, 306 or 905 hereof. The Stated
Maturity of the Notes shall be July 1, 2004, and each Note shall bear
interest at the rate of 10% per annum on the outstanding balance, until the
principal thereof is paid or made available for payment.
The Notes shall be dated as provided in Section 303 hereof, shall bear
interest from the Original Interest Accrual Date of such Note, or from the
most recent Interest Payment Date to which interest has been paid or duly
provided for, as the case may be, payable on each January 1, April 1, July 1
and October 1, commencing on July 1, 1998, until the principal thereof is
paid or made available for payment.
The Notes shall be subject to mandatory redemption as provided in
Article Eleven.
The principal of (and premium, if any) and interest on the Notes shall
be payable at the office or agency maintained by the Company in St. Paul,
Minnesota (initially the principal corporate trust office of the Trustee), or
in any other city or cities as the Company may maintain additional such
offices or agencies pursuant to Section 1002, maintained for such purpose,
provided that, at the option of the Company, payment of interest may be made
by check mailed to the address of the Person entitled thereto as such address
shall appear in the Note Register.
The Notes shall be redeemable at the option of the Company as provided
in Article Eleven. The Company may, at its option, elect to have any
optional redemption applied to the next subsequent mandatory redemption
payment. The Company shall notify the Trustee of such election at least 60
days prior to the Redemption Date.
The Notes are unsecured obligations of the Company and shall be
subordinated in right of payment to Senior Debt of the Company as provided in
Article Twelve. The Notes shall be senior in right of payment to all
Subordinated Debt.
The Notes are an obligation of the Company but not of any Affiliate.
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SECTION 302. DENOMINATIONS.
The Notes shall be issuable only in registered form without coupons and in
denominations of $1,000 or any integral multiple thereof.
SECTION 303. EXECUTION, AUTHENTICATION, DELIVERY AND DATING.
The Notes shall be executed on behalf of the Company by its President or
any Vice President and attested by its Secretary or Assistant Secretary. The
signature of any of these officers on the Notes may be manual or facsimile.
Notes bearing the manual or facsimile signatures of individuals who were
at any time the proper officers of the Company shall bind the Company,
notwithstanding that such individuals or any of them have ceased to hold such
offices prior to the authentication and delivery of such Notes or did not hold
such offices at the date of such Notes.
At any time and from time to time after the execution and delivery of this
Indenture, the Company may deliver Notes executed by the Company to the Trustee
for authentication, together with a Company Order for the authentication and
delivery of such Notes. The Trustee in accordance with such Company Order
shall authenticate and deliver such Notes as in this Indenture provided and not
otherwise.
Upon the initial issuance, each Note shall be dated __________, 1998, and
thereafter, Notes issued hereunder shall be dated the date of their
authentication.
No Note shall be entitled to any benefit under this Indenture or be valid
or obligatory for any purpose unless there appears on such Note a certificate
of authentication substantially in the form provided for herein executed by the
Trustee by manual signature, and such certificate upon any Note shall be
conclusive evidence, and the only evidence, that such Note has been duly
authenticated and delivered hereunder and is entitled to the benefits of the
Indenture.
SECTION 304. TEMPORARY NOTES.
Pending the preparation of definitive Notes, the Company may execute, and
upon Company Order the Trustee shall authenticate and deliver, temporary Notes
which are printed, lithographed, typewritten, mimeographed or otherwise
produced, in any authorized denomination, substantially of the tenor of the
definitive Notes, in lieu of which they are issued and with such appropriate
insertions, omissions, substitutions and other variations as the officers
executing such Notes may determine, as evidenced by their execution of such
Notes.
If temporary Notes are issued, the Company will cause definitive Notes to
be prepared without unreasonable delay. After the preparation of definitive
Notes, the temporary Notes shall be exchangeable for definitive Notes upon
surrender of the temporary Notes at any office or agency of the Company
designated pursuant to Section 1002, without charge to the Holder.
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Upon surrender for cancellation of any one or more temporary Notes, the
Company shall execute and the Trustee shall authenticate and deliver in
exchange therefor a like principal amount of definitive Notes of authorized
denominations. Until so exchanged the temporary Notes shall in all respects
be entitled to the same benefits under this Indenture as definitive Notes.
SECTION 305. REGISTRATION, TRANSFER, AND EXCHANGE.
The Company shall cause to be kept at the Corporate Trust Office of the
Trustee a register (the register maintained in such office or any other
office or agency pursuant to Section 1002 being herein sometimes referred to
as the "Note Register") in which, subject to such reasonable regulations as
it may prescribe, the Company shall provide for the registration of Notes and
of transfers of Notes. The Trustee is hereby appointed "Note Registrar" for
the purpose of registering Notes and transfers of Notes as herein provided.
Upon surrender for registration of transfer of any Note at an office or
agency of the Company designated pursuant to Section 1002 for such purpose,
the Company shall execute, and the Trustee shall authenticate and deliver, in
the name of the designated transferee or transferees, one or more new Notes
of any authorized denomination, of a like aggregate principal amount.
At the option of the Holder, Notes may be exchanged for other Notes of
any authorized denominations, of a like aggregate principal amount, upon
surrender of the Notes to be exchanged at such office or agency. Whenever
any Notes are so surrendered for exchange, the Company shall execute, and the
Trustee shall authenticate and deliver, the Notes which the Holder making the
exchange is entitle to receive.
All Notes issued upon any registration of transfer or exchange of Notes
shall be valid obligations of the Company, evidencing the same debt and
entitled to the same benefits under this Indenture as the Notes surrendered
upon such registration of transfer or exchange.
Every Note presented or surrendered for registration of transfer or for
exchange shall be duly endorsed for transfer (if so required by the Company
or the Trustee), or shall be accompanied by a written instrument of transfer
in form satisfactory to the Company and the Note Registrar duly executed by
the Holder thereof or such Holder's attorney duly authorized in writing.
No service charge shall be made for any registration of transfer or
exchange of Notes, but the Company may require payment of a sum sufficient to
cover any tax or other governmental charge that may be imposed in connection
with any registration of transfer or exchange of Notes, other than exchanges
pursuant to Section 304 or 905 not involving any transfer.
The Company shall not be required to issue or register the transfer of
any Note during a period beginning at the opening of business 15 days before
the day of the mailing of a notice of redemption of Notes selected for
redemption pursuant to Section 1105 and ending at the close of business on
the day of such mailing or to register the transfer of or exchange any Notes so
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<PAGE>
selected for redemption in whole or in part, except the unredeemed portion of
any Notes being redeemed in part.
SECTION 306. MUTILATED, DESTROYED, LOST AND STOLEN NOTES.
If any mutilated Note is surrendered to the Trustee, the Company shall
execute and the Trustee shall authenticate and deliver in exchange therefor a
new Note of like series, tenor and principal amount and bearing a number not
contemporaneously outstanding.
If there shall be delivered to the Company and the Trustee (i) evidence to
their satisfaction of the destruction, loss or theft of any Note and (ii) such
security or indemnity as may be required by them to save each of them harmless,
then, in the absence of notice to the Company or the Trustee that such Note has
been acquired by a bona fide purchaser, the Company shall execute and upon its
request the Trustee shall authenticate and deliver, in lieu of any such
destroyed, lost or stolen Note, a new Note of like series, tenor and principal
amount and bearing a number not contemporaneously outstanding.
In case any such mutilated, destroyed, lost or stolen Note has become or
is about to become due and payable, the Company in its discretion, may instead
of issuing a new Note, may pay such Note.
Upon the issuance of any new Note under this Section, the Company may
require the payment of a sum sufficient to cover any tax or other governmental
charge that may be imposed in relation thereto and any other expenses
(including the fees and expenses of the Trustee) connected therewith.
Every new Note issued pursuant to this Section in lieu of any destroyed,
lost or stolen Note shall constitute an original contractual obligation of the
Company, whether or not the destroyed, lost or stolen Note shall be at any time
enforceable by anyone, and shall be entitled to all the benefits of this
Indenture.
The provisions of this Section are exclusive and shall preclude (to the
extent lawful) all other rights and remedies with respect to the replacement or
payment of mutilated, destroyed, lost or stolen Notes.
SECTION 307. PAYMENTS OF PRINCIPAL AND INTEREST; RIGHTS PRESERVED.
Any installment of interest or interest and principal under any Note which
is payable, and is punctually paid or duly provided for, on any Interest
Payment Date or Principal Payment Date, as the case may be, shall be paid to
the Person in whose name that Note (or one or more Predecessor Notes) is
registered at the close of business on the Regular Record Date for such
installment.
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<PAGE>
Any installment of interest or principal and interest on any Note which is
payable, but is not punctually paid or duly provided for, on any Interest
Payment Date (herein called "Defaulted Interest") or on any Principal Payment
Date (herein called "Defaulted Principal"), as the case may be, shall forthwith
cease to be payable to the Holder on the relevant Regular Record Date by virtue
of having been such Holder, and such Defaulted Interest or Default Principal,
as the case may be, shall be paid by the Company, at its election in each case,
as provided in paragraph (1) or (2) below:
(1) The Company may elect to make payment of any Defaulted Interest or
Defaulted Principal to the Persons in whose names the Notes (or their
respective Predecessor Notes) are registered at the close of business on a
Special Record Date for the payment of such Defaulted Interest or Defaulted
Principal, which shall be fixed in the following manner. The Company shall
notify the Trustee in writing of the amount of Defaulted Interest or Defaulted
Principal proposed to be paid on each Note and the date of the proposed payment
and, at the same time, the Company shall deposit with the Trustee an amount of
money equal to the aggregate amount proposed to be paid in respect of such
Defaulted Interest or Defaulted Principal or shall make arrangements
satisfactory to the Trustee for such deposit prior to the date of the proposed
payment, such money when deposited to be held in trust for the benefit of the
Persons entitled to such Defaulted Interest or Defaulted Principal as in this
Clause provided. Thereupon the Trustee shall fix a Special Record Date for the
payment of such Defaulted Interest or Defaulted Principal which shall be not
more than 15 days and not less than 10 days prior to the date of the proposed
payment and not less than 10 days after the receipt by the Trustee of the
notice of the proposed payment. The Trustee shall promptly notify the Company
of such Special Record Date and, in the name and at the expense of the Company,
shall cause notice of the proposed payment of such Defaulted Interest or
Defaulted Principal and the Special Record Date therefor to be mailed, first-
class postage prepaid, to each Holder of an affected Note at such Holder's
address as it appears in the Note Register, not less than 10 days prior to such
Special Record Date. Notice of the proposed payment of such Defaulted Interest
or Defaulted Principal and the Special Record Date therefor having been so
mailed, such Defaulted Interest or Defaulted Principal shall be paid to the
Persons in whose names the Notes (or their respective Predecessor Notes) are
registered at the close of business on such Special Record Date and shall no
longer be payable pursuant to the following Paragraph (2).
(2) The Company may make payment of any Defaulted Interest or Defaulted
Principal in any other lawful manner not inconsistent with the requirements of
any securities exchange or market on which the Notes may be listed or included
and, upon such notice as may be required by such exchange or market if, after
notice given by the Company to the Trustee of the proposed payment pursuant to
this Clause, such manner of payment shall be deemed practicable by the Trustee
and the Trustee shall have sent written notification to the Company to such
effect.
If any installment of interest whose Stated Maturity is on or prior to the
Redemption Date for any Notes called for redemption pursuant to Section 301 or
Article Eleven is not paid or duly provided for on or prior to the Redemption
Date in accordance with the foregoing provisions of this Section, such interest
shall be payable as part of the Redemption Price of such Notes.
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<PAGE>
Subject to the foregoing provisions of this Section, each Note delivered
under this Indenture upon registration of transfer of or in exchange for or in
lieu of any other Note shall carry the rights to interest accrued and unpaid
and to accrue which were carried by such other Note.
All payments of interest on the Notes to the person entitled thereto,
whether made by the Company, the Trustee or any Paying Agent, as authorized
pursuant to this Indenture, shall be made (subject to collection) by check
mailed to the address of the person entitled thereto as such address shall
appear on the Note Register, unless the Trustee determines such methods to be
inappropriate in the circumstances.
Holders must present and surrender the Notes to collect the principal of
such Notes.
SECTION 308. PERSONS DEEMED OWNERS.
Prior to due presentment of a Note for registration of transfer, the
Company, the Trustee, the Note Registrar and any agent of the Company or the
Trustee may treat the Person in whose name such Note is registered as the owner
of such Note for the purpose of receiving payment (subject to Section 307) of
principal of (and premium, if any) and interest on such Note and for all other
purposes whatsoever, whether or not such Note be overdue, and neither the
Company, the Trustee nor any agent of the Company or the Trustee shall be
affected by notice to the contrary.
SECTION 309. CANCELLATION.
All Notes surrendered for payment, redemption, registration of transfer or
exchange if surrendered to any Person other than the Trustee, shall be
delivered to the Trustee and shall be promptly cancelled by it. The Company
may at any time deliver to the Trustee for cancellation any Notes previously
authenticated and delivered hereunder which the Company may have acquired in
any manner whatsoever, and all Notes so delivered shall be promptly cancelled
by the Trustee. No Notes shall be authenticated in lieu of or in exchange for
any Notes cancelled as provided in this Section, except as expressly permitted
by this Indenture. All cancelled Notes held by the Trustee shall be disposed
of and a destruction certificate shall be delivered to the Company.
SECTION 310. COMPUTATION OF INTEREST.
Interest on the Notes shall be computed on the basis of a 360-day year
comprised of twelve 30-day months, compounded annually.
SECTION 311. AUTHENTICATION AND DELIVERY OF ORIGINAL ISSUE.
Forthwith upon the execution and delivery of this Indenture, or from time
to time thereafter, Notes up to the aggregate principal amount of $11,500,000
may be executed by the
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Company and delivered to the Trustee for authentication and delivered by the
Trustee upon Company Order, without any further action by the Company.
END OF ARTICLE THREE.
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ARTICLE FOUR
SATISFACTION AND DISCHARGE
SECTION 401. SATISFACTION AND DISCHARGE OF INDENTURE.
This Indenture shall upon Company Request cease to be of further effect
(except as to any surviving rights of registration of transfer or exchange of
Notes herein expressly provided for), and the Trustee, at the expense of the
Company, shall execute proper instruments acknowledging satisfaction and
discharge of this Indenture, when
(1) either:
(a) all Notes theretofore authenticated and delivered (other than
(i) Notes which have been destroyed, lost or stolen and which have been
replaced or paid as provided in Section 306 and (ii) Notes for whose
payment money has theretofore been deposited in trust or segregated and
held in trust by the Company and thereafter paid to the Company or
discharged from such trust, as provided in Section 1003) have been
delivered to the Trustee for cancellation; or
(b) all such Notes not theretofore delivered to the Trustee for
cancellation (i) have become due and payable, or (ii) will become due
and payable at their Stated Maturity within one year, or (iii) are to be
called for redemption within one year under arrangements satisfactory to
the Trustee for the giving of notice of redemption by the Trustee in the
name, and at the expense, of the Company; and the Company, in the case
of this subsection (b) (i), (ii) or (iii) above, has deposited or caused
to be deposited with the Trustee as trust funds in trust for the purpose
an amount sufficient to pay and discharge the entire indebtedness on
such Notes not theretofore delivered to the Trustee for cancellation,
for principal (and premium, if any) and interest to the date of such
deposit (in the case of Notes which have become due and payable) or to
the Stated Maturity or Redemption Date, as the case may be;
(2) the Company has paid or caused to be paid all other sums payable
hereunder by the Company; and
(3) the Company has delivered to the Trustee an Officers' Certificate
and an Opinion of Counsel, each stating that all conditions precedent herein
provided for relating to the satisfaction and discharge of this Indenture
have been complied with.
Notwithstanding the satisfaction and discharge of this Indenture, the
obligations of the Company to the Trustee under Section 607 shall survive,
and, if the money shall have been deposited with the Trustee pursuant to
subclause (b) of clause (1) of this Section, the obligations of the Trustee
under Section 402 and the last paragraph of Section 1003 shall survive.
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SECTION 402. APPLICATION OF TRUST MONEY.
Subject to the provisions of the last paragraph of Section 1003, all
money deposited with the Trustee pursuant to Section 401 shall be held in
trust and applied by it, in accordance with the provisions of the Notes and
this Indenture, to the payment, either directly or through any Paying Agent
(including the Company acting as its own Paying Agent) as the Trustee may
determine, to the Persons entitled thereto, of the principal (and premium, if
any) and interest for whose payment such money has been deposited with the
Trustee.
END OF ARTICLE FOUR.
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ARTICLE FIVE
REMEDIES
SECTION 501. EVENTS OF DEFAULT.
"Event of Default," wherever used herein, means any one of the following
events (whatever the reason for such Event of Default and whether it shall be
voluntary or involuntary or be effected by operation of law or pursuant to
any judgment, decree or order of any court or any order, rule or regulation
of any administrative or governmental body):
(1) default in the payment of any installment interest upon any Note
when it becomes due and payable and continuance of such default for a period
of 15 days (whether or not such payment is prohibited under the provisions of
Article Twelve); or
(2) default in the payment of the principal of or premium, if any, on
any Note at its Maturity (whether or not such payment is prohibited under the
provisions of Article Twelve); or
(3) breach of a covenant of the Company contained in Sections 1008 or
1011 hereof and the continuance of such breach for a period of 15 days after
the due date for filing of the report pursuant to section 703(5) which
reports such breach, provided, however, that prior to the expiration of the
15 day period referred to above, the Company shall have filed with the
Trustee a certificate, certifying that such breach has been cured; or
(4) default in the performance, or breach, of any covenant or warranty
of the Company in this Indenture, except Section 701(3), (other than a
covenant or warranty default in whose performance or whose breach is
elsewhere in this Section specifically dealt with), and continuance of such
default or breach for a period of 30 days after there has been given, by
registered or certified mail, to the Company by the Trustee or to the Company
and the Trustee by the Noteholders of at least 25% in principal amount of the
Outstanding Notes, a written notice (and the Trustee shall give such written
notice to the Company upon the request of the Noteholders of at least 25% in
principal amount of the Outstanding Notes) specifying such default or breach
and requiring it to be remedied and stating that such notice is a "Notice of
Default" hereunder; or
(5) a default under any bond, debenture, note or other evidence of
Indebtedness of the Company or any Subsidiary (including obligations under
leases required to be capitalized on the balance sheet of the lessee under
GAAP), or a default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness of the Company or Subsidiary, (including such leases), whether
such indebtedness now exists or shall hereafter be created, which default
shall have resulted in such indebtedness in excess of $500,000 becoming or
being declared due and payable prior to the date on which it would otherwise
have become due and payable or such obligations in excess of $500,000 being
accelerated, without such acceleration having been rescinded or annulled or
such Indebtedness
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shall not have been discharged within a period of 30 days after such default
or acceleration; provided, however, that this Section 501(5) shall not apply
to (a) a default under any purchase money obligation of the Company if, and
so long as, the Company is in good faith and in the exercise of its
reasonably prudent business judgment, contesting its obligations thereunder
in accordance with a reasonable interpretation of the documentation of such
obligation; or (b) a default in a contractual obligation not otherwise
constituting Indebtedness if and so long as, the Company is in good faith
contesting such obligation; or
(6) the entry of a decree or order by a court having jurisdiction in
the premises adjudging the Company or any Material Subsidiary a bankrupt or
insolvent, or approving as properly filed a petition seeking reorganization,
arrangement, adjustment or composition of or in respect of the Company or any
Material Subsidiary, under Federal bankruptcy law, as now or hereafter
constituted, or any other applicable Federal or State bankruptcy, insolvency
or other similar law, or appointing a receiver, liquidator, assignee,
trustee, sequestrator or other similar official of the Company or any
Material Subsidiary or of any substantial part of its property, or ordering
the winding up or liquidation of its affairs, and the continuance of any such
decree or order unstayed and in effect for a period of sixty (60) consecutive
days; provided however, that this Section 501(6) shall not apply to any
Material Subsidiary that after giving effect to such bankruptcy or
insolvency, the Company's Consolidated Tangible Net Worth exceeds $10
Million; or
(7) the commencement by the Company or any Material Subsidiary of a
voluntary case under Federal bankruptcy law, as now or hereafter constituted,
or any other applicable Federal or State bankruptcy, insolvency, or other
similar law, or the consent by it to the institution of bankruptcy or
insolvency proceedings against it, or the filing by it of a petition or
answer or consent seeking reorganization or relief under Federal bankruptcy
law or any other applicable Federal or State law, or the consent by it to the
filing of such petition or to the appointment of a receiver, liquidator,
assignee, trustee, sequestrator or similar official of the Company or any
Subsidiary or of any substantial part of its property, or the making by it of
an assignment for the benefit of creditors, or the admission by it in writing
of its inability to pay its debts generally as they become due, or the taking
of corporate action by the Company or any Subsidiary in furtherance of any
such action; provided however, that this Section 501(7) shall not apply to
any Material Subsidiary that after giving effect to such voluntary bankruptcy
or insolvency, the Company's Consolidated Tangible Net Worth exceeds $10
Million; or
(8) the rendering of a final judgment or judgments (not subject to
appeal) for the payment of money against the Company or any Subsidiary not
fully insured against in an aggregate amount in excess of $500,000 by a court
or courts of competent jurisdiction, which judgment or judgments remain
unsatisfied for a period of 30 days after the right to appeal all such
judgments has expired or otherwise terminated.
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SECTION 502. ACCELERATION OF MATURITY; RESCISSION AND ANNULMENT.
If an Event of Default occurs and is continuing, then and in every such
case the Trustee or the Noteholders of not less than 25% in principal amount
of the Outstanding Notes may, and the Trustee upon request of the Noteholders
of not less than 25% in principal amount of the Outstanding Notes shall,
declare the principal of all the Notes to be due and payable immediately, by
notice in writing to the Company (and to the Trustee if given by
Noteholders), and upon any such declaration such entire principal amount and
all interest shall become immediately due and payable. Collection actions or
judicial proceedings may be commenced as set forth in Section 503.
At any time after such a declaration of acceleration has been made and
before a judgment or decree for payment of the money due has been obtained by
the Trustee as hereinafter in this Article provided, the Noteholders of a
majority in principal amount of the Outstanding Notes, by written notice to
the Company and the Trustee, may rescind and annul such declaration and its
consequences if:
(1) the Company has paid or deposited with the Trustee a sum sufficient
to pay
(a) all overdue installments of interest on all Notes,
(b) the principal of (and premium, if any, on) any Notes which
have become due otherwise than by such declaration of acceleration and
interest thereon at the rate borne by the Notes,
(c) to the extent that payment of such interest is lawful,
interest upon overdue installments of interest at the rate borne by the
Notes, and
(d) all sums paid or advanced by the Trustee hereunder and the
reasonable compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel and the Holders and their agents and
counsel if such Holders have initiated action in accordance with this
Section 502; and
(2) all Events of Default, other than the non-payment of the principal
of Notes which have become due solely by such declaration of acceleration,
have been cured or waived as provided in Section 513.
No such rescission shall affect any subsequent default or impair any
right consequent thereon.
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SECTION 503. COLLECTION OF INDEBTEDNESS AND SUITS FOR ENFORCEMENT BY
TRUSTEE.
The Company covenants that if:
(1) default is made in the payment of any installment of interest on
any Note when such interest becomes due and payable and such default
continues for a period of 15 days, or
(2) default is made in the payment of the principal of (or premium, if
any, on) any Note at its Maturity,
the Company will, subject to the provisions of Article Twelve, upon demand of
the Trustee or Noteholders of not less than 25% in aggregate principal amount
of the Outstanding Notes, pay to the Trustee, for the benefit of all the
Noteholders of such Notes, the whole amount then due and payable on such
Notes for principal, premium, if any, and interest, with interest upon the
overdue principal (and premium, if any) and, to the extent that payment of
such interest shall be legally enforceable, upon overdue installments of
interest, at the rate borne by the Notes and, in addition thereto, such
further amount as shall be sufficient to cover the costs and expenses of
collection, including the reasonable compensation, expenses, disbursements
and advances of the Trustee, its agents and counsel or the Holders as set
forth herein, their agents and counsel, as the case may be, whether or not
judicial proceedings are commenced.
If the Company fails to pay such amounts forthwith upon such demand, the
Trustee, in its own name as trustee of an express trust, or the Holders of
not less than 25% in principal amount of the Notes Outstanding, on behalf of
all Holders, may institute a judicial proceeding for the collection of the
sums so due and unpaid, may prosecute such proceeding to judgment or final
decree and may enforce the same against the Company or any other obligor upon
the Notes and collect the moneys adjudged or decreed to be payable in the
manner provided by law out of the property of the Company or any other
obligor upon the Notes, wherever situated.
If an Event of Default occurs and is continuing, the Trustee may in its
discretion proceed to protect and enforce its rights and the rights of the
Noteholders by such appropriate judicial proceedings as the Trustee shall
deem most effectual to protect and enforce any such rights, whether for the
specific enforcement of any covenant or agreement in this Indenture or in and
of the exercise of any power granted herein, or to enforce any other proper
remedy. Holders of not less than 25% in principal amount of Notes
Outstanding, on behalf of all Holders, may initiate such appropriate judicial
proceedings in the same manner as the Trustee. The Trustee or the Holders
initiating action hereunder, as the case may be, shall be reimbursed for the
costs of collection incurred as provided for above in this Section 503.
SECTION 504. TRUSTEE MAY FILE PROOFS OF CLAIM.
In case of the pendency of any receivership, insolvency, liquidation,
bankruptcy, reorganization, arrangement, adjustment, composition or other
judicial proceeding relative to the Company or any other obligor upon the
Notes or the property of the Company or of such other
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obligor, the Trustee (irrespective of whether the principal of the Notes
shall then be due and payable as therein expressed or by declaration or
otherwise and irrespective of whether the Trustee shall have made any demand
on the Company for the payment of overdue principal or interest) shall be
entitled and empowered, by intervention in such proceeding or otherwise,
(1) to file and prove a claim for the whole amount of principal,
premium, if any, and interest owing and unpaid in respect of the Notes and to
file such other papers or documents as may be necessary or advisable in order
to have the claims of the Trustee (including any claim for the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agents
and counsel) and of the Noteholders allowed in such judicial proceeding, and
(2) to collect and receive any moneys or other property payable or
deliverable on any such claims and to distribute the same; and any custodian,
receiver, assignee, trustee, liquidator, sequestrator or other similar
official in any such judicial proceeding is hereby authorized by each Holder
to make such payments to the Trustee and, in the event that the Trustee shall
consent to the making of such payments directly to the Noteholders, to pay to
the Trustee any amount due it for the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel, and any
other amounts due the Trustee under Section 607 hereof.
Nothing herein contained shall be deemed to authorize the Trustee to
authorize or consent to or accept or adopt on behalf of any Holder any plan
of reorganization, arrangement, adjustment or composition affecting the Notes
or the rights of any Holder thereof or to authorize the Trustee to vote in
respect of the claim of any Holder in any such proceeding.
SECTION 505. TRUSTEE MAY ENFORCE CLAIMS WITHOUT POSSESSION OF NOTES.
All rights of action and claims under this Indenture or the Notes may be
prosecuted and enforced by the Trustee without the possession of any of the
Notes or the production thereof in any proceeding relating thereto, and any
such proceeding instituted by the Trustee shall be brought in its own name as
trustee of an express trust, and any recovery of judgment shall, after
provision for the payment of the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel, be for the
ratable benefit of the Noteholders of the Notes in respect of which such
judgment has been recovered.
SECTION 506. APPLICATION OF MONEY COLLECTED.
Any money collected by the Trustee or the Holders directly pursuant to
this Article shall be applied in the following order, at the date or dates
fixed by the Trustee and, in case of the distribution of such money on
account of principal or interest, upon presentation of the Notes and the
notation thereon of the payment if only partially paid and upon surrender
thereof if fully paid.
FIRST: to the payment of all amounts due the Trustee under Section 607
hereof;
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SECOND: to the payment of the amounts then due and unpaid for costs of
collection, principal, premium, if any, and interest on the Notes in respect
of which or for the benefit of which such money has been collected, ratably,
without preference or priority of any kind, according to the amounts due and
payable on such Notes for principal, premium, if any, and interest,
respectively; and
THIRD: to the payment of the remainder, if any, to the Company or any
other person lawfully entitled thereto.
SECTION 507. LIMITATION ON SUITS.
(1) Prior to the declaration of acceleration provided for in Section
502 hereof, no Holder of any Note shall have any right to institute any
proceeding, judicial or otherwise, with respect to this Indenture, or for the
appointment of a receiver or trustee, or for any other remedy hereunder,
unless
(a) such Holder has previously given written notice to the
Trustee of a continuing Event of Default;
(b) the Noteholders of not less than 25% in principal amount of
the Outstanding Notes shall have made written request to the Trustee to
institute proceedings in respect of such Event of Default in its own
name as Trustee hereunder;
(c) such Holder or Noteholders have offered to the Trustee
reasonable indemnity against the costs, expenses and liabilities to be
incurred in compliance with such request;
(d) the Trustee for 30 days after its receipt of such notice,
request and offer of indemnity has failed to institute any such
proceeding; and
(e) no direction inconsistent with such written request has been
given to the Trustee during such 30-day period by the Noteholders of a
majority in principal amount of the Outstanding Notes;
it being understood and intended that no one or more Noteholders shall have
any right in any manner whatever by virtue of, or by availing of, any
provision of this Indenture to affect, disturb or prejudice the rights of any
other Noteholders, or to obtain or to seek to obtain priority or preference
over any other Noteholders or to enforce any right under this Indenture,
except in the manner herein provided and for the equal and ratable benefit of
all the Noteholders.
(2) After the declaration of acceleration provided for in Section 502
hereof, Holders of 25% or more in principal amount of Outstanding Notes may
institute judicial proceedings in respect to such Event of Default which
triggers the declaration of acceleration in their own name in the manner
provided in Section 503 if the Trustee has not instituted such proceedings
within 60
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days after such declaration, it being understood that such Holders shall not
have any right in any manner whatever by virtue of, or by availing of, any
provision of the Indenture to affect, disturb or prejudice the rights of any
other Holders of Notes, or to obtain or to seek to obtain priority or
preference over any other Holders or to enforce any rights under this
Indenture, except in the manner herein provided and for the equal and ratable
benefit of all the Holders of Notes.
SECTION 508. UNCONDITIONAL RIGHT OF NOTEHOLDERS TO RECEIVE PRINCIPAL,
PREMIUM AND INTEREST.
Notwithstanding any other provision in this Indenture, the Holder of any
Note shall have the right to receive payment (subject to Section 307) of the
principal of (and premium, if any) and interest on such Note on the Stated
Maturity thereof (or, in the case of redemption, on the Redemption Date) and
to institute suit for the enforcement of any such payment, and such rights
shall not be impaired without the consent of such Holder.
SECTION 509. RESTORATION OF RIGHTS AND REMEDIES.
If the Trustee or any Holder has instituted any proceeding to enforce
any right or remedy under this Indenture and such proceeding shall have been
discontinued or abandoned for any reason or shall have been determined
adversely to the Trustee or to such Holder, then and in every such case,
subject to any determination in such proceeding, the Company, the Trustee and
the Noteholders shall be restored severally and respectively to their former
positions hereunder and thereafter all rights and remedies of the Trustee and
the Noteholders shall continue as though no such proceeding had been
instituted.
SECTION 510. RIGHTS AND REMEDIES CUMULATIVE.
Except as otherwise provided with respect to the replacement or payment
of mutilated, destroyed, lost or stolen Notes in the last paragraph of
Section 306, no right or remedy herein conferred upon or reserved to the
Trustee or to the Noteholders is intended to be exclusive of any other right
or remedy, and every right and remedy shall, to the extent permitted by law,
be cumulative and in addition to every other right and remedy given hereunder
or now or hereafter existing at law or in equity or otherwise. The assertion
or employment of any right or remedy hereunder, or otherwise, shall not
prevent the concurrent assertion or employment of any other appropriate right
or remedy.
SECTION 511. DELAY OR OMISSION NOT WAIVER.
No delay or omission of the Trustee or of any Holder of any Note to
exercise any right or remedy accruing upon any Event of Default shall impair
any such right or remedy or constitute a waiver of any such Event of Default
or an acquiescence therein. Every right and remedy given by this Article or
by law to the Trustee or to the Noteholders may be exercised from time to
time, and as often as may be deemed expedient, by the Trustee or by the
Noteholders, as the case may be.
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SECTION 512. CONTROL BY NOTEHOLDERS.
The Holders of a majority in principal amount of the Outstanding Notes
shall have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee, provided that:
(1) such direction shall not be in conflict with any rule of law or
with this Indenture; and
(2) the Trustee may take any other action deemed proper by the Trustee
which is not inconsistent with such direction.
SECTION 513. WAIVER OF PAST DEFAULTS.
The Holders of not less than a majority in aggregate principal amount of
the Outstanding Notes may on behalf of the Holders of all the Notes waive any
past default hereunder and its consequences, provided that a default in the
payment of the principal of, premium, if any, or interest on any Note, or in
respect of certain other covenants or provisions hereof cannot be modified or
amended except as set forth in Section 902 hereof.
Upon any such waiver, such default shall cease to exist and any Event of
Default arising therefrom shall be deemed to have been cured, for every
purpose of this Indenture, but no such waiver shall extend to any subsequent
or other default or impair any right consequent thereon.
SECTION 514. UNDERTAKING FOR COSTS.
All parties to this Indenture agree, and each Holder of any Note by such
Holder's acceptance thereof shall be deemed to have agreed, that any court
may in its discretion require in any suit for the enforcement of any right or
remedy under this Indenture, or in any suit against the Trustee for any
action taken, suffered or omitted by it as Trustee, the filing by any party
litigant in such suit of an undertaking to pay the costs of such suit, and
that such court may in its discretion assess reasonable costs, including
reasonable attorneys' fees, against any party litigant in such suit, having
due regard to the merits and good faith of the claims or defenses made by
such party litigant. The provisions of this Section shall not apply to any
suit instituted by the Trustee, to any suit instituted by any Holder, or
group of Noteholders, holding in the aggregate more than 25% in principal
amount of the Outstanding Notes, or to any suit instituted by any Holder for
the enforcement of the payment of the principal of, premium, if any, or
interest on any Note on or after the Stated Maturity thereof (or, in the case
of redemption, on or after the Redemption Date).
SECTION 515. WAIVER OF STAY OR EXTENSION LAWS.
The Company covenants (to the extent that it may lawfully do so) that it
will not at any time insist upon, or plead, or in any manner whatsoever claim
or take the benefit or advantage of,
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any stay or extension law wherever enacted, now or at any time hereafter in
force, which may affect the covenants or the performance of this Indenture;
and the Company (to the extent that it may lawfully do so) hereby expressly
waives all benefit or advantage of any such law and covenants that it will
not hinder, delay or impede the execution of any power herein granted to the
Trustee, but will suffer and permit the execution of every such power as
though no such law had been enacted.
END OF ARTICLE FIVE.
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ARTICLE SIX
THE TRUSTEE
SECTION 601. CERTAIN DUTIES AND RESPONSIBILITIES.
(1) Except during the continuance of an Event of Default,
(a) the Trustee undertakes to perform such duties and only such
duties as are specifically set forth in this Indenture and the Trust
Indenture Act, and no implied covenants or obligations shall be read into
this Indenture against the Trustee; and
(b) in the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the correctness
of the opinions expressed therein, upon certificates or opinions furnished
to the Trustee and conforming to the requirements of this Indenture, but
in the case of any such certificates or opinions which by any provision
hereof are specifically required to be furnished to the Trustee, the
Trustee shall be under a duty to examine the same to determine whether or
not they conform to the requirements of this Indenture.
(2) In case an Event of Default has occurred and is continuing, the
Trustee shall exercise such of the rights and powers vested in it by this
Indenture and the Trust Indenture Act, and use the same degree of care and
skill in their exercise, as a prudent person would exercise or use under the
circumstances in the conduct of such person's own affairs.
(3) No provision of this Indenture shall be construed to relieve the
Trustee from liability for its own negligent action, its own negligent failure
to act, or its own willful misconduct, except that:
(a) this Subsection shall not be construed to limit the effect of
Subsection (1) (a) of this Section;
(b) the Trustee shall not be liable for any error of judgment made
in good faith by a Responsible Officer, unless it shall be proved that the
Trustee was negligent in ascertaining the pertinent facts;
(c) the Trustee shall not be liable with respect to any action taken
or omitted to be taken by it in good faith in accordance with the
direction of the Holders of a majority in principal amount of the
Outstanding Notes relating to the time, method and place of conducting any
proceeding for any remedy available to the Trustee, or exercising any
trust or power conferred upon the Trustee, under this Indenture; and
(d) no provision of this Indenture shall require the Trustee to
expend or risk its own funds or otherwise incur any financial liability in
the performance of any of its duties
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hereunder, or in the exercise of any of its rights or powers, if it
shall have reasonable grounds for believing that repayment of such funds
or adequate indemnity against such risk or liability is not reasonably
assured to it.
(4) Whether or not therein expressly so provided, every provision of this
Indenture relating to the conduct or affecting the liability of or affording
protection to the Trustee shall be subject to the provisions of this Section.
SECTION 602. NOTICE OF DEFAULTS.
Within 90 days after the occurrence of any default hereunder, the Trustee
shall transmit by mail to all Noteholders, as their names and addresses appear
in the Note Register, notice of such default hereunder known to a Responsible
Officer of Trustee, unless such default shall have been cured or waived,
provided that (i) except in the case of a default in the payment of the
principal of (or premium, if any) or interest on any Note, the Trustee shall be
protected in withholding such notice if and so long as the board of directors,
the executive committee or a trust committee of directors or Responsible
Officers of the Trustee in good faith determine that the withholding of such
notice is in the interests of the Noteholders, and (ii) in the case of any
default of the character specified in Section 501(4), no such notice to
Noteholders shall be given until at least 30 days after the occurrence thereof.
For the purpose of this Section, the term "default" means any event which is,
or after notice or lapse of time or both would become, an Event of Default.
SECTION 603. CERTAIN RIGHTS OF TRUSTEE.
Except as otherwise provided in Section 601:
(1) the Trustee may rely and shall be protected in acting or refraining
from acting upon any resolution, certificate, statement, instrument, opinion,
report, notice, request, direction, consent, order, bond, debenture, note or
other paper or document believed by it to be genuine and to have been signed or
presented by the proper party or parties;
(2) any request or direction of the Company mentioned herein shall be
sufficiently evidenced by a Company Request or Company Order and any resolution
of the board of directors of the Company may be sufficiently evidenced by a
Company Resolution;
(3) whenever in the administration of this Indenture the Trustee shall
deem it desirable that a matter be proved or established prior to taking,
suffering or omitting any action hereunder, the Trustee (unless other evidence
be herein specifically prescribed) may, in the absence of bad faith on its
part, rely upon an Officers' Certificate;
(4) the Trustee may consult with counsel (who may be counsel to the
Company) and the advice of such counsel or any Opinion of Counsel shall be full
and complete authorization and protection in respect of any action taken,
suffered or omitted by it hereunder in good faith and in reliance thereon;
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(5) the Trustee shall be under no obligation to exercise any of the
rights or powers vested in it by this Indenture at the request or direction of
any of the Noteholders pursuant to this indenture, unless such Noteholders
shall have offered to the Trustee reasonable indemnity against the costs,
expenses and liabilities which might be incurred by it in compliance with such
request or direction;
(6) prior to the occurrence of an Event of Default hereunder and after
the curing of all Events of Default, the Trustee shall not be bound to make any
investigation into the facts or matters stated in any resolution, certificate,
statement, instrument, opinion, report, notice, request, direction, consent,
order, bond, debenture, note or other paper or document unless requested to do
so by the Holders of not less than a majority in aggregate principal amount of
the Notes then outstanding, but the Trustee, in its discretion, may make such
further inquiry or investigation into such facts or matters as it may see fit,
and, provided that if the payment within a reasonable time to the Trustee of
the costs, expenses and liabilities likely to be incurred in the making of such
investigation is not, in the opinion of the Trustee, reasonably assured to the
Trustee by the terms of this Indenture, the Trustee may require reasonable
indemnity against such expense or liability as a condition to so proceeding;
and
(7) the Trustee shall have no duty to inquire as to the performance of
the Company's covenants in Article Ten or Section 1102 hereof. In addition,
the Trustee shall not be deemed to have knowledge of any Default or Event of
Default, except (i) any Default or Event of Default occurring pursuant to
Section 501(1), 501(2) or 1001, or (ii) any Default or Event of Default of
which the Trustee shall have received written notification or obtained actual
knowledge.
SECTION 604. NOT RESPONSIBLE FOR RECITALS OR ISSUANCE OF NOTES.
The recitals contained herein and in the Notes, except the Trustee's
certificates of authentication, shall be taken as the statements of the Company
and the Trustee assumes no responsibility for their correctness. The Trustee
makes no representations as to the validity or sufficiency of this Indenture or
of the Notes. The Trustee shall not be accountable for the use or application
by the Company of Notes or the proceeds thereof.
SECTION 605. TRUSTEE MAY HOLD NOTES.
The Trustee, any Authenticating Agent, any Paying Agent, any Note
Registrar or any other agent of the Company, in its individual or any other
capacity, may become the owner or pledgee of Notes and, subject to Sections 608
and 613, may otherwise deal with the Company with the same rights it would have
it if were not Trustee, Authenticating Agent, Paying Agent, Note Registrar or
such other agent.
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SECTION 606. MONEY HELD IN TRUST.
Money held by the Trustee in trust hereunder need not be segregated from
other funds except to the extent required by law. The Trustee shall be under no
liability for interest on any money received by it hereunder except as
otherwise agreed in writing with the Company.
SECTION 607. COMPENSATION AND REIMBURSEMENT.
The Company agrees:
(1) to pay to the Trustee from time to time reasonable compensation for
all services rendered by it hereunder (which compensation shall not be limited
by any provision of law in regard to the compensation of a trustee of an
express trust);
(2) except as otherwise expressly provided for herein, to reimburse the
Trustee upon its request for all reasonable expenses, disbursements and
advances incurred or made by the Trustee in accordance with any provision of
this Indenture (including the reasonable compensation and the expenses and
disbursements of its agents and counsel), except any such expense, disbursement
or advance as may be attributable to its negligence or bad faith; and
(3) to indemnify the Trustee for, and to hold it harmless against, any
loss, liability or expense incurred without negligence or bad faith on its
part, arising out of or in connection with the acceptance or administration of
this trust, including the costs and expenses of defending itself against any
claim or liability in connection with the exercise or performance of any of its
powers or duties hereunder.
As security for the performance of the obligations of the Company under
this Section, the Trustee shall have a lien prior to the Notes upon all
property and funds held or collected by the Trustee as such, except funds held
in trust for the payment of principal of, premium, if any, or interest on
Notes.
SECTION 608. DISQUALIFICATION; CONFLICTING INTERESTS.
(1) If the Trustee has or shall acquire any conflicting interest, as
defined in this Section 608, then, within 90 days after ascertaining that it
has such conflicting interest, and if the default (as defined in Section
608(3)) to which such conflicting interest relates has not been cured or duly
waived or otherwise eliminated before the end of such 90-day period, the
Trustee shall either eliminate such conflicting interest or resign in the
manner and with the effect hereinafter specified in this Article and the
Company shall take prompt steps to have a successor appointed in the manner
provided in this Indenture.
(2) In the event that the Trustee shall fail to comply with the
provisions of Subsection (1) of this Section, within ten (10) days after the
expiration of such 90-day period, the Trustee
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shall transmit by mail to all Noteholders, as their names and addresses
appear in the Note Register, notice of such failure.
(3) For the purposes of this Section, the Trustee shall be deemed to have
a conflicting interest if:
(a) the Trustee is trustee under another indenture under which any
other securities, or certificates of interest or participation in any
other securities, of the Company are outstanding, unless such other
indenture is a collateral trust indenture under which the only collateral
consists of Notes issued under this Indenture, provided that there shall
be excluded from the operation of this paragraph any indenture or
indentures under which other securities, or certificates of interest or
participation in other securities, of the Company are outstanding, if:
(i) this Indenture and such other indenture or indentures are
wholly unsecured and such other indenture or indentures are hereafter
qualified under the Trust Indenture Act, unless the Commission shall
have found and declared by order pursuant to Section 305(b) or
Section 307(1) of the Trust Indenture Act that differences exist
between the provisions of this Indenture and the provisions of such
other indenture or indentures which are so likely to involve a
material conflict of interest as to make it necessary in the public
interest or for the protection of investors to disqualify the Trustee
from acting as such under this Indenture and such other indenture or
indentures, or
(ii) the Company shall have sustained the burden of proving, on
application to the Commission and after opportunity for hearing
thereon, that trusteeship under this Indenture and such other
indenture or indentures is not so likely to involve a material
conflict of interest as to make it necessary in the public interest
or for the protection of investors to disqualify the Trustee from
acting as such under one of such indentures;
(b) the Trustee or any of its directors or executive officers is an
underwriter for the Company;
(c) the Trustee directly or indirectly controls or is directly or
indirectly controlled by or is under direct or indirect common control
with an underwriter for the Company;
(d) the Trustee or any of its directors or executive officers is a
director, officer, partner, employee, appointee or representative of the
Company, or of an underwriter (other than the Trustee itself) for the
Company who is currently engaged in the business of underwriting, except
that the Trustee may be designated by the Company or by any underwriter
for the Company to act in the capacity of transfer agent, registrar,
custodian, paying agent, fiscal agent, escrow agent or depositary, or in
any other similar capacity or,
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subject to the provisions of paragraph (a) of this Subsection, to act as
trustee, whether under an indenture or otherwise;
(e) 10% or more of the voting securities of the Trustee is
beneficially owned either by the Company or by any director or executive
officer thereof, or 20% or more of such voting securities is beneficially
owned, collectively, by any two or more of such persons; or 10% or more of
the voting securities of the Trustee is beneficially owned either by an
underwriter for the Company or by any director, partner or executive
officer of any such underwriter, or is beneficially owned, collectively,
by any two or more such persons;
(f) the Trustee is the beneficial owner of, or holds as collateral
security for an obligation which is in default (as hereinafter in this
Subsection defined), (i) 5% or more of the voting securities, or 10% or
more of any other class of security of the Company not including the Notes
issued under this Indenture and securities issued under any other
indenture under which the Trustee is also trustee, or (ii) 10% or more of
any class of security of an underwriter for the Company;
(g) the Trustee is the beneficial owner of, or holds as collateral
security for an obligation which is in default (as hereinafter in this
Subsection defined), 5% or more of the voting securities of any person
who, to the knowledge of the Trustee, owns 10% or more of the voting
securities of, or controls directly or indirectly or is under direct or
indirect common control with, the Company;
(h) the Trustee is the beneficial owner of, or holds as collateral
security for an obligation which is in default (as hereinafter in this
Subsection defined), 10% or more of a class of security of any person who,
to the knowledge of the Trustee, owns 50% or more of the voting securities
of the Company;
(i) the Trustee owns, on the date of default upon the Notes or on
any anniversary of such default while the default upon the Notes remains
outstanding, in the capacity of executor, administrator, testamentary or
inter vivos trustee, guardian, committee or conservator, or in any other
similar capacity, an aggregate of 25% or more of the voting securities, or
of any class of security, of any person, the beneficial ownership of a
specified percentage of which would have constituted a conflicting
interest under paragraph (f), (g) or (h) of this Subsection. As to any
such securities of which the Trustee acquired ownership through becoming
executor, administrator or testamentary trustee of an estate which
included them, the provisions of the preceding sentence shall not apply,
for a period of two years from the date of such acquisition, to the extent
that such securities included in such estate do not exceed 25% of such
voting securities or 25% of any such class of security. Promptly after the
date of any such default and annually each succeeding year that the Notes
remain in default, the Trustee shall make a check of its holdings of such
securities in any of the above-mentioned capacities as of such dates. If
the Company fails to make payment in full of the principal of (or premium,
if any) or
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interest on any of the Notes when and as the same becomes due
and payable, and such failure continues for 30 days thereafter, the
Trustee shall make a prompt check of its holdings of such securities in
any of the above-mentioned capacities as of the date of the expiration of
such 30-day period, and after such date, notwithstanding the foregoing
provisions of this paragraph, all such securities so held by the Trustee,
with sole or joint control over such securities vested in it, shall, but
only so long as such failure shall continue, be considered as though
beneficially owned by the Trustee for the purposes of paragraphs (f), (g)
and (h) of this Subsection; or
(j) except under the circumstances described in paragraphs (1), (3),
(4), (5) or (6) of Section 311(b) of the Trust Indenture Act, the Trustee
shall be or become a creditor of the Company.
The specification of percentages in paragraphs (e) to (i), inclusive, of
this Subsection shall not be construed as indicating that the ownership of such
percentage of the securities of a person is or is not necessary or sufficient
to constitute direct or indirect control for the purposes of paragraph (c) or
(g) of this Subsection.
For the purposes of paragraphs (f), (g), (h) and (i) of this Subsection
only, (i) the terms "security" and "securities" shall include only such
securities as are generally known as corporate securities, but shall not
include any note or other evidence of indebtedness issued to evidence an
obligation to repay moneys lent to a person by one or more banks, trust
companies or banking firms, or any certificate of interest or participation in
any such note or evidence of indebtedness; (ii) an obligation shall be deemed
to be "in default" when a default in payment of principal shall have continued
for 30 days or more and shall not have been cured; and (iii) the Trustee shall
not be deemed to be the owner or holder of (A) any security which it holds as
collateral security, as trustee or otherwise, for an obligation which is not in
default as defined in clause (ii) above, or (B) any security which it holds as
collateral security under this Indenture, irrespective of any default
hereunder, or (C) any security which it holds as agent for collection, or as
custodian, escrow agent or depositary, or in any similar representative
capacity.
(4) For the purposes of this Section:
(a) The term "underwriter," when used with reference to the Company
means every person who, within one year prior to the time as of which the
determination is made, has purchased from the Company with a view to, or
has offered or sold for the Company in connection with, the distribution
of any security of the Company outstanding at such time, or has
participated or has had a direct or indirect participation in any such
undertaking, or has participated or has had a participation in the direct
or indirect underwriting of any such undertaking, but such term shall not
include a person whose interest was limited to a commission from an
underwriter or dealer not in excess of the usual and customary
distributors' or sellers' commission.
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(b) The term "director" means any director of a corporation or any
individual performing similar functions with respect to any organization,
whether incorporated or unincorporated.
(c) The term "person" means an individual, a corporation, a
partnership, an association, a joint-stock company, a trust, an
unincorporated organization or a government or political subdivision
thereof. As used in this paragraph, the term "trust" shall include only a
trust where the interest or interests of the beneficiary or beneficiaries
are evidenced by a security.
(d) The term "voting security" means any security presently
entitling the owner or holder thereof to vote in the direction or
management of the affairs of a person, or any security issued under or
pursuant to any trust, agreement or arrangement whereby a trustee or
trustees or agent or agents for the owner or holder of such security are
presently entitled to vote in the direction or management of the affairs
of a person.
(e) The term "Company" means any obligor upon the Notes.
(f) The term "executive officer" means the president, every vice
president, every trust officer, the cashier, the secretary and the
treasurer of a corporation, and any individual customarily performing
similar functions with respect to any organization whether incorporated or
unincorporated, but shall not include the chairman of the board of
directors.
(g) The term "default" shall mean an Event of Default or an event
which with notice or passage of time, or both, would constitute an Event
of Default.
(5) The percentages of voting securities and other securities specified
in this Section shall be calculated in accordance with the following
provisions:
(a) A specified percentage of the voting securities of the Trustee,
the Company or any other person referred to in this Section (each of whom
is referred to as a "person" in this paragraph) means such amount of the
outstanding voting securities of such person as entitles the holder or
holders thereof to cast such specified percentage of the aggregate votes
which the holders of all the outstanding voting securities of such person
are entitled to cast in the direction or management of the affairs of such
person.
(b) A specified percentage of a class of securities of a person
means such percentage of the aggregate amount of securities of the class
outstanding.
(c) The term "amount," when used in regard to securities, means the
principal amount if relating to evidences of indebtedness, the number of
shares if relating to capital shares and the number of units if relating
to any other kind of security.
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(d) The term "outstanding" means issued and not held by or for the
account of the issuer. The following securities shall not be deemed
outstanding within the meaning of this definition:
(i) securities of an issuer held in a sinking fund relating
to securities of the issuer of the same class;
(ii) securities of an issuer held in a sinking fund relating
to another class of securities of the issuer, if the obligation
evidenced by such other class of securities is not in default as to
principal or interest or otherwise;
(iii) securities pledged by the issuer thereof as security for
an obligation of the issuer not in default as to principal or
interest or otherwise; and
(iv) securities held in escrow if placed in escrow by the
issuer thereof, provided, that any voting securities of an issuer
shall be deemed outstanding if any person other than the issuer is
entitled to exercise the voting rights thereof.
(e) A security shall be deemed to be of the same class as another
security if both securities confer upon the holder or holders thereof
substantially the same rights and privileges, provided, that, in the case
of secured evidences of indebtedness, all of which are issued under a
single indenture, differences in the interest rates or maturity dates of
various series thereof shall not be deemed sufficient to constitute such
series different classes and provided, further, that, in the case of
unsecured evidences of indebtedness, differences in the interest rates or
maturity dates thereof shall not be deemed sufficient to constitute them
securities of different classes, whether or not they are issued under a
single indenture.
SECTION 609. TRUSTEE REQUIRED; ELIGIBILITY.
There shall at all times be a Trustee hereunder which shall (a) be a
corporation or trust company organized and doing business under the laws of the
United States of America, any State thereof or the District of Columbia,
authorized under such laws to exercise corporate trust powers or any other
person permitted by the Trust Indenture Act to act as a trustee under an
indenture qualified under the Trust Indenture Act, and (b) have a combined
capital and surplus of at least $150,000 subject to supervision or examination
by Federal or State authority. If such corporation publishes reports of
condition at least annually, pursuant to law or to the requirements of such
supervising or examining authority, then for the purposes of this Section, the
combined capital and surplus of such corporation shall be deemed to be its
combined capital and surplus as set forth in its most recent report of
condition so published. If at any time the Trustee shall cease to be eligible
in accordance with the provisions of this Section, it shall resign immediately
in the manner and with the effect hereinafter specified in this Article.
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SECTION 610. RESIGNATION AND REMOVAL; APPOINTMENT OF SUCCESSOR.
(1) No resignation or removal of the Trustee and no appointment of a
successor Trustee pursuant to this Article shall become effective until the
acceptance of appointment by the successor Trustee under Section 611.
(2) The Trustee may resign at any time by giving written notice thereof
to the Company. If an instrument of acceptance by a successor Trustee shall
not have been delivered to the Trustee within 30 days after the giving of
such notice of resignation, the resigning Trustee may petition any court of
competent jurisdiction for the appointment of a successor Trustee. Such
court may thereupon after such notice, if any, as it may deem proper and
prescribe, remove the Trustee and appoint a successor Trustee.
(3) The Trustee may be removed at any time by Act of the Holders of a
majority in principal amount of the Outstanding Notes, delivered to the
Trustee and to the Company. If an instrument of acceptance by a successor
Trustee shall not have been delivered to the Trustee within 30 days after the
giving of such notice of removal, the Trustee may petition any court of
competent jurisdiction for the appointment of a successor Trustee.
(4) If at any time:
(a) the Trustee shall fail to comply with Section 608(1) after
written request therefor by the Company or by any Holder who has been a
bona fide Holder of a Note for at least six months, or
(b) the Trustee shall cease to be eligible under Section 609 and
shall fail to resign after written request therefor by the Company or by
any Holder who has been a bona fide Holder of a Note for at least six
months, or
(c) the Trustee shall become incapable of acting or shall be
adjudged a bankrupt or insolvent or a receiver of the Trustee or of its
property shall be appointed or any public officer shall take charge or
control of the Trustee or of its property or affairs for the purpose of
rehabilitation, conservation or liquidation,
THEN, in any such case, (i) the Company by a Company Resolution may
remove the Trustee, or (ii) subject to Section 514, any Holder who has
been a bona fide Holder of a Note for at least six months, on behalf of
himself and all others similarly situated, petition any court of
competent jurisdiction for the removal of the Trustee and the
appointment of a successor Trustee.
(5) If the Trustee shall resign, be removed or become incapable of
acting, or if a vacancy shall occur in the office of Trustee for any cause,
the Company, by a Company Resolution, shall promptly appoint a successor
Trustee. If, within one year after such resignation, removal or incapability,
or the occurrence of such vacancy, a successor Trustee shall be appointed
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by Act of the Noteholders of a majority in principal amount of the
Outstanding Notes delivered to the Company and the retiring Trustee, the
successor Trustee so appointed, forthwith upon its acceptance of such
appointment, shall become the successor Trustee and supersede the successor
Trustee appointed by the Company. If no successor Trustee shall have been so
appointed by the Company or the Noteholders and accepted appointment in the
manner provided in Section 611, any Holder who has been a bona fide holder of
a Note for at least six months, on behalf of himself and all others similarly
situated, may petition any court of competent jurisdiction for the
appointment of a successor Trustee.
(6) The Company shall give notice of each resignation and each removal
of the Trustee and each appointment of a successor Trustee by mailing written
notice of such event by first-class mail, postage prepaid, to all Noteholders
as their names and addresses appear in the Note Register. Each notice shall
include the name of the successor Trustee and the address of its Corporate
Trust Office.
SECTION 611. ACCEPTANCE OF APPOINTMENT BY SUCCESSOR.
Every successor Trustee appointed hereunder shall execute, acknowledge
and deliver to the Company and to the retiring Trustee an instrument
accepting such appointment, and thereupon the resignation or removal of the
retiring Trustee shall become effective and such successor Trustee, without
any further act, deed or conveyance, shall become vested with all the rights,
powers, trusts and duties of the retiring Trustee; but, on request of the
Company or the successor Trustee, such retiring Trustee, upon payment of its
charges, shall execute and deliver an instrument transferring to such
successor Trustee all the rights, powers and trusts of the retiring Trustee
and shall duly assign, transfer and deliver to such successor Trustee all
property and money held by such retiring Trustee hereunder, subject
nevertheless to its lien, if any, provided for in Section 607. Upon request
of any such successor Trustee, the Company shall execute any and all
instruments for more fully and certainly vesting in and confirming to such
successor Trustee all such rights, powers and trusts.
No successor Trustee shall accept its appointment unless at the time of
such acceptance such Successor Trustee shall be qualified and eligible under
this Article.
Upon the appointment of any Successor Trustee hereunder, all fees,
charges and expenses of the retiring Trustee shall become immediately due and
payable.
SECTION 612. MERGER, CONVERSION, CONSOLIDATION OR SUCCESSION TO BUSINESS.
Any corporation into which the Trustee may be merged or converted or
with which it may be consolidated, or any corporation resulting from any
merger, conversion or consolidation to which the Trustee shall be a party, or
any corporation succeeding to all or substantially all the corporate trust
business of the Trustee, shall be the successor of the Trustee hereunder,
provided that such corporation shall be otherwise qualified and eligible
under this Article, without the execution or filing of any paper or any
further act on the part of any of the parties hereto. In case
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any Notes shall have been authenticated but not delivered by the Trustee then
in office, any successor by merger, conversion or consolidation to such
authenticating Trustee may adopt such authentication and deliver the Notes so
authenticated with the same effect as if such successor Trustee had itself
authenticated such Notes. In case any of the Notes shall not have been
authenticated by the Trustee then in office, any successor by merger,
conversion or consolidation to such Trustee may authenticate such notes
either in the name of such predecessor hereunder or in the name of the
successor Trustee; and in all such cases such certificates shall have the
full force which it is anywhere in the Notes or in this Indenture provided
that the certificate of the Trustee shall have; provided, however, the right
to adopt the certificate of authentication of any predecessor Trustee or to
authenticate Notes in the name of any predecessor Trustee shall apply only to
its successor or successors by merger, conversion or consolidation.
SECTION 613. PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY.
(1) Subject to Subsection (2) of this Section, if the Trustee shall be
or shall become a creditor, directly or indirectly, secured or unsecured, of
the Company within three months prior to a default, as defined in Subsection
(3) of this Section, or subsequent to such a default, then, unless and until
such default shall be cured, the Trustee shall set apart and hold in a
special account for the benefit of the Trustee individually, the Holders of
the Notes and the holders of other indenture securities, as defined in
Subsection (3) of this Section:
(a) an amount equal to any and all reductions in the amount due
and owing upon any claim as such creditor in respect of principal or
interest, effected after the beginning of such three-month period and
valid as against the Company and its other creditors, except any such
reduction resulting from the receipt or disposition of any property
described in paragraph (2) of this Subsection, or from the exercise of
any right of set off which the Trustee could have exercised if a
petition in bankruptcy had been filed by or against the Company upon the
date of such default; and
(b) all property received by the Trustee in respect of any claims
as such creditor, either as security therefor, or in satisfaction or
composition thereof or otherwise, after the beginning of such
three-month period, or an amount equal to the proceeds of any such
property if disposed of, subject, however, to the rights, if any, of the
Company and its other creditors in such property or such proceeds.
Nothing herein contained, however, shall affect the right of the Trustee:
(i) to retain for its own account (A) payments made on
account of any such claim by any Person (other than the Company)
who is liable thereon, (B) the proceeds of the bona fide sale of
any such claim by the Trustee to a third Person, and (C)
distributions made in cash, securities or other property in respect
of claims filed against the Company in bankruptcy or receivership
or in proceedings for reorganization pursuant to the Federal
Bankruptcy Act or applicable State law;
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(ii) to realize for its own account upon any property held by
it as security for any such claim, if such property was so held
prior to the beginning of such three-month period;
(iii) to realize for its own account but only to the extent of
the claim hereinafter mentioned, upon any property held by it as
security for any such claim, if such claim was created after the
beginning of such three-month period and such property was received
as security therefor simultaneously with the creation thereof, and
if the Trustee shall sustain the burden of proving that at the time
such property was so received the Trustee had no reasonable cause
to believe that a default, as defined in Subsection (3) of this
Section, would occur within three months; or
(iv) to receive payment on any claim referred to in paragraph
(ii) or (iii), against the release of any property held as security
for such claim as provided in paragraph (ii) or (iii), as the case
may be, to the extent of the fair value of such property.
For the purposes of paragraphs (ii), (iii) and (iv), property
substituted after the beginning of such three-month period for property held
as security at the time of such substitution, to the extent of the fair value
of the property released, shall have the same status as the property released
and, to the extent that any claim referred to in any of such paragraphs is
created in renewal of or in substitution for or for the purpose of repaying
or refunding any preexisting claim of the Trustee as such creditor, such
claim shall have the same status as such pre-existing claim.
If the Trustee shall be required to account, the funds and property held
in such special account and the proceeds thereof shall be apportioned among
the Trustee, the Noteholders and the holders of other indenture securities in
such manner that the Trustee, the Noteholders and the holders of other
indenture securities realize, as a result of payments from such special
account and payments of dividends on claims filed against the Company in
bankruptcy or receivership or in proceedings for reorganization pursuant to
the Federal Bankruptcy Act or applicable State law, the same percentage of
their respective claims, figured before crediting to the claim of the Trustee
anything on account of the receipt by it from the Company of the funds and
property in such special account and before crediting to the respective
claims of the Trustee and the Noteholders and the holders of other indenture
securities dividends on claims filed against the Company in bankruptcy or
receivership or in proceedings for reorganization pursuant to the Federal
Bankruptcy Act or applicable State law, but after crediting thereon receipts
on account of the indebtedness represented by their respective claims from
all sources other than from such dividends and from the funds and property so
held in such special account. As used in this paragraph, with respect to any
claim, the term "dividends" shall include any distribution with respect to
such claim, in bankruptcy or receivership or proceedings for reorganization
pursuant to the Federal Bankruptcy Act or applicable State law, whether such
distribution is made in cash, securities or other property, but shall not
include any such distribution with respect to the secured portion, if any, of
such claim. The court in which such bankruptcy, receivership or proceedings
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for reorganization is pending shall have jurisdiction (i) to apportion among
the Trustee, the Noteholders and the holders of other indenture securities,
in accordance with the provisions of this paragraph, the funds and property
held in such special account and proceeds thereof, or (ii) in lieu of such
apportionment, in whole or in part, to give to the provisions of this
paragraph due consideration in determining the fairness of the distributions
to be made to the Trustee and the Noteholders and the holders of other
indenture securities with respect to their respective claims, in which event
it shall not be necessary to liquidate or to appraise the value of any
securities or other property held in such special account or as security for
any such claim, or to make a specific allocation of such distributions as
between the secured and unsecured portions of such claims, or otherwise to
apply the provisions of this paragraph as a mathematical formula.
Any Trustee which has resigned or been removed after the beginning of
such three-month period shall be subject to the provisions of this Subsection
as though such resignation or removal had not occurred. If any Trustee has
resigned or been removed prior to the beginning of such three-month period,
it shall be subject to the provisions of this Subsection if and only if the
following conditions exist: (i) the receipt of property or reduction of
claim, which would have given rise to the obligation to account, if such
Trustee had continued as Trustee, occurred after the beginning of such
three-month period; and (ii) such receipt of property or reduction of claim
occurred within three months after such resignation or removal.
(2) There shall be excluded from the operation of subsection (a) of
this Section a creditor relationship arising from:
(a) the ownership or acquisition of securities issued under any
indenture, or any security or securities having a maturity of one year
or more at the time of acquisition by the Trustee;
(b) advances authorized by a receivership or bankruptcy court of
competent jurisdiction or by this Indenture for the purpose of
preserving any property which shall at any time be subject to the lien
of this Indenture or of discharging tax liens or other prior liens or
encumbrances thereon, if notice of such advances and of the
circumstances surrounding the making thereof is given to the Noteholders
at the time and in the manner provided in this Indenture;
(c) disbursements made in the ordinary course of business in the
capacity of trustee under an indenture, transfer agent, registrar,
custodian, paying agent, fiscal agent or depositary, or other similar
capacity;
(d) an indebtedness created as a result of services rendered or
premises rented; or an indebtedness created as a result of goods or
securities sold in a cash transaction, as defined in Subsection (3) of
this Section;
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(e) the ownership of stock or other securities of a corporation
organized under the provisions of Section 25(a) of the Federal Reserve
Act, as amended, which is directly or indirectly a creditor of the
Company; and
(f) the acquisition, ownership, acceptance or negotiation of any
drafts, bills of exchange, acceptances or obligations which fall within
the classification of self-liquidating paper, as defined in Subsection
(3) of this Section.
(3) For the purposes of this Section only:
(a) the term "default" means any failure to make payment in full
of the principal of or interest on any of the Notes or upon the other
indenture securities when and as such principal or interest become due
and payable;
(b) the term "other indenture securities" means securities upon
which the Company is an obligor outstanding under any other indenture
(i) under which the Trustee is also trustee, (ii) which contains
provisions substantially similar to the provisions of this Section, and
(iii) under which a default exists at the time of the apportionment of
the funds and property held in such special account;
(c) the term "cash transaction" means any transaction in which
full payment for goods or securities sold is made within seven days
after delivery of the goods or securities in currency or in checks or
other orders drawn upon banks or bankers and payable upon demand;
(d) the term "self-liquidating paper" means any draft, bill of
exchange, acceptance or obligation which is made, drawn, negotiated or
incurred by the Company for the purpose of financing the purchase,
processing, manufacturing, shipment, storage or sale of goods, wares or
merchandise and which is secured by documents evidencing title to,
possession of, or a lien upon, the goods, wares or merchandise or the
receivables or proceeds arising from the sale of the goods, wares or
merchandise previously constituting the security, provided the security
is received by the Trustee simultaneously with the creation of the
creditor relationship with the Company arising from the making, drawing,
negotiating or incurring of the draft, bill of exchange, acceptance or
obligation;
(e) the term "Company" means any obligor upon the Notes; and
(f) the term "Federal Bankruptcy Act" means the Bankruptcy Act or
Title 11 of the United States Code.
SECTION 614. APPOINTMENT OF AUTHENTICATING AGENT.
At any time when any of the Notes remain Outstanding, the Trustee may
appoint an Authenticating Agent or Agents which shall be authorized to act on
behalf of the Trustee to
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authenticate Notes issued upon original issuance, exchange, registration of
transfer or partial redemption thereof or pursuant to Section 306, and Notes
so authenticated shall be entitled to the benefits of this Indenture and
shall be valid and obligatory for all purposes as if authenticated by the
Trustee hereunder. Wherever reference is made in this Indenture to the
authentication and delivery of Notes by the Trustee or the Trustee's
certificate of authentication, such reference shall be deemed to include
authentication and delivery on behalf of the Trustee by an Authenticating
Agent and a certificate of authentication executed on behalf of the Trustee
by an Authenticating Agent. Each Authenticating Agent shall be acceptable to
the Company and shall at all times be a corporation organized and doing
business under the laws of the United States of America, any State thereof or
the District of Columbia, authorized under such laws to act as Authenticating
Agent, having a combined capital and surplus of not less than $10,000,000 and
subject to supervision or examination by Federal or State authority. If such
Authenticating Agent publishes reports of condition at least annually,
pursuant to law or to the requirements of such supervising or examining
authority, for the purposes of this Section, the combined capital and surplus
of such Authenticating Agent shall be deemed to be its combined capital and
surplus as set forth in its most recent report of condition so published. If
at any time an Authenticating Agent shall cease to be eligible in accordance
with the provisions of this Section, such Authenticating Agent shall resign
immediately in the manner and with the effect specified in this Section.
Any corporation into which an Authenticating Agent may be merged or
converted or with which it may be consolidated, or any corporation resulting
from any merger, conversion or consolidation to which such Authenticating
Agent shall be a party, or any corporation succeeding to the corporate agency
or corporate trust business of an Authenticating Agent, shall continue to be
an Authenticating Agent, provided such corporation shall be otherwise
eligible under this Section, without the execution or filing of any paper or
any further act on the part of the Trustee or the Authenticating Agent.
An Authenticating Agent may resign at any time by giving written notice
thereof to the Trustee and to the Company. The Trustee may at any time
terminate the agency of an Authenticating Agent by giving written notice
thereof to such Authenticating Agent and to the Company. Upon receiving such
a notice of resignation or upon such a termination, or in case at any time
such Authenticating Agent shall cease to be eligible in accordance with the
provisions of this Section, the Trustee may appoint a successor
Authenticating Agent which shall be acceptable to the Company and shall mail
written notice of such appointment by first-class mail, postage prepaid, to
all Noteholders as their names and addresses appear in the Note Register. Any
successor Authenticating Agent upon acceptance of its appointment hereunder
shall become vested with all the rights, powers and duties of its predecessor
hereunder, with like effect as if originally named as an Authenticating Agent
herein. No successor Authenticating Agent shall be appointed unless eligible
under the provisions of this Section.
The Trustee agrees to pay to each Authenticating Agent from time to time
reasonable compensation for its services under this Section, and the Trustee
shall be entitled to be reimbursed for such payments, subject to the
provisions of Section 607.
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If an appointment is made pursuant to this Section, the Notes may have
endorsed thereon, in lieu of the form of certificate of authentication set
forth in Section 204, a certificate of authentication in the following form:
"This is one of the Notes described in the within mentioned
Indenture."
_____________________________________
As Trustee
By __________________________________
As Authenticating Agent
By __________________________________
Authorized Signature
END OF ARTICLE SIX.
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ARTICLE SEVEN
NOTEHOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY
SECTION 701. COMPANY TO FURNISH TRUSTEE NAMES AND ADDRESSES OF NOTEHOLDERS.
The Company will furnish or cause to be furnished to the Trustee:
(1) quarterly, not later than fifteen day of the month preceding the
month in which an Interest Payment Date occurs, a list, in such form as the
Trustee may reasonably require, of the names and addresses of the Noteholders
as of such Regular Record Date, and
(2) at such other times as the Trustee may request in writing, within
30 days after the receipt by the Company of any such request, a list of
similar form and content as of a date not more than fifteen (15) days prior
to the time such list is furnished;
provided, however, that such list need not be furnished so long as the
Trustee is the Note Registrar.
(3) The Trustee shall furnish, and the Company shall cause the Trustee
to furnish, to Miller & Schroeder Financial, Inc. or its successor ("Miller &
Schroeder") at such times as Miller & Schroeder may reasonably request in
writing, within 30 days of the receipt by the Trustee of such request, a list
of the names and addresses of the Noteholders as of a date not more than 15
days prior to the time such list is furnished; provided however, the
Company's obligations under this Section 701(3) shall cease in the event the
Company consolidates or merges into any other Person pursuant to Article 8 or
there is a change of control of Miller & Schroeder Financial, Inc.
SECTION 702. PRESERVATION OF INFORMATION; COMMUNICATIONS TO NOTEHOLDERS.
(1) The Trustee shall preserve, in as current a form as is reasonably
practicable, the names and addresses of Noteholders contained in the most
recent list furnished to the Trustee as provided in Section 701 and the names
and addresses of Noteholders received by the Trustee in its capacity as Note
Registrar. The Trustee may destroy any list furnished to it as provided in
Section 701 upon receipt of a new list so furnished.
(2) If three or more Noteholders (herein referred to as "applicants")
apply in writing to the Trustee, and furnish to the Trustee reasonable proof
that each such applicant has owned a Note for a period of at least six months
preceding the date of such application, and such application states that the
applicants desire to communicate with other Noteholders with respect to their
rights under this Indenture or under the Notes and is accompanied by a copy
of the form of proxy or other communication which such applicants propose to
transmit, then the Trustee shall, within five business days after the receipt
of such application, at its election, either
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(a) afford such applicants access to the information preserved at
the time by the Trustee in accordance with Section 702(1), or
(b) inform such applicants as to the approximate number of
Noteholders whose names and addresses appear in the information
preserved at the time by the Trustee in accordance with Section 702(1)
and as to the approximate cost of mailing to such Noteholders the form
of proxy or other communication, if any, specified in such application.
If the Trustee shall elect not to afford such applicants access to such
information, the Trustee shall, upon the written request of such applicants,
mail to each Holder whose name and address appears in the information
preserved at the time by the Trustee in accordance with Section 702(1) a copy
of the form of proxy or other communication which is specified in such
request, with reasonable promptness after a tender to the Trustee of the
material to be mailed and of payment, or provision for the payment, of the
reasonable expenses of mailing, unless within five days after such tender the
Trustee shall mail to such applicants and file with the Commission, together
with a copy of the material to be mailed, a written statement to the effect
that, in the opinion of the Trustee, such mailing would be contrary to the
best interest of the Noteholders or would be in violation of applicable law.
Such written statement shall specify the basis of such opinion. If the
Commission, after opportunity for a hearing upon the objections specified in
the written statement so filed and, on notice to the Trustee, shall enter an
order refusing to sustain any of such objections or if, after the entry of an
order sustaining one or more of such objections, the Commission shall find,
after notice and opportunity for hearing, that all the objections so
sustained have been met and shall enter an order so declaring, the Trustee
shall mail copies of such material to all such Noteholders with reasonable
promptness after the entry of such order and the renewal by such applicants
of their applications.
(3) Every Holder of Notes, by receiving and holding the same, agrees
with the Company and the Trustee that neither the Company nor the Trustee nor
any agent of either of them shall be held accountable by reason of the
disclosure of any such information as to the names and addresses of the
Noteholders in accordance with Section 702(2), regardless of the source from
which such information was derived, and that the Trustee shall not be held
accountable by reason of mailing any material pursuant to a request made
under Section 702(2).
SECTION 703. REPORTS BY THE COMPANY.
The Company shall:
(1) File with the Trustee, within 15 days after the Company is required
to file the same with the Commission or to mail the same to its shareholders,
copies of the quarterly reports, annual reports and the information,
documents and other reports (or copies of such portions of the foregoing as
the Commission may from time to time by rules and regulations prescribe)
which the Company may be required to file with the Commission pursuant to
Section 12 or 13 or Section 15(d) of the Exchange Act, or to mail to its
shareholders pursuant to Section 14(a)
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thereof. The Company agrees to make all filings with the Commission required
by Section 15(d) of the 1934 Act without regard to the number of holders of
record of the Notes.
(2) File with the Trustee and the Commission, in accordance with rules
and regulations prescribed from time to time by the Commission, such
additional information, documents and reports with respect to compliance by
the Company with the conditions and covenants of this Indenture as may be
required from time to time by such rules and regulations.
(3) Transmit by mail to all Holders, as their names and addresses
appear in the Note Register, within 30 days after the filing thereof with the
Trustee, such summaries of any information, documents and reports required to
be filed by the Company pursuant to paragraphs (1) and (2) of this Section as
may be required by rules and regulations prescribed from time to time by the
Commission.
(4) Transmit by mail to all Noteholders, as their names and addresses
appear in the Note Register, within 30 days after the filing thereof with the
Trustee (unless some other time shall be fixed by the Commission) (a) any
annual report filed with the Trustee pursuant to paragraph (1) of this
Section.
(5) File with the Trustee within 45 days after the end of each of the
Company's fiscal quarters a certificate of the Chief Executive Officer and
the Controller of the Company stating that the Company is in compliance with
Article Ten, and attaching the unaudited financial statements of the Company.
(6) File with the Trustee, within 120 days after the end of each fiscal
year of the Company ending after the date hereof, an Officer's Certificate of
the Company as to such person's knowledge of the Company's compliance with
all conditions and covenants under this Indenture, such compliance to be
determined without regard to any period of grace or requirement of notice
provided under this Indenture.
SECTION 704. REPORTS BY TRUSTEE.
(1) Within sixty (60) days of May 15 each year commencing with the year
1999, the Trustee shall transmit by mail to all Noteholders, as hereafter
provided for, a brief report with respect to the following, provided that no
report need be transmitted if no event requiring to be disclosed in the
report has occurred:
(a) any change to its eligibility under Section 609 and its
qualifications under Section 608, or in lieu thereof, if to the best of
its knowledge it has continued to be eligible and qualified under such
Section, a written statement to such effect;
(b) the creation of or any material change to a relationship
specified in paragraphs (e) through (f) of subsection (3) of Section 608;
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(c) the character and amount of any advances (and if the Trustee
elects so to state, the circumstances surrounding the making thereof)
made by the Trustee (as such) which remain unpaid on the date of such
report, and for the reimbursement of which it claims or may claim a lien
or charge, prior to that of the Notes, on the trust estate or any
property or funds held or collected by it as Trustee, except that the
Trustee shall not be required (but may elect) to report such advances if
the unpaid aggregate of such advances does not exceed 1/2 of 1% of the
principal amount of the Notes Outstanding on the date of such report;
(d) the amount, interest rate and maturity date of all other
indebtedness owing by the Company (or by any other obligor on the Notes)
to the Trustee in its corporate capacity, on the date of such report,
with a brief description of any property held as collateral security
therefor, except an indebtedness based upon a creditor relationship
arising in any manner described in Section 612(2) (b), (c), (d) or (f);
(e) any change to the property and funds, if any, physically in
the possession of the Trustee as such on the date of such report;
(f) any additional issue of Notes which the Trustee has not
previously reported; and
(g) any action taken by the Trustee in the performance of its
duties hereunder which it has not previously reported and which in its
opinion materially affects the Notes, except action in respect of a
default, notice of which has been or is to be withheld by the Trustee in
accordance with Section 602.
(2) The Trustee shall transmit by mail to all Noteholders, as
their names and addresses appear in the Note Register, a brief report
with respect to the character and amount of any advances (and if the
Trustee elects so to state, the circumstances surrounding the making
thereof) made by the Trustee (as such) since the date of the last report
transmitted pursuant to Subsection (1) of this Section (or if no such
report has yet been so transmitted, since the date of execution of this
instrument) for the reimbursement of which it claims or may claim a lien
or charge, prior to that of the Notes, on property or funds held or
collected by it as Trustee and which it has not previously reported
pursuant to this subsection, except that the Trustee shall not be
required (but may elect) to report such advances if such advances
remaining unpaid at any time aggregate 10% or less of the principal
amount of the Notes Outstanding at such time, such report to be
transmitted within 90 days after such time.
(3) Reports pursuant to this Section 704 shall be transmitted by
mail to all Noteholders, as the names and addresses of such Noteholders
appear upon the Note Register.
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(4) A copy of each such report, at the time of such transmission
to Noteholders, shall be filed by the Trustee with each stock exchange
or market upon which the Notes are listed, with the Commission, if
required, and with the Company. The Company will notify the Trustee
when the Notes are listed on any stock exchange.
END OF ARTICLE SEVEN.
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ARTICLE EIGHT
CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE
SECTION 801. COMPANY MAY CONSOLIDATE, ETC., ONLY ON CERTAIN TERMS.
The Company shall not consolidate with or merge into any other Person or
convey, transfer or lease its properties and assets substantially as an
entirety to any Person, and the Company shall not permit any Person to
consolidate with or merge into the Company or any Subsidiary or convey,
transfer or lease its properties and assets substantially as an entirety to the
Company or any Subsidiary, unless:
(1) in case the Company shall consolidate with or merge into another
corporation, trust or entity, the Person formed by such consolidation or into
which the Company is merged shall be a trust, corporation or other entity
organized and existing under the laws of the United States of America, any
State thereof or the District of Columbia and shall expressly assume, by an
indenture supplemental hereto, executed and delivered to the Trustee, in form
satisfactory to the Trustee and counsel to the Trustee, the due and punctual
payment of the principal of (and premium, if any) and interest on all the Notes
and the performance of every covenant of this Indenture on the part of the
Company to be performed or observed;
(2) immediately after giving effect to such transaction, and treating any
indebtedness which becomes an obligation of the Company or a Subsidiary as a
result of such transaction as having been incurred by the Company or such
Subsidiary at the time of such transaction, no Event of Default, and no event
which, with the passage of time or the giving of notice, would become an Event
of Default, shall have occurred and be continuing;
(3) the Company, or the surviving entity, as the case may be, immediately
before and immediately after giving effect to such transaction or series of
transactions (including, without limitation, any Indebtedness incurred or
anticipated to be incurred in connection with or in respect of such transaction
or series of transactions) shall have a Consolidated Tangible Net Worth equal
to or greater than the amount required by Section 1011 hereof;
(4) the Company has delivered to the Trustee an Officers' Certificate and
an Opinion of Counsel, each stating that such consolidation, merger,
conveyance, transfer or lease and, if a supplemental indenture is required in
connection with such transaction, such supplemental indenture comply with this
Article and that all conditions precedent herein provided for relating to such
transaction have been complied with.
SECTION 802. SUCCESSOR SUBSTITUTED.
Upon any consolidation or merger of the Company with or into any other
corporation, trust or other entity in accordance with Section 801, the
successor Person formed by such consolidation or into which the Company is
merged shall succeed to, and be substituted for, and
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may exercise every right and power of, the Company under this Indenture with
the same effect as if such successor Person had been named as the Company
herein, and thereafter the predecessor Person shall be relieved of all
obligations and covenants under this Indenture and the Notes.
END OF ARTICLE EIGHT.
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ARTICLE NINE
SUPPLEMENTAL INDENTURES
SECTION 901. SUPPLEMENTAL INDENTURES WITHOUT CONSENT OF NOTEHOLDERS.
Without the consent of any Noteholders, the Company, when authorized by a
Company Resolution, and the Trustee, at any time and from time to time may
enter into one or more indentures supplemental hereto, in form satisfactory to
the Trustee for any of the following purposes:
(1) to evidence the succession of another trust, corporation or other
entity to the Company and the assumption by any such successor of the covenants
of the Company herein and in the Notes; or
(2) to add to the covenants of the Company for the benefit of the
Noteholders, or to surrender any right or power herein conferred upon the
Company; or
(3) to evidence and provide for acceptance of appointment of a successor
trustee; or
(4) to convey, transfer, assign, mortgage or pledge any property to or
with the Trustee; or
(5) to cure any ambiguity, to correct or supplement any provision herein
which may be inconsistent with any other provision herein, to correct any
nonmaterial provisions, such as typographical errors, or to make any other
provisions with respect to matters or questions arising under this Indenture or
Trust Indenture Act which shall not be inconsistent with the provisions of this
Indenture, provided that such action pursuant to this paragraph (5) shall not
adversely affect the interests of the Noteholders.
SECTION 902. SUPPLEMENTAL INDENTURES WITH CONSENT OF NOTEHOLDERS.
With the consent of the Holders of not less than a majority of the
aggregate principal amount of the Outstanding Notes, by Act of such
Noteholders delivered to the Company and the Trustee, the Company, when
authorized by a Company Resolution, and the Trustee may enter into an
indenture or indentures supplemental hereto for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions
of this Indenture or of modifying in any manner the rights of the Noteholders
under this Indenture, provided that without the consent of the Holder of each
Outstanding Note affected thereby, no such supplemental indenture shall,
(1) change the Stated Maturity of the principal of, or any installment of
interest on, any Note, or any premium payable on the redemption thereof, or
reduce the principal amount thereof or the rate of interest thereon, or change
the place of payment where, or the coin or currency in which, any Note or the
interest thereon is payable, or impair the right to institute suit
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for the enforcement of any such payment on or after the Stated Maturity
thereof (or, in the case of redemption, on or after the Redemption Date), or
(2) reduce the percentages in principal amount of the Outstanding Notes,
the consent of whose Noteholders is required for any such supplemental
indenture, or the consent of whose Noteholders is required for any waiver (of
compliance with certain provisions of this Indenture or certain defaults
hereunder and their consequences) provided for in this Indenture, or
(3) modify any of the provisions of this Section, Section 513, or Section
1012, except to increase any such percentage or to provide that certain other
provisions of this Indenture cannot be modified or waived without the consent
of the Holder of each Outstanding Note affected thereby, or
(4) modify any of the provisions of this Indenture relating to the
subordination of the Notes in a manner adverse to the Noteholders.
It shall not be necessary for any Act of Noteholders under this Section to
approve the particular form of any proposed supplemental indenture, but it
shall be sufficient if such Act shall approve the substance thereof.
SECTION 903. EXECUTION OF SUPPLEMENTAL INDENTURES.
In executing, or accepting the additional trusts created by, any
supplemental indenture permitted by this Article or the modifications thereby
of the trusts created by this Indenture, the Trustee shall be entitled to
receive, and (subject to Section 601) shall be fully protected in relying upon,
an Opinion of Counsel stating that the execution of such supplemental indenture
is authorized or permitted by this Indenture. The Trustee may, but shall not
(except to the extent required in the case of a supplemental indenture entered
into under Section 901(4)) be obligated to, enter into any such supplemental
indenture which affects the Trustee's own rights, duties or immunities under
this Indenture or otherwise.
SECTION 904. EFFECT OF SUPPLEMENTAL INDENTURES.
Upon the execution of any supplemental indenture under this Article, this
Indenture shall be modified in accordance therewith, such supplemental
indenture shall form a part of this Indenture for all purposes and every Holder
of Notes theretofore or thereafter authenticated and delivered hereunder shall
be bound thereby.
SECTION 905. REFERENCE IN NOTES TO SUPPLEMENTAL INDENTURES.
Notes authenticated and delivered after the execution of any supplemental
indenture pursuant to this Article may, and shall if required by the Trustee,
bear a notation in form approved by the Trustee as to any matter provided for
in such supplemental indenture. If the Company shall so determine, new Notes
so modified as to conform, in the opinion of the Trustee and the Board
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of Directors of the Company, to any such supplemental indenture may be
prepared and executed by the Company and authenticated and delivered by the
Trustee in exchange for Outstanding Notes.
SECTION 906. EFFECT ON SENIOR DEBT.
No supplemental indenture shall adversely affect the rights of any holder
of Senior Debt under Article Twelve without the consent of such holder.
SECTION 907. CONFORMITY WITH TRUST INDENTURE ACT.
Every supplemental indenture executed pursuant to this Article Nine shall
conform to the requirements of the Trust Indenture Act.
END OF ARTICLE NINE.
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ARTICLE TEN
COVENANTS
SECTION 1001. PAYMENT OF PRINCIPAL AND INTEREST.
The Company will duly and punctually pay the principal of, premium, if
any, and interest on the Notes in accordance with the terms of the Notes and
this Indenture.
SECTION 1002. MAINTENANCE OF OFFICE OR AGENCY.
The Company will maintain in Minneapolis or in St. Paul, Minnesota, an
office or agency where Notes may be presented or surrendered for payment, where
Notes may be surrendered for registration of transfer or exchange, and where
notices and demands to or upon the Company in respect of the Notes and this
Indenture may be served. The Company will give prompt written notice to the
Trustee of the location and any change in the location, of such office or
agency. Until otherwise designated by the Company in a written notice to the
Trustee, and if at any time the Company shall fail to maintain any such
required office or agency or shall fail to furnish the Trustee with the address
thereof, such presentations, surrenders, notices and demands may be made or
served at the Corporate Trust Office of the Trustee, and the Company hereby
appoints the Trustee its agent to receive such presentations, surrenders,
notices and demands.
The Company may also from time to time designate one or more other offices
or agencies where the Notes may be presented or surrendered for any or all such
purposes and may from time to time rescind such designations, provided that no
such designation or rescission shall in any manner relieve the Company of its
obligation to maintain an office or agency in Minneapolis or St. Paul,
Minnesota, for such purposes. The Company will give prompt written notice to
the Trustee of any such designation or rescission and of any change in the
location of any such other office or agency.
The Company hereby initially designates the Corporate Trust Office of the
Trustee set forth in the first paragraph of this instrument as an agency of the
Company.
SECTION 1003. MONEY FOR NOTE PAYMENTS TO BE HELD IN TRUST.
If the Company shall at any time act as its own Paying Agent, it will, on
or before each due date of the principal of (and premium, if any) or interest
on any of the Notes, segregate and hold in trust for the benefit of the persons
entitled thereto a sum sufficient to pay the principal (and premium, if any) or
interest so becoming due until such sums shall be paid to such Persons or
otherwise disposed of as herein provided and will promptly notify the Trustee
of its action.
Whenever the Company shall have one or more Paying Agents, on or prior to
each due date of the principal of (and premium, if any) or interest on any
Notes, it will deposit with a Paying Agent a sum sufficient to pay the
principal (and premium, if any) or interest so becoming
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due, such sum to be held in trust for the benefit of the Persons entitled to
such principal (and premium, if any) or interest, and (unless such Paying
Agent is the Trustee) the Company will promptly notify the Trustee of its
action or failure so to act.
The Company will cause each Paying Agent other than the Trustee to execute
and deliver to the Trustee an instrument in which such Paying Agent shall agree
with the Trustee, subject to the provisions of this Section, that such Paying
Agent will:
(1) hold all sums held by it for the payment of the principal of (and
premium, if any) or interest on Notes in trust for the benefit of the Persons
entitled thereto until such sums shall be paid to such Persons or otherwise
disposed of as herein provided;
(2) give the Trustee notice of any default by the Company (or any other
obligor upon the Notes) in the making of any payment of principal (and premium,
if any) or interest on the Notes; and
(3) at any time during the continuance of any such default, upon the
written request of the Trustee, forthwith pay to the Trustee all sums so held
in trust by such Paying Agent.
The Company may at any time, for the purpose of obtaining the satisfaction
and discharge of this Indenture or for any other purpose, pay, or by Company
Order direct any Paying Agent to pay, to the Trustee all sums held in trust by
the Company or such Paying Agent, such sums to be held by the Trustee upon the
same trusts as those upon which such sums were held by the Company or such
Paying Agent. Upon such payment by any Paying Agent to the Trustee, such
Paying Agent shall be released from all further liability with respect to such
money.
Unless otherwise required by applicable law, any money deposited with the
Trustee or any Paying Agent, or then held by the Company, in trust for the
payment of the principal of (and premium, if any) or interest on any Note and
remaining unclaimed for two years after such principal (and premium, if any) or
interest has become due and payable shall be paid to the Company on Company
Request, or (if then held by the Company) shall be discharged from such trust.
The Holder of such Note shall thereafter, as an unsecured general creditor,
look only to the Company for payment thereof, and all liability of the Trustee
or such Paying Agent with respect to such trust money, and all liability of the
Company as trustee thereof, shall thereupon cease, provided that the Trustee or
such Paying Agent, before being required to make any such repayment, at the
expense of the Company, may cause to be published once, in a newspaper
published in the English language, customarily published on each Business Day
and of general circulation in Minneapolis or Saint Paul, Minnesota, notice that
such money remains unclaimed and that, after a date specified therein, which
shall not be less than thirty (30) days from the date of such publication, any
unclaimed balance of such money then remaining will be repaid to the Company.
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SECTION 1004. MAINTENANCE OF CORPORATE EXISTENCE, LICENSING AND RIGHTS.
Subject to Article Eight hereof, the Company will do or cause to be done
all things necessary to preserve and keep in full force and effect the
corporate existence of the Company and each Subsidiary, and all material
rights, certificates, authorities, licenses, permits and approvals of any of
them, and shall conduct its business in conformity with the requirements of
such rights, certificates, authorities, licenses, permits and approvals,
provided that the Company shall not be required to preserve any such right,
certificate, authority, license or permit or maintain the corporate existence
of any subsidiary that is not a Material Subsidiary if the Board of Directors
of the Company shall reasonably determine that the preservation thereof is no
longer desirable in the conduct of the business of the Company or of its
Subsidiaries and that the loss thereof is not disadvantageous in any material
respect to the Noteholders.
SECTION 1005. PAYMENT OF TAXES AND ASSESSMENTS.
The Company will cause to be paid and discharged all lawful taxes,
assessments and governmental charges or levies imposed upon the Company or any
Subsidiary or upon the income or profits of the Company or any Subsidiary or
upon property or any part thereof belonging to the Company or any Subsidiary
before the same shall be in default, as well as all lawful claims for labor,
materials and supplies which, if unpaid, might become a lien or charge upon
such property or any part thereof, provided that the Company shall not be
required to cause to be paid or discharged any such tax, assessment, charge,
levy or claim so long as the validity or amount thereof shall be contested in
good faith by appropriate proceedings.
SECTION 1006. MAINTENANCE OF PROPERTIES, INSURANCE; BOOKS AND RECORDS;
COMPLIANCE WITH LAW.
(1) The Company shall and the Company shall cause its Subsidiaries to
maintain insurance in such amounts and covering such risks as are usually and
customarily carried with respect to similar facilities according to their
respective locations if the failure to maintain such insurance would have a
material adverse effect on the Company and its Subsidiaries taken as a whole.
(2) The Company shall and the Company shall cause its Subsidiaries to
cause all its properties (including leased properties) used or useful in the
conduct of its business to be maintained and kept in good condition, repair and
working order and supplied with all necessary equipment and will cause to be
made all necessary repairs, renewals, replacements, betterments and
improvements thereof, all as in the judgment of the Company may be necessary so
that the business carried on in connection therewith may be properly and
advantageously conducted at all times; provided, however, that nothing in this
subsection (2) shall prevent the Company or any Subsidiary from discontinuing
the operation and maintenance of any of its properties if such discontinuance
is, in judgment of the Board of Directors of the Company, desirable in the
conduct of its business and not disadvantageous in any material respect to the
Noteholders.
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(3) The Company shall and the Company shall cause its Subsidiaries to use
its best efforts to keep proper books of record and account, in which full and
correct entries shall be made of all financial transactions and the assets and
business of the Company and each Subsidiary, in accordance with GAAP
consistently applied to the Company and its Subsidiary taken as a whole.
(4) The Company shall and the Company shall cause its Subsidiaries to
comply with all material statutes, laws, ordinances, or government rules and
regulations, including rules, regulations and orders of governmental agencies,
decrees, orders, injunctions, writs to which it is subject, noncompliance with
which would materially and adversely affect the business, prospects, earnings,
properties, assets or condition (financial or otherwise) of the Company and its
Subsidiary taken as a whole.
SECTION 1007. MAINTENANCE OF NASDAQ LISTING.
The Company shall, throughout the term of the Notes and this Indenture,
file all reports required by the Exchange Act in a timely manner and maintain
the listing of its shares of Common Stock on the Nasdaq National Market or
another national market or exchange.
SECTION 1008. LIMITATIONS ON RESTRICTED PAYMENTS.
The Company shall not make and shall not permit any Subsidiary to make,
directly or indirectly, any Restricted Payment:
(1) if at the time of such action an Event of Default shall have occurred
and be continuing or with the lapse of time will occur, after giving effect to
such Restricted Payment; or
(2) if, immediately after giving effect to such Restricted Payment, the
aggregate of all Restricted Payments declared or made from the date of this
Indenture, through and including the date of such Restricted Payment (the "Base
Period") exceeds the sum of 25% of the Consolidated Net Income (or in the event
Consolidated Net Income is a deficit, minus 100% of such deficit) during the
Base Period.
SECTION 1009. LIMITATION ON TRANSACTIONS WITH AFFILIATES.
The Company shall not, and shall not permit, cause or suffer any
Subsidiary of the Company to, conduct any business or enter into any
transaction or series of transactions with or for the benefit of any Affiliate
or any Subsidiary of the Company, or any holder of 5% or more of any class of
capital stock of the Company (each an "Affiliate Transaction"), except for
(a) an Affiliate Transaction that is approved by a committee of independent,
non-interested directors of the Company who conclude that the Affiliate
Transaction is in good faith and on terms that are, in the aggregate, no less
favorable to the Company or such Subsidiary, as the case may be, than those
that could have been obtained in a comparable transaction on an arm's-length
basis from a Person not an Affiliate of the Company or such Subsidiary, or
(b) transactions between the Company and any wholly owned Subsidiary or
transactions between any wholly owned
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Subsidiaries of the Company. Any loan, advance, or other evidence of
indebtedness from an Affiliate, other than wholly owned Subsidiaries of the
Company, to the Company or any Subsidiary shall be Subordinated Debt and be
expressly subordinated to the Notes in substantially the form and manner
provided by Article Twelve of this Indenture.
SECTION 1010. MAINTENANCE OF KEY MAN INSURANCE.
The Company shall obtain and deliver to the Trustee, for the benefit of
the Company, a certificate of life insurance policy from an insurer insuring
the life of Johan P. Finley in the amount of at least $2,000,000 (the "Key-man
Insurance"). The Company shall maintain the Key-man Insurance in full force
and effect throughout the term of the Notes and this Indenture.
SECTION 1011. NET WORTH.
The Company will at all times during the term of the Notes keep and
maintain Consolidated Tangible Net Worth at an amount not less than Six
Million ($6,000,000) plus 15% of positive Consolidated Net Income earned
after January 1, 1998.
SECTION 1012. WAIVER OF CERTAIN COVENANTS.
The Company may omit in any particular instance to comply with the
covenants set forth in Sections 1004 through 1011 and Section 1013, inclusive,
if before the time for such compliance the Noteholders of at least two-thirds
in aggregate principal amount of the Outstanding Notes shall, by Act of such
Noteholders, either waive such compliance in such instance or generally waive
compliance with such covenants, but no such waiver shall extend to or affect
such covenant except to the extent so expressly waived, and, until such waiver
shall become effective, the obligations of the Company and the duties of the
Trustee in respect of such covenant shall remain in full force and effect.
SECTION 1013. PROHIBITION ON RESTRICTED DIVIDENDS.
The Company shall not make and shall not permit any Subsidiary to make,
directly or indirectly, any Restricted Dividend.
END OF ARTICLE TEN.
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ARTICLE ELEVEN
MANDATORY AND OPTIONAL
REDEMPTION OF NOTES
SECTION 1101. MANDATORY REDEMPTION.
The Notes shall be subject to mandatory redemption beginning on the
Initial Amortization Date. On or before July 1, 2000 and on each July 1
thereafter through July 1, 2003, the Company will pay the Trustee cash
sufficient to redeem Notes on each Redemption Date of a principal amount
equal to 15% of the original principal amount of the Notes issued. On or
before July 1, 2004, the Company shall pay to the Trustee cash sufficient to
redeem all remaining outstanding Notes.
(a) The Company may, at its option, direct the Trustee to apply Notes,
previously redeemed pursuant to Section 1102 and not previously applied to
the Company's mandatory redemption obligation pursuant to Section 1101, to
the Company's mandatory redemption obligation hereto. The Trustee shall
include such Notes with the Notes selected by the Trustee pursuant to Section
1105, and the Notes presented to the Trustee for mandatory redemption
pursuant to subsection (b) below, if any.
(b) The Company may, at its option, purchase Notes in the open market
and deliver such Notes to the Trustee for mandatory redemption pursuant to
Section 1101. The Trustee shall include such Notes with the Notes selected by
the Trustee pursuant to Section 1105, and the Notes presented to the Trustee
for mandatory redemption pursuant to subsection (a) below, if any.
(c) The Trustee shall select the particular Notes to be redeemed on a
Redemption Date, other than Notes presented for mandatory redemption under
subsections (a) and (b) of Section 1101 above, as provided in Section 1105.
SECTION 1102. OPTIONAL REDEMPTION.
The Company may, at its option, at any time on or after July 1, 1998,
redeem the Notes either as a whole or from time to time in part in a minimum
aggregate principal amount of $100,000, at the following Redemption Prices
(expressed in percentages of the principal amount thereof), together with
interest accrued and unpaid thereon to the Redemption Date (which shall be an
Interest Payment Date), if redeemed during the twelve month period beginning
on July 1, in each of the following years:
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<TABLE>
<CAPTION>
1998 1999 2000 2001 2002 2003 and thereafter
---- ---- ---- ---- ---- -------------------
<S> <C> <C> <C> <C> <C> <C>
Redemption
Price: 106% 106% 106% 104% 102% 100%
</TABLE>
The particular Notes to be redeemed on a Redemption Date pursuant shall
be selected as provided in Section 1105.
SECTION 1103. APPLICABILITY OF ARTICLE.
Redemption of Notes at the election of the Company or otherwise, as
permitted or required by any provision of this Indenture, or any supplement
hereto shall be made in accordance with such provisions and this Article,
provided that no Redemption shall be made under this Article during any
period in which an Event of Default, or an event which, with notice or lapse
of time or both, would constitute an Event of Default, has occurred and is
continuing.
SECTION 1104. ELECTION TO REDEEM; NOTICE TO TRUSTEE.
The election of the Company to redeem any Notes pursuant to Section 1102
shall be evidenced by a Company Resolution. In case of any Redemption at the
election of the Company of less than all the Notes, at least 60 days prior to
the Redemption Date fixed by the Company (unless a shorter notice shall be
satisfactory to the Trustee), the Company shall notify the Trustee of such
Redemption Date and of the aggregate principal amount of Notes to be redeemed
and shall deliver to the Trustee such documentation and records as shall
enable the Trustee to select the Notes to be redeemed pursuant to Section
1105.
SECTION 1105. SELECTION BY TRUSTEE OF NOTES TO BE REDEEMED.
If less than all the Notes are to be redeemed, the particular Notes to
be redeemed shall be selected not more than 60 days prior the Redemption Date
by the Trustee, from the Outstanding Notes not previously called for
redemption, by lot or in any manner deemed by the Trustee to be proper,
subject the Company's option to direct the Trustee to apply Notes redeemed
pursuant to subsections (a) and (b) of Section 1101. The Trustee shall
promptly notify the Company in writing of the distinctive numbers of the
Notes which have been selected for redemption.
SECTION 1106. NOTICE OF REDEMPTION.
Notice of redemption shall be given by first-class mail, postage
prepaid, mailed not less than 30 nor more than 60 days prior to the
Redemption Date, to each Holder of Notes to be redeemed, at the address
appearing in the Note Register.
All notices of redemption shall state:
(1) the Redemption Date (which shall be an Interest Payment Date),
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(2) the Redemption Price,
(3) if less than all the Outstanding Notes are to be redeemed, the
identification of the particular Notes to be redeemed,
(4) that on the Redemption Date, the Redemption Price will become due
and payable upon each such Note to be redeemed and that interest thereon will
cease to accrue on and after said date, and
(5) the place or places where such Notes are to be surrendered for
payment of the Redemption Price.
Notice of redemption of Notes to be redeemed shall be given by the
Company or, upon Company Request, by the Trustee in the name and at the
expense of the Company.
SECTION 1107. DEPOSIT OF REDEMPTION PRICE.
On or prior to any Redemption Date, the Company shall deposit with the
Trustee or with a Paying Agent (or, if the Company is acting as its own
Paying Agent, the Company will segregate and hold in trust as provided in
Section 1003) in immediately available funds an amount of money sufficient to
pay the Redemption Price of all the Notes which are to be redeemed on that
date.
SECTION 1108. NOTES PAYABLE ON REDEMPTION DATE.
Notice of redemption having been given as aforesaid, the Notes so to be
redeemed shall become, on the Redemption Date, due and payable at the
Redemption Price therein specified, and on and after such date (unless the
Company shall default in the payment of the Redemption Price and accrued
interest) such Notes shall cease to bear interest. Upon surrender of any
such Note for redemption in accordance with such notice, such Note shall be
paid by the Company at the Redemption Price, together with accrued interest
to the Redemption Date, exclusive of installments of interest whose Stated
Maturity is on or prior to the Redemption Date, which shall be payable to the
Holders of such Notes, or one or more Predecessor Notes, registered as such
at the close of business on the relevant Record Dates according to their
terms and the provisions of Section 307.
If any Note called for redemption shall not be so paid upon surrender
thereof for redemption, the principal (and premium, if any) shall, until
paid, bear interest from the Redemption Date at the rate borne by the Note.
END OF ARTICLE ELEVEN.
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ARTICLE TWELVE
SUBORDINATION OF NOTES
SECTION 1201. AGREEMENT TO SUBORDINATE.
The Company covenants and agrees, and each Holder of Notes by such
Holder's acceptance thereof (whether upon original issue or upon transfer or
assignment) likewise covenants and agrees, that the indebtedness represented
by the Notes and the payment of the principal of (and premium, if any) and
interest on each and all of the Notes is hereby expressly subordinated, and
junior to the extent and in the manner hereinafter set forth, in right of
payment to the prior payment in full of all Senior Debt.
SECTION 1202. DISTRIBUTION OF ASSETS, ETC.
Upon any distribution of assets of the Company upon any dissolution,
winding-up, liquidation or reorganization of the Company, whether in
bankruptcy, insolvency, reorganization or receivership proceedings or upon an
assignment for the benefit of creditors or any other marshalling of the
assets and liabilities of the Company or upon any acceleration or maturity of
the Notes or otherwise:
(1) the holders of all Senior Debt shall first be entitled to
receive payment in full of the principal thereof (and premium, if any) and
interest due thereon, or adequate provisions shall be made for such
payment, before the Noteholders of the Notes are entitled to receive any
payment on account of the principal of (or premium, if any) or interest on
the Indebtedness evidenced by the Notes; and
(2) any payment by, or distribution of assets of, the Company
of any kind or character, whether in cash, property or securities, to
which the Noteholders of the Notes or the Trustee would be entitled except
for the provisions of this Article Twelve shall be paid or delivered by
the person making such payment or distribution, whether a trustee in
bankruptcy, a receiver or liquidating trustee or otherwise, directly to
the holders of Senior Debt which may have been issued, ratably according
to the aggregate amounts remaining unpaid on account of the Senior Debt
held or represented by each, to the extent necessary to make payment in
full of all Senior Debt remaining unpaid after giving effect to any
concurrent payment or distribution (or provision therefor) to the holders
of such Senior Debt.
SECTION 1203. NO PAYMENT TO NOTEHOLDERS IF SENIOR DEBT IS IN DEFAULT.
(a) Upon the maturity of any Senior Debt by lapse of time, acceleration
or otherwise, all principal thereof (and premium, if any) and interest due
thereon shall first be paid in full, or such payment duly provided for in
cash or in a manner satisfactory to the holder or holders of
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such Senior Debt before any payment is made on account of the principal of
(or premium, if any) or interest on the Notes or to acquire any of the Notes.
(b) Upon the happening of an event of default with respect to any
Senior Debt, as such event of default is defined therein or in the instrument
under which it is outstanding, permitting the holders to accelerate the
maturity thereof, and, if the default is other than default in payment of the
principal of (or premium, if any) or interest on such Senior Debt, upon
written notice thereof given to the Company and the Trustee by the holder or
holders of such Senior Debt or their representative or representatives, then,
unless and until such event of default shall have been cured or waived or
shall have ceased to exist, no payment shall be made by the Company with
respect to the principal (or premium, if any) or interest on the Notes or to
acquire any of the Notes.
SECTION 1204. SUBROGATION.
Subject to the payment in full of all Senior Debt, the Holders of the
Notes shall be subrogated to the rights of the holders of Senior Debt to
receive payments or distributions of cash, property or securities of the
Company applicable to the Senior Debt until all amounts owing on the Notes
shall be paid in full, and, as between the Company, its creditors other than
holders of Senior Debt, and the Noteholders of the Notes, no such payment or
distribution made to the holders of Senior Debt by virtue of this Article
Twelve which otherwise would have been made to the Holders of the Notes shall
be deemed to be a payment by the Company on account of the Senior Debt, it
being understood that the provisions of this Article Twelve are and are
intended solely for the purpose of defining the relative rights of the
Holders of the Notes, on the one hand, and the holders of Senior Debt, on the
other hand.
SECTION 1205. OBLIGATION OF COMPANY UNCONDITIONAL.
Nothing contained in this Article Twelve or elsewhere in this Indenture
or in the Notes is intended to or shall impair, as between the Company, its
creditors other than the holders of Senior Debt, and the Holders of the
Notes, the obligation of the Company, which is absolute and unconditional, to
pay to the Holders of the Notes the principal of (and premium, if any) and
interest on the Notes as and when the same shall become due and payable in
accordance with their terms, or affect the relative rights of the Holders of
the Notes and creditors of the Company other than the holders of Senior Debt,
nor shall anything herein or exercising all remedies otherwise permitted by
applicable law upon default under this Indenture, subject to the rights, if
any, under this Article Twelve of the holders of Senior Debt in respect of
cash, property or securities of the Company received upon the exercises of
any such remedy.
Upon any payment or distribution of assets of the Company referred to in
this Article Twelve, the Trustee and the Noteholders of the Notes shall be
entitled to rely upon any order or decree made by any court of competent
jurisdiction in which any such dissolution, winding-up, liquidation or
reorganization proceeding affecting the affairs of the Company is pending or
upon a certificate of the liquidating trustee or agent or other person making
any payment or distribution
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to the Trustee or to the Noteholders of the Notes for the purpose of
ascertaining the persons entitled to participate in such payment or
distribution, the holders of the Senior Debt and other Indebtedness of the
Company, the amount thereof or payable thereon, the amount paid or
distributed thereon and all other facts pertinent thereto or to this Article
Twelve.
SECTION 1206. PAYMENTS ON NOTES PERMITTED.
Nothing contained in this Article Twelve or elsewhere in this Indenture,
or in any of the Notes, shall (a) affect the obligation of the Company to
make, or prevent the Company from making, at any time except during the
pendency of any dissolution, winding-up, liquidation of reorganization
proceeding, and except during the continuance of any event of default
specified in Section 1203 (not cured or waived), payments at the Stated
Maturity of principal of (or premium, if any) or interest on the Notes, or
(b) prevent the application by the Trustee or any Paying Agent of any moneys
held by the Trustee or such Paying Agent, in trust for the benefit of the
Noteholders of Notes as to which notice of redemption shall have been mailed
or published at least once prior to the happening of an event of default
specified in Section 1203, to the payment of or on account of the principal
of (and premium, if any) and interest on such Notes, or (c) prevent the
application by the Trustee or any Paying Agent of any moneys deposited prior
to the happening of any event of default specified in Section 1203 with the
Trustee or such Paying Agent in trust for the purpose of paying a specified
installment or installments of interest on the Notes, to the payment of such
installments of interest on the Notes, or (d) prevent the application by the
Trustee of the proceeds of the Key-man Insurance in accordance with Sections
1402 and 1403.
SECTION 1207. EFFECTUATION OF SUBORDINATION BY TRUSTEE.
Each Holder of Notes, by such Holder's acceptance thereof, authorizes
and directs the Trustee in such Holder's behalf to take such action as may be
necessary or appropriate to effectuate the subordination provided in this
Article Twelve and appoints the Trustee such Holder's attorney-in-fact for
any and all such purposes.
SECTION 1208. KNOWLEDGE OF TRUSTEE.
Notwithstanding the provisions of this Article Twelve or any other
provisions of this Indenture, the Trustee shall not be charged with knowledge
of the existence of any facts which would prohibit the making of any payment
of moneys to or by the Trustee, or the taking of any other action by the
Trustee, unless and until the Trustee shall have received written notice
thereof, at least one business day prior to the relevant payment date, from
the Company, any Holder, any Paying Agent or the holder or representative or
any class of Senior Debt.
SECTION 1209. RIGHTS OF HOLDERS OF SENIOR DEBT NOT IMPAIRED.
No right of any present or future holder of any Senior Debt to enforce
the subordination herein shall at any time or in any way be prejudiced or
impaired by any act or failure to act on the
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part of the Company with the terms, provisions and covenants of this
Indenture, regardless of any knowledge thereof any such holder may have or be
otherwise charged with.
SECTION 1210. TRUSTEE NOT FIDUCIARY FOR HOLDERS OF SENIOR DEBT.
The Trustee shall not be deemed to owe any fiduciary duty to the holders
of Senior Debt and shall not be liable to any such holders if it shall in
good faith pay over or distribute to the Noteholders of the Notes, to the
Company or to any other Person cash, property or securities to which any
holders of Senior Debt shall be entitled by virtue of this Article or
otherwise.
SECTION 1211. RIGHTS OF TRUSTEE AS HOLDER OF SENIOR DEBT.
The Trustee in its individual capacity shall be entitled to all the
rights set forth in this Article with respect to any Senior Debt which may at
any time be held by it, to the same extent as any other holder of Senior
Debt, and nothing in this Indenture shall deprive the Trustee of any of its
rights as such holder.
SECTION 1212. ARTICLE APPLICABLE TO PAYING AGENTS.
In case at any time any Paying Agent other than the Trustee shall have
been appointed by the Company and be then acting hereunder, the term
"Trustee" as used in this Article shall in such case (unless the context
shall otherwise require) be construed as extending to and including such
Paying Agent within its meaning as fully for all intents and purposes as if
such Paying Agent were named in this Article in addition to or in place of
the Trustee.
SECTION 1213. RIGHTS AND OBLIGATIONS SUBJECT TO POWER OF COURT.
The rights of the holders of Senior Debt and the obligations of the
Trustee and the Noteholders set forth in this Article Twelve are subject to
the power of a court of competent jurisdiction to make other equitable
provision reflecting the rights conferred in this Indenture upon the Senior
Debt and the holders thereof with respect to the Notes and the Noteholders
thereof by a plan or reorganization under applicable bankruptcy law.
END OF ARTICLE TWELVE.
This Indenture may be executed in any number of counterparts, each of
which so executed shall be deemed to be an original, but all such
counterparts shall together constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be
duly executed, and their respective seals to be hereunto affixed and
attested, all as of the day and year first above written.
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PDS FINANCIAL CORPORATION
By________________________________
Johan P. Finley, President
Attest:
__________________________
Peter D. Cleary, Secretary
US BANK TRUST NATIONAL ASSOCIATION,
as Trustee
By________________________________
Its_______________________________
Attest:
__________________________
Trust Officer
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