<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 11, 1996
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
---------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
FIRST MERCHANTS ACCEPTANCE CORPORATION
(Exact name of Registrant as Specified in its Charter)
<TABLE>
<S> <C>
DELAWARE 36-3759045
(State or Other Jurisdiction of Incorporation (I.R.S. Employer Identification No.)
or Organization)
</TABLE>
570 Lake Cook Road
Suite 126
Deerfield, IL 60015
(847) 948-9300
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
---------------------
MITCHELL C. KAHN
President and Chief Executive Officer
First Merchants Acceptance Corporation
570 Lake Cook Road, Suite 126
Deerfield, IL 60015
(847) 948-9300
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
---------------------
Please send copies of all communications to:
<TABLE>
<S> <C>
MITCHELL L. HOLLINS, ESQ. BOB F. THOMPSON, ESQ.
Sonnenschein Nath & Rosenthal Bass, Berry & Sims PLC
8000 Sears Tower 2700 First American Center
Chicago, Illinois 60606 Nashville, Tennessee 37238
(312) 876-8144 (615) 742-6200
</TABLE>
---------------------
Approximate date of commencement of proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 of the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. / /
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(b)
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>
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER UNIT(2) OFFERING PRICE(2) REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Subordinated Reset Notes due 2006..... $51,750,000 100% $51,750,000 $15,682
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</TABLE>
(1) Includes $6,750,000 aggregate principal amount of additional Notes that the
Underwriters have the option to purchase from the Company to cover
over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a) under the Securities Act of 1933, as amended.
---------------------
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.
- --------------------------------------------------------------------------------
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<PAGE> 2
SUBJECT TO COMPLETION, DATED OCTOBER 11, 1996
PROSPECTUS
$45,000,000
[FIRST MERCHANTS LOGO]
FIRST MERCHANTS
ACCEPTANCE CORPORATION
SUBORDINATED RESET NOTES DUE 2006
The Subordinated Reset Notes due December 15, 2006 (the "1996 Notes")
offered hereby (the "Offering") are unsecured debt obligations of First
Merchants Acceptance Corporation (the "Company"). Interest on the 1996 Notes is
payable quarterly, on March 15, June 15, September 15, and December 15 of each
year, commencing December 15, 1996, at an interest rate of % per annum until
December 15, 2001. The interest rate will reset, at the Company's option, on
December 15, 2001 to a rate and for a period (an "Interest Rate Period") of one,
two, three or five years determined by the Company and will reset thereafter, at
the Company's option, upon the date of expiration of each such new Interest Rate
Period prior to maturity (each such date, including December 15, 2001, an
"Interest Reset Date"). Any new interest rate determined by the Company with
respect to an Interest Reset Date shall not be less than 105% of the Effective
Interest Rate on Comparable Maturity U.S. Treasury Obligations (as defined
herein). In the event that the Company decides not to reset the interest rate on
an Interest Reset Date, the interest rate for the prior Interest Rate Period
shall continue to be the interest rate in effect for the next year and each year
thereafter, unless and until the Company shall reset the interest rate on a
subsequent Interest Reset Date. Until the interest rate is reset for a
subsequent period, each December 15 shall be deemed to be an Interest Reset
Date. See "Description of the 1996 Notes."
The 1996 Notes are redeemable, in whole, at the option of the holder, at
100% of the principal amount plus accrued interest to the date of redemption, on
each Interest Reset Date and, in whole or in part, upon the occurrence of
certain "Special Redemption Events" referred to herein. The Company will redeem,
in whole or in part, at any time, at 100% of the principal amount plus accrued
interest to the date of redemption, 1996 Notes tendered by the personal
representative or surviving joint tenant, tenant by the entirety or tenant in
common of a deceased holder, within 60 days of presentation of the necessary
documents, up to an annual maximum of $25,000 per holder and an annual maximum
for all holders of 5% of the original aggregate principal amount of the 1996
Notes. The 1996 Notes are redeemable at the option of the Company, in whole, on
any Interest Reset Date, at 100% of the principal amount plus accrued interest
to the date of redemption. See "Description of the 1996 Notes."
The 1996 Notes will be issued in integral multiples of $1,000 and will be in
fully registered form. No sinking fund will be established for the 1996 Notes.
The minimum principal amount of 1996 Notes which may be purchased is $1,000. The
Company has been advised by the four Underwriters that each of them intends to
make a market in the 1996 Notes; however, the 1996 Notes will not be authorized
for quotation on The Nasdaq Stock Market's National Market or any other
quotation system or listed on any securities exchange and no assurance can be
given that an active trading market for the 1996 Notes will develop.
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS
WHICH SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE 1996 NOTES OFFERED
HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
==================================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
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<S> <C> <C> <C>
Per 1996 Note.......................... 100% % %
- --------------------------------------------------------------------------------------------------
Total(3)............................... $45,000,000 $ $
==================================================================================================
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting estimated expenses of $300,000 payable by the Company.
(3) The Company has granted the Underwriters an over-allotment option
exercisable within 30 days from the date of this Prospectus to purchase up
to $6,750,000 aggregate principal amount of additional 1996 Notes on the
same terms and conditions as set forth above. If all such 1996 Notes are
purchased by the Underwriters, the total Price to Public will be
$51,750,000, the total Underwriting Discount will be $ and the total
Proceeds to Company will be $ . See "Underwriting."
------------------------
The 1996 Notes are offered subject to receipt and acceptance by the
Underwriters, to prior sale and to the Underwriters' right to reject orders in
whole or in part and to withdraw, cancel or modify the offer without notice. The
1996 Notes will bear interest from the date of delivery to the Underwriters. It
is expected that the 1996 Notes will be available for delivery on or about
, 1996.
------------------------
J.C. BRADFORD & CO.
PIPER JAFFRAY INC.
KEEFE, BRUYETTE & WOODS, INC.
STIFEL, NICOLAUS & COMPANY
INCORPORATED
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> 3
[MAP OF REGIONAL DEALER SERVICE CENTERS]
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE 1996 NOTES
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus. Unless otherwise indicated, all information in this Prospectus
assumes no exercise of the Underwriters' over-allotment option.
THE COMPANY
First Merchants Acceptance Corporation is a specialty finance company
primarily engaged in financing the purchase of used automobiles by acquiring
dealer-originated retail installment contracts ("finance contracts"). Since the
Company's incorporation in March 1991, it has targeted its marketing efforts on
dealers (the "dealers") which sell automobiles to consumers who have limited
access to traditional sources of credit ("non-prime borrowers"). The Company
serves two customers, the dealer and, indirectly, the dealer's customer, the
non-prime borrower. As of September 30, 1996, the Company serviced approximately
3,000 dealers in 37 states. The Company's total finance contract portfolio,
which includes receivables owned and sold with servicing retained, increased
from approximately $94.1 million at December 31, 1994 and $284.2 million at
December 31, 1995 to approximately $479.2 million at June 30, 1996. The Company
generated net earnings before extraordinary item in 1993, 1994 and 1995 of
approximately $0.9 million, $2.8 million and $6.7 million, respectively. For the
six months ended June 30, 1995 and June 30, 1996, the Company generated net
earnings of approximately $2.5 million and $6.2 million, respectively.
During 1993, 1994 and 1995, the Company purchased finance contracts with
aggregate initial principal balances of approximately $33.9 million, $91.4
million and $257.9 million, respectively. For the six months ended June 30, 1995
and June 30, 1996, the Company purchased finance contracts with aggregate
initial principal balances of approximately $99.0 million and $265.3 million,
respectively. Finance contracts purchased during the six months ended June 30,
1996 had an average initial principal balance of $11,075, a weighted average
annual percentage rate ("APR") of 20.3%, a weighted average purchase discount of
4.3% and a weighted average initial contract term of 54 months. Based on the
Company's historical experience, its finance contracts have an average life of
approximately 34 months. During the six months ended June 30, 1996, the
Company's owned finance contract portfolio generated a net portfolio yield of
16.7%. During such period, accounts with payments 31 days or more past due
averaged less than 4.0% of the Company's total finance contract portfolio.
The Company has historically funded the purchase of its finance contracts
with borrowings from banks and other lenders. Beginning in November 1995, the
Company began securitizing portions of its portfolio of finance contract
receivables to increase the Company's liquidity, provide for the redeployment of
capital, reduce risks associated with interest rate fluctuations and provide the
Company with access to a cost-effective, diversified source of financing. The
Company has structured its securitization transactions both as debt financings
and as off-balance sheet financings that result in gains on the sale of finance
contract receivables. The Company plans to continue to employ its securitization
program as an integral component of its funding strategy and anticipates that it
will generally complete securitization transactions, primarily off-balance
sheet, on a quarterly basis.
The Company's growth strategy is to utilize its national sales force,
together with its Dealer Service Center managers, to increase the volume of
finance contracts purchased per automobile dealer relationship, increase its
presence and geographic scope within existing markets and penetrate new markets.
The Company has established relationships with certain national used car
superstores, such as CarMax(R), and certain large, regional franchised dealers
and intends to develop relationships with additional national used car
superstores and additional large, regional franchised dealers. The Company is
also in the process of developing referral programs with financial institutions,
which enable the Company to finance non-prime borrowers whose credit
applications are turned down by such financial institutions. In addition, the
Company is considering bulk purchases of non-automobile consumer receivables and
various other strategic business alternatives, including diversification into
other areas of consumer financial services. However, the Company anticipates
that its primary business strategy will continue to be to focus its resources on
purchasing finance contracts from dealers that sell automobiles to non-prime
borrowers. During the six months ended June 30, 1996,
3
<PAGE> 5
approximately 80% (by aggregate principal balance) of the finance contracts
purchased by the Company were originated by franchised dealers and the remainder
were originated by quality independent dealers. The key elements of the
Company's business strategy are:
- Efficient Operational Structure -- The Company's operational structure is
designed to maximize dealer service and finance contract originations,
while maintaining consistent portfolio performance and controlling
operating expenses. The Company's sales, credit and collection functions
are organized as follows: (i) a national sales force, which is dedicated
to developing new dealer relationships and expanding the geographic scope
of regional dealer service centers; (ii) regional dealer service centers
("Dealer Service Centers"), which coordinate with the sales force to
build and nurture dealer relationships, process and underwrite credit
applications and disburse funds to dealers; (iii) account service centers
("Account Service Centers"), which perform all account servicing
functions, such as finance contract verification, payment processing,
delinquency follow-ups and cost-effective recoveries of charged-off
account balances; and (iv) the asset disposition group ("Asset
Disposition Group"), which arranges the disposition of repossessed
collateral.
- Experienced Management Personnel -- The Company has recruited experienced
management personnel at the executive, supervisory and managerial levels.
The Company believes that the retention of such experienced management
personnel is important in maintaining credit quality, supervising its
operations and maintaining flexible strategies for growth in a changing
business environment. The Company's executive officers, senior managerial
personnel and Dealer Service Center and Account Service Center managers
have an average of over 15 years of experience in the consumer or
automobile finance industries.
- Sophisticated Risk Management Techniques -- To mitigate the higher risks
often associated with non-prime borrowers, the Company has developed
sophisticated risk management techniques for evaluating credit
applications based in part upon the Company's ongoing analysis and review
of existing portfolio characteristics. The Company utilizes a credit
scoring system developed by a leading credit evaluation company as an
objective guideline for evaluating a non-prime borrower's
creditworthiness. The Company also employs a tiered pricing system that
provides guidance for the determination of the APR, discount and other
terms of a finance contract commensurate with the credit characteristics
of such contract. The Company has assigned each Dealer Service Center
manager a maximum credit authority per finance contract based on various
factors, including such manager's experience level. Within the guidelines
and procedures established by the Company, each Dealer Service Center
manager is authorized to approve or reject credit applications and to
supplement objective credit criteria with subjective judgment.
- Proactive Collection Management -- The Company pursues a policy of
proactive collection management through its Account Service Centers with
respect to both current and delinquent accounts, including activities
related to monthly billing and collections, borrower inquiries and
repossessions. The Company utilizes predictive dialing technology to
complement its calling efforts and enhance the productivity of its
collection personnel. Any finance contract for which a payment is one day
overdue is treated as a past due account for collection purposes, and the
Company typically contacts a borrower within two days after such
borrower's account becomes past due. The Company generally commences
repossession procedures before an account is more than two payments past
due. Management believes that proactive collection management is critical
in maintaining a low level of delinquencies and charge-offs.
- Monitoring and Supervising the Operational Structure -- The Company
maintains departments reporting directly to senior management that
perform independent control functions to monitor and review the
operations of the Company. The Company's Risk Management group performs
ongoing analyses of new finance contracts purchased by the Company to
ensure that such finance contracts meet the Company's credit guidelines
and were purchased in compliance with the Company's operational
procedures. In addition, the Risk Management group analyzes trends in the
finance contract portfolio and performs back-end reviews of the finance
contract portfolio's performance. The
4
<PAGE> 6
Company's Internal Audit department and Managing Directors of Dealer
Services review the operations of each Dealer Service Center in order to
evaluate compliance with the Company's policies and procedures and
maintenance of the Company's credit quality standards. Each control
function actively utilizes the Company's management information system
that provides real time, on-line review and audit capabilities. In
addition, management conducts daily reviews of the volume of finance
contracts purchased, aging of accounts, repossession activities and other
operating data.
- Providing Superior Service to Quality Dealers -- By providing prompt,
flexible service and a reliable source of financing for non-prime
borrowers, the Company helps to expand the dealers' customer base,
thereby increasing the efficiency and effectiveness of their used car
sales operations. The Company typically responds to credit applications
on the date received, in many cases within 2 to 3 hours, and generally
pays the dealer for finance contracts purchased within 24 hours after the
Company has received required documentation from the dealer. As of August
31, 1996, the Company operated a nationwide network of 33 Dealer Service
Centers servicing dealers in 37 states. In the first half of 1996, the
Company consolidated 13 smaller Dealer Service Centers to improve
operating efficiencies in accordance with its nationwide hub and spoke
strategy, and the Company intends to continuously review the operating
efficiencies of its remaining Dealer Service Center network. The Company
has strengthened its national sales force to support the efforts of its
Dealer Service Centers in providing consistent, reliable service to
dealers. The Company has further focused its operations by centralizing
collections into two Account Service Centers, thus allowing Dealer
Service Centers to concentrate on developing and nurturing dealer
relationships and maintaining credit quality with respect to new
purchases of finance contracts.
The Company is a Delaware corporation. The Company's principal executive
office and mailing address is 570 Lake Cook Road, Suite 126, Deerfield, Illinois
60015 and its telephone number is (847) 948-9300.
5
<PAGE> 7
THE OFFERING
NOTES OFFERED.................... $45,000,000 principal amount of
Subordinated Reset Notes due 2006, assuming
no exercise of the Underwriters' over-
allotment option to purchase up to an
additional $6,750,000 principal amount of
1996 Notes. See "Description of the 1996
Notes" for a more detailed description of
the 1996 Notes offered hereby.
DENOMINATION..................... $1,000 and any integral multiple thereof.
MATURITY DATE.................... December 15, 2006.
INTEREST RATE.................... % per annum until December 15, 2001. The
Company will reset the interest rate for
the 1996 Notes, at its option, effective
December 15, 2001, to a rate and for an
Interest Rate Period of one, two, three or
five years determined by the Company and
will reset the interest rate thereafter, at
its option, effective as of each Interest
Reset Date prior to maturity. Any such new
interest rate shall not be less than 105%
of the Effective Interest Rate on
Comparable Maturity U.S. Treasury
Obligations (as defined herein). In the
event that the Company decides not to reset
the interest rate on the Interest Reset
Date, the interest rate for the prior
Interest Rate Period shall continue to be
the interest rate in effect for the next
year and each year thereafter, unless and
until the Company shall reset the interest
rate on a subsequent Interest Reset Date.
Until the interest rate is reset for a
subsequent period, each December 15 shall
be deemed to be an Interest Reset Date.
INTEREST PAYMENT DATES........... Interest is payable quarterly, on March 15,
June 15, September 15 and December 15 of
each year, commencing December 15, 1996.
The first interest payment will represent
interest from the date of original issuance
through December 14, 1996.
REDEMPTION AT THE OPTION OF THE
HOLDER........................... 1996 Notes tendered on or before the fifth
business day prior to December 15, 2001 or
any subsequent Interest Reset Date will be
redeemable, in whole, at 100% of the
principal amount plus accrued interest to
the date of redemption.
REDEMPTION OPTION UPON DEATH OF
HOLDER........................... 1996 Notes tendered by the personal
representative or surviving joint tenant,
tenant by entirety or tenant in common of a
deceased beneficial owner will be
redeemable, in whole or in part, within 60
days of tender, at 100% of the principal
amount plus accrued interest to the date of
redemption, subject to an annual maximum of
$25,000 per holder and an annual maximum
for all holders of 5% of the original
aggregate principal amount of the 1996
Notes.
REDEMPTION AT COMPANY'S OPTION... The 1996 Notes may not be redeemed prior to
December 15, 2001. The 1996 Notes may be
redeemed, in whole, at the Company's option
on December 15, 2001 or on any subsequent
Interest Reset Date at 100% of the
principal amount plus accrued interest to
the date of redemption.
6
<PAGE> 8
REDEMPTION UPON OCCURRENCE OF
CERTAIN EVENTS................... In the event of a Special Redemption Event
(as defined herein), each holder of 1996
Notes will have the right, at the holder's
option, to require the Company to purchase
the holder's 1996 Notes, in whole or in
part, at 100% of the principal amount plus
accrued interest to the date of redemption.
The term Special Redemption Event is
limited to certain transactions involving a
change in control of the Company.
SUBORDINATION.................... The 1996 Notes are unsecured and
subordinated in right of payment to all
senior indebtedness of the Company,
including amounts outstanding under the
Company's Senior Revolving Credit Facility,
as defined herein. The 1996 Notes are equal
in rank to the 1995 Notes (as defined
herein).
CERTAIN COVENANTS OF THE
COMPANY.......................... In the 1996 Indenture (as defined herein),
the Company agrees to certain limitations
on dividends and additional indebtedness
and to certain restrictions on
consolidation, merger or transfer of all or
substantially all of it assets.
SINKING FUND..................... None.
USE OF PROCEEDS.................. The net proceeds from the sale of the 1996
Notes will be used to fund future purchases
of finance contracts. Pending such use, the
Company will use such net proceeds to repay
a portion of the indebtedness under the
Senior Revolving Credit Facility. See "Use
of Proceeds."
TRUSTEE.......................... LaSalle National Bank, Chicago, Illinois.
7
<PAGE> 9
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------- -------------------
1991(1) 1992 1993 1994 1995 1995 1996
------ ------- ------- ------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA, (UNAUDITED)
PORTFOLIO DATA AND OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Interest income -- finance contracts................. $ 132 $ 1,960 $ 6,354 $15,324 $ 38,210 $ 14,487 $ 35,480
Other portfolio income............................... 23 78 401 699 1,338 479 965
Gain on sale of finance receivables.................. -- -- -- -- -- -- 8,092
Servicing fee and other income....................... -- -- -- -- -- -- 868
Earnings (loss) before income taxes and extraordinary
item............................................... (331) 327 1,565 4,499 10,804 4,086 10,184
Net earnings (loss)(2)............................... (331) 327 939 1,621 6,701 2,533 6,212
Per share data:
Net earnings (loss) before extraordinary item...... (0.19) 0.17 0.32 0.85 1.35 0.57 0.92
Net earnings (loss)(2)............................. (0.19) 0.17 0.32 0.49 1.35 0.57 0.92
Weighted average number of common and common
equivalent shares outstanding...................... 1,765 1,921 2,922 3,297 4,980 4,463 6,754
PORTFOLIO DATA:
Number of contracts acquired during period........... 277 2,371 5,263 10,154 25,336 9,879 23,958
Dollar value of contracts acquired during period (in
thousands)......................................... $1,545 $13,127 $33,895 $91,430 $257,946 $ 98,964 $265,334
Average initial finance contract amount.............. 5,577 5,536 6,440 9,004 10,181 10,018 11,075
Weighted average initial finance contract term (in
months)............................................ N/A(3) N/A(3) N/A(3) N/A(3) 50 48 54
Weighted average discount of contracts acquired
during period...................................... 10.4% 9.0% 9.0% 8.0% 6.2% 7.1% 4.3%
Net finance receivables -- owned -- end of period (in
thousands)(4)...................................... $1,400 $11,418 $33,563 $94,090 $284,173 $166,059 $339,826
Number of finance contracts outstanding -- owned --
end of period(4)................................... 261 2,330 6,194 12,670 31,082 19,597 36,167
Average net finance receivables -- owned (in
thousands)(4)...................................... $ 554 $ 6,314 $22,005 $62,898 $171,737 $128,000 $319,948
Net finance receivables -- serviced -- end of period
(in thousands)..................................... 1,400 11,418 33,563 94,090 284,173 166,059 479,243
Number of finance contracts outstanding -- serviced
-- end of period................................... 261 2,330 6,194 12,670 31,082 19,597 49,287
Average net finance receivables -- serviced (in
thousands)......................................... $ 554 $ 6,314 $22,005 $62,898 $171,737 $128,000 $384,497
OPERATING DATA:
Gross portfolio yield(5)............................. 28.1% 32.3% 30.7% 25.5% 23.0% 23.4% 22.8%
Net interest spread(5)............................... 13.1 23.2 21.1 16.2 13.9 13.8 14.8
Net portfolio yield(5)............................... 21.5 25.3 24.4 19.1 16.8 16.6 16.7
Allowance for credit losses as a percentage of net
finance receivables -- owned -- excluding
receivables held-for-sale.......................... 5.9 5.6 4.6 4.8 5.7 5.9 6.0
Allowance for credit losses as a percentage of net
finance receivables -- serviced(4)................. 5.9 5.6 4.6 4.8 5.2 5.9 7.0
Net charge-offs as a percentage of average net
finance receivables -- serviced (annualized)....... 5.0 3.0 4.6 4.5 5.2 4.8 5.8
Operating expenses as a percentage of average net
finance receivables -- serviced.................... 72.2 20.1 15.4 11.9 9.5 10.0 9.3
Ratio of earnings to fixed charges:(6)
Historical......................................... (2.69) 1.70 2.51 2.48 2.35 2.26 2.43
Pro forma.......................................... -- -- -- -- 2.07 -- 2.21
Number of states served.............................. 1 4 10 16 30 21 35
Number of dealers.................................... N/A(3) N/A(3) N/A(3) 1,004 1,983 1,714 2,884
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, AT JUNE 30, 1996
---------------------------------------------------- --------------------------
1991(1) 1992 1993 1994 1995 ACTUAL AS ADJUSTED(7)
------- ------- ------- ------- -------- -------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Net finance receivables................ $1,400 $11,418 $33,563 $94,090 $251,908 $313,606 $313,606
Total assets........................... 2,496 12,820 33,781 92,108 282,274 362,105 362,105
Total senior debt...................... -- 7,440 22,255 61,975 174,378 242,691 199,791
Total subordinated debt................ 1,000 1,000 163 -- 14,375 14,375 59,375
Total stockholders' equity............. 1,380 4,017 7,507 25,704 84,279 90,467 90,467
</TABLE>
- -------------------------
(1) The Company commenced operations on June 1, 1991.
(2) In the third quarter of 1994, the Company recorded a one-time, non-cash
extraordinary charge of $1,168, net of a $716 income tax benefit, as a
result of the early termination of the Company's $6.5 million subordinated
credit facility (the "Subordinated Credit Facility").
(3) The information is not available.
(4) Includes receivables held-for-sale.
(5) Gross portfolio yield represents income from the owned finance contract
portfolio as a percentage of average net finance receivables-owned. Net
interest spread represents the gross portfolio yield less the average cost
of borrowed funds. Net portfolio yield represents net interest income from
the owned finance contract portfolio as a percentage of average net finance
receivables-owned.
(6) For purposes of calculating the historical ratio of earnings to fixed
charges, earnings consist of income before income taxes and extraordinary
losses, warrant accretion and fixed charges. Fixed charges consist of
interest charges and one-third of rentals. Earnings were inadequate to cover
fixed charges in the amount of $331 for 1991. For purposes of calculating
the pro forma ratio of earnings to fixed charges, the historical results of
operations of the Company have been adjusted as if the Offering had been
completed effective at the beginning of the fiscal period applying the
estimated net proceeds thereof to repay a portion of the borrowings under
the Senior Revolving Credit Facility. The pro forma ratio of earnings to
fixed charges reflects the decrease in earnings which results from the
interest expense from the 1996 Notes, net of income taxes, which is
partially offset by the increase in earnings which results from the
reduction in borrowings under the Senior Revolving Credit Facility and
related interest expense, net of income taxes.
(7) Adjusted to give effect to the sale by the Company of the 1996 Notes offered
hereby and the application of the estimated net proceeds from the Offering.
The Company intends to use the net proceeds from the Offering to fund future
purchases of finance contracts. See "Use of Proceeds."
8
<PAGE> 10
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following factors should be considered carefully in evaluating an investment in
the 1996 Notes offered hereby.
AVAILABILITY OF FUNDS. The Company's operations require substantial
external financing to fund the purchase of finance contracts. Such purchases are
funded primarily by money borrowed by the Company from banks and other lenders
and by funds generated from securitizations of portions of the Company's
portfolio of finance contract receivables. The principal source of borrowings by
the Company has historically been the Senior Revolving Credit Facility, as
defined in "Use of Proceeds." The Senior Revolving Credit Facility expires on
June 30, 1997. There can be no assurance that the Senior Revolving Credit
Facility will be renewed or that a new credit facility will be established after
June 30, 1997. In addition, the Company employs its securitization program as an
integral component of its funding strategy. The Company has historically applied
the net proceeds from securitization transactions to repay indebtedness under
the Senior Revolving Credit Facility, thereby increasing the amounts available
under such facility to fund future purchases of finance contracts. Any failure
by the Company to effect additional securitizations of finance contract
receivables on terms acceptable to the Company would restrict the Company's
financing capabilities, could require the Company to curtail the purchase of
finance contracts and could have a material adverse effect on the Company.
Furthermore, the timing of any securitization transaction is affected by a
number of factors beyond the Company's control, including, among others,
conditions in the asset-backed securities markets, interest rates and approvals
from third parties. Some or all of these factors may cause delays in closing a
securitization or may prevent such transactions entirely. Gains from the sale of
finance contract receivables in securitization transactions constituted a
significant portion of the net earnings of the Company during the six months
ended June 30, 1996 and are likely to continue to represent a significant
portion of the Company's net earnings. If the Company were unable to securitize
finance contract receivables in a financial reporting period, the Company would
incur a significant decline in total revenues and net earnings for such period.
In addition, in order for the Company to continue to fund the purchase of
finance contracts in accordance with its growth strategy, the Company will
require financing in excess of that provided by its cash flow from operations,
the net proceeds from the Offering and the Senior Revolving Credit Facility (or
any successor bank facility). No assurance can be given that additional
financing sources, including securitization transactions, will be available on
terms acceptable to the Company. See "Business -- Financing."
CASH FLOWS ASSOCIATED WITH SECURITIZATIONS. Under the financial structures
the Company has used to date in its off-balance sheet securitizations, certain
excess servicing cash flows generated by the finance contracts are retained in a
"spread account" within the securitization structure to provide liquidity and
credit enhancement. While the specific terms and mechanics of the spread account
can vary slightly depending on each transaction, the Company's agreements with
Financial Security Assurance, Inc. ("FSA"), the financial guaranty insurer that
has provided credit enhancements in connection with the Company's
securitizations, generally provide that the Company is not entitled to receive
any excess servicing cash flows unless certain spread account balances have been
attained and/or the delinquency or losses related to the finance contracts in
the pool are below certain predetermined levels. In the event delinquencies and
losses on the finance contracts exceed such levels, the terms of securitization
may require increased spread account balances to be accumulated for the
particular pool; may restrict the distribution to the Company of excess cash
flows associated with other pools in which pass-through certificates are insured
by FSA; or, in certain circumstances, may require the transfer of servicing on
some or all of the finance contracts in FSA insured pools to another servicer.
The imposition by FSA of any of these conditions could materially adversely
affect the Company's liquidity and financial condition. As of August 31, 1996,
all FSA insured pools were performing within the guidelines required by their
related insurance policies.
PREPAYMENT RISK. Gains from the sale of finance contract receivables in
securitization transactions constituted a significant portion of the net
earnings of the Company during the six months ended June 30, 1996 and are likely
to continue to represent a significant portion of the Company's net earnings.
The gains are recorded in the Company's revenues and are based in part on
management's estimates of future prepayment rates and other considerations in
light of then-current conditions. If actual prepayments with respect to finance
contracts occur more quickly than was projected at the time such contracts were
sold, as can occur when
9
<PAGE> 11
interest rates decline, a charge to earnings will be taken in the period of
adjustment. If actual prepayments with respect to finance contracts sold occur
more slowly than estimated, total revenue would exceed previously estimated
amounts.
COMPETITION. The automobile finance business is highly competitive. The
Company believes that there are numerous competitors providing, or capable of
providing, financing through dealers to non-prime borrowers. The Company
competes with a number of national, local and regional finance companies with
operations similar to the Company. Competitors or potential competitors include
other types of financial services companies, such as commercial banks, savings
and loan associations, credit unions, finance companies affiliated with
automobile manufacturers and other consumer lenders (many of which are larger
than the Company, have significantly greater financial resources than the
Company or have relationships with established captive networks). If additional
competitors were to enter the Company's market, the Company could be materially
adversely affected. In addition, the Company has experienced increased
competition, which has resulted in a reduction in the interest rate charged to
borrowers, a reduction in (and in some cases the elimination of) the discount
from the principal amount of a finance contract (the "discount") which the
Company is able to charge to dealers and an increase in the frequency and amount
of other consideration that is paid by the Company to dealers. Further
competition may result in additional reductions in such interest rate,
reductions in or elimination of the discount and increases in the frequency and
amount of other consideration that is paid by the Company to dealers, which
could materially adversely affect the Company's profitability. See "Business --
Competition" and "Business -- Contract Acquisition Process."
DEFAULTS ON INSTALLMENT CONTRACTS. The Company is engaged in purchasing
automobile finance contracts entered into by dealers with borrowers who have
limited access to traditional sources of consumer credit. The inability of a
borrower to finance an automobile purchase by means of traditional credit
sources is generally due to various factors including such individual's impaired
credit history or the absence or limited extent of such individual's credit
history. As a result, finance contracts purchased by the Company are generally
entered into by purchasers of automobiles who are considered to have a higher
risk of default on a finance contract than most automobile purchasers. Such risk
of default may increase in times of economic downturn in the areas in which such
borrowers reside. A significant increase in charge-offs or delinquencies
relating to the finance contracts purchased by the Company could have a material
adverse effect on the Company's profitability and operations.
INCREASES IN INTEREST RATES. While the finance contracts purchased by the
Company in most cases bear interest at a fixed rate (which, in jurisdictions
that regulate the interest rate that may be charged, is in many cases equal to
the maximum rate permitted by law), the Company finances its purchase of a
substantial portion of such contracts by incurring indebtedness with floating
interest rates. As a result, the Company's interest costs could increase during
periods of rising interest rates, which may decrease net interest margins and
thereby adversely affect the Company's profitability. In addition, rising
interest rates could decrease gains realized on the sale of the Company's
finance contract receivables and thereby adversely affect the Company's
profitability. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Impact of Inflation."
MANAGEMENT OF RAPID GROWTH. The Company has experienced rapid growth and
expansion of its business. The Company's ability to support, manage and control
continued growth is dependent upon, among other things, its ability to train,
supervise and manage increased personnel. The success of the Company's growth
strategy is also dependent upon the Company's ability to maintain credit quality
as its finance contract portfolio grows, which requires, among other things, the
maintenance of efficient collection procedures and adequate collection staffing,
internal controls and automated systems. There can be no assurance that the
Company will be successful in maintaining credit quality as its finance contract
portfolio grows or that the Company's personnel, procedures, staff, internal
controls or systems will be adequate to support such growth.
RELATIONSHIPS WITH DEALERS. The Company's business depends in large part
upon its ability to establish and maintain relationships with automobile
dealers. While the Company believes that it has been successful in developing
and maintaining relationships with dealers, these relationships are not
long-standing, and there can be no assurance that the Company will be successful
in maintaining such relationships or increasing the
10
<PAGE> 12
number of dealers with which it does business, or that its existing dealer base
will continue to generate a volume of finance contracts comparable to the volume
of such contracts historically generated by such dealers. See "Business -- The
Industry" and "Business -- Strategy."
REGULATION. The Company's business is subject to various state and federal
laws which require licensing and qualification and regulate, among other things,
the maximum interest rate that may be charged to borrowers and the Company's
rights to repossess and sell collateral. An adverse change in these laws could
have a material adverse effect on the Company's business by limiting the
interest and fee income the Company may generate on existing and additional
purchased finance contracts, limiting the states in which the Company may
operate or restricting the Company's ability to realize the value of the
collateral securing its finance contracts. An adverse change in the maximum
permissible interest rate that may be charged to borrowers in any particular
market could also reduce the attractiveness of such market, thereby limiting the
expansion opportunities of the Company. See "Business -- Regulation."
LITIGATION. Because of the consumer-oriented nature of the industry in
which the Company operates and the application of certain laws and regulations,
industry participants are regularly named as defendants in litigation involving
alleged violations of federal and state laws and regulations and consumer law
torts, including fraud. Many of these actions involve alleged violations of
consumer protection laws. A significant judgment against the Company or within
the industry in connection with any such litigation could have a material
adverse effect on the Company's financial condition and results of operations.
See "Business -- Regulation."
MARKET CONDITIONS. The Company's business is affected by certain trends in
the automobile and finance industries. The Company believes that purchasers of
automobiles are more frequently considering used automobiles and that dealers
are focusing on the sale of used automobiles to generate additional revenue.
Historically, traditional sources of consumer credit have tightened lending
criteria on used automobile financing, making financing from such sources
available to fewer persons. A change in any of these trends, whether resulting
from changes in general economic conditions or otherwise, may lead to a
reduction in the number of purchasers of used automobiles, less emphasis on
selling used automobiles or an increase in the number of used automobile
purchasers who qualify for traditional financing. Any of such events could have
a material adverse effect on the Company. See "Business -- General."
COVENANTS IN THE SENIOR REVOLVING CREDIT FACILITY, THE INDENTURE RELATING
TO THE 1995 NOTES AND THE INDENTURE RELATING TO THE 1996 NOTES. The Senior
Revolving Credit Facility, the indenture (the "1995 Indenture") pursuant to
which the Company issued the Subordinated Reset Notes due 2005 (the "1995
Notes") and the indenture pursuant to which the 1996 Notes will be issued (the
"1996 Indenture") contain financial and operating covenants, including, among
others, certain limitations on the ability of the Company to pay dividends and
incur additional indebtedness and certain restrictions on consolidation, merger
or transfer of all or substantially all of its assets. See "Description of the
1996 Notes." The Company's leverage and the restrictive covenants contained in
its loan documents could limit the Company's ability to withstand competitive
pressures or adverse economic conditions, make acquisitions or take advantage of
business opportunities that may arise. Failure to comply with the obligations
contained in the Senior Revolving Credit Facility, the 1995 Indenture or the
1996 Indenture could result in an event of default under any or all of such
documents which could permit acceleration of the indebtedness under the Senior
Revolving Credit Facility and acceleration of the indebtedness under the 1995
Notes and the 1996 Notes. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
SUBORDINATION OF THE 1996 NOTES AND ASSET ENCUMBRANCES. The 1996 Notes are
equal in rank with the 1995 Notes and are subordinated in right of payment to
all senior indebtedness of the Company, which includes all indebtedness under
the Senior Revolving Credit Facility. Therefore, in the event of the
liquidation, dissolution, reorganization or any similar proceedings regarding
the Company, the assets of the Company will be available to pay obligations on
the 1995 Notes and the 1996 Notes only after all senior indebtedness has been
paid in full, and there may not be sufficient assets to pay all amounts due on
the 1995 Notes and the 1996 Notes. The 1995 Notes are not, and the 1996 Notes
will not be, secured by any of the Company's assets, and
11
<PAGE> 13
the obligations of the Company under the Senior Revolving Credit Facility are
secured by a first priority security interest in a substantial portion of the
Company's assets. If the Company becomes insolvent or is liquidated, or if
payment under the Senior Revolving Credit Facility is accelerated, the lenders
under the Senior Revolving Credit Facility would be entitled to exercise the
remedies available to a secured lender under applicable law and pursuant to the
Senior Revolving Credit Facility. Accordingly, such lenders will have a claim
prior in right to that of the holders of the 1995 Notes and the 1996 Notes with
respect to the Company's assets in which such lenders have a security interest.
LIMITED MARKET FOR 1996 NOTES. The Company has no present intention to have
the 1996 Notes authorized for quotation on The Nasdaq Stock Market's National
Market or any other quotation system or listed on any securities exchange.
Although the Company has been advised that J.C. Bradford & Co., Piper Jaffray
Inc., Keefe, Bruyette & Woods, Inc. and Stifel, Nicolaus & Company,
Incorporated. (the "Underwriters") currently intend to make a market in the 1996
Notes, the Underwriters are under no obligation to do so or to continue any
market making activities if commenced. No assurance can be given that an active
trading market in the 1996 Notes will develop.
12
<PAGE> 14
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1996 Notes offered
hereby are estimated to be approximately $42.9 million ($49.4 million if the
Underwriters' over-allotment option is exercised in full), after deducting the
underwriting discount and estimated offering expenses payable by the Company.
The Company intends to use the net proceeds to fund future purchases of finance
contracts. Pending such use, the Company will use such net proceeds to repay
approximately $42.9 million of indebtedness incurred under the Company's $205.0
million senior revolving credit facility with a group of nine banks which bears
interest at the Company's option at either (i) the reference prime rate or (ii)
LIBOR plus 1.60% for maturities of one, two, three or six months, and expires on
June 30, 1997 (the "Senior Revolving Credit Facility"). The Company estimates
that the outstanding principal balance under the Senior Revolving Credit
Facility will be approximately $130.0 million immediately prior to the closing
of the Offering. The actual amounts outstanding on that date will vary depending
upon the Company's results from operations and cash flows through that date. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and Note 5 of the Notes to
Consolidated Financial Statements.
13
<PAGE> 15
CAPITALIZATION
The following table sets forth (i) the actual capitalization of the Company
at June 30, 1996 and (ii) the capitalization of the Company at June 30, 1996, as
adjusted to reflect the effects of the sale by the Company of the 1996 Notes
offered hereby, and, after deducting the underwriting discount and estimated
offering expenses payable by the Company, the application of the estimated net
proceeds of the Offering as described in "Use of Proceeds."
<TABLE>
<CAPTION>
JUNE 30, 1996
-----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
INDEBTEDNESS:
Senior Revolving Credit Facility....................... $ 69,825 $ 26,925
Subordinated Reset Notes (the 1995 Notes and the 1996
Notes).............................................. 14,375 59,375
Notes Payable -- Securitized Pools..................... 172,866 172,866
STOCKHOLDERS' EQUITY:
Preferred stock, par value $100 per share; 500,000
shares authorized; no shares issued and
outstanding......................................... -- --
Common stock, par value $0.01 per share; 20,000,000
shares authorized; 6,525,519 shares issued and
outstanding......................................... 65 65
Non-voting common stock, par value $0.01 per share;
300,000 shares authorized; no shares issued and
outstanding......................................... -- --
Additional paid-in capital............................. 75,078 75,078
Retained earnings...................................... 15,324 15,324
-------- ---------
Total stockholders' equity.......................... 90,467 90,467
-------- ---------
Total capitalization................................ $347,533 $ 349,633
======== =========
</TABLE>
14
<PAGE> 16
SELECTED FINANCIAL AND OPERATING DATA
The following table sets forth selected financial data for the Company for
the periods and at the dates indicated. The selected statement of earnings and
balance sheet data for or at the end of each of the full years presented below
were derived from the Consolidated Financial Statements of the Company, which
were audited by Deloitte & Touche LLP, independent auditors. The unaudited
financial data as of and for the six months ended June 30, 1995 and 1996 have
been prepared in conformity with generally accepted accounting principles and
include all adjustments which are, in the opinion of management, necessary for a
fair presentation of the results for the interim periods presented. All such
adjustments are, in the opinion of management, of a normal recurring nature.
Results of operations for the six months ended June 30, 1996 are not necessarily
indicative of results to be expected for the year. The table should be read in
conjunction with the Consolidated Financial Statements, related Notes and other
financial information included herein.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------- -------------------
1991(1) 1992 1993 1994 1995 1995 1996
------ ------- ------- ------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA, (UNAUDITED)
PORTFOLIO DATA AND OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Interest income -- finance contracts................ $ 132 $ 1,960 $ 6,354 $15,324 $ 38,210 $ 14,487 $ 35,480
Other portfolio income.............................. 23 78 401 699 1,338 479 965
Gain on sale of finance receivables................. -- -- -- -- -- -- 8,092
Servicing fee and other income...................... -- -- -- -- -- -- 868
Earnings (loss) before income taxes and
extraordinary item................................ (331) 327 1,565 4,499 10,804 4,086 10,184
Net earnings (loss)(2).............................. (331) 327 939 1,621 6,701 2,533 6,212
Per share data:
Net earnings (loss) before extraordinary item..... (0.19) 0.17 0.32 0.85 1.35 0.57 0.92
Net earnings (loss)(2)............................ (0.19) 0.17 0.32 0.49 1.35 0.57 0.92
Weighted average number of common and common
equivalent shares outstanding..................... 1,765 1,921 2,922 3,297 4,980 4,463 6,754
PORTFOLIO DATA:
Number of contracts acquired during period.......... 277 2,371 5,263 10,154 25,336 9,879 23,958
Dollar value of contracts acquired during period
(in thousands).................................... $1,545 $13,127 $33,895 $91,430 $257,946 $ 98,964 $265,334
Average initial finance contract amount............. 5,577 5,536 6,440 9,004 10,181 10,018 11,075
Weighted average initial finance contract term
(in months)....................................... N/A(3) N/A(3) N/A(3) N/A(3) 50 48 54
Weighted average discount of contracts acquired
during period..................................... 10.4% 9.0% 9.0% 8.0% 6.2% 7.1% 4.3%
Net finance receivables -- owned -- end of period
(in thousands)(4)................................. $1,400 $11,418 $33,563 $94,090 $284,173 $166,059 $339,826
Number of finance contracts outstanding -- end of
period -- owned(4)................................ 261 2,330 6,194 12,670 31,082 19,597 36,167
Average net finance receivables -- owned
(in thousands)(4)................................. $ 554 $ 6,314 $22,005 $62,898 $171,737 $128,000 $319,948
Net finance receivables -- serviced -- end of period
(in thousands).................................... 1,400 11,418 33,563 94,090 284,173 166,059 479,243
Number of finance contracts outstanding -- serviced
-- end of period.................................. 261 2,330 6,194 12,670 31,082 19,597 49,287
Average net finance receivables -- serviced (in
thousands)........................................ $ 554 $ 6,314 $22,005 $62,898 $171,737 $128,000 $384,497
OPERATING DATA:
Gross portfolio yield(5)............................ 28.1% 32.3% 30.7% 25.5% 23.0% 23.4% 22.8%
Net interest spread(5).............................. 13.1 23.2 21.1 16.2 13.9 13.8 14.8
Net portfolio yield(5).............................. 21.5 25.3 24.4 19.1 16.8 16.6 16.7
Allowance for credit losses as a percentage of net
finance receivables -- owned -- excluding
receivables held-for-sale......................... 5.9 5.6 4.6 4.8 5.7 5.9 6.0
Allowance for credit losses as a percentage of net
finance receivables -- serviced -- including
receivables held-for-sale......................... 5.9 5.6 4.6 4.8 5.2 5.9 7.0
Net charge-offs as a percentage of average net
finance receivables -- serviced -- (annualized)... 5.0 3.0 4.6 4.5 5.2 4.8 5.8
Operating expenses as a percentage of average net
finance receivables -- serviced................... 72.2 20.1 15.4 11.9 9.5 10.0 9.3
Ratio of earnings to fixed charges:(6)
Historical........................................ (2.69) 1.70 2.51 2.48 2.35 2.26 2.43
Pro forma......................................... -- -- -- -- 2.07 -- 2.21
Number of states served............................. 1 4 10 16 30 21 35
Number of dealers................................... N/A(3) N/A(3) N/A(3) 1,004 1,983 1,714 2,884
</TABLE>
15
<PAGE> 17
<TABLE>
<CAPTION>
AT DECEMBER 31, AT JUNE 30, 1996
--------------------------------------------------- --------------------------
1991(1) 1992 1993 1994 1995 ACTUAL AS ADJUSTED(7)
------ ------- ------- ------- -------- -------- --------------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Net finance receivables................. $1,400 $11,418 $33,563 $94,090 $251,908 $313,606 $313,606
Total assets............................ 2,496 12,820 33,781 92,108 282,274 362,105 362,105
Total senior debt....................... -- 7,440 22,255 61,975 174,378 242,691 199,791
Total subordinated debt................. 1,000 1,000 163 -- 14,375 14,375 59,375
Total stockholders' equity.............. 1,380 4,017 7,507 25,704 84,279 90,467 90,467
</TABLE>
- -------------------------
(1) The Company commenced operations on June 1, 1991.
(2) In the third quarter of 1994, the Company recorded a one-time, non-cash
extraordinary charge of $1,168, net of a $716 income tax benefit, as a
result of the early termination of the Subordinated Credit Facility.
(3) The information is not available.
(4) Includes receivables held-for-sale.
(5) Gross portfolio yield represents income from the owned finance contract
portfolio as a percentage of average net finance receivables-owned. Net
interest spread represents the gross portfolio yield less the average cost
of borrowed funds. Net portfolio yield represents net interest income from
the owned finance contract portfolio as a percentage of average net finance
receivables-owned.
(6) For purposes of calculating the historical ratio of earnings to fixed
charges, earnings consist of income before income taxes and extraordinary
losses, warrant accretion and fixed charges. Fixed charges consist of
interest charges and one-third of rentals. Earnings were inadequate to cover
fixed charges in the amount of $331 for 1991. For purposes of calculating
the pro forma ratio of earnings to fixed charges, the historical results of
operations of the Company have been adjusted as if the Offering had been
completed effective at the beginning of the fiscal period applying the
estimated net proceeds thereof to repay a portion of the borrowings under
the Senior Revolving Credit Facility. The pro forma ratio of earnings to
fixed charges reflects the decrease in earnings which results from the
interest expense from the 1996 Notes, net of income taxes, which is
partially offset by the increase in earnings which results from the
reduction in borrowings under the Senior Revolving Credit Facility and
related income expense, net of income taxes.
(7) Adjusted to give effect to the sale by the Company of the 1996 Notes offered
hereby and the application of the estimated net proceeds from the Offering.
The Company intends to use the net proceeds from the Offering to fund future
purchases of finance contracts. See "Use of Proceeds."
16
<PAGE> 18
SUPPLEMENTAL FINANCIAL INFORMATION
The following table sets forth certain unaudited operating results for the
first two quarters of 1996 and for each of the quarters in the two years ended
December 31, 1995. This information has been prepared on the same basis as the
audited financial statements and includes all adjustments (which consist solely
of normal recurring adjustments) necessary to present fairly the financial
information of such periods.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1996
Total revenues......................................... $20,825 $24,580 $ -- $ --
Net interest income.................................... 13,091 13,682 -- --
Earnings before income taxes........................... 4,954 5,230 -- --
Net earnings........................................... 3,022 3,190 -- --
Earnings per share..................................... 0.45 0.47 -- --
Weighted average common and common equivalent shares
outstanding.......................................... 6,733 6,780 -- --
1995
Total revenues......................................... $ 6,428 $ 8,538 $10,593 $13,988
Net interest income.................................... 4,645 5,954 7,501 10,694
Earnings before income taxes........................... 1,884 2,202 2,703 4,015
Net earnings........................................... 1,168 1,365 1,677 2,491
Net earnings per share................................. 0.26 0.31 0.37 0.38
Weighted average common and common equivalent shares
outstanding.......................................... 4,453 4,470 4,489 6,496
1994
Total revenues......................................... $ 2,926 $ 3,612 $ 4,397 $ 5,087
Net interest income.................................... 2,368 2,625 3,122 3,873
Earnings before income taxes and extraordinary item.... 819 953 1,163 1,563
Net earnings before extraordinary item................. 508 591 721 968
Net earnings (loss).................................... 508 591 (447)(1) 968
Net earnings (loss) available to stockholders.......... 442 531 (447) 968
Net earnings (loss) per share.......................... 0.17 0.20 (0.15)(1) 0.22
Net earnings (loss) available to stockholders per
share................................................ 0.15 0.18 (0.15) 0.22
Weighted average common and common equivalent shares
outstanding.......................................... 2,922 2,922 2,937 4,393
</TABLE>
- -------------------------
(1) In the third quarter of 1994, the Company recorded a one-time, non-cash
extraordinary charge of $1,168, net of a $716 income tax benefit, as a
result of the early termination of the Subordinated Credit Facility.
17
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following analysis of the financial condition and results of operations
of the Company should be read in conjunction with the preceding "Selected
Financial and Operating Data" and the Company's Consolidated Financial
Statements and Notes thereto and other financial data included herein. The
financial information provided below has been rounded in order to simplify its
presentation. However, the ratios and percentages provided below are calculated
using the detailed financial information contained in the Consolidated Financial
Statements, the Notes thereto and the financial data included elsewhere in this
Prospectus. In December 1995, the Company changed its fiscal year end to
December 31 from May 31 and restated all prior periods.
GENERAL
The Company is a specialty finance company primarily engaged in financing
the purchase of used automobiles by acquiring dealer-originated finance
contracts. The Company has experienced significant annual growth in its finance
contract portfolio since it commenced operations in June 1991. The Company
derives its revenues from its finance contract portfolio and from the gains and
servicing fees associated with the securitization of finance contract
receivables.
In order to adjust for credit risks and achieve an acceptable rate of
return, the Company typically purchases finance contracts from dealers at a
discount from the principal amounts of such contracts. This discount is
non-refundable to the dealer. The discount is allocated to the allowance for
credit losses. Prior to 1995, a portion of the discount was being amortized into
interest income. Beginning in 1995, the remaining unamortized contract
acquisition discounts were used to absorb credit losses.
RESULTS OF OPERATIONS
The following table sets forth certain financial data relating to the
Company:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------ --------------------
1993 1994 1995 1995 1996
------- ------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Average net finance receivables-owned(1).... $22,005 $62,898 $171,737 $128,000 $319,948
Average net finance
receivables-serviced(1)................... 22,005 62,898 171,737 128,000 384,497
Average indebtedness(2)..................... 14,385 43,481 118,173 90,621 241,258
Income from finance contract portfolio...... 6,755 16,023 39,548 14,966 36,445
Interest expense............................ 1,378 4,304 10,754 4,367 9,671
------- ------- -------- -------- --------
Net interest income......................... $ 5,377 $11,989 $ 28,794 $ 10,599 $ 26,774
======= ======= ======== ======== ========
Gross portfolio yield(3).................... 30.7% 25.5% 23.0% 23.4% 22.8%
Average cost of borrowed funds(2)........... 9.6 9.3 9.1 9.6 8.0
Net interest spread(4)...................... 21.1 16.2 13.9 13.8 14.8
Net portfolio yield(3)...................... 24.4 19.1 16.8 16.6 16.7
Total states served......................... 10 16 30 21 35
</TABLE>
- -------------------------
(1) Net finance receivables-owned represents those net finance receivables that
have been retained by the Company. Net finance receivables-serviced
represents net finance receivables-sold and net finance receivables-owned.
Net finance receivables-owned and serviced represents the total contractual
payments due under finance contracts less the related unearned finance
charges on those contracts. Net finance receivables-owned and serviced have
not been reduced by unamortized contract acquisition discounts, unearned
ancillary income, unamortized contract acquisition costs and the allowance
for credit losses. Average net finance receivables-owned and serviced are
calculated based on month-end balances.
(2) Indebtedness includes borrowings outstanding under the Senior Revolving
Credit Facility, notes payable-securitized pools and the 1995 Notes. The
average indebtedness is based on daily balances. Average cost of borrowed
funds represents interest expense, including the amortization of fees, as a
percentage of average indebtedness.
(3) Gross portfolio yield represents income from the owned finance contract
portfolio as a percentage of average finance receivables-owned. Net
portfolio yield represents net interest income from the owned finance
contract portfolio as a percentage of average finance receivables-owned.
(4) Net interest spread represents the gross portfolio yield less the average
cost of borrowed funds.
18
<PAGE> 20
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1995
Revenues
The Company purchased 23,958 finance contracts having an aggregate initial
principal amount of $265.3 million in the six months ended June 30, 1996, an
increase of 142.5% and 168.1%, respectively, from the 9,879 finance contracts
having an aggregate initial principal amount of $99.0 million purchased in the
six months ended June 30, 1995.
Interest and other income from the owned finance contract portfolio
increased $21.5 million, or 143.5%, from $14.9 million in the six months ended
June 30, 1995 to $36.4 million in the six months ended June 30, 1996. The growth
in income from the owned finance contract portfolio resulted from an increase in
the number of finance contracts purchased by Dealer Service Centers in operation
at June 30, 1995 as well as the purchase of finance contracts by new Dealer
Service Centers opened after June 30, 1995.
Average net finance receivables-owned increased $191.9 million, or 150.0%,
from $128.0 million in the six months ended June 30, 1995 to $319.9 million in
the six months ended June 30, 1996. Income from the owned finance contract
portfolio as a percentage of average net finance receivables-owned ("gross
portfolio yield") decreased from 23.4% in the six months ended June 30, 1995 to
22.8% in the six months ended June 30, 1996. The decrease in the gross portfolio
yield was primarily attributable to general competition in the marketplace and
the purchase of a higher percentage of finance contracts covering later model
automobiles, which generally have a lower interest rate.
The Company may experience further reductions in its gross portfolio yield
and decreases in interest income from finance contracts. However, increases in
the Company's total revenues attributable to increases in the volume of finance
contracts purchased, securitizations and sales of finance receivables and
related servicing activities are expected to offset any decreases in interest
income attributable to decreases in the Company's gross portfolio yield.
For the six months ended June 30, 1996, the Company recognized $8.1 million
in gains on sales of finance receivables, resulting from the sale of finance
receivables to the First Merchants Grantor Trust 1996-1 (the "Trust 1996-1") and
the First Merchants Grantor Trust 1996-2 (the "Trust 1996-2") (the Trust 1996-1
and the Trust 1996-2 are referred to herein as the "Trusts") in March 1996 and
June 1996, respectively, and the issuance to investors of $55.8 million and
$90.4 million, respectively, of automobile receivable-backed certificates of the
Trusts. The gains represent the difference between the sales proceeds, net of
transaction costs, and the Company's carrying value of the receivables sold,
plus the present value of the excess servicing cash flows. Excess servicing cash
flows are equal to estimated future collections and recoveries on the finance
receivables sold to the Trusts, less required principal and interest payments to
the investors, base servicing fees payable to the Company at an annual rate of
2.5% of finance receivables serviced and certain other fees.
Because the Company may choose to structure future issuances of automobile
receivable-backed securities in a manner which will result in the recognition of
gains on the sale of receivables in some securitization transactions and the
issuance of debt in others, the amount and timing of such future transactions
could impact the Company's net earnings in any given financial reporting period.
No gain on sale of finance receivables was recorded for the six months ended
June 30, 1995. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
Servicing fee income represents the Company's base servicing fee on the
finance receivables sold to the Trusts and amortization of the excess servicing
receivable. Servicing fee income totaled $868,000 for the six months ended June
30, 1996. No servicing fee income was recorded for the six months ended June 30,
1995.
Expenses
Interest expense increased $5.3 million, or 121.5%, from $4.4 million in
the six months ended June 30, 1995 to $9.7 million in the six months ended June
30, 1996. The increase in interest expense resulted primarily from an increase
in borrowings under the Senior Revolving Credit Facility and the issuance of
notes payable - securitized pools. Such increased borrowings were used to fund
the growth of the Company's finance contract
19
<PAGE> 21
portfolio. Average indebtedness, including borrowings under the Senior Revolving
Credit Facility, notes payable-securitized pools and the 1995 Notes, increased
$150.7 million, or 166.2%, from $90.6 million in the six months ended June 30,
1995 to $241.3 million in the six months ended June 30, 1996. Interest expense,
including the amortization of fees, as a percentage of average indebtedness
("average cost of borrowed funds") was 9.64% in the six months ended June 30,
1995 compared to 8.02% in the six months ended June 30, 1996. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
The provision for credit losses increased $7.6 million from $0.1 million
charged against earnings in the six months ended June 30, 1995 to $7.7 million
charged against earnings in the six months ended June 30, 1996. For the six
months ended June 30, 1995 and 1996, discounts as a percentage of the principal
amount financed were 7.1% and 4.3%, respectively. Non-refundable discounts
collected from dealers are supplemented by the provision for credit losses and
are used to absorb future credit losses. The declining discounts combined with a
168.1% increase in the aggregate initial principal amount financed during the
six months ended June 30, 1996 were factors in determining the increase in the
provision for credit losses. The Company expects to continue recording
provisions for credit losses in light of these declining discounts. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Credit Loss Experience."
Operating expenses increased $11.5 million, or 179.4%, from $6.4 million in
the six months ended June 30, 1995 to $17.9 million in the six months ended June
30, 1996. Operating expenses in the six months ended June 30, 1996 include a
$600,000 charge for costs associated with consolidating thirteen of the smaller
Dealer Service Centers to improve operating efficiencies. Although operating
expenses increased during the six months ended June 30, 1996, the Company's
finance contract portfolio grew at a faster rate than the rate of increase in
operating expenses. As a result, operating expenses as a percentage of average
net finance receivables-serviced decreased from 10.0% in the six months ended
June 30, 1995 to 9.3% in the six months ended June 30, 1996.
Employee compensation and related costs, such as group insurance and
payroll taxes, represented 62.7% and 60.3% of total operating expenses in the
six months ended June 30, 1995 and 1996, respectively. Employee compensation
expense increased $6.8 million, or 168.8%, from $4.0 million in the six months
ended June 30, 1995 to $10.8 million in the six months ended June 30, 1996. Both
employee compensation and total operating expenses increased due to expanding
operations and growth in the serviced finance contract portfolio.
Income Taxes
Income taxes were recorded at an effective rate of 38.0% and 39.0% in the
six months ended June 30, 1995 and 1996, respectively.
Net Earnings
Net earnings increased $3.7 million, or 145.2%, from $2.5 million in the
six months ended June 30, 1995 to $6.2 million in the six months ended June 30,
1996. The increase in net earnings is directly attributable to the growth in the
finance contract portfolio and related factors discussed above.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Revenues
The Company purchased 25,336 finance contracts having an aggregate initial
principal amount of $257.9 million in 1995, an increase of 149.5% and 182.1%,
respectively, from the 10,154 finance contracts having an aggregate initial
principal amount of $91.4 million purchased in 1994.
Interest and other income from the owned finance contract portfolio
increased $23.5 million, or 146.8%, from $16.0 million in 1994 to $39.5 million
in 1995. The growth in income from the owned finance contract portfolio resulted
from an increase in the Company's finance contract portfolio due to an increase
in the number of finance contracts purchased by regional Dealer Service Centers
in operation at the beginning of 1995 as well as the purchase of finance
contracts by new regional Dealer Service Centers opened during 1995.
20
<PAGE> 22
The Company opened 13 regional Dealer Service Centers in 1995, increasing its
Dealer Service Center network to 36 at December 31, 1995.
Average net finance receivables-owned increased $108.8 million, or 173.0%,
from $62.9 million in 1994 to $171.7 million in 1995. Gross portfolio yield
decreased from 25.5% in 1994 to 23.0% in 1995. The decrease in gross portfolio
yield was primarily attributable to a combination of a greater concentration of
finance contracts in states with lending regulations that limited the maximum
rate of interest which may be charged, the purchase of a higher percentage of
finance contracts covering later model automobiles, which generally have a lower
interest rate, and the elimination of discount amortization into interest
income.
Expenses
Interest expense increased $6.8 million, or 166.6%, from $4.0 million in
1994 to $10.8 million in 1995. The increase in interest expense resulted from an
increase in borrowings under the Senior Revolving Credit Facility and the
issuance of notes payable-securitized pool and the 1995 Notes. Such increased
borrowings were used to fund the growth to the Company's finance contract
portfolio. Average indebtedness increased $74.7 million, or 171.8%, from $43.5
million in 1994 to $118.2 million in 1995. Average cost of borrowed funds was
9.3% in 1994 compared to 9.1% in 1995.
In 1995, the Company negotiated two interest rate reductions in conjunction
with its Senior Revolving Credit Facility. In 1995, the interest rate charged on
borrowings under the Senior Revolving Credit Facility averaged 8.24% compared to
8.00% in 1994. At December 31, 1995, the referenced prime rate was 8.50%;
however, because of the LIBOR pricing option, the weighted average interest rate
under the Senior Revolving Credit Facility was 7.39%. At December 31, 1994, the
reference prime rate was 8.50% and the interest rate charged on the Senior
Revolving Credit Facility was 8.73%.
A provision for credit losses of $1.7 million was charged against earnings
in 1995. No such provision was recorded in 1994. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Credit Loss
Experience."
Operating expenses increased $8.8 million, or 117.5%, from $7.5 million in
1994 to $16.3 million in 1995. Although operating expenses increased during
1995, the Company's finance contract portfolio grew at a faster rate than the
rate of increase in operating expenses. As a result, operating expenses as a
percentage of average net finance receivables-serviced decreased from 11.9% in
1994 to 9.5% in 1995.
Employee compensation and related costs, such as group insurance and
payroll taxes, represented 66.0% and 63.0% of total operating expenses in 1994
and 1995, respectively. Employee compensation expenses increased $5.4 million,
or 107.7%, from $4.9 million in 1994 to $10.3 million in 1995. Both employee
compensation and other operating expenses increased due to expanding operations
and growth in the serviced finance contract portfolio.
Income Taxes
Income taxes were recorded at an effective rate of 38.0% for both 1994 and
1995.
Net Earnings, Extraordinary Item and Accretion of Common Stock Warrants
Net earnings before extraordinary item increased $3.9 million, or 140.3%,
from $2.8 million in 1994 to $6.7 million in 1995. The increase in net earnings
before extraordinary item is directly attributable to the growth in the finance
contract portfolio and related factors discussed above. In 1994, the Company
recorded a one-time, non cash extraordinary charge of $1.2 million resulting
from the early termination of its $6.5 million Subordinated Credit Facility. Net
earnings increased $5.1 million from $1.6 million in 1994 to $6.7 million in
1995. The difference between net earnings and net earnings available to
stockholders was attributable to warrant accretion during 1994.
21
<PAGE> 23
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
Revenues
The Company purchased 10,154 finance contracts having an aggregate initial
principal amount of $91.4 million in 1994, an increase of 92.9% and 169.7%,
respectively, from the 5,263 finance contracts having an aggregate initial
principal amount of $33.9 million purchased in 1993.
Interest and other income from the owned finance contract portfolio
increased $9.2 million, or 137.2%, from $6.8 million in 1993 to $16.0 million in
1994. The growth in income from the owned finance contract portfolio resulted
from an increase in the Company's finance contract portfolio due to an increase
in the number of finance contracts purchased by regional Dealer Service Centers
in operation at the beginning of 1994 as well as the purchase of finance
contracts by new regional Dealer Service Centers opened during 1994. The Company
opened eight regional Dealer Service Centers in 1994, increasing its Dealer
Service Center network to 23 at December 31, 1994.
Average net finance receivables-owned increased $40.9 million, or 185.8%,
from $22.0 million in 1993 to $62.9 million in 1994. Gross portfolio yield
decreased from 30.7% in 1993 to 25.5% in 1994. The decrease in the gross
portfolio yield was primarily attributable to a combination of a greater
concentration of finance contracts in states with lending regulations that limit
the maximum rate of interest which may be charged and the purchase of a higher
percentage of finance charges covering later model automobiles, which generally
have a lower interest rate.
Expenses
Interest expense increased $2.6 million from $1.4 million in 1993 to $4.0
million in 1994. The increase in interest expense resulted primarily from an
increase in borrowings under the Senior Revolving Credit Facility and the
Subordinated Credit Facility. Such increased borrowings were used to fund the
growth of the Company's finance contract portfolio. Average indebtedness
increased $29.1 million from $14.4 million in 1993 to $43.5 million in 1994.
Average cost of borrowed funds was 9.6% in 1993 compared to 9.3% in 1994.
The interest rate charged on borrowings under the Senior Revolving Credit
Facility for 1993 and 1994 averaged 7.35% and 8.00%, respectively. At December
31, 1994, the weighted average interest rate charged under the Senior Revolving
Credit Facility was 8.73%.
Operating expenses increased $4.1 million, or 121.7%, from $3.4 million in
1993 to $7.5 million in 1994. Although operating expenses increased during 1994,
the Company's finance contract portfolio grew at a faster rate than the rate of
increase in operating expenses. As a result, operating expenses as a percentage
of average net finance receivables-serviced decreased from 15.4% in 1993 to
11.9% in 1994.
Employee compensation and related costs, such as a group insurance and
payroll taxes, represented 67.1% and 66.0% of total operating expenses in 1993
and 1994, respectively. Employee compensation expenses increased $2.6 million,
or 117.9%, from $2.3 million in 1993 to $4.9 million in 1994. Both employee
compensation and total operating expenses increased due to expanding operations
and growth in the serviced finance contract portfolio.
Non-Recurring Charges
In 1993, the Company reported non-recurring charges of $434,000. These
charges included $366,000 in fees and expenses incurred in terminating a finance
advisory agreement and $68,000 of costs, including unamortized software license
fees, associated with terminating a data processing contract.
Income Taxes
Income taxes were recorded at an effective rate of 40% and 38.0% in 1993
and 1994, respectively.
22
<PAGE> 24
Net Earnings and Accretion of Common Stock Warrants
Net earnings increased $0.7 million, or 72.7%, from $0.9 million in 1993 to
$1.6 million in 1994. The increase in net earnings is directly attributable to
the growth in the finance contract portfolio and related factors discussed
above. Net earnings available to stockholders increased $0.6 million, or 62.4%,
from $0.9 million in 1993 to $1.5 million in 1994. The difference between net
earnings and net earnings available to stockholders is attributable to warrant
accretion.
CREDIT LOSS EXPERIENCE
The Company maintains an allowance for credit losses at a level that
management believes adequate to absorb potential losses in the owned finance
contract portfolio. Management evaluates the adequacy of the allowance for
credit losses by reviewing credit loss experience, delinquencies, the value of
the underlying collateral, the level of the finance contract portfolio and
general economic conditions and trends. An account is charged-off at the
earliest of the time the account's collateral is repossessed, the account is 91
or more days past due or the account is otherwise deemed to be uncollectible.
The allowance for credit losses is initially established through an
allocation of contract acquisition discounts based upon management's estimate of
credit losses. A provision for credit losses is charged against earnings in
addition to the contract acquisition discounts allocated to the allowance for
credit losses.
The following table summarizes data relating to the Company's charge-off
experience and allowance for credit losses. The charge-off experience includes
estimated losses to be incurred upon the sale of repossessed collateral.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------ --------------------
1993 1994 1995 1995 1996
------- ------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Average net finance receivables --
serviced................................... $22,005 $62,898 $171,737 $128,000 $384,497
Net charge-offs -- serviced.................. 1,016 2,820 8,969 3,051 11,204
Net charge-offs as a percentage of average
net finance receivables -- serviced
(annualized)............................... 4.6% 4.5% 5.2% 4.8% 5.8%
End of Period:
Net finance receivables -- owned............. $33,563 $94,090 $251,908 $166,059 $313,606
Allowance for credit losses -- owned......... 1,553 4,489 14,301 9,795 18,829
Allowance for credit losses as a percentage
of net finance receivables -- owned........ 4.6% 4.8% 5.7% 5.9% 6.0%
</TABLE>
Net finance receivables held-for-sale totaled $32.3 million and $26.2
million, net of contract acquisition discounts of $0.4 million and $0.6 million
at December 31, 1995 and June 30, 1996, respectively. Net finance receivables
held-for-sale are not included above as they are recorded at the lower of
aggregate cost or market value. There were no net finance receivables
held-for-sale at December 31, 1993, December 31, 1994 or June 30, 1995.
At June 30, 1996, the excess servicing receivable is reported net of $14.1
million allowance for estimated credit losses on finance receivables sold to the
Trusts. There was no excess servicing receivable at December 31, 1993, December
31, 1994, June 30, 1995 or December 31, 1995.
DELINQUENCY EXPERIENCE
A payment is considered past due if the borrower fails to make any full
payment on or before the due date as specified by the terms of the finance
contract. The Company typically contacts borrowers whose payments are not
received by the due date within two days after such due date. The following
table summarizes the Company's delinquency experience for accounts with payments
31 or more days past due on both a number
23
<PAGE> 25
and dollar basis for its finance contract portfolio as of the following dates.
The delinquency experience data exclude contracts where the collateral has been
repossessed.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------
AS OF JUNE 30,
1994 1995 1996
-------------------- --------------------- ---------------------
NUMBER OF NUMBER OF NUMBER OF
DOLLARS CONTRACTS DOLLARS CONTRACTS DOLLARS CONTRACTS
------- --------- -------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net finance receivables --
serviced(1).......................... $94,090 12,670 $284,173 31,082 $479,243 49,287
Past due accounts:
31-60 days(2)........................ 446 85 5,163 595 11,171 1,253
61 days or more(3)................... 177 29 2,021 251 4,323 494
------- ------ -------- ------ -------- ------
Total.................................. $ 623 114 $ 7,184 846 $ 15,494 1,747
======= ====== ======== ====== ======== ======
Accounts with payments 31 or more days
past due as a percentage of net
finance receivables and number of
contracts -- serviced(4)............. 0.7% 0.9% 2.5% 2.7% 3.2% 3.5%
======= ====== ======== ====== ======== ======
</TABLE>
- -------------------------
(1) Includes net finance receivables owned, sold or held-for-sale.
(2) Customers in this category have missed two consecutive monthly payments.
(3) Customers in this category have missed three or more consecutive monthly
payments.
(4) Customers in this category have missed two or more consecutive monthly
payments.
REPOSSESSED COLLATERAL
The Company commences repossession procedures against the underlying
collateral when it determines that collection efforts are likely to be
unsuccessful. Repossession generally occurs before a borrower has missed more
than two consecutive monthly payments. In such cases, the net amount due under
the finance contract is reduced to the estimated fair value of the collateral,
less the cost of disposition, and this reduction is reported as a credit loss.
Repossessed collateral included 69, 150, 505 and 786 automobiles at December 31,
1993, 1994 and 1995, respectively, and at June 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has funded its operations, regional Dealer
Service Center openings and finance contract portfolio growth through the
following: funds provided from principal payments received under finance
contracts, borrowings under the Senior Revolving Credit Facility, proceeds from
the issuance of subordinated debt and securitization of finance receivables and
from the sale of shares of common stock, par value $.01 per share ("Common
Stock"), and cash flows from operating activities.
Net cash flows provided by operating activities were $6.7 million and $10.6
million in the six months ended June 30, 1995 and 1996, respectively, and $1.0
million, $3.8 million and $12.5 million in the years ended December 31, 1993,
1994 and 1995, respectively. The increased cash flows from operating activities
primarily resulted from annual increases in net earnings before extraordinary
item.
Net cash used in investing activities was $66.7 million and $77.4 million
in the six months ended June 30, 1995 and 1996, respectively, and $20.1 million,
$56.8 million and $189.6 million in the years ended December 31, 1993, 1994 and
1995, respectively. The increase in cash flows used in investing activities
during such periods was primarily attributable to the finance contract portfolio
growth.
24
<PAGE> 26
Net cash flows provided by financing activities are primarily used to
support finance contract portfolio growth. Financing activities for the six
months ended June 30, 1995 and 1996 and for the years ended December 31, 1993,
1994 and 1995 were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------ -------------------
1993 1994 1995 1995 1996
------- ------- -------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Proceeds from issuance of common stock,
net........................................ $ 1,440 $14,910 $ 51,588 $ -- $ --
Proceeds from issuance of notes
payable-securitized pools, net............. -- -- 74,486 -- 124,989
Repayment of notes payable-securitized
pools...................................... -- -- (4,748) -- (23,331)
Proceeds from issuance of subordinated debt,
net........................................ 2,599 4,500 13,530 13,530 --
Repayment of subordinated debt............... (1,000) (6,500) -- -- --
Net (decrease) increase in borrowings under
senior revolving credit facility........... 14,785 39,750 42,025 46,375 (34,175)
Other, net................................... 19 183 170 (26) (24)
------- ------- -------- ------- -------
Total........................................ $17,843 $52,843 $177,051 $59,879 $ 67,459
======= ======= ======== ======= =======
</TABLE>
The Company maintains a $205.0 million Senior Revolving Credit Facility
with a group of nine banks. The Senior Revolving Credit Facility expires June
30, 1997 and borrowings are secured by a substantial portion of the Company's
assets. The Company has the option to borrow at either (i) the reference prime
rate or (ii) LIBOR plus 1.60% per annum for maturities of one, two, three or six
months. On May 1, 1996, the Company amended the loan agreement relating to the
Senior Revolving Credit Facility to provide for an additional temporary credit
facility (the "Temporary Credit Facility") in the amount of $25.0 million which
expires on November 1, 1996 and bears interest at the reference prime rate. The
Company is also a party to an interest rate protection agreement aggregating a
notional amount of $15.0 million, which limits the Company's exposure to
increases in borrowing costs.
In June 1996, the Company completed a $90.4 million asset securitization
through the sale of 6.85% automobile receivable-backed Class A Certificates. The
Company recorded a $5.1 million gain on sale of net finance receivables in the
three months ended June 30, 1996. The certificates were issued by Trust 1996-2,
a trust formed specifically for purposes of the securitization transaction.
Principal and interest on the certificates are payable monthly commencing July
15, 1996 from collections and recoveries on the pool of finance receivables. FSA
issued a financial guaranty insurance policy for the benefit of the holders of
the certificates. Net proceeds from the sale and securitization of finance
receivables were used to repay indebtedness under the Senior Revolving Credit
Facility.
In May 1996, the Company completed a $125.9 million debt financing
consisting of automobile receivable-backed notes. Of these notes, $85.0 million
have a floating interest rate of 0.17% over one-month LIBOR and the remaining
$40.9 million have a fixed rate of 6.70%. In an effort to reduce the Company's
exposure to potential increases in interest rates, the Company entered into an
interest rate swap agreement on May 21, 1996 with an initial notional amount of
$85.0 million, whereby the Company pays a fixed rate of 5.98% and receives a
variable rate of one-month LIBOR. The notional amount declines, as specified in
the swap agreement, at each month-end during the term of the agreement, which
expires in May 1998. At June 30, 1996, the notional amount was $76.7 million and
one-month LIBOR was 5.50%. The notes were issued by First Merchants Auto Trust
1996-A, a trust formed specifically for purposes of the securitization
transaction. Principal and interest on the notes are payable monthly commencing
June 17, 1996 from collections and recoveries on the pool of finance
receivables. FSA issued a financial guaranty policy for the benefit of the
noteholders. The proceeds that the Company received from the securitization of
finance receivables were used to repay indebtedness under the Senior Revolving
Credit Facility and the Temporary Credit Facility.
25
<PAGE> 27
In March 1996, the Company completed a $55.8 million asset securitization
through the sale of 5.90% automobile receivable-backed Class A Certificates. The
Company recorded a $3.0 million gain on sale of net finance receivables in the
three months ended March 31, 1996. The certificates were issued by Trust 1996-1,
a trust formed specifically for purposes of the securitization transaction.
Principal and interest on the certificates are payable monthly commencing March
20, 1996 from collections and recoveries on the pool of finance receivables. FSA
issued a financial guaranty insurance policy for the benefit of the holders of
the certificates. Net proceeds from the sale and securitization of finance
receivables were used to repay indebtedness under the Senior Revolving Credit
Facility.
In November 1995, the Company completed a $75.0 million debt financing
consisting of 6.20% automobile receivable-backed notes, Series 1995-A. The notes
were issued by First Merchants Auto Receivable Corporation, a wholly-owned
special purpose subsidiary of the Company. Principal and interest on the notes
are payable monthly commencing December 15, 1995 from collections and recoveries
on the pool of finance receivables. FSA issued a financial guaranty policy for
the benefit of the noteholders. The proceeds that the Company received from the
securitization of finance receivables were used to repay indebtedness under the
Senior Revolving Credit Facility.
In October 1995, the Company completed a public offering of 2,250,000
shares of Common Stock at a price of $24.50 per share. The proceeds, which
approximated $51.6 million after deducting the underwriting discount and
offering expenses, were used to fund future purchases of finance contracts and,
prior to such use, the proceeds were used to reduce borrowings under the Senior
Revolving Credit Facility.
In February 1995, the Company received approximately $13.5 million for the
issuance of the 1995 Notes after deducting the underwriting discount and
offering expenses. The proceeds were used to repay indebtedness under the Senior
Revolving Credit Facility. Interest on the 1995 Notes is payable quarterly, on
March 15, June 15, September 15 and December 15 of each year commencing March
15, 1995, at an interest rate of 11% per annum until March 15, 2000. The
interest rate will reset, at the Company's option, on March 15, 2000 to a rate
and for a term of one, two, three, or five years determined by the Company and
will reset thereafter, at the Company's option, upon the date of expiration of
each such new interest rate period prior to maturity on March 15, 2005. Any such
subsequent interest rate shall not be less than 105% of the effective interest
rate on Comparable Maturity U.S. Treasury Obligations (as defined in the 1995
Indenture). Holders of the 1995 Notes have the option to redeem all or any
portion of the 1995 Notes on March 15, 2000 or any subsequent interest reset
date.
During the second half of 1994, the Company completed an initial public
offering of 1,530,000 shares of Common Stock at a price of $11.00 per share. The
proceeds, which approximated $14.9 million after deducting the underwriting
discount and offering expenses, were used to repay and terminate the
Subordinated Credit Facility and to repay indebtedness under the Senior
Revolving Credit Facility.
The Senior Revolving Credit Facility, the 1995 Indenture and the indentures
relating to the Company's securitizations contain several financial and other
covenants, including interest coverage requirements, leverage tests, delinquency
and credit loss tests, a dividend restriction and minimum net worth
requirements. The Company believes these covenants will not materially limit its
business or expansion strategy. The Company was in compliance with all such
covenants at June 30, 1996.
The Company intends to continue increasing its finance contract portfolio.
In order to meet its funding needs for the remainder of 1996 and 1997, the
Company will require additional capital resources to supplement its expected
cash flows from operations, the principal payments on finance contracts, the
proceeds from the Offering and the anticipated borrowings under its Senior
Revolving Credit Facility. The Company is expecting to complete additional
securitizations of finance receivables in 1996 and 1997 and is exploring other
sources of liquidity in order to satisfy its needs for additional capital
resources.
IMPACT OF INFLATION AND CHANGING PRICES
Although the Company does not believe that inflation directly has a
material adverse affect on its financial condition or results of operations,
increases in the inflation rate generally are associated with
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increased interest rates. Because the Company borrows a portion of its funds on
a floating rate basis and purchases finance contracts bearing a fixed rate of
interest, increased costs of borrowed funds could have a material adverse impact
on the Company's profitability. In addition, rising interest rates could
decrease gains realized on the sale of the Company's finance contract
receivables and thereby adversely affect the Company's profitability. Inflation
also can affect the Company's operating expenses.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), effective for the Company in 1996,
provides an alternative method for accounting for stock-based compensation and
requires certain disclosures regarding the fair value of stock-based
compensation. The Company does not expect to adopt the alternative method of
accounting for stock-based compensation and, accordingly, the adoption of SFAS
123 will not have any effect on the Company's financial position or results of
operations. The Company expects to expand its disclosure of stock-based
compensation plans to include pro forma fair value information in its 1996
Annual Report to Stockholders.
Statement of Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
("SFAS 125"), effective for the Company in 1997, provides new methods of
accounting and reporting for transfers and servicing of financial assets and
extinguishments of liabilities. The Company will apply SFAS 125 to
securitization transactions occurring on or after January 1, 1997. The effect of
adopting SFAS 125 is not expected to have a material effect on the Company's
financial position or results of operations.
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BUSINESS
GENERAL
The Company is a specialty finance company primarily engaged in financing
the purchase of used automobiles by acquiring dealer-originated finance
contracts. Since the Company's incorporation in March 1991, it has targeted its
marketing efforts to dealers which sell automobiles to consumers who have
limited access to traditional sources of credit. The Company serves two
customers, the dealer and, indirectly, the dealer's customer, the non-prime
borrower. As of September 30, 1996, the Company serviced approximately 3,000
dealers in 37 states. The Company's total finance contract portfolio, which
includes receivables owned and sold with servicing retained, increased from
approximately $94.1 million at December 31, 1994 and $284.2 million at December
31, 1995 to approximately $479.2 million at June 30, 1996, while maintaining net
charge-offs as a percentage of average net finance receivables of under 6.0% for
such periods. The Company generated net earnings before extraordinary item in
1993, 1994, and 1995 of approximately $0.9 million, $2.8 million and $6.7
million, respectively. For the six months ended June 30, 1995 and June 30, 1996,
the Company generated net earnings of approximately $2.5 million and $6.2
million, respectively.
The automobile dealer business is highly fragmented and includes businesses
selling principally new automobiles, but also operating a used automobile
business, that are franchised by an automobile manufacturer ("franchised
dealers") and businesses selling exclusively used automobiles that are not
affiliated with an automobile manufacturer ("independent dealers"). During the
six months ended June 30, 1996, approximately 80% (by aggregate principal
balance) of the finance contracts purchased by the Company were originated by
franchised dealers and the remainder were originated by quality independent
dealers.
The finance contracts purchased by the Company are primarily with non-prime
borrowers who are generally relatively higher credit risks due to various
factors, including their impaired credit history or the absence or limited
extent of their credit history. Typical non-prime borrowers include young
borrowers (18 to 25 years old) who are trying to establish an initial credit
rating, previously bankrupt borrowers who are re-establishing their credit
rating, slow payers of credit cards and department store accounts and borrowers
who desire payment terms slightly longer than the maximum term permitted by
traditional sources of automobile financing, such as commercial banks, savings
and loan associations, credit unions, finance companies affiliated with
automobile manufacturers and other consumer lenders.
THE INDUSTRY
Automobile financing is one of the two largest categories, by dollar
amount, of consumer installment debt in the United States. Most traditional
sources of automobile financing generally provide automobile financing for the
most creditworthy, or so-called "prime" borrowers. The Company believes that the
strong credit performance and large size of the market have led to intense price
competition in the financing market for prime borrowers, and, in turn, low
profit margins, effectively limiting this market to only the largest
participants. In addition, special low-rate financing programs offered by
automobile manufacturers' captive finance companies to promote the sale of
specific automobiles have added to the competition within the prime borrower
market.
Although prime borrowers represent the largest segment of the automobile
financing market, there are many potential purchasers of automobiles who do not
qualify as prime borrowers. Purchasers considered by the Company to be non-prime
borrowers are generally unable to obtain credit from traditional sources of
automobile financing. The Company believes that, because these potential
purchasers represent a substantial market, there is a demand by automobile
dealers with respect to financing for non-prime borrowers that has not been
effectively served by traditional automobile financing sources.
At December 31, 1995, there were approximately 22,750 franchised dealers
and approximately 63,750 independent dealers in the United States. According to
the Federal Reserve Board, as of March 31, 1996, there was approximately $359.0
billion in automobile related installment credit outstanding. The Company is
unaware of any authoritative estimates of the "non-prime" portion of this
market, although various sources have estimated that the potential loan base in
this portion of the market is between $50 billion and $70 billion.
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The Company believes that demographic and economic trends favor increased growth
in the non-prime segment of the automobile finance industry. The average
American family must spend a significantly higher percentage of its income to
purchase an automobile than it did several years ago. According to industry
data, the average price of a new automobile in 1994 represented approximately
59.3% of the U.S. median family income for that year, an increase from
approximately 51.5% in 1986. This increase, combined with increases in the
average useful life of automobiles and the number of late-model used automobiles
available for sale (including rental cars and cars that were formerly leased),
have led industry analysts to believe that the market for retail sales of used
automobiles will continue to grow.
The Company believes that the largest competitor in the non-prime
automobile financing market has a finance contract portfolio that represents
less than 3% of such market and that no other competitor in such market has a
portfolio representing more than 2% of such market. The Company estimates that
its finance contract portfolio represents less than 1% of the non-prime
automobile financing market.
STRATEGY
The Company's growth strategy is to utilize its national sales force,
together with its Dealer Service Center managers, to increase the volume of
contracts purchased per automobile dealer relationship, increase its presence
and geographic scope within existing markets and penetrate new markets. The
Company has established relationships with certain national used car
superstores, such as CarMax(R), and certain large, regional franchised dealers
and intends to develop relationships with additional national used car
superstores and additional large, regional franchised dealers. The Company is
also in the process of developing referral programs with financial institutions,
which enable the Company to finance non-prime borrowers whose credit
applications have been turned down by such financial institutions. In addition,
the Company is considering bulk purchases of non-automobile consumer receivables
and various other strategic business alternatives, including diversification
into other areas of consumer financial services. However, the Company
anticipates that its primary business strategy will continue to be to focus its
resources on purchasing finance contracts from dealers that sell automobiles to
non-prime borrowers. The key elements of the Company's business strategy are as
follows:
Efficient Operational Structure. The Company's operational structure is
designed to maximize dealer service and finance contract originations, while
maintaining consistent portfolio performance and controlling operating expenses.
The Company's sales, credit and collection functions are organized as follows:
(i) a national sales force, which is dedicated to developing new dealer
relationships and expanding the geographic scope of Dealer Service Centers; (ii)
regional Dealer Service Centers, which coordinate with the sales force to build
and nurture dealer relationships, process and underwrite credit applications and
disburse funds to dealers; (iii) Account Service Centers, which perform all
account servicing functions, such as finance contract verification, payment
processing, delinquency follow-ups and cost-effective recoveries of charged-off
account balances; and (iv) the Asset Disposition Group, which arranges the
disposition of repossessed collateral.
Experienced Management Personnel. The Company has recruited experienced
management personnel at the executive, supervisory, and managerial levels. The
Company believes that the retention of such experienced management personnel is
important in maintaining credit quality, supervising its operations and
maintaining flexible strategies for growth in a changing business environment.
The Company's executive officers, senior managerial personnel and Dealer Service
Center and Account Service Center managers have an average of over 15 years of
experience in the consumer or automobile finance industries. In addition to
recruiting experienced management personnel, the Company places an emphasis on
retaining such personnel through competitive compensation, equity incentives and
professional development programs, such as sales training and counseling and
credit underwriting certification programs.
Sophisticated Risk Management Techniques. To mitigate the higher risks
often associated with non-prime borrowers, the Company has developed
sophisticated risk management techniques for evaluating credit applications
based in part upon the Company's ongoing analysis and review of existing
portfolio characteristics. The Company utilizes a credit scoring system
developed by a leading credit evaluation company as an objective guideline for
evaluating a non-prime borrower's creditworthiness. The Company employs a tiered
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pricing system that provides guidance for the determination of the APR, discount
and other terms of a finance contract commensurate with the credit
characteristics of such contract. The Company has also established uniform
guidelines and procedures for evaluating credit applications relating to such
matters as the borrower's stability of residence, employment history, credit
history, capacity to pay, income, discretionary income, debt ratio and credit
bureau score, as well as the value of the collateral. In addition, the Company
has assigned each Dealer Service Center manager a maximum credit authority per
finance contract based on various factors, including such manager's experience
level. Within the guidelines and procedures established by the Company, each
Dealer Service Center manager is authorized to approve or reject credit
applications within such manager's maximum credit authority and to supplement
objective credit criteria with subjective judgment in making credit decisions.
If the proposed financing amount exceeds the Dealer Service Center manager's
maximum credit authority or does not meet the Company's guidelines, the Dealer
Service Center manager must obtain the approval of the Assistant Vice President
- - Operations Risk Management.
Proactive Collection Management. The Company pursues a policy of proactive
collection management through its Account Service Centers with respect to both
current and delinquent accounts, including activities related to monthly billing
and collections, borrower inquiries and repossessions. Shortly after the Company
purchases a finance contract, personnel at an Account Service Center typically
contact the borrower by telephone to verify the terms of the sale. The Company
also sends the borrower a letter which describes the procedures and schedule for
repaying the finance contract and explains the Company's delinquency and
repossession policies. The Company utilizes predictive dialing technology to
complement its calling efforts and enhance the productivity of its collection
personnel. Any finance contract for which a payment is one day overdue is
treated as a past due account for collection purposes, and the Company typically
contacts a borrower within two days after such borrower's account becomes past
due. The Company generally commences repossession procedures before an account
is more than two payments past due. Management believes that proactive
collection management is critical in maintaining a low level of delinquencies
and charge-offs.
Monitoring and Supervising the Operational Structure. The Company maintains
the following three departments reporting directly to senior management that
perform independent control functions to monitor and review the operations of
the Company: (i) Risk Management, which performs ongoing analyses of new finance
contracts purchased by the Company to ensure that such finance contracts meet
the Company's credit guidelines and were purchased in compliance with the
Company's operational procedures, analyzes trends in the finance contract
portfolio and performs back-end reviews of the finance contract portfolio's
performance; (ii) Internal Audit, which performs on-site audits of each Dealer
Service Center and Account Service Center at least annually to ensure compliance
with the Company's guidelines and procedures and maintenance of the Company's
credit quality standards; and (iii) Managing Directors of Dealer Services, who
typically visit and review the operations of each Dealer Service Center
throughout the year in order to evaluate compliance with the Company's policies
and procedures, measure the effectiveness of business development efforts, and
review general portfolio credit and performance quality and office
profitability. Each control function actively utilizes the Company's management
information system that provides real time, on-line reports on a daily basis
which contain operational information from each of the Company's Dealer Service
Centers, Account Service Centers and the Asset Disposition Group. In addition,
management conducts daily reviews of the volume of finance contracts purchased,
aging of accounts, repossession activities and other operating data. See
"Business -- Management Information Systems."
Providing Superior Service to Quality Dealers. By providing prompt,
flexible service and a reliable source of financing for non-prime borrowers, the
Company helps to expand the dealers' customer base, thereby increasing the
efficiency and effectiveness of their used car sales operations. The Company
believes that its guidelines and procedures allow it to respond quickly to
dealers. The Company typically responds to credit applications on the date
received, in many cases within 2 to 3 hours, and generally pays the dealer for
finance contracts purchased within 24 hours after the Company has received
required documentation from the dealer. Management believes that because of its
prompt and reliable response to dealers, many dealers conduct business with the
Company. As of August 31, 1996, the Company operated a nationwide network of 33
Dealer Service Centers servicing dealers in 37 states. In the first half of
1996, the Company consolidated 13 smaller Dealer Service Centers to improve
operating efficiencies in accordance with its nationwide hub and spoke
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strategy, and the Company intends to continuously review the operating
efficiencies of its remaining Dealer Service Center network. The Company has
strengthened its national sales force to support the efforts of its Dealer
Service Centers in providing consistent, reliable service to dealers. The
Company has further focused its operations by centralizing collections into two
Account Service Centers, thus allowing Dealer Service Centers to concentrate on
developing and nurturing dealer relationships and maintaining credit quality
with respect to new purchases of finance contracts.
OFFICES
As of September 30, 1996, the Company operated 33 Dealer Service Centers,
two Account Service Centers and the Asset Disposition Group. The Company
establishes Dealer Service Centers in locations that allow Company personnel to
provide personal service to dealers, while covering a wide geographical area. By
utilizing a hub and spoke strategy, the Company's Dealer Service Center managers
and sales professionals are able to meet individually with local dealers to
negotiate dealer agreements, quickly resolve problems as they develop and
respond to the competitive conditions of a particular market. Management
believes that this structure significantly enhances the Company's operations and
competitive advantage. See "Business -- Contract Acquisition Process-Dealer
Relations." Dealer Service Center managers are evaluated and compensated based
upon objective financial and operational criteria relating to the performance of
their respective Dealer Service Centers.
The Company considers each Dealer Service Center as its own profit center,
having primary responsibility for business development and contract acquisition.
Each Dealer Service Center functions independently of the other centers and is
operated by a full-time Dealer Service Center manager who reports to a Managing
Director of Dealer Services. The Account Service Centers are primarily
responsible for collections, including recoveries of charged-off account
balances, and payment processing. Each Account Service Center is operated by an
Account Service Center manager who reports to a Managing Director of Account
Services. The Asset Disposition Group arranges for dispositions of repossessed
collateral and is supervised by a Managing Director of Asset Disposition. The
Company's four Managing Directors of Dealer Services are responsible for
reviewing compliance with the Company's guidelines and procedures and conducting
periodic on-site reviews of the Dealer Service Centers. In addition, Managing
Directors of Dealer Services provide day-to-day guidance to Dealer Service
Center managers in making credit decisions. The Managing Directors of Dealer
Services report directly to the Vice President - Automotive Financial Services.
The Managing Directors of Account Services and the Managing Director of Asset
Disposition report to the Vice President - Account Services.
CONTRACT PROFILE
During 1993, 1994 and 1995, the Company purchased 5,263, 10,154 and 25,336
finance contracts, respectively, with aggregate initial principal balances of
approximately $33.9 million, $91.4 million and $257.9 million, respectively. For
the six months ended June 30, 1995 and June 30, 1996, the Company purchased
9,879 and 23,958 finance contracts, respectively, with aggregate initial
principal balances of approximately $99.0 million and $265.3 million,
respectively. Finance contracts purchased during the six months ended June 30,
1996 had an average initial principal balance of $11,075, a weighted average APR
of 20.3%, a weighted average purchase discount of 4.3% and a weighted average
initial contract term of 54 months. Based on the Company's historical
experience, its finance contracts have an average life of approximately 34
months. The Company's interest and other portfolio income as a percentage of
average net finance receivables-owned was 22.8% in the six months ended June 30,
1996 which, based on an average cost of borrowed funds of 8.0%, represents a net
interest spread of 14.8%. During the six months ended June 30, 1996, the
Company's owned finance contract portfolio generated a net portfolio yield of
16.7%. During such period, accounts with payments 31 days or more past due
averaged less than 4.0% of the Company's total finance contract portfolio.
CONTRACT ACQUISITION PROCESS
The following is a summary of the process that the Company typically
follows in connection with its acquisition of an automobile finance contract.
Dealer Relations. Using a hub and spoke strategy, the Company solicits
business from automobile dealers through the business development efforts of its
sales force and Dealer Service Centers. The Company evaluates each dealer with
which it establishes a financing relationship to endeavor to ensure that the
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Company purchases finance contracts from only reputable automobile dealers
carrying an inventory of high quality used automobiles. The Company assesses the
length of service and reputation of prospective dealers through the local Better
Business Bureau and state regulatory authorities. The Company inspects each
dealer's physical premises and automobile inventory to determine whether such
dealer appears to be operating its business satisfactorily and maintaining
consistently high quality inventory. The Company's management information
systems track the monthly performance of borrowers' accounts by dealer, allowing
the Company to review and evaluate the quality of finance contracts purchased
from each dealer.
Each dealer with which the Company establishes a financing relationship
enters into a non-exclusive written dealer agreement (a "Dealer Agreement") with
the Company governing the Company's finance contract purchases from the dealer.
A Dealer Agreement generally provides that the dealer shall indemnify the
Company against any damages or liabilities, including reasonable attorneys'
fees, arising out of (i) any breach of a representation or warranty of the
dealer set forth in the Dealer Agreement or (ii) any claim or defense that a
borrower may have against a dealer relating to a finance contract.
Representations and warranties in a Dealer Agreement generally relate to such
matters as whether (i) the financed automobile is free of all liens, claims and
encumbrances except the Company's lien, (ii) the down payment specified in the
finance contract has been paid in full in cash and/or trade in and no part of
the down payment was loaned to the borrower by the dealer and (iii) the dealer
has complied with applicable law. If the dealer violates the terms of the Dealer
Agreement with respect to any finance contract, the dealer must repurchase such
contract on demand for the unpaid balance and all other indebtedness due to the
Company from the borrower.
Credit Evaluation Procedures. If a non-prime borrower elects to finance the
purchase of an automobile through a dealer, the dealer will submit the
borrower's credit application to the Company for review of the borrower's
creditworthiness and proposed transaction terms. Dealer Service Center personnel
conduct such review in accordance with the Company's guidelines and procedures,
which take into account, among other things, the individual's stability of
residence, employment history, credit history, ability to pay, income,
discretionary income and credit bureau score, as well as the value of the
collateral. In addition, Dealer Service Center personnel evaluate a credit
bureau report in order to determine if (i) the individual's credit quality is
deteriorating, (ii) the individual's credit history suggests a high probability
of default or (iii) the individual's credit experience is too limited for the
Company to assess the probability of performance. The Company also utilizes a
credit scoring system developed by a leading credit evaluation company that is
used as an additional objective guideline for evaluating a non-prime borrower's
creditworthiness and employs a tiered pricing system that provides guidance for
the determination of the APR, discount and other terms of a finance contract
commensurate with the credit characteristics of such contract. Dealer Service
Center personnel may also require verification of certain applicant or dealer
provided information prior to making the credit decision. Such verification
typically requires submission of supporting documentation, such as a paycheck
stub or other substantiation of income, and is performed solely by the Company's
personnel. The Company has assigned each Dealer Service Center manager a maximum
credit authority per finance contract based on various factors, including such
manager's experience level. Within the guidelines and procedures established by
the Company, the Dealer Service Center manager is authorized to approve or
reject credit applications within such manager's maximum credit authority and to
supplement objective credit criteria with subjective judgment in making credit
decisions. If the proposed financing exceeds the Dealer Service Center manager's
maximum credit authority or does not meet the Company's guidelines, the Dealer
Service Center manager must obtain the approval of the Assistant Vice President
- - Operations Risk Management.
After reviewing the credit application and the terms of the sale, the
Dealer Service Center notifies the dealer whether or not the Company would be
willing to purchase the finance contract upon sale of the automobile to the
applicant. The Company typically responds to submitted dealer applications on
the date received, in many cases within 2 to 3 hours. The Company is selective
in its approval process. The Company historically has approved approximately 25%
of all submitted credit applications, and approximately 52% of those approved
finance contracts have been purchased by the Company. The difference between the
number of applications approved and the number of finance contracts entered into
is due primarily to industry practice whereby the dealer typically submits the
credit application to more than one finance company and then selects the finance
company that is willing to provide the most favorable terms. In cases where the
Company is unwilling to purchase a finance contract from a dealer under the
proposed terms but believes the applicant has
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the capacity to meet other repayment obligations, Dealer Service Center
personnel will work with the dealer to restructure the terms of the financing or
suggest the sale of an alternative automobile with a price more suited to the
applicant's financial means.
Approval Process. When the Company approves the purchase of a finance
contract, the Dealer Service Center notifies the dealer by facsimile or
telephone. Such notice specifies all pertinent information relating to the terms
of the approval, including the interest rate, the term, information about the
automobile to be sold, the amount of discount that the Company will take from
the principal amount of the finance contract and other consideration, if any,
paid by the Company to the dealer. Generally, a borrower is required to make a
down payment of at least 10% of the purchase price. The Company's guidelines and
procedures require that the advance to the dealers on the underlying collateral
cannot exceed 110% of the wholesale value of such collateral, excluding the cost
of ancillary products sold by the dealer to the borrower, such as warranties or
insurance, which may be financed by the Company. Generally, advances to dealers
have not exceeded 100% of the collateral's wholesale value, excluding the cost
of ancillary products financed by the Company.
Contract Purchase. Upon final confirmation of the terms by the borrower,
the dealer completes the sale of the automobile to the borrower. After the
dealer delivers all required documentation to the Company, the Company remits
funds to the dealer, generally within 24 hours. Upon purchase of the finance
contract, the Company acquires a perfected security interest in the financed
automobile. Each finance contract requires that the automobile be properly
insured and that the Company be named as a loss payee, and compliance with these
requirements is verified prior to the remittance of funds to the dealer.
Additionally, the Company maintains a blanket insurance policy covering physical
property damages in the event that the borrower does not maintain insurance.
CONTRACT SERVICING AND ADMINISTRATION
The Company's contract servicing and administration activities have been
specifically tailored to the unique challenges of servicing loans made to
non-prime borrowers. Each Account Service Center (i) collects payments, (ii)
accounts for and posts all payments received, (iii) responds to borrower
inquiries, (iv) takes all necessary action to maintain the security interest
granted in the financed automobile, (v) investigates delinquencies and
communicates with the borrower to obtain timely payments and (vi) monitors the
finance contract and its related collateral. When necessary, the Asset
Disposition Group contracts with third parties to repossess and dispose of
financed automobiles.
The Company's activities incorporate proactive procedures and systems. For
example, the Company has established a process through which it attempts to
educate borrowers, both in writing and by telephone, upon the Company's purchase
of their finance contracts. This process is designed to ensure that borrowers
clearly understand their obligations and includes a review of the terms of the
finance contract with particular emphasis on the amount and due date of each
payment obligation, the Company's expectations as to the timely receipt of
payments and maintenance of insurance coverage and the Company's delinquency and
repossession policies.
The Company utilizes a monthly billing statement system (rather than
payment coupon books) to remind borrowers of their monthly payment obligations.
This system also serves as an early warning mechanism in the event that a
borrower has failed to notify the Company of an address change. The Company
typically contacts borrowers whose payments are not received by the due date
earlier than it believes is customary in the industry, commencing within two
days after a borrower's due date and continuing until payment has been received.
The Company believes that early and frequent contact with the borrower
reinforces the borrower's recognition of his or her obligations and the
Company's expectation of timely payment.
DELINQUENCY CONTROL AND COLLECTION
Personnel at each Account Service Center review accounts that are past due
to assess collection efforts to date and to define the collection strategy, if
appropriate. Each Account Service Center designs a collection strategy that
includes a specific deadline before which each delinquent obligation should be
collected. Each Account Service Center employs predictive dialing technology
that automates the collection process with
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respect to accounts that are from one to 30 days past due. Accounts that are
over 30 days past due are turned over to personnel at the Account Service Center
for more intensive collection efforts. Accounts that have not been collected
prior to the deadline established by the Account Service Center are again
reviewed and, unless there are specific circumstances which warrant further
collection efforts, such accounts are assigned to an outside agency for
repossession. Repossessed automobiles are generally resold through wholesale
auctions. The elapsed time between repossession and resale is generally 30 to 45
days, including passage of the period during which the law of the applicable
jurisdiction permits the borrower to redeem the automobile. Since its inception,
the Company has, on average, recovered approximately 52% of the principal amount
of the finance contracts relating to its repossessed automobiles. Typically,
after repossession, recovery specialists based in the Account Service Centers
seek to recover any deficiency from the borrower, subject to applicable legal
limitations.
MANAGEMENT INFORMATION SYSTEMS
Overall, management believes that it is essential to pursue a strategy of
continuous improvement in information systems in order to maintain the Company's
competitive position. The Company's current systems have been developed to
provide for complete processing of the Company's finance contracts and
associated activities.
Taking advantage of the continuing developments in personal computing
platforms, the Company has furthered its ability to use data warehousing
approaches to perform detailed monthly analyses of portfolio performance and
customized reporting for management purposes. In addition, the Company is
currently working with several information and processing technology providers
in the development and implementation of customized third party systems. The
Company has entered into contracts for these developmental services which will
require a significant investment. The Company anticipates that customized third
party systems will assist it in becoming more adaptable to future business needs
in an efficient and cost effective manner.
RISK MANAGEMENT
The Company maintains a Risk Management group comprised of the following
three subgroups which monitor and review the Company's finance contract
portfolio to reduce risk: (i) Underwriting and Analysis, which performs ongoing
analyses of new finance contracts purchased by the Company to ensure that such
finance contracts meet the Company's credit guidelines and were purchased in
compliance with the Company's operational procedures; (ii) Portfolio Analysis,
which performs statistical analyses of the finance contract portfolio to
identify trends in the portfolio; and (iii) Portfolio Performance, which
performs back-end reviews of the finance contract portfolio's performance to
identify the factors contributing to delinquent accounts. The Risk Management
subgroups work together to effectively track the life cycle of a finance
contract in an effort to identify those characteristics that are correlated with
finance contract repayment or delinquency. The Company utilizes the information
generated by the Risk Management group to refine its guidelines and procedures
for evaluating credit applications and its tiered pricing system for the
determination of the APR, discount and other terms of a finance contract
commensurate with the credit characteristics of such contract.
COMPETITION
The automobile finance business is highly competitive. The Company believes
that there are numerous competitors providing, or capable of providing,
financing through dealers to non-prime borrowers. The Company competes with a
number of national, local and regional finance companies with operations similar
to the Company. Competitors or potential competitors include other types of
financial services companies, such as commercial banks, savings and loan
associations, credit unions, finance companies affiliated with automobile
manufacturers and other consumer lenders (many of which are larger than the
Company, have significantly greater financial resources than the Company or have
relationships with captive networks). If additional competitors were to enter
the Company's market, the Company could be materially adversely affected. In
addition, the Company has experienced increased competition, which has resulted
in a reduction in the interest rate charged the borrower, a reduction in (and in
some cases the elimination of) the discount which the Company is able to charge
to dealers and an increase in the frequency and amount of other
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<PAGE> 36
consideration that is paid by the Company to dealers Further competition may
result in additional reductions in such interest rate, additional reductions in
or the elimination of the discount and increases in the frequency and amount of
other consideration that is paid by the Company to dealers, which could
adversely affect the Company's profitability. The Company believes that it
competes principally on the basis of service to participating dealers.
FINANCING
Integral to the Company's business and growth strategy is the maintenance
of sufficient capital resources to support its operations. The Company's
external funding presently consists of the Senior Revolving Credit Facility, the
Temporary Credit Facility, the 1995 Notes and funds generated from
securitizations of portions of the Company's portfolio of finance contract
receivables.
Senior Revolving Credit Facility and Temporary Credit Facility. The Senior
Revolving Credit Facility currently provides for a $205.0 million facility
during the term thereof. The interest rate for borrowings is, at the Company's
option, either (i) the reference prime rate or (ii) LIBOR plus 1.60% for
maturities of one, two, three or six months. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." On May 1, 1996, the Company amended the loan agreement relating to
the Senior Revolving Credit Facility to provide for an additional Temporary
Credit Facility in the amount of $25.0 million which bears interest at the
reference prime rate. The Senior Revolving Credit Facility and the Temporary
Credit Facility are secured by a substantial portion of the Company's assets.
The term of the Temporary Credit Facility expires on November 1, 1996 and the
term of the Senior Revolving Credit Facility expires on June 30, 1997. Amounts
borrowed under the Senior Revolving Credit Facility and the Temporary Credit
Facility are subject to principal repayment on their respective expiration
dates. No amounts were outstanding under the Temporary Credit Facility as of the
date of this Prospectus.
1995 Subordinated Reset Notes. On February 14, 1995, the Company received
approximately $13.5 million, after deducting the underwriting discount and
offering expenses, from the sale of $14.4 million principal amount of 1995
Notes. The 1995 Notes are unsecured, subordinated obligations of the Company.
Interest on the 1995 Notes is payable quarterly, on March 15, June 15, September
15 and December 15 of each year commencing March 15, 1995, at an interest rate
of 11% per annum until March 15, 2000. The interest rate will reset, at the
Company's option, on March 15, 2000 to a rate and for a term of one, two, three,
or five years determined by the Company and will reset thereafter, at the
Company's option, upon the date of expiration of each such new interest rate
period prior to maturity on March 15, 2005. Each holder of the 1995 Notes has
the option to require the Company to redeem all of such holder's 1995 Notes on
March 15, 2000 or any subsequent interest reset date.
Securitizations. The Company securitizes portions of its portfolio of
finance contract receivables in securitization transactions to increase the
Company's liquidity, provide for redeployment of capital, reduce risks
associated with interest rate fluctuations and provide the Company with access
to a cost-effective, diversified source of financing. The Company has
historically applied the net proceeds from securitization transactions to repay
indebtedness under the Senior Revolving Credit Facility, thereby increasing the
amounts available under such facility to fund future purchases of finance
contracts. The Company has structured its securitization transactions both as
debt financings and as off-balance sheet financings that result in gains on the
sale of finance contract receivables. Gains from the sale of finance contract
receivables in securitization transactions constituted a significant portion of
the net earnings of the Company during the six months ended June 30, 1996 and
are likely to continue to represent a significant portion of the Company's net
earnings. The timing of any securitization transaction is affected by a number
of factors beyond the Company's control, including, among others, conditions in
the asset-backed securities markets, interest rates and approvals from third
parties. Some or all of these factors may cause delays in closing a
securitization or may prevent such transactions entirely. If the Company were
unable to securitize finance contract receivables in a financial reporting
period, the Company could incur a significant decline in total revenues and net
earnings for such period. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations." In addition, if the loss or prepayment
experience with respect to finance contracts collateralizing asset-backed
securities is greater than estimated at the time of sale, the Company may be
required to write down its excess
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<PAGE> 37
servicing receivable and, to a lesser extent, its asset-backed securities. A
write-down would reduce the Company's net earnings in the period in which the
write-down occurred. The Company plans to continue to employ its securitization
program as an integral component of its funding strategy and anticipates that it
will generally complete securitization transactions, primarily off-balance
sheet, on a quarterly basis. The Company currently has an effective Registration
Statement on Form S-3 on file with the Securities and Exchange Commission (the
"Commission") pursuant to which the Company intends to effect public offerings
of securitized finance contract receivables from time to time. On September 26,
1996, the Company completed an offering to the public under such Registration
Statement aggregating approximately $117.5 million.
REGULATION
The Company's business is subject to regulation and licensing under various
federal, state and local statutes and regulations. As of August 31, 1996, the
Company's business operations were conducted with dealers located in 37 states,
and, accordingly, the laws and regulations of such states govern the Company's
operations. Most states where the Company operates (i) limit the interest rate,
fees and other charges that may be imposed by, or prescribe certain other terms
of, the finance contracts that the Company purchases, and (ii) define the
Company's rights to repossess and sell collateral. In addition, the Company is
required to be licensed or registered to conduct its finance operations in
certain states in which the Company purchases finance contracts.
Numerous federal and state consumer protection laws and related regulations
impose substantive disclosure requirements upon lenders and servicers involved
in automobile financing. Some of the federal laws and regulations include the
Truth-in-Lending Act, the Equal Credit Opportunity Act, the Federal Trade
Commission Act, the Fair Credit Report Act, the Fair Credit Billing Act, the
Fair Debt Collection Practices Act, the Magnuson-Moss Warranty Act, the Federal
Reserve Board's Regulations B and Z and the Soldiers' and Sailors' Civil Relief
Act.
In addition, the Federal Trade Commission ("FTC") has adopted a
holder-in-due-course rule which has the effect of subjecting persons that
finance consumer credit transactions (and certain related lenders and their
assignees) to all claims and defenses which the purchaser could assert against
the seller of the goods and services. With respect to used automobiles
specifically, the FTC's Rule on Sale of Used Vehicles requires that all sellers
of used automobiles prepare, complete and display a Buyer's Guide which explains
the warranty coverage for such automobiles. The Credit Practices Rules of the
FTC impose additional restrictions on sales contract provisions and credit
practices.
The Company believes that it is in substantial compliance with all
applicable material laws and regulations. Adverse changes in the laws or
regulations to which the Company's business is subject, or in the interpretation
thereof, could have a material adverse effect on the Company's business. In
addition, due to the consumer-oriented nature of the industry in which the
Company operates and the application of certain laws and regulations, industry
participants are regularly named as defendants in litigation involving alleged
violations of federal and state laws and regulations and consumer law torts,
including fraud. Many of these actions involve alleged violations of consumer
protection laws. A significant judgment against the Company or within the
industry in connection with any such litigation could have a material adverse
effect on the Company's financial condition and results of operations.
LEGAL PROCEEDINGS
On August 27, 1996, a purported class action entitled Mercedes Hoffman v.
Grossinger Motor Corp. and First Merchants Acceptance Corporation was filed in
the United States District Court for the Northern District of Illinois. The
complaint, as amended on September 27, 1996 (the "Complaint"), alleges
violations of certain Federal and Illinois consumer protection statutes and RICO
and seeks unspecified damages. The Company believes that certain material
allegations in the Complaint are incorrect and that it has meritorious defenses
to the claims made in the Complaint. The Company intends to vigorously defend
this action. The Company is also involved from time to time in other litigation
incidental to its business.
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<PAGE> 38
MANAGEMENT
EXECUTIVE OFFICERS
The executive officers of the Company, their ages and their present
positions with the Company are as follows.
<TABLE>
<CAPTION>
NAME AGE POSITION AND OFFICES HELD
---------------------------------- --- -------------------------------------
<S> <C> <C>
Mitchell C. Kahn.................. 43 President and Chief Executive
Officer, Director
Alan J. Appelman.................. 39 Vice President -- Risk Management
Thomas R. Ehmann.................. 44 Vice President and Chief Financial
Officer, Assistant Secretary
S. Mark Floyd..................... 43 Vice President -- Portfolio
Acquisitions
Peter J. Gorman................... 38 Vice President -- Account Services
Brian W. Hausmann................. 41 Vice President -- Automotive
Financial Services
Allen D. Rice..................... 40 Vice President -- Sales & Marketing
Paul M. Van Eyl................... 31 Vice President -- Strategic
Development
Richard P. Vogelman............... 54 Vice President, General Counsel and
Secretary
</TABLE>
Mr. Kahn has served as President, Chief Executive Officer and a director
since the Company was founded in March 1991. From April 1989 to March 1991, Mr.
Kahn served as President and Chief Executive Officer of First Credit
Corporation, a consumer finance company specializing in the purchase of home
improvement sales finance receivables. In December 1983, Mr. Kahn co-founded
Mercury Finance Company, a specialty consumer finance company, and served as a
Vice President of such company from December 1983 to February 1987 and a Senior
Vice President of such company from February 1987 to April 1989.
Mr. Appelman joined the Company in August 1995 as Vice President -
Operations Development and was named Vice President - Risk Management in August
1996. From October 1990 to August 1995, Mr. Appelman held various operation
analysis positions, including Manager - Operations and Portfolio Analysis, at
Hyundai Motor Finance Company.
Mr. Ehmann joined the Company in November 1992 as Vice President - Finance
and Controller and Assistant Secretary and was named Vice President and Chief
Financial Officer in June 1995. From May 1988 to November 1992, Mr. Ehmann was
Vice President, Finance and Controller for The LINC Group, Inc. and its
subsidiary LINC Scientific Leasing, both of which are equipment leasing
companies. Mr. Ehmann is a Certified Public Accountant.
Mr. Floyd joined the Company in June 1996 as Vice President - Portfolio
Acquisitions. From April 1990 to June 1996, Mr. Floyd was President and a
principal of National Asset Placement Corporation, a private company engaged in
purchasing and servicing loan portfolios. From April 1979 to April 1990, he was
employed in various management positions with several banks located in Texas.
Mr. Gorman joined the Company in January 1996 as Vice President - Account
Services. From July 1979 to January 1996, Mr. Gorman held various loan
acquisition and servicing positions at Key Bank of New York, including Vice
President from August 1990 to January 1996.
Mr. Hausmann joined the Company in June 1991 as Vice President - Operations
and was named Vice President - Automotive Financial Services in August 1996.
From March 1989 to March 1991, Mr. Hausmann served as Vice President and Chief
Operating Officer of First Credit Corporation, a consumer finance company
specializing in the purchase of home improvement sales finance receivables.
Mr. Rice joined the Company in March 1995 as Vice President - Sales &
Marketing. From January 1990 to March 1995, Mr. Rice was founder and President
of Aegis International, an international consulting firm specializing in
marketing and sales.
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<PAGE> 39
Mr. Van Eyl joined the Company in July 1993 as Director of Planning and
Analysis, was named Vice President - Risk Management in March 1995 and was named
Vice President - Strategic Development in August 1996. From October 1988 to July
1993, Mr. Van Eyl was employed in various managerial positions at LINC
Scientific Leasing, an equipment leasing company.
Mr. Vogelman has served as Vice President, General Counsel and Secretary of
the Company since July 1995. From June 1969 to March 1995, Mr. Vogelman held
various positions in the Investment Law Division of Allstate Insurance Company,
including Assistant Vice President and Assistant General Counsel during the
period from January 1987 to March 1995.
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<PAGE> 40
DESCRIPTION OF THE 1996 NOTES
GENERAL
The 1996 Notes are to be issued under the 1996 Indenture, dated as of
, 1996, between the Company and LaSalle National Bank, as Trustee
(the "Trustee"), the form of which is filed as an exhibit to the Registration
Statement of which this Prospectus is a part. The following statements, unless
the context otherwise requires, are summaries of the substance or general effect
of certain provisions of the 1996 Indenture, do not purport to be complete and
are qualified in their entirety by reference to the 1996 Indenture. Unless
otherwise defined herein, capitalized terms used in this Prospectus have the
same meanings as defined in the 1996 Indenture.
The 1996 Notes will be limited to $51,750,000 aggregate principal amount
(including $6,750,000 which may be sold only to cover over-allotments). The 1996
Notes will be issued in denominations of $1,000 or any integral multiple of
$1,000 and will be issued in fully registered form only, without coupons.
Interest on the 1996 Notes will be payable from their original date of issuance,
quarterly, on March 15, June 15, September 15 and December 15 of each year (the
"Interest Payment Date"), commencing December 15, 1996. The 1996 Notes will bear
interest as described below, payable to the person in whose name the 1996 Note
is registered at the close of business on the seventh day of the month (whether
or not a business day) immediately preceding an Interest Payment Date. The 1996
Notes will mature on December 15, 2006, unless redeemed earlier at the option of
the 1996 Noteholders or unless redeemed earlier at the option of the Company.
See "Description of the 1996 Notes -- Redemption at Option of 1996 Noteholder,"
"Description of the 1996 Notes -- 1996 Noteholders' Right to Redemption After
Special Redemption Event" and "Description of the 1996 Notes -- Optional
Redemption by the Company." The 1996 Notes will be direct, unsecured obligations
of the Company, will be equal in rank to the 1995 Notes and will be subordinated
in right of payment of principal and interest to Senior Indebtedness of the
Company. See "Description of the 1996 Notes -- Subordination." The 1996 Notes
will not be subject to any sinking fund.
The 1996 Notes will mature on December 15, 2006. The 1996 Notes will be
exchangeable and transferable at the principal corporate trust office of the
Trustee in Chicago, Illinois, without charge therefor, except for any tax or
other governmental charge connected therewith.
The Company intends to apply for a rating from Duff and Phelps Credit
Rating Co. with respect to the 1996 Notes.
ADJUSTABLE INTEREST RATE
The 1996 Notes shall bear interest from the date of original issuance until
December 15, 2001 at the rate of % per annum. Thereafter, the 1996 Notes shall
bear interest in accordance with the following procedures: On or before 30 days
prior to December 15, 2001, or the expiration date of any subsequent Interest
Rate Period, the Company shall establish, at its option, the interest rate per
annum (rounded to the nearest five hundredths of a percentage point; each such
rate, a "Subsequent Interest Rate") for an Interest Rate Period of one, two,
three or five years (but never extending beyond December 15, 2006), commencing
with such Interest Reset Date and ending on, but not including, the December 15
of such first, second, third or fifth year, as the case may be. Any such
Subsequent Interest Rate shall not be less than 105% of the Effective Interest
Rate on Comparable Maturity U.S. Treasury Obligations (as defined herein)
established prior to the commencement of each such subsequent Interest Rate
Period. In the event that the Company determines on the November 15 preceding
such Interest Reset Date that, during the ten calendar days preceding such
November 15, no Weekly Comparable Maturity Treasury Rate (as defined herein) has
been published and the Alternate Comparable Maturity Treasury Rate (as defined
herein) could not be determined, the Company shall establish such Subsequent
Interest Rate in its discretion without limitation.
In the event that the Company establishes a Subsequent Interest Rate for a
subsequent Interest Rate Period, the Company will notify the Trustee of each
Subsequent Interest Rate and Interest Rate Period on or before 30 days prior to
an Interest Reset Date. Not later than the second business day after
notification to the
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<PAGE> 41
Trustee by the Company of each Subsequent Interest Rate and Interest Rate
Period, the Trustee will mail such notice to each 1996 Noteholder.
If the Company decides not to establish a Subsequent Interest Rate for a
subsequent Interest Rate Period as provided above, the interest rate for the
prior Interest Rate Period shall continue to be the interest rate in effect for
the next year and each year thereafter, unless and until the Company shall
establish a Subsequent Interest Rate on or before November 15 of a subsequent
year in which an Interest Reset Date occurs for a subsequent Interest Rate
Period as provided above, commencing with December 15 of such year. Until
establishment of such a Subsequent Interest Rate for a subsequent Interest Rate
Period, each December 15 shall be deemed to be an Interest Reset Date.
In the event that the Company decides not to establish a Subsequent
Interest Rate for a subsequent Interest Rate Period, the Company shall so notify
the Trustee on or before 30 days prior to the Interest Reset Date. Not later
than the second business day after such notification to the Trustee by the
Company, the Trustee will mail such notice to each 1996 Noteholder.
As used herein, the following capitalized terms shall have the following
definitions:
"Alternate Comparable Maturity Treasury Rate" means the average yields
to maturity of the daily closing bids (or less frequently if daily
quotations shall not be available), quoted by at least three recognized
U.S. Government securities dealers selected by the Company, for all
marketable U.S. Treasury securities with a maturity of not less than three
months shorter nor more than three months longer than the applicable
Comparable Maturity from the November 15 preceding an Interest Reset Date
(other than securities which can, at the option of the 1996 Noteholder, be
surrendered at face value in payment of any Federal estate tax) for the
most recent five consecutive business days during which there had been at
least three days on which daily closing bids were quoted within the 25
calendar day period preceding such November 15.
"Comparable Maturity" means, with respect to an Interest Rate Period
of one, two, three or five years, one, two, three or five years,
respectively.
"Effective Interest Rate on Comparable Maturity U.S. Treasury
Obligations" means as of the November 15 preceding an Interest Reset Date
(i) if available, the most recent Weekly Comparable Maturity Treasury Rate
published during the 25 calendar day period preceding such November 15 or
(ii) if such Weekly Comparable Treasury Rate is not available, the
Alternate Comparable Maturity Treasury Rate as of such November 15.
"Weekly Comparable Maturity Treasury Rate" means the weekly average
yield to maturity values adjusted to a constant maturity of the Comparable
Maturity as read from the yield curves of the most actively traded
marketable U.S. Treasury fixed interest rate securities constructed daily
by the U.S. Treasury Department as published by the Federal Reserve Board,
any Federal Reserve Bank or any United States Government department or
agency.
REDEMPTION AT OPTION OF 1996 NOTEHOLDER
If requested by the personal representative or surviving tenant of a
deceased 1996 Noteholder, the Company will redeem, in whole or in part, during
the period from the date of original issuance through December 15, 1997, and
thereafter in any subsequent twelve-month period ending December 15 (each a
"Redemption Period") an aggregate maximum per Redemption Period of 5% of the
original aggregate principal amount of the 1996 Notes issued under the 1996
Indenture, subject to certain limitations. Any such redemption shall be at a
price of 100% of the principal amount plus accrued interest to the date of
redemption. Such redemption will take place within 60 days following the
Trustee's receipt of a redemption request and certain other documents from the
personal representative or surviving tenant of any such deceased 1996 Noteholder
or beneficial owner.
The Company is not obligated to redeem more than $25,000 of the 1996 Notes
tendered by any single personal representative or surviving tenant of a deceased
1996 Noteholder in any Redemption Period, except
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<PAGE> 42
that in the case of 1996 Notes registered in the name of banks, trust companies
or broker-dealers who are members of a national securities exchange or the
National Association of Securities Dealers, Inc. ("Qualified Institutions"), the
$25,000 limitation applies to each beneficial owner of 1996 Notes held by a
Qualified Institution. Such Qualified Institution in its request for redemption
on behalf of such a representative or tenant must submit evidence, satisfactory
to the Trustee, that it holds 1996 Notes on behalf of such representative or
tenant and must certify that the aggregate requests for redemption tendered by
such Qualified Institution on behalf of such representative or tenant per
Redemption Period does not exceed $25,000.
A 1996 Note held in tenancy by the entirety, joint tenancy or tenancy in
common will be deemed to be held by a single holder, and the death of a tenant
by the entirety, joint tenant or tenant in common will be deemed the death of a
holder. The death of a person who, during such person's lifetime, was entitled
to substantially all of the beneficial ownership interests of a 1996 Note will
be deemed the death of the holder, regardless of the registered holder, if such
beneficial interest can be established to the satisfaction of the Trustee. Such
beneficial interest will be deemed to exist in cases of street name or nominee
ownership, ownership by a custodian for the benefit of a minor under the Uniform
Gifts to Minors Act, community property or other joint ownership arrangements
between spouses (including individual retirement accounts or Keogh plans
maintained solely by or for the decedent, or by or for the decedent and the
decedent's spouse) and trusts and certain other arrangements whereby a person
has substantially all of the beneficial ownership interests in a 1996 Note
during such person's lifetime. Beneficial interests include the power to sell,
transfer or otherwise dispose of a 1996 Note and the right to receive the
proceeds therefrom, as well as interest and principal payable with respect
thereto.
Further, the 1996 Notes may be redeemable, in whole, on December 15, 2001
or at any subsequent Interest Reset Date at the option of the holder thereof, at
100% of the principal amount plus accrued interest to the date of redemption. To
be redeemed, a 1996 Note must be presented to the Trustee at its principal
corporate trust office in Chicago, Illinois. The Trustee shall notify 1996
Noteholders of any Interest Reset Date not later than two business days after
receipt of notice from the Company. Such notice from the Trustee shall, among
other things, set forth the Subsequent Interest Rate and the Interest Rate
Period (or that the Company has decided not to reset the interest rate, as the
case may be) and that the 1996 Noteholder must exercise his option to have his
1996 Notes redeemed not later than the fifth business day before the Interest
Reset Date and that if a 1996 Noteholder elects to revoke his exercise of such
option prior to the redemption of the 1996 Notes, he must do so not later than
the fifth business day before the Interest Reset Date.
No particular form of request for redemption or authority to request
repayment is necessary. However, in order for 1996 Notes to be validly tendered
for redemption, the Trustee must have received: (1) a written request for
redemption, (2) the 1996 Notes to be redeemed free of any liens or encumbrances
and (3) in the case of a surviving tenant or personal representative of a
deceased 1996 Noteholder or beneficial owner, appropriate evidence of death and
such other additional documents as the Trustee shall require, including, but not
limited to, inheritance or estate tax waivers and evidence of authority of the
personal representative. Any 1996 Notes tendered or any request for redemption
may be withdrawn by written request received by the Trustee on or prior to (1)
the fifth business day before an Interest Reset Date in the case of a redemption
on an Interest Reset Date, (2) on the date that is 75 days after the occurrence
of the Special Redemption Event in the case of a Special Redemption Event (as
defined herein) or (3) the issuance of a check in payment thereof in the case of
1996 Notes presented by reason of death of a 1996 Noteholder or beneficial
owner. Requests for redemption covering 1996 Notes not paid will remain in
effect unless withdrawn. A 1996 Noteholder who has tendered a 1996 Note for
redemption shall continue to receive all monthly interest payments prior to the
date of redemption.
The Company's obligation to redeem 1996 Notes properly tendered for
redemption is not cumulative. Although the Company is obligated to redeem from
any personal representative or surviving tenant of a deceased 1996 Noteholder in
any Redemption Period up to 5% of the original aggregate principal amount of the
1996 Notes issued under the 1996 Indenture, it is not required to establish a
sinking fund or otherwise set aside funds for that purpose, and the Company has
no present intention of setting aside funds for the redemption of 1996 Notes
prior to maturity. The Company intends to redeem 1996 Notes tendered out of its
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<PAGE> 43
internally-generated funds or, if necessary, short-term or other long-term
borrowings. The obligation to redeem the 1996 Notes, however, is an unsecured
obligation of the Company.
Nothing in the 1996 Indenture prohibits the Company from purchasing any
1996 Notes on the open market. However, the Company may not use any 1996 Notes
purchased on the open market as a credit against amounts the Company is
otherwise obligated under the 1996 Indenture to redeem.
1996 NOTEHOLDERS' RIGHT TO REDEMPTION AFTER SPECIAL REDEMPTION EVENT
In the event of any Special Redemption Event (as defined below), each 1996
Noteholder will have the right, at such holder's option and subject to the terms
and conditions of the 1996 Indenture, to require the Company to redeem such
holder's 1996 Notes, in whole or in part (provided the principal amount of such
part is $1,000 or an integral multiple thereof), on the date that is 75 days
after the occurrence of the Special Redemption Event at a price equal to 100% of
the principal amount plus accrued interest to the date of redemption. Neither
the Board of Directors of the Company nor the Trustee has the ability to waive
the Company's obligation to redeem a holder's 1996 Notes upon request in the
event of a Special Redemption Event.
If a Special Redemption Event occurs, 40 days thereafter, the Company is
obligated to promptly provide, but in any event within three business days after
expiration of such 40-day period, notice to the Trustee, who shall promptly (and
in all events within five days after receipt of notice from the Company) notify
all 1996 Noteholders of the Special Redemption Event, which notice shall state,
among other things, (i) the availability of the redemption option, (ii) the date
before which a holder must notify the Trustee of such 1996 Noteholder's
intention to exercise the redemption option (which date shall be no more than
three business days prior to the date of redemption), and (iii) the procedure
such holder must follow to exercise such right. To exercise this right, the 1996
Noteholder must deliver to the Trustee on or before the close of business on the
date of redemption, written notice of such 1996 Noteholder's redemption election
and the 1996 Note or 1996 Notes to be redeemed free of liens or encumbrances.
Under the 1996 Indenture, a "Special Redemption Event" means the occurrence
of any one or more of the following: (A) the Company shall consolidate with or
merge into any other corporation or partnership (except in a transaction in
which the Company is the surviving entity and is not itself the subsidiary of
another entity), or convey, transfer or lease all or substantially all of its
assets to any person, other than as part of a loan securitization or sale
entered into in the ordinary course of its business; or (B) any person or group
of persons acting in concert who was or were not holders of Common Stock of the
Company immediately prior to the transaction (or the first of a series of
transactions) shall purchase or otherwise acquire in one or more transactions
beneficial ownership of 50% or more of the Common Stock of the Company
outstanding on the date immediately prior to the last such purchase or other
acquisition; provided, however, that a change of 50% or more of the beneficial
ownership of the Common Stock of the Company resulting directly from an
underwritten public offering of Common Stock, duly approved by the Company's
Board of Directors, shall not constitute a Special Redemption Event.
Although there is a developing body of case law interpreting the phrase
"substantially all," there is no precise established definition of the phrase
under applicable law. Accordingly, the ability of a 1996 Noteholder to require
the Company to redeem such 1996 Notes as a result of conveyance, transfer or
lease of less than all of the assets of the Company to another person may be
uncertain.
Except as described above with respect to a Special Redemption Event, the
1996 Indenture does not contain any other provisions that permit the 1996
Noteholders to require that the Company redeem the 1996 Notes in the event of a
takeover or similar transaction. Moreover, a recapitalization of the Company or
a transaction entered into by the Company with management or their affiliates
would not necessarily be included within the definition of a "Special Redemption
Event." Accordingly, while such definition covers a wide variety of arrangements
which have traditionally been used to effect highly leveraged transactions, the
1996 Indenture does not afford the 1996 Noteholders protection in all
circumstances from highly leveraged transactions, reorganizations,
restructurings, mergers or similar transactions involving the Company that may
adversely affect 1996 Noteholders.
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The Special Redemption Event redemption feature of the 1996 Notes may, in
certain circumstances, make more difficult or discourage a takeover of the
Company and thus removal of incumbent management. The Special Redemption Event
redemption feature, however, is not the result of management's knowledge of any
specific effort to obtain control of the Company or part of a plan by management
to adopt a series of anti-takeover provisions. Rather, the terms of the Special
Redemption Event redemption feature are a result of negotiations between the
Company and the Underwriters.
To the extent that the right of redemption by a 1996 Noteholder in the
event of a Special Redemption Event constitutes a tender offer under Section
14(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
and the rules thereunder, the Company intends to comply with all applicable
tender offer rules.
OPTIONAL REDEMPTION BY THE COMPANY
The 1996 Notes may not be redeemed by the Company prior to December 15,
2001. On December 15, 2001, or at any subsequent Interest Reset Date, the
Company may, at its option, redeem the 1996 Notes, in whole, upon not less than
30 days' nor more than 60 days' written notice, at 100% of the principal amount
plus accrued interest to the date of redemption. The 1996 Notes will not be
subject to any sinking fund for such purpose.
SUBORDINATION
Payment of the principal of and interest on the 1996 Notes is subordinated
in right of payment to payments due under Senior Indebtedness. Senior
Indebtedness is defined to include the principal of (and premium, if any) and
interest on all indebtedness of the Company, other than the 1995 Notes and the
1996 Notes, incurred in connection with the borrowing of money from banks, trust
companies, insurance companies, investment companies, real estate investment
trusts, pension and profit sharing trusts or other financial institutions or
institutional investors, whether outstanding at the date of execution of the
1996 Indenture or thereafter incurred or created, and such Indebtedness of
others that the Company has assumed, guaranteed or otherwise assured payment of,
directly or indirectly, and renewals, extensions and refunding of any of the
foregoing. Senior Indebtedness does not include indebtedness incurred, created
or assumed after the date of execution of the 1996 Indenture that provides by
its terms that such indebtedness is not prior in right of payment to the 1996
Notes or secured indebtedness with respect to which the sole recourse of the
lender in the event of nonpayment or other default is to the collateral. At
September 30, 1996, Senior Indebtedness aggregated approximately $73.1 million.
The amount of Senior Indebtedness may change in the future.
The 1996 Notes are equal in rank with the 1995 Notes. The 1996 Notes are
senior to the Company's authorized Common Stock and preferred stock and will be
senior to any other class of capital stock that may be authorized.
EVENTS OF DEFAULT; NOTICE AND WAIVER
The following will be Events of Default: (i) default in the payment of
principal, when due, which continues for five days; (ii) default in the payment
of any interest when due, which continues for 10 days; (iii) default in the
performance, or any breach, of any other covenant of the Company, which
continues for 30 days; (iv) any default by the Company under any Senior
Indebtedness pursuant to which all or any portion of such Senior Indebtedness is
accelerated or all or any portion of the collateral securing such Senior
Indebtedness is foreclosed upon or, if such default creates the right of
acceleration or foreclosure, if acceleration or foreclosure do not occur but
such default continues for 180 days; (v) the entry of a final non-appealable
judgment for the payment of money against the Company or any Subsidiary by a
court having jurisdiction which results in a liability (after provision for the
proceeds of any policy of insurance with respect to such liability) in excess of
$15,000,000; or (vi) certain events of bankruptcy, insolvency or reorganization.
If any Event of Default shall occur and be continuing, the Trustee or the
holders of not less than 25% in principal amount of outstanding 1996 Notes may
declare the 1996 Notes immediately due and payable. In the case of certain
Events of Default, including defaults in the payment of the principal of the
1996 Notes at maturity, on
43
<PAGE> 45
an Interest Reset Date or resulting from the occurrence of a Special Redemption
Event, such action may be taken only if such period of continuance shall be at
least 180 days. However, such action may be taken after expiration of the five
day grace period described in (i) above in the event of a default in the payment
of principal of the 1996 Notes related to the death of a 1996 Noteholder and
after expiration of the 10 day grace period described in (ii) above in the event
of a default in the payment of interest on the 1996 Notes.
The Company is required to deliver quarterly to the Trustee an officers'
certificate as to the absence or existence of any default in the performance of
any covenant contained in the 1996 Indenture during the preceding quarter.
The 1996 Indenture provides that the Trustee will, within 60 days after
obtaining notice of the occurrence of a default, give the 1996 Noteholders
notice of all uncured defaults known to it; but, except in the case of a default
in the payment of principal of or interest on any of the 1996 Notes, the Trustee
shall be protected in withholding such notice if it in good faith determines
that the withholding of such notice is in the interest of such 1996 Noteholders.
The holders of not less than a majority of the aggregate principal amount
of outstanding 1996 Notes may on behalf of all of the 1996 Noteholders waive
certain past defaults, not including a default in payment of principal, or
premium, if any, or interest on any 1996 Note.
RESTRICTIONS ON ADDITIONAL INDEBTEDNESS
The Company is prohibited by the 1996 Indenture from permitting its total
indebtedness (excluding secured indebtedness with respect to which the sole
recourse of the lender in the event of nonpayment or other default is to the
collateral), including the 1996 Notes, to exceed six (6.0) times the Company's
Consolidated Net Worth (as defined in the 1996 Indenture) at any time. At August
31, 1996, assuming that the 1996 Notes were then outstanding, such indebtedness
was approximately 1.8 times the Company's Consolidated Net Worth.
LIMITATION ON DIVIDENDS AND OTHER PAYMENTS
The Company has agreed pursuant to the 1996 Indenture that it will not
make, pay or declare any of the following (each a "Restricted Payment"): (i) any
dividend or other distribution of property or assets other than dividends paid
solely in the Company's capital stock or (ii) any stock repurchase (other than a
repurchase from a subsidiary or an employee of the Company in connection with
the termination of the employee's employment), unless such Restricted Payment
when aggregated with all other Restricted Payments made by the Company after
September 30, 1996, is less than the sum of (A) $3 million plus (B) 50% of the
cumulative consolidated net income of the Company and its subsidiaries earned
during the period commencing January 1, 1996 and ending on the date of such
Restricted Payment, plus (C) the cumulative cash and non-cash proceeds to the
Company of all public or private offerings of the Company's capital stock during
the period between September 30, 1996 and the date of such Restricted Payment.
In addition, the Company is prohibited by the 1996 Indenture from making any
Restricted Payment if, by so doing, the Company will be in violation of any
other provision of the 1996 Indenture or the Senior Indebtedness.
MERGER, CONSOLIDATION OR SALE OF ASSETS; SUCCESSOR CORPORATION
The Company has covenanted that it will not merge or consolidate with, or,
other than as part of a loan securitization or sale entered into in the ordinary
course of business, sell or convey all or substantially all of its assets to,
any person, firm or corporation unless the Company is the continuing corporation
in such transaction and is not in default under the 1996 Indenture or, if it is
not the continuing corporation, the successor corporation is a corporation
organized under the laws of the United States of America, expressly assumes the
Company's obligations under the 1996 Indenture and, immediately after such
transaction, the successor corporation is not in default under the 1996
Indenture. Any successor corporation shall succeed to and be substituted for the
Company as if such successor corporation has been named as the Company in the
1996 Indenture.
44
<PAGE> 46
MODIFICATION OF THE 1996 INDENTURE
Modifications of and amendments to the 1996 Indenture may be made by the
Company and the Trustee with the consent of the holders of a majority of the
aggregate principal amount of outstanding 1996 Notes, provided that no such
modification or amendment may (i) reduce the principal amount of or interest on
any 1996 Note or change the stated maturity of the principal or the interest
payment dates or change the currency in which the 1996 Notes are to be paid,
without the consent of each holder of any 1996 Note affected thereby, or (ii)
reduce the percentage of holders of 1996 Notes necessary to modify or alter the
1996 Indenture, without the consent of the holders of all 1996 Notes then
outstanding.
THE TRUSTEE
LaSalle National Bank is the Trustee under the 1996 Indenture. Its
principal corporate trust office is located at 135 South LaSalle Street,
Chicago, Illinois 60603. LaSalle National Bank performs banking services for the
Company and is a lender and the agent bank for the lenders under the Senior
Revolving Credit Facility and the Temporary Credit Facility.
The 1996 Indenture contains a provision pursuant to which the Company will
indemnify the Trustee against any and all losses, liabilities or expenses
incurred by the Trustee in connection with its execution and performance of the
1996 Indenture; provided, however, that such indemnification will not extend to
losses resulting from the negligence or bad faith of the Trustee. The 1996
Indenture provides that the holders of not less than a majority in principal
amount of the outstanding 1996 Notes may direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or exercising
any trust or power conferred upon the Trustee, subject to certain limitations
set forth in the 1996 Indenture. The Trustee is not required to take any action
at the direction of the 1996 Noteholders unless the 1996 Noteholders have
provided the Trustee with a reasonable indemnity.
45
<PAGE> 47
UNDERWRITING
Pursuant to the Underwriting Agreement and subject to the terms and
conditions thereof, the Underwriters named below have agreed, severally, to
purchase from the Company the principal amount of 1996 Notes set forth below
opposite their respective names.
<TABLE>
<CAPTION>
NAME OF UNDERWRITER AMOUNT OF 1996 NOTES
- -------------------------------------------------------------------------- --------------------
<S> <C>
J.C. Bradford & Co. ...................................................... $
Piper Jaffray Inc. .......................................................
Keefe, Bruyette & Woods, Inc. ............................................
Stifel, Nicolaus & Company, Incorporated..................................
-----------
Total................................................................ $ 45,000,000
===========
</TABLE>
In the Underwriting Agreement, the Underwriters have agreed, subject to the
terms and conditions therein set forth, to purchase all the principal amount of
1996 Notes offered hereby if any of such 1996 Notes are purchased.
The Underwriters have advised the Company that they propose initially to
offer the 1996 Notes to the public at the public offering price set forth on the
cover page of this Prospectus and to certain dealers at such price less a
concession not in excess of % of the principal amount. The Underwriters may
allow and such dealers may reallow a concession not in excess of % of the
principal amount to certain other dealers. After the Offering, the public
offering price and such concessions may be changed.
The offering of the 1996 Notes is made for delivery when, as and if
accepted by the Underwriters and subject to prior sale and to withdrawal,
cancellation or modification of the offer without notice. The Underwriters
reserve the right to reject any order for the purchase of the 1996 Notes.
The Company has granted to the Underwriters an option, exercisable not
later than 30 days from the date of this Prospectus, to purchase up to an
additional $6,750,000 aggregate principal amount of 1996 Notes at the Price to
Public set forth on the cover page of this Prospectus less the underwriting
discount set forth on the cover page of this Prospectus. The Underwriters may
exercise such option only to cover over-allotments made in connection with the
sale of the 1996 Notes offered hereby.
There is no public market for the 1996 Notes, and the Company does not
intend to apply for quotation of the 1996 Notes on The Nasdaq Stock Market's
National Market or any other quotation system or listing of the 1996 Notes on
any securities exchange. The Company has been advised by the Underwriters that,
following the public offering of the 1996 Notes, the Underwriters presently
intend to make a market in the 1996 Notes; however, the Underwriters are not
obligated to do so, and any market-making activity with respect to the 1996
Notes may be discontinued at any time without notice. There can be no assurances
as to the liquidity of the public market for the 1996 Notes or that an active
public market for the 1996 Notes will develop. If an active market does not
develop, the market price and liquidity of the 1996 Notes may be adversely
affected.
The Underwriting Agreement provides that the Company will indemnify the
Underwriters and controlling persons, if any, against certain liabilities,
including liabilities under the Securities Act of 1933, as amended (the
"Securities Act"), or will contribute to payments which the Underwriters or any
such controlling persons may be required to make in respect thereof.
LEGAL MATTERS
The validity of the 1996 Notes offered hereby will be passed upon for the
Company by Sonnenschein Nath & Rosenthal, Chicago, Illinois. Certain legal
matters with respect to the Offering will be passed upon for the Underwriters by
Bass, Berry & Sims PLC, Nashville, Tennessee.
46
<PAGE> 48
EXPERTS
The financial statements of the Company as of December 31, 1994 and 1995
and for each of the three years in the period ended December 31, 1995 included
in this Prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein, and have been included in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
AVAILABLE INFORMATION
The Company has filed a Registration Statement with the Commission on Form
S-3 under the Securities Act with respect to the 1996 Notes offered hereby. This
Prospectus, which constitutes a part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement, certain
items of which are contained in schedules and exhibits to the Registration
Statement as permitted by rules of the Commission. For further information with
respect to the Company and the 1996 Notes offered hereby, reference is made to
such Registration Statement and the exhibits and schedules thereto. Statements
contained in this Prospectus as to the contents of any contract or any other
document referred to are not necessarily complete. With respect to each such
contract or any other document filed as an exhibit to the Registration
Statement, or incorporated by reference to exhibits previously filed, reference
is made to the exhibit for a more complete description of the matters involved,
and each such statement shall be deemed qualified in its entirety by such
reference.
The Company is subject to the informational requirements of the Exchange
Act and in accordance therewith files reports, proxy statements and other
information with the Commission. The Registration Statement, including exhibits
and schedules thereto, filed by the Company with the Commission, as well as
reports, proxy statements and other information filed by the Company with the
Commission, may be inspected and copied at the offices of the Commission, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the following Regional
Offices of the Commission: New York Regional Office, Seven World Trade Center,
13th Floor, New York, New York 10048; and Chicago Regional Office, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material may
be obtained from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549 upon the payment of fees prescribed by the
Commission. The Commission also maintains a web site that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission at http://www.sec.gov.
47
<PAGE> 49
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 10-K for the year ended December 31,
1995, the Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 1996 and the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1996, as amended, each of which has been filed by the Company with the
Commission, are incorporated herein by reference, except for the financial
statements included therein. The Company's Current Reports on Form 8-K filed
with the Commission on March 27, 1996, July 11, 1996, September 17, 1996 and
October 11, 1996, respectively, are incorporated herein by reference.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Prospectus and prior to the
termination of the Offering of the 1996 Notes shall be deemed to be incorporated
by reference in this Prospectus and to be a part hereof from the date of filing
of such documents. Any statement contained herein or in a document incorporated
or deemed to be incorporated by reference in this Prospectus shall be deemed to
be modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein or in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
The Company will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus is delivered, upon the
written or oral request of such person, a copy of any or all of the documents
incorporated by reference in this Prospectus, other than exhibits to such
documents, unless such exhibits are specifically incorporated by reference into
such documents. Requests for such copies should be directed to Secretary, First
Merchants Acceptance Corporation, 570 Lake Cook Road, Suite 126, Deerfield,
Illinois 60015 (telephone (847) 948-9300).
48
<PAGE> 50
FIRST MERCHANTS ACCEPTANCE CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report........................................................ F-2
Consolidated Balance Sheets......................................................... F-3
Consolidated Statements of Earnings................................................. F-4
Consolidated Statements of Changes in Stockholders' Equity.......................... F-5
Consolidated Statements of Cash Flows............................................... F-6
Notes to Consolidated Financial Statements.......................................... F-7
</TABLE>
F-1
<PAGE> 51
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
First Merchants Acceptance Corporation:
We have audited the accompanying consolidated balance sheets of First
Merchants Acceptance Corporation and subsidiary (the "Company") as of December
31, 1994 and 1995, and the related consolidated statements of earnings, changes
in stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require the we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of First Merchant Acceptance
Corporation and subsidiary as of December 31, 1994 and 1995, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1995 in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Chicago, Illinois
January 25, 1996 (October 10, 1996 as to Notes 16 and 17)
F-2
<PAGE> 52
FIRST MERCHANTS ACCEPTANCE CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1995 AND (UNAUDITED) JUNE 30, 1996
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30,
--------------------------- ----------------
1994 1995 1996
----------- ------------ ----------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Net finance receivables............................. $94,089,938 $251,908,318 $ 313,605,511
Allowance for credit losses......................... (4,488,995) (14,300,661) (18,829,115)
----------- ------------ ------------
Net receivables........................... 89,600,943 237,607,657 294,776,396
Finance receivables held-for-sale, net.............. -- 32,264,734 26,220,800
Excess servicing receivable......................... -- -- 13,002,213
Cash................................................ 135,240 112,040 711,603
Restricted cash..................................... -- 6,807,842 17,773,660
Repossessed collateral.............................. 749,278 2,304,509 3,335,818
Property and equipment, net......................... 857,923 1,623,679 3,618,092
Other assets........................................ 764,549 1,553,367 2,666,099
----------- ------------ ------------
Total assets.............................. $92,107,933 $282,273,828 $ 362,104,681
=========== ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Borrowings under senior revolving credit
facility....................................... $61,975,000 $104,000,000 $ 69,825,000
Notes payable -- securitized pools, net........... -- 70,378,298 172,866,135
Accounts payable and accrued expenses............. 2,846,267 5,765,322 10,371,071
Interest payable.................................. 148,056 471,085 965,937
Dealer reserves................................... 133,813 552,548 415,281
Income taxes payable.............................. -- 722,776 1,428,187
Deferred income taxes............................. 1,301,000 2,209,000 1,813,000
----------- ------------ ------------
66,404,136 184,099,029 257,684,611
Subordinated reset notes, net..................... -- 13,895,833 13,953,333
----------- ------------ ------------
Total liabilities......................... $66,404,136 $197,994,862 $ 271,637,944
----------- ------------ ------------
Stockholders' equity:
Preferred stock -- $100 par value, 500,000 shares
authorized, no shares issued and outstanding... -- -- --
Common stock -- $.01 par value:
Non-voting, 300,000 shares authorized, 161,758
shares issued and outstanding in 1994........ 1,618 -- --
Voting -- 20,000,000 shares authorized,
3,980,066 and 6,525,519 shares issued and
outstanding in 1994 and 1995, respectively... 39,800 65,255 65,255
Additional paid-in-capital........................ 23,468,302 75,101,401 75,077,317
Unearned compensation attributable to stock
options........................................ (178,767) -- --
Notes receivable from stockholders................ (38,824) -- --
Retained earnings................................. 2,411,668 9,112,310 15,324,165
----------- ------------ ------------
Total stockholders' equity................ 25,703,797 84,278,966 90,466,737
----------- ------------ ------------
Total liabilities and stockholders' equity.......... $92,107,933 $282,273,828 $ 362,104,681
=========== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 53
FIRST MERCHANTS ACCEPTANCE CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
(UNAUDITED) SIX MONTHS ENDED JUNE 30, 1995 AND 1996
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------------------- --------------------------
1993 1994 1995 1995 1996
---------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Interest income -- finance
contracts.................. $6,353,886 $15,324,093 $38,209,587 $14,487,363 $35,479,311
Other portfolio income........ 401,213 698,980 1,338,273 478,761 965,264
Gain on sale of finance
receivables................ -- -- -- -- 8,092,363
Servicing fee and other
income..................... -- -- -- -- 868,446
---------- ----------- ----------- ----------- -----------
Total revenues........ 6,755,099 16,023,073 39,547,860 14,966,124 45,405,384
---------- ----------- ----------- ----------- -----------
Expenses:
Interest expense.............. 1,377,689 4,034,368 10,754,083 4,367,227 9,670,942
Provision for credit losses... -- -- 1,700,000 125,000 7,700,000
Non-recurring charges......... 434,612 -- -- -- --
---------- ----------- ----------- ----------- -----------
Operating expenses:
Employee compensation and
related costs............ 2,267,664 4,940,457 10,263,043 4,007,111 10,768,610
Other operating expenses... 1,110,531 2,549,616 6,027,092 2,380,454 7,081,979
---------- ----------- ----------- ----------- -----------
Total expenses........ 5,190,496 11,524,441 28,744,218 10,879,792 35,221,531
---------- ----------- ----------- ----------- -----------
Earnings before income taxes and
extraordinary item............ 1,564,603 4,498,632 10,803,642 4,086,332 10,183,853
Income taxes.................... 626,000 1,710,000 4,103,000 1,553,000 3,972,000
---------- ----------- ----------- ----------- -----------
Net earnings before
extraordinary item............ 938,603 2,788,632 6,700,642 2,533,332 6,211,853
Extraordinary item from early
extinguishment of debt, net of
income taxes.................. -- (1,167,886) -- -- --
---------- ----------- ----------- ----------- -----------
Net earnings.................... 938,603 1,620,746 6,700,642 2,533,332 6,211,853
Warrant accretion............... (18,269) (126,291) -- -- --
---------- ----------- ----------- ----------- -----------
Net earnings available to
stockholders.................. $ 920,334 $ 1,494,455 $ 6,700,642 $ 2,533,332 $ 6,211,853
========== =========== =========== =========== ===========
Per share data:
Net earnings before
extraordinary item......... $ 0.32 $ 0.85 $1.35 $0.57 $0.92
Extraordinary item............ -- (0.36) -- -- --
---------- ----------- ----------- ----------- -----------
Net earnings.................. 0.32 0.49 1.35 0.57 0.92
Warrant accretion............. (0.01) (0.04) -- -- --
---------- ----------- ----------- ----------- -----------
Net earnings available to
stockholders............... $ 0.31 $ 0.45 $1.35 $0.57 $0.92
========== =========== =========== =========== ===========
Weighted average common and
common equivalent shares
outstanding................... 2,922,423 3,296,747 4,979,958 4,462,848 6,753,960
========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 54
FIRST MERCHANTS ACCEPTANCE CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
(UNAUDITED) SIX MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
UNEARNED
COMPENSATION NOTES
ADDITIONAL ATTRIBUTABLE RECEIVABLE RETAINED TOTAL
COMMON PAID-IN TO STOCK FROM EARNINGS STOCKHOLDERS'
STOCK CAPITAL OPTIONS STOCKHOLDERS (DEFICIT) EQUITY
------- ----------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1992..................... $19,715 $ 4,640,941 $ (399,426) $ (241,250) $ (3,121) $ 4,016,859
Issuance of 289,800 shares of common stock
for cash, net.............................. 2,898 1,437,102 -- -- -- 1,440,000
Issuance of 193,216 shares of common stock in
exchange for subordinated notes payable to
stockholders............................... 1,932 998,068 -- -- -- 1,000,000
Exercise of common stock warrants for 16,858
warrant shares............................. 169 87,071 -- -- -- 87,240
Repayment of notes receivable from
stockholders............................... -- -- -- 19,751 -- 19,751
Termination of 47,384 stock options.......... -- (100,156) 100,156 -- -- --
Amortization of unearned compensation........ -- -- 22,991 -- -- 22,991
Warrant accretion............................ -- -- -- -- (18,269) (18,269)
Net earnings................................. -- -- -- -- 938,603 938,603
------- ----------- -------- -------- ---------- ----------
Balance, December 31, 1993..................... 24,714 7,063,026 (276,279) (221,499) 917,213 7,507,175
Issuance of 1,530,000 shares of common stock
for cash................................... 15,300 14,895,200 -- -- -- 14,910,500
Exercise of common stock warrants for 140,472
warrant shares and transfer 123,616 common
stock warrants to additional paid-in
capital.................................... 1,404 1,510,076 -- -- -- 1,511,480
Repayment of notes receivable from
stockholders............................... -- -- -- 182,675 -- 182,675
Amortization of unearned compensation........ -- -- 97,512 -- -- 97,512
Warrant accretion............................ -- -- -- -- (126,291) (126,291)
Net earnings................................. -- -- -- -- 1,620,746 1,620,746
------- ----------- -------- -------- ---------- ----------
Balance, December 31, 1994..................... 41,418 23,468,302 (178,767) (38,824) 2,411,668 25,703,797
Purchase of employee stock options for
cash....................................... -- (25,873) -- -- -- (25,873)
Repayment of notes receivable from
stockholders............................... -- -- -- 38,824 -- 38,824
Issuance of 2,250,000 shares of common stock
for cash................................... 22,500 51,565,000 -- -- -- 51,587,500
Exercise 123,616 warrant shares for common
shares..................................... 1,236 (1,236) -- -- -- --
Issuance of 10,079 shares of common stock
under 1994 Employee Stock Purchase Plan.... 101 95,208 -- -- -- 95,309
Amortization of unearned compensation........ -- -- 178,767 -- -- 178,767
Net earnings................................. -- -- -- -- 6,700,642 6,700,642
------- ----------- -------- -------- ---------- ----------
Balance, December 31, 1995..................... 65,255 75,101,401 -- -- 9,112,310 84,278,966
Purchase of employee stock options for cash
(unaudited)................................ -- (24,084) -- -- -- (24,084)
Net earnings (unaudited)..................... -- -- -- -- 6,211,855 6,211,855
------- ----------- -------- -------- ---------- ----------
Balance, June 30, 1996 (unaudited)............. $65,255 $75,077,317 $ -- $ -- $15,324,165 $ 90,466,737
======= =========== ======== ======== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 55
FIRST MERCHANTS ACCEPTANCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
(UNAUDITED) SIX MONTHS ENDED JUNE 30, 1995 AND 1996
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
--------------------------------------------- ---------------------------
1993 1994 1995 1995 1996
------------ ------------ ------------- ------------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Interest income received -- finance contracts.... $ 5,906,994 $ 14,796,843 $ 38,932,636 $ 14,802,189 $ 35,885,096
Servicing fees received.......................... -- -- -- -- 735,151
Ancillary and other operating receipts........... 379,681 688,256 1,381,989 467,289 1,088,421
Purchases of finance receivables held-for-sale,
net............................................ -- -- -- -- (140,130,332)
Proceeds from sale of finance receivables
held-for-sale, net............................. -- -- -- -- 141,397,711
Payments for operating expenses.................. (3,198,233) (7,349,496) (15,344,370) (5,505,311) (16,121,975)
Payments for interest and borrowing fees......... (1,439,266) (4,217,944) (10,071,484) (2,834,016) (8,615,156)
Income taxes paid................................ (184,405) (125,100) (2,417,836) (198,962) (3,662,589)
Payments related to non-recurring charges........ (434,612) -- -- -- --
------------ ------------ ------------- ------------ -------------
Net cash flows from operating activities... 1,030,159 3,792,559 12,480,935 6,731,189 10,576,327
Cash flows from investing activities:
Purchases of finance contracts, net.............. $(30,574,661) $(87,044,137) $(241,697,374) $(93,632,264) $(124,360,247)
Principal payments received on finance contracts,
net............................................ 10,852,481 30,715,235 60,074,429 28,015,213 60,203,772
Purchases of property and equipment.............. (425,373) (499,700) (1,124,009) (559,624) (2,313,610)
Increase in restricted cash...................... -- -- (6,317,779) (490,168) (10,965,819)
Other............................................ -- -- (490,168) -- --
------------ ------------ ------------- ------------ -------------
Net cash flows from investing activities... (20,147,553) (56,828,602) (189,554,901) (66,666,843) (77,435,904)
Cash flows from financing activities:
Proceeds from issuance of common stock, net...... $ 1,440,000 $ 14,910,500 $ 51,587,500 $ -- $ --
Proceeds from issuance of notes payable --
securitized pools, net......................... -- -- 74,486,350 -- 124,989,000
Proceeds from issuance of subordinated debt,
net............................................ 2,598,629 4,500,000 13,530,000 13,530,000 --
Repayment of notes payable -- securitized
pools.......................................... -- -- (4,747,672) -- (23,330,777)
Repayment of subordinated debt................... (1,000,000) (6,500,000) -- -- --
Net (decrease) increase in borrowings under
senior revolving credit facility............... 14,785,000 39,750,000 42,025,000 46,375,000 (34,175,000)
Other............................................ 19,751 182,675 169,588 (25,873) (24,083)
------------ ------------ ------------- ------------ -------------
Net cash flows from financing activities... 17,843,380 52,843,175 177,050,766 59,879,127 67,459,140
------------ ------------ ------------- ------------ -------------
Net increase (decrease) in cash................... (1,274,014) (192,868) (23,200) (56,527) 599,563
Cash balance beginning of period.................. 1,602,122 328,108 135,240 135,240 112,040
------------ ------------ ------------- ------------ -------------
Cash balance at end of period..................... $ 328,108 $ 135,240 $ 112,040 $ 78,713 $ 711,603
============ ============ ============= ============ =============
Reconciliation of net earnings to net cash flows
from operating activities:
Net earnings..................................... $ 938,603 $ 1,620,746 $ 6,700,642 $ 2,533,332 $ 6,211,853
Extraordinary item, net of income taxes.......... -- 1,167,886 -- -- --
Amortization of contract acquisition costs and
discounts, net................................. (446,892) (527,250) 723,049 353,160 528,942
Provision for credit losses...................... -- -- 1,700,000 125,000 7,700,000
Depreciation and other amortization.............. 104,010 483,933 1,181,775 541,510 1,076,233
Provision for deferred income taxes.............. 418,000 883,000 908,000 229,000 786,000
Increase in other assets......................... (496,268) (423,979) (633,329) (151,869) (964,573)
Decrease in finance receivables held-for-sale,
net............................................ -- -- -- -- 6,043,934
Gain on sale of finance receivables and other
increase in excess servicing receivable........ -- -- -- -- (13,002,213)
Increase in accounts payable and accrued
expenses....................................... 404,124 575,354 854,993 757,163 2,177,888
Increase in interest payable..................... 108,582 12,869 323,029 1,218,855 494,852
Increase (decrease) in income taxes payable...... -- -- 722,776 1,125,038 (476,589)
------------ ------------ ------------- ------------ -------------
Net cash flows from operating activities... $ 1,030,159 $ 3,792,559 $ 12,480,935 $ 6,731,189 $ 10,576,327
============ ============ ============= ============ =============
Supplemental schedule of significant noncash
financing activities:
Common stock warrants exercised for shares of
common stock and transfer common stock warrants
to additional paid-in capital.................. $ 87,240 $ 1,511,480 $ 1,236 $ -- $ --
============ ============ ============= ============ =============
Transfer of net finance receivables
held-for-sale, net............................. $ -- $ -- $ 32,264,734 $ -- $ --
============ ============ ============= ============ =============
Common stock warrants issued to lenders of
subordinated credit facility recorded as
original issue discount and common stock
warrants....................................... $ 1,454,160 $ -- $ -- $ -- $ --
============ ============ ============= ============ =============
Subordinated notes payable to stockholders
exchanged for common stock..................... $ 1,000,000 $ -- $ -- $ -- $ --
============ ============ ============= ============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 56
FIRST MERCHANTS ACCEPTANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND (UNAUDITED) SIX MONTHS ENDED JUNE 30, 1995 AND 1996
1. BUSINESS DESCRIPTION
First Merchants Acceptance Corporation, including its wholly-owned
subsidiary, First Merchants Auto Receivable Corporation (the "Company"), is a
specialty finance company primarily engaged in financing the purchase of used
automobiles by acquiring dealer-originated retail installment contracts
("finance contracts"). The Company was incorporated on March 22, 1991 in
Delaware and commenced operations on June 1, 1991. In December 1995, the Company
changed its fiscal year end to December 31 from May 31 and restated all prior
periods. At December 31, 1995, the Company operated 36 regional dealer service
centers servicing automobile dealers located in 30 states.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation -- The consolidated financial statements include accounts of
First Merchants Acceptance Corporation and its wholly-owned subsidiary, First
Merchants Auto Receivable Corporation. All significant intercompany accounts
have been eliminated in consolidation.
Revenue Recognition -- Finance contracts consist of both precomputed and
simple interest finance contracts, which require payment of a fixed monthly
amount over a specific term. For precomputed finance contracts, the difference
between the total amount of contractual payments and the principal amount
financed represents unearned finance charges. Unearned finance charges are
amortized and recorded as interest income using the interest method over the
terms and at the interest rates stated in the underlying finance contracts.
Simple interest loan contracts are written at the principal amount advanced to
the borrower and bear interest computed on the unpaid balance. When an account
becomes 61 or more days past due, income recognition is suspended until the
contractual aging is restored to a current status.
The Company receives commissions from the sale of credit insurance
contracts. These commissions are deferred, recorded as unearned ancillary income
and amortized to income using the sum-of-the-digits method over the terms of the
underlying insurance contracts. The use of the sum-of-the-digits method
approximates the results under the interest method.
Other portfolio income, which includes borrower late charges and extension
fees, is recognized when collected.
Deferred Contract Acquisition Costs -- The Company defers costs directly
associated with the acquisition of finance contracts and amortizes such costs
using the interest method as a reduction of interest income over the term of the
finance contracts.
Non-refundable Contract Acquisition Discounts -- Finance contracts are
generally purchased from dealers at a discount from the principal amounts
financed by the borrower. This discount, which primarily represents a credit
enhancement, is negotiated between the Company and the dealers and is
non-refundable to the dealers. The contract acquisition discount necessary to
absorb estimated credit losses is allocated to the allowance for credit losses.
Any remaining contract acquisition discount is amortized to interest income
using the interest method over the term of the finance contracts. Beginning in
1995, the full discount is allocated to the allowance for credit losses and the
discount is no longer being amortized to interest income.
Allowance for Credit Losses -- The allowance for credit losses is initially
established through an allocation of the non-refundable contract acquisition
discount based upon management's estimate of credit losses. If necessary, a
provision for credit losses is charged against earnings to maintain the
allowance for credit losses at an amount management believes necessary to absorb
potential losses in the finance contract portfolio. Beginning in the second
quarter of 1995, management commenced recording provisions for credit losses to
supplement the discount that is allocated to the allowance for credit losses.
F-7
<PAGE> 57
FIRST MERCHANTS ACCEPTANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND (UNAUDITED) SIX MONTHS ENDED JUNE 30, 1995 AND 1996
The allowance for credit losses is maintained at a level management
believes adequate to absorb potential losses in the finance contract portfolio.
Management evaluates the adequacy of the allowance for credit losses by
reviewing credit loss experience, delinquencies, the value of the underlying
collateral, the level of the finance contract portfolio, and general economic
conditions and trends.
An account is charged off at the earliest of the time the account's
collateral is repossessed, the account is 91 or more days past due or the
account is otherwise deemed to be uncollectible.
Finance Receivables Held-For-Sale, Net -- Finance contracts designated for
future sale and securitization during the first quarter of 1996 are classified
as held-for-sale. Finance contracts held-for-sale, net are carried at the lower
of aggregate cost or market value. Market value is determined by current
investor yield requirements.
Restricted Cash -- The Company is required to establish and maintain cash
reserve and collection accounts with a trustee with respect to the securitized
pool of finance receivables. These balances are reported as restricted cash on
the Company's consolidated balance sheets.
Repossessed Collateral -- The Company commences repossession procedures
against the underlying collateral when it determines that collection efforts are
likely to be unsuccessful. Repossession generally occurs before a borrower has
failed to make more than two consecutive monthly payments. In such cases, the
net amount due under the finance contract is reduced to the estimated fair value
of the collateral, less the cost of disposition, and the amount of reduction is
recorded as a credit loss.
Dealer Reserves -- Dealer reserves consist of (1) amounts withheld from
funds paid to dealers to purchase finance contracts, commonly referred to as
deferred certificates, and such amounts are refundable to the dealer when the
finance contracts are fully paid and (2) a portion of the finance charges on
finance contracts which is payable pursuant to agreements with certain dealers
and may be retained by the Company in the event of an early repayment or default
under the finance contract.
Property and Equipment -- Property, equipment and leasehold improvements
are stated at original cost less accumulated depreciation and amortization.
Depreciation and amortization are computed on the straight-line method over the
estimated useful lives of the related assets. Maintenance and repairs are
expensed as incurred.
Senior Revolving Credit Facility -- Commitment and agency fees are paid to
banks in accordance with the provisions of the Company's senior revolving credit
facility ("Senior Revolving Credit Facility"). These fees and the related legal
expenses are deferred and amortized over the term of this facility. These
deferred costs are included in other assets and amortization of these fees is
recorded as interest expense.
Interest Rate Protection Agreements -- The Company enters into interest
rate protection agreements to hedge against interest rate increases. Amounts to
be paid or received under the agreements are recorded using the settlement
method and are treated as an adjustment to interest expense.
Income Taxes -- The Company recognizes deferred tax assets and liabilities
based on differences between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. The effect of a change in tax rates on
deferred tax assets and liabilities is recognized in the period in which the
enactment is effective.
Earnings per share -- Earnings per share amounts are calculated based on
net earnings divided by the weighted average number of shares of common stock
outstanding during the period after consideration of the dilutive effect of
common stock equivalents. Shares of common stock and options and warrants to
purchase
F-8
<PAGE> 58
FIRST MERCHANTS ACCEPTANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND (UNAUDITED) SIX MONTHS ENDED JUNE 30, 1995 AND 1996
shares of common stock issued during the twelve months prior to the Company's
initial public offering are treated as outstanding since the inception of the
Company for purposes of this calculation.
Uses of Estimates in Preparation of Financial Statements -- 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 as of the date of the financial statements, as well as the
reported amounts of income and expenses during the reported periods. Actual
results could differ from those estimates.
3. FINANCE RECEIVABLES
Finance contracts generally have terms of 18 to 60 months. Net finance
receivable balances consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
--------------------------- ------------
1994 1995 1996
----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Precomputed interest contracts, net... $90,297,274 $222,931,347 $259,461,577
Simple interest contracts............. 5,193,977 28,976,971 54,143,934
Unamortized contract acquisition
discount............................ (1,401,313) -- --
----------- ------------ ------------
Net finance receivables............. $94,089,938 $251,908,318 $313,605,511
========== =========== ===========
</TABLE>
Precomputed interest contracts are shown net of unearned finance charges of
$32,842,654, $89,318,743 and $101,218,395 at December 31, 1994 and 1995,
respectively, and at June 30, 1996 (unaudited).
The Company's experience has shown that a portion of the payments will be
received prior to contractual due dates. Therefore, the table below is not a
forecast of future cash collections.
At December 31, 1995, contractual payments, including principal and
interest, due under finance contracts are scheduled to be received as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ------------------------
<S> <C> <C>
1996.......................................................... $112,346,148
1997.......................................................... 91,895,369
1998.......................................................... 76,630,160
1999.......................................................... 51,856,567
2000.......................................................... 18,812,321
------------
Total contractual payments due................................ $351,540,565
===========
</TABLE>
Borrowers under the finance contracts are not concentrated in any specific
geographic region. At December 31, 1995, one regional dealer service center
accounted for approximately 10% of the finance contract portfolio. However, the
primary concentration of credit risk relates to lending to borrowers who cannot
obtain traditional financing and a substantial portion of the borrowers' ability
to honor their contracts may be dependent upon the economic conditions in a
particular geographic region.
F-9
<PAGE> 59
FIRST MERCHANTS ACCEPTANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND (UNAUDITED) SIX MONTHS ENDED JUNE 30, 1995 AND 1996
Activity in the allowance for credit losses and contract acquisition
discount was as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
----------------------------------------- ---------------------------
ALLOWANCE FOR CREDIT LOSSES 1993 1994 1995 1995 1996
- ----------------------------- ----------- ----------- ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Balance -- beginning of
period..................... $ 634,205 $ 1,552,950 $ 4,488,995 $ 4,488,995 $ 14,300,661
Discounts allocated to
the allowance for credit
losses, net................ 1,934,521 5,756,428 15,723,930 6,934,801 7,456,581
Provision for credit
losses..................... -- -- 1,700,000 125,000 7,700,000
Charge-offs, net............. (1,015,776) (2,820,383) (7,612,264) 1,753,557 (10,628,127)
----------- ----------- ----------- ----------- ------------
Balance -- end of period..... $ 1,552,950 $ 4,488,995 $14,300,661 $ 9,795,239 $ 18,829,115
=========== =========== =========== =========== ============
<CAPTION>
CONTRACT ACQUISITION DISCOUNT
- -----------------------------
<S> <C> <C> <C> <C> <C>
Balance -- beginning of
period..................... $ 339,108 $ 888,122 $ 1,401,313 $ 1,401,313 $ --
Discounts negotiated in
excess of amount allocated
to allowance for credit
losses..................... 1,115,681 1,574,195 -- -- --
Amortization to interest
income..................... (516,596) (934,992) (12,766) (12,766) --
Charge-offs.................. -- -- (1,356,344) (1,297,600) --
Other........................ (50,071) (126,012) (32,203) (32,203) --
----------- ----------- ----------- ----------- ------------
Balance -- end of period..... $ 888,122 $ 1,401,313 $ -- $ 58,744 $ --
=========== =========== =========== =========== ============
</TABLE>
The components of net charge-offs were as stated in the table below.
Beginning in 1995, the entire contract acquisition discount is allocated to the
allowance for credit losses and the remaining discount is no longer being
amortized to interest income.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------------------- ---------------------------
SUMMARY OF NET CHARGE-OFFS 1993 1994 1995 1995 1996
- ----------------------------- ----------- ----------- ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Charge-offs -- allowance for
credit losses.............. $ 1,286,586 $ 2,982,664 $ 8,204,840 $ 1,963,968 $ 11,448,832
Recoveries -- allowance for
credit losses.............. (270,810) (162,281) (592,576) (210,411) (820,705)
---------- ---------- ---------- ---------- -----------
Charge-offs, net............. 1,015,776 2,820,383 7,612,264 1,753,557 10,628,127
Charge-offs -- contract
acquisition discount....... -- -- 1,356,344 1,297,600 --
---------- ---------- ---------- ---------- -----------
Total net
charge-offs...... $ 1,015,776 $ 2,820,383 $ 8,968,608 $ 3,051,157 $ 10,628,127
========== ========== ========== ========== ===========
</TABLE>
F-10
<PAGE> 60
FIRST MERCHANTS ACCEPTANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND (UNAUDITED) SIX MONTHS ENDED JUNE 30, 1995 AND 1996
4. PROPERTY AND EQUIPMENT
Depreciation and amortization of property and equipment were $47,786,
$141,402, and $358,253 for 1993, 1994 and 1995, respectively. Property and
equipment consisted of the following as of December 31, 1994 and 1995:
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Computer equipment.................................... $ 655,120 $1,223,589
Furniture and other equipment......................... 402,540 951,688
Leasehold improvements................................ 9,801 16,193
---------- ----------
Total cost.................................. 1,067,461 2,191,470
Accumulated depreciation and amortization............. (209,538) (567,791)
---------- ----------
Total....................................... $ 857,923 $1,623,679
========== ==========
</TABLE>
5. SENIOR REVOLVING CREDIT FACILITY
At December 31, 1995, the Company had a $175.0 million Senior Revolving
Credit Facility with a group of eight banks. The Senior Revolving Credit
Facility expires on June 30, 1997 and borrowings are secured by a substantial
portion of the assets of the Company. Through a series of negotiations the
Company has increased its Senior Revolving Credit Facility from $15.0 million at
January 1, 1993 and reduced its borrowing costs relative to the underlying prime
rate and London Interbank Offering Rate ("LIBOR") references. The Company had
the option of borrowing at the reference prime rate plus 1.25% at December 31,
1993, LIBOR plus 2.75% or the reference prime rate plus 0.25% at December 31,
1994 and LIBOR plus 1.60% or the reference prime rate at December 31, 1995. The
Senior Revolving Credit Facility requires the Company to maintain specified
financial ratios and to comply with other covenants. The Company was in
compliance with these ratios and covenants at December 31, 1995.
Interest rate and borrowing information as of and for 1993, 1994 and 1995
were as follows:
<TABLE>
<CAPTION>
1993 1994 1995
----------- ----------- ------------
<S> <C> <C> <C>
As of December 31:
Borrowings..................................... $22,225,000 $61,975,000 $104,000,000
Weighted average contractual interest rate..... 7.25% 8.73% 7.39%
Years ended December 31:
Interest expense............................... $ 1,180,400 $ 3,692,466 $ 8,572,045
Highest month end borrowings................... 22,225,000 61,975,000 149,575,000
Average outstanding borrowings................. 13,527,781 41,311,781 97,339,543
Weighted average interest rates:
Contractual................................. 7.35% 8.00% 8.24%
Effective................................... 8.73% 8.94% 8.81%
</TABLE>
6. NOTES PAYABLE -- SECURITIZED POOL OF FINANCE CONTRACTS
On November 17, 1995, the Company completed a $75,140,000 debt financing
consisting of 6.20% automobile receivable-backed notes, Series 1995-A. The notes
were issued by First Merchants Auto Receivable Corporation, a wholly-owned
special purpose subsidiary of First Merchants Acceptance Corporation. The
proceeds that the Company received were used to repay indebtedness under the
Senior Revolving Credit Facility. Principal and interest on the notes are
payable monthly commencing December 15, 1995 from collections and recoveries on
the pool of finance receivables. Financial Security Assurance Inc. ("FSA")
F-11
<PAGE> 61
FIRST MERCHANTS ACCEPTANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND (UNAUDITED) SIX MONTHS ENDED JUNE 30, 1995 AND 1996
issued a financial guaranty insurance policy for the benefit of the noteholders.
Interest expense, including the amortization of debt issuance costs, was
$672,748 for 1995.
The Company is required to establish and maintain cash reserve and
collection accounts with a trustee with respect to the securitized pool of
finance receivables. The amounts set aside would be used to supplement certain
shortfalls in payments, if any, to investors. These balances are subject to an
increase up to a maximum amount as specified in the securitization indenture and
are invested in certain instruments as permitted by the trust agreement. To the
extent balances on deposit exceed specified levels, distributions are made to
the Company and, at the termination of the transaction, any remaining amounts on
deposit are distributed to the Company. The indenture requires the Company to
maintain delinquency and credit loss covenants. The Company was in compliance
with these covenants at December 31, 1995.
7. SUBORDINATED DEBT
Subordinated Reset Notes -- On February 14, 1995, the Company received
$13,530,000 from the issuance of $14,375,000 of subordinated reset notes (the
"1995 Notes"), in an underwritten public offering, including $1,875,000 from the
exercise of the underwriters' over-allotment option and after deducting the
underwriting discount and offering expenses. The proceeds were used to repay
borrowings under the Senior Revolving Credit Facility. Interest on the 1995
Notes is payable quarterly, on March 15, June 15, September 15 and December 15
of each year commencing March 15, 1995, at an interest rate of 11% per annum
until March 15, 2000. The interest rate will reset, at the Company's option, on
March 15, 2000 to a rate and for a term of one, two, three, or five years
determined by the Company and will reset thereafter, at the Company's option,
upon the date of expiration of each such new interest rate period prior to
maturity on March 15, 2005. Holders of the 1995 Notes have the option to redeem
all or any portion of the 1995 Notes on March 15, 2000 or any subsequent
interest reset date. Interest expense, including amortization of underwriting
discount and issuance costs, was $1,509,290 for the year ended December 31,
1995. The indenture relating to the 1995 Notes requires the Company to maintain
specified financial ratios and to comply with other covenants. The Company was
in compliance with these ratios and covenants at December 31, 1995.
As of December 31, 1995, the $14,375,000 outstanding principal balance of
the 1995 Notes is reported net of the unamortized underwriting discount of
$479,167.
Subordinated Credit Facility -- On October 29, 1993, the Company entered
into a $6.5 million subordinated credit facility (the "Subordinated Credit
Facility") with Bank of America Illinois ("BA Illinois"), formerly Continental
Bank, and RFE Investment Partners IV, L.P. ("RFE"). Simultaneously, the Company
sold shares of common stock and issued warrants ("1993 Warrants") to acquire
shares of common stock to such lenders and certain affiliates of BA Illinois
("BA Illinois Affiliates").
Upon issuance, the $1,454,160 fair value of the 1993 Warrants was recorded
as original issue discount. The Company incurred costs totaling $401,371 in
connection with the Subordinated Credit Facility. These costs and the original
issue discount were amortized as interest expense over the term of the
Subordinated Credit Facility using the interest method. On September 30, 1994,
using the proceeds from the initial public offering of common stock, the Company
repaid and terminated the $6.5 million Subordinated Credit Facility and recorded
a one-time, non-cash extraordinary charge of $1,167,886, net of $716,000 income
tax benefit, as a result of the early termination of the Subordinated Credit
Facility. Interest expense was $50,824 and $341,902 for 1993 and 1994,
respectively.
Subordinated Notes Payable to Stockholders -- On June 6, 1991, the Company
issued 15% subordinated notes to Middlewest Ventures II, L.P. ("MW") and Chicago
Holdings, Inc. ("CHI") in the aggregate
F-12
<PAGE> 62
FIRST MERCHANTS ACCEPTANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND (UNAUDITED) SIX MONTHS ENDED JUNE 30, 1995 AND 1996
amount of $1,000,000. On October 29, 1993, the notes were exchanged for 193,216
shares of the Company' s common stock. Interest expense was $146,465 for 1993.
8. INTEREST RATE PROTECTION AGREEMENTS
The Company is a party to two interest rate protection agreements
aggregating a notional amount of $30.0 million, which limits the Company's
exposure to increases in its borrowing costs relating to both the reference
prime and LIBOR interest rates. The first agreement is dated January 12, 1994,
expires in January 1996, provides protection on a notional amount of $15.0
million against increases in the reference prime rate above 7.75% per annum and
requires the Company to make payments if the reference prime rate drops below
6.00% per annum. The Company entered into a second agreement dated December 12,
1994. This agreement expires in January 1998 and provides protection on a
notional amount of $15.0 million against increases in the 90-day LIBOR rate, as
determined on each quarterly anniversary date, above 6.50% per annum. If the
90-day LIBOR rate equals or exceeds 8.50% per annum on any such quarterly
anniversary date, the cap rate resets to 8.50% per annum for such quarter.
The first interest rate protection agreement involved no cost to the
Company. The second interest protection agreement requires the Company to make
payments totaling $517,173 which are being treated as an adjustment to interest
expense over the term of the agreement. These agreements expose the Company to
potential credit risk through counterparty nonperformance. This credit risk is
mitigated by the counterparty's financial condition. As a result, the Company
has not required collateral or other security from its counterparties to support
financial instruments with off-balance sheet credit risk.
9. STOCKHOLDERS' EQUITY AND COMMON STOCK WARRANTS
General -- On October 10, 1995, the Company completed a public offering of
2,250,000 shares of its common stock at a price of $24.50 per share pursuant to
a Form S-1 Registration Statement under the Securities Act of 1933, as
originally filed on August 29, 1995 and subsequently amended (the "1995 Common
Stock Offering"). The Company received $51,587,500 from the 1995 Common Stock
Offering, after deducting the underwriting discount and offering expenses. The
proceeds were used to fund purchases of finance contracts and, prior to such
use, the proceeds were used to reduce borrowings under the Senior Revolving
Credit Facility.
Upon completion of the 1995 Common Stock Offering, warrants held by BA
Illinois were exercised to acquire 123,616 shares of common stock.
On September 30, 1994, the Company completed an initial public offering of
1,350,000 shares of its common stock at a price of $11.00 per share (the "1994
Common Stock Offering") pursuant to a Form S-1 Registration Statement under the
Securities Act of 1933, as originally filed on July 1, 1994, and subsequently
amended. Such Registration Statement became effective on September 23, 1994. On
September 30, 1994, the Company received $13,100,500 from the 1994 Common Stock
Offering, after deducting the underwriting discount and offering expenses. The
proceeds were used to repay and terminate the $6.5 million Subordinated Credit
Facility and to reduce borrowings under the Senior Revolving Credit Facility.
The underwriters for the 1994 Common Stock Offering exercised their
over-allotment option and purchased an additional 180,000 shares of common stock
at a price of $11.00 per share on October 31, 1994. The Company received
$1,810,000, after deducting the underwriting discount and offering expenses,
from the exercise of this over-allotment option. These additional proceeds were
used to reduce borrowings under the Senior Revolving Credit Facility.
F-13
<PAGE> 63
FIRST MERCHANTS ACCEPTANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND (UNAUDITED) SIX MONTHS ENDED JUNE 30, 1995 AND 1996
In conjunction with the 1994 Common Stock Offering, the Company increased
the authorized shares of common stock and non-voting common stock from 150,000
shares and 15,000 shares, respectively, to 20,000,000 shares and 300,000 shares,
respectively, reduced the par value per common share from $1.00 to $.01 and
effected a 23.184-for-1 stock split. The Company also authorized 500,000 shares
of preferred stock, par value $100 per share. All share and per share data for
all periods and dates have been adjusted to retroactively reflect the stock
split.
On October 29, 1993, the Company sold 289,800 shares of common stock for
$1,500,000 to RFE and BA Illinois Affiliates. The Subordinated Credit Facility
required that warrants to acquire 280,946 shares of common stock be issued to
RFE and BA Illinois Affiliates and also required two founding stockholders, MW
and CHI, to exchange $1,000,000 of subordinated notes for 193,216 shares of
common stock. The shares of common stock issued in exchange for the CHI note
were issued to Finance Acquisition Corporation, a subsidiary of CHI.
Common Stock Warrants -- As of December 31, 1995, the 1993 Warrants, which
were originally scheduled to expire on October 29, 1998, had been exercised
without exchange of further consideration. Upon completion of the Company's 1994
Common Stock Offering, the put provision of the 1993 Warrants expired resulting
in the carrying value of such warrants being transferred to additional paid-in
capital. 1993 Warrants representing 16,858, 140,472 and 123,616 shares of common
stock were exercised in 1993, 1994 and 1995, respectively.
Common Stock Options -- On July 27, 1994, the Company adopted the First
Merchants Acceptance Corporation 1994 Equity Incentive Plan (the "Equity
Incentive Plan"). The Equity Incentive Plan became effective on September 30,
1994 and is administered by a committee of the Board of Directors, which is
authorized to award stock options, stock appreciation rights, limited stock
appreciation rights, restricted stock, performance shares, performance units and
bonus stock. All full-time employees of the Company are eligible to receive
awards. The Equity Incentive Plan has a 10-year-term. Subject to anti-dilution
adjustments, a maximum of 300,000 shares of Common Stock may be delivered
pursuant to awards under the Equity Incentive Plan. At December 31, 1995, 75,250
options had been granted and 67,000 options were outstanding under the Equity
Incentive Plan.
On July 27, 1994, the Company adopted the First Merchants Acceptance
Corporation 1994 Non-Employee Directors Stock Option Plan (the "Directors
Plan"). The Directors Plan became effective September 30, 1994. At December 31,
1995, options to acquire a total of 17,500 common shares had been granted to the
Company's six non-employee directors at exercise prices ranging from $11.00 to
$12.25 per share. Each option will become exercisable as to 1,000 shares each
year on the first to occur of the anniversary of the grant date of such option
or the annual meeting to stockholders. The Directors Plan has a 10-year term,
and a maximum of 60,000 shares of common stock will be available for awards,
subject to anti-dilution adjustments.
During June 1993, the Company adopted the First Merchants Acceptance
Corporation Incentive Stock Option Plan (the "Incentive Stock Option Plan").
Options to acquire 36,936 and 26,872 shares of common stock at $4.40 per share
were granted during 1993 and 1994, respectively. The options were granted to key
employees, vest over a four year period beginning on the option grant date, and,
with limited exceptions, must be exercised within 10 years of the date of grant.
The Incentive Stock Option Plan was terminated effective September 23, 1994 and
no additional grants were made after such date. At December 31, 1995, 53,930
options were outstanding.
During April 1994, the President and Chief Executive Officer was awarded
options to acquire up to 11,824 shares of common stock in each of the years
ending December 31, 1995 and 1996. The number of
F-14
<PAGE> 64
FIRST MERCHANTS ACCEPTANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND (UNAUDITED) SIX MONTHS ENDED JUNE 30, 1995 AND 1996
options to be earned is dependent upon the performance of the Company in such
years. The exercise price is $11.00 per share. As of December 31, 1995, 8,717
options were earned and outstanding. These options vest at various times and
expire five years from the applicable vesting date.
In connection with the October 1993 sale of common stock, the Company
granted options to a newly elected member of the Company's Board of Directors.
The options are immediately exercisable and entitle the director the right to
acquire 5,982 shares of common stock at a price of $5.18 per share.
Certain stock options granted in 1991 are exercisable at prices lower than
the estimated fair value of the common stock on the date such options were
granted. The excess of the estimated fair value of the options over the option
price is considered compensation earned during the vesting period.
The unearned compensation was recorded in stockholders' equity with an
offsetting increase to additional paid-in capital and was amortized to expense
over the period in which it was earned. On April 11, 1995, the then remaining
non-exercisable options became fully vested when the market value of the
Company's common stock exceeded $60.0 million. Compensation expense attributable
to such stock options was $22,991, $97,512 and $178,767 for 1993, 1994 and 1995,
respectively.
<TABLE>
<CAPTION>
EXERCISE
NUMBER PRICE RANGE
OPTIONS OUTSTANDING OF SHARES PER SHARE
------------------------------------------------------- --------- ------------
<S> <C> <C>
Balance at December 31, 1992........................... 193,448 $ 0.04
Granted.............................................. 36,936 4.40
Canceled............................................. (47,384) 0.04
-------
Balance at December 31, 1993........................... 183,000 .04- 4.40
Granted.............................................. 71,502 4.40-11.00
-------
Balance at December 31, 1994........................... 254,502 .04-11.00
Granted.............................................. 77,750 12.25-19.00
Canceled or reacquired............................... (21,235) 4.40-18.75
-------
Balance at December 31, 1995........................... 311,017 $ .04-19.00
=======
Options exercisable.................................... 185,716 $ .04-12.25
=======
Options available for future grant..................... 275,500
=======
</TABLE>
10. EMPLOYEE BENEFIT PLANS
The Company sponsors a discretionary contribution savings plan (the "Plan")
covering substantially all employees, under the Internal Revenue Code Section
401(k). Employees may elect to make a salary reduction contribution in any
percentage permitted by the Plan administrator up to a maximum of 15% of their
compensation or up to the maximum amount permitted by tax law per calendar year.
All participants are fully vested in their account balances and are able to
direct the investment of their savings into several investment options. In July
1995, the Company began matching a portion of each participant's contribution.
Company contributions vest over six years from the contribution date.
Contribution expense was $26,064 in 1995.
On July 27, 1994, the Company adopted the First Merchants Acceptance
Corporation 1994 Employee Stock Purchase Plan (the "Stock Purchase Plan"), which
became effective September 30, 1994. On November 1, 1994 and November 1, 1995,
eligible employees were given the opportunity to purchase common stock at a
discount of not more than 15% based upon the fair market value of the common
stock at the
F-15
<PAGE> 65
FIRST MERCHANTS ACCEPTANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND (UNAUDITED) SIX MONTHS ENDED JUNE 30, 1995 AND 1996
beginning of the enrollment period or date of purchase, whichever is less. The
Stock Purchase Plan is administered by a committee of the Board of Directors and
is intended to qualify as an "Employee Stock Purchase Plan" under the Internal
Revenue Code Section 423. Subject to anti-dilution adjustments, a maximum of
100,000 shares of common stock are reserved for issuance under the Stock
Purchase Plan. At December 31, 1995, 10,079 shares have been issued under the
Stock Purchase Plan.
11. INCOME TAXES
The components of the income tax provision for the years ended December 31,
1993, 1994 and 1995 were as follows:
<TABLE>
<CAPTION>
1993 1994 1995
-------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal.................................... $183,000 $ 709,000 $2,681,000
State...................................... 25,000 118,000 514,000
---------- ---------- --------
Total current......................... 208,000 827,000 3,195,000
---------- ---------- --------
Deferred:
Federal.................................... 357,000 754,000 816,000
State...................................... 61,000 129,000 92,000
---------- ---------- --------
Total deferred........................ 418,000 883,000 908,000
---------- ---------- --------
Total................................. $626,000 $1,710,000 $4,103,000
========== ========== ========
</TABLE>
The income tax provision differs from the provision computed at the Federal
statutory income tax rate primarily due to state income taxes. A reconciliation
of the Federal statutory income tax rate (34%) to the effective income tax rate
for 1993, 1994 and 1995 follows:
<TABLE>
<CAPTION>
1993 1994 1995
----------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Income tax at Federal
statutory rate...... $532,000 34.0% $1,529,000 34.0% $3,673,000 34.0%
State income tax, net
of Federal tax
benefit............. 94,000 6.0% 181,000 4.0% 430,000 4.0%
---------- ----- ---------- ----- ---------- -----
Total income
tax
provision... $626,000 40.0% $1,710,000 38.0% $4,103,000 38.0%
========== ===== ========== ===== ========== =====
</TABLE>
Temporary differences, which represent the difference between the amounts
reported in the financial statements and the tax bases of assets and
liabilities, result in deferred income taxes. At December 31, 1994 and 1995, the
components of the Company' s net deferred tax liability were as follows:
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Deferred tax asset-accrued compensation............... $ 50,000 $ 116,000
---------- ----------
Deferred tax liabilities:
Contract acquisition discounts...................... 772,000 1,792,000
Accumulated depreciation............................ 83,000 107,000
Other............................................... 496,000 426,000
---------- ----------
Total deferred tax liabilities................. 1,351,000 2,325,000
---------- ----------
Net deferred tax liability............................ $1,301,000 $2,209,000
========== ==========
</TABLE>
F-16
<PAGE> 66
FIRST MERCHANTS ACCEPTANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND (UNAUDITED) SIX MONTHS ENDED JUNE 30, 1995 AND 1996
12. COMMITMENTS AND CONTINGENT LIABILITIES
The Company leases its corporate office and regional service centers under
noncancelable operating lease agreements with initial terms ranging from three
to five years. These leases generally require the Company to reimburse the
landlord for certain common area expenses, such as real estate taxes, utilities
and maintenance; such expenses are included in rent expense. Rental expense with
respect to all operating leases totaled $215,489, $447,510 and $775,758 for
1993, 1994 and 1995, respectively.
At December 31, 1995, future minimum lease payments for noncancelable
operating leases were as shown in the table below. Note that, in the normal
course of business, it is expected that office leases will expire and be renewed
or replaced with leases for other locations.
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
------------------------------------------------------------------ ----------
<S> <C>
1996.................................................... $ 860,269
1997.................................................... 738,591
1998.................................................... 490,160
1999.................................................... 201,590
2000.................................................... 48,389
----------
Total minimum future rentals...................................... $2,338,999
==========
</TABLE>
Data Processing Agreement -- The Company entered into a five year contract
to receive data processing services. The contract, which expires in September
1998, requires minimum monthly services fees of $15,000.
13. NON-RECURRING CHARGES
During June 1993, the Company entered into a financial advisory services
agreement for the procurement of not less than $5.0 million in capital. This
agreement was terminated in October 1993. The fees and direct expenses
associated with this capital raising effort totaled $365,985 and are reported as
non-recurring charges.
In September 1993, the Company terminated a data processing services
contract. Costs totaling $68,627, including unamortized software license fees,
were expensed and reported as non-recurring charges.
14. IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), effective for the Company in 1996,
provides an alternative method for accounting for stock-based compensation and
requires certain disclosures regarding the fair value of stock-based
compensation. The Company does not expect to adopt the alternative method of
accounting for stock-based compensation and, accordingly, the adoption of SFAS
123 will not have any effect on the Company's financial position or results of
operations. The Company expects to expand its disclosure of stock-based
compensation plans to include pro forma fair value information in its 1996
Annual Report to Stockholders.
15. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates, methods and assumptions are set forth below for the
Company's financial instruments. Fair value estimates are made at a specific
point in time, are subjective in nature, and involve uncertainties and matters
of significant judgment. Therefore, the fair value estimates cannot be
determined with precision and do not reflect the total value of the Company as a
going concern.
F-17
<PAGE> 67
FIRST MERCHANTS ACCEPTANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND (UNAUDITED) SIX MONTHS ENDED JUNE 30, 1995 AND 1996
Cash and Restricted Cash -- The carrying amount of cash and restricted cash
approximates fair value because of its maturity characteristics and because it
does not present unanticipated credit concerns.
Finance Receivables, Net -- The fair value of finance receivables was
estimated by the present value of future cash flows, using current rates at
which similar finance contracts would be made to borrowers with comparable
credit ratings and the same remaining maturities.
Senior Revolving Credit Facility -- The carrying amount of the Company's
Senior Revolving Credit Facility approximates fair value because of its variable
rate pricing terms.
Subordinated Reset Notes and Notes Payable-Securitized Pool, Net -- The
fair value of the Company's subordinated reset notes and notes
payable-securitized pool, net is estimated based on the quoted market price of
similar issues.
Interest Rate Protection Agreements -- The fair value of interest rate
protection agreements is estimated using quoted market prices. The estimated
fair value of interest rate protection agreements as of December 31, 1994 and
1995 was $969,000 and $8,980, respectively.
A summary of the fair values of financial assets and liabilities at
December 31, 1994 and 1995 follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1995
-------------------------- ----------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash.................................... $ 135,240 $ 135,240 $ 112,040 $ 112,040
Restricted cash......................... -- -- 6,317,779 6,317,779
Finance receivables held-for-sale,
net................................... -- -- 32,264,734 32,734,877
Net finance receivables................. 94,089,938 95,609,125 251,908,318 252,560,156
Allowance for credit losses............. (4,488,995) (4,488,995) (14,300,661) (14,300,661)
----------- ----------- ------------ ------------
Total................................... $89,736,183 $91,255,370 $276,302,210 $277,424,191
=========== =========== ============ ============
FINANCIAL LIABILITIES:
Senior revolving credit facility........ $61,975,000 $61,975,000 $104,000,000 $104,000,000
Notes payable -- securitized pool,
net................................... -- -- 70,378,298 70,609,119
Subordinated reset notes, net........... -- -- 13,895,833 14,980,740
----------- ----------- ------------ ------------
Total................................... $61,975,000 $61,975,000 $188,274,131 $189,589,859
=========== =========== ============ ============
</TABLE>
16. RECLASSIFICATIONS
Certain reclassifications have been made to the balance sheets as of
December 31, 1994 and 1995, and the related consolidated statements of earnings,
and cash flows for each of the three years in the period ended December 31, 1995
to conform to the reporting format adopted effective June 30, 1996.
17. LITIGATION
On August 27, 1996, a purported class action was filed against an
automobile dealer and the Company. The complaint, as amended on September 27,
1996 (the "Complaint"), alleges violations of certain Federal and Illinois
consumer protection statutes and RICO and seeks unspecified damages. The Company
believes that certain material allegations in the Complaint are incorrect and
that it has meritorious defenses to the claims made in the Complaint. The
Company intends to vigorously defend this action.
F-18
<PAGE> 68
FIRST MERCHANTS ACCEPTANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND (UNAUDITED) SIX MONTHS ENDED JUNE 30, 1995 AND 1996
18. QUARTERLY RESULTS (UNAUDITED)
The following table sets forth certain unaudited operating results for each
of the eight quarters in the period ended December 31, 1995. This information
has been prepared on the same basis as the audited consolidated financial
statements and includes all adjustments (which consist solely of normal
recurring adjustments) necessary to present fairly the financial information of
such periods.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH YEAR
QUARTER QUARTER QUARTER QUARTER ENDED
---------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
1995
Total revenues.................. $6,427,957 $8,538,167 $10,593,425 $13,988,311 $39,547,860
Net interest income............. 4,645,212 5,953,685 7,500,971 10,693,909 28,793,777
Earnings before income taxes.... 1,884,028 2,202,304 2,702,536 4,014,774 10,803,642
Net earnings.................... 1,168,028 1,365,304 1,676,536 2,490,774 6,700,642
Net earnings per share.......... 0.26 0.31 0.37 0.38 1.35
Stock price range of common
stock: (1)
High.......................... 13.00 19.50 27.00 27.25 27.25
Low........................... 10.00 12.25 17.00 17.00 10.00
Weighted average number of
common and common equivalent
shares outstanding............ 4,452,850 4,469,597 4,488,967 6,495,501 4,979,958
- --------------------------------------------------------------------------------------------------------
1994
Total revenues.................. $2,926,072 $3,612,473 $ 4,397,207 $ 5,087,321 $16,023,073
Net interest income............. 2,368,111 2,625,050 3,122,427 3,873,117 11,988,705
Earnings before income taxes and
extraordinary item............ 819,326 953,007 1,163,057 1,563,242 4,498,632
Net earnings before
extraordinary item............ 508,326 591,007 721,057 968,242 2,788,632
Net earnings (loss)............. 508,326 591,007 (446,829) 968,242 1,620,746
Net earnings (loss) available to
stockholders.................. 442,382 530,660 (446,829) 968,242 1,494,455
Earnings before extraordinary
item.......................... 0.17 0.20 0.25 0.22 0.85
Net earnings (loss) per share... 0.17 0.20 (0.15) 0.22 0.49
Net earnings (loss) per share
available to stockholder...... 0.15 0.18 (0.15) 0.22 0.45
Stock price range of common
stock: (1)
High.......................... N/A N/A 11.75 12.50 12.50
Low........................... N/A N/A 11.00 9.00 9.00
Weighted average number of
common and common equivalent
shares outstanding............ 2,922,423 2,922,423 2,937,097 4,392,813 3,296,747
</TABLE>
- -------------------------
(1) The above table sets forth the stock price range of high and low bid
quotations for the periods indicated for the common stock as reported by The
Nasdaq Stock Market's National Market. The Company completed an initial
public offering of common stock on September 23, 1994. Therefore, there is
no stock price prior to the third quarter of 1994. These quotations
represent prices between dealers and do not include retail markups,
markdowns, or commissions, and do not necessarily represent actual
transactions. As of December 31, 1995, the Company estimates that there were
more than 400 beneficial owners of its common stock. The Company's common
stock trades on The Nasdaq Stock Market's National Market under the symbol
"FMAC".
F-19
<PAGE> 69
FIRST MERCHANTS ACCEPTANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND (UNAUDITED) SIX MONTHS ENDED JUNE 30, 1995 AND 1996
19. UNAUDITED INTERIM FINANCIAL INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX
MONTHS ENDED JUNE 30, 1995 AND 1996
The unaudited interim consolidated financial statements of the Company, in
the opinion of management, reflect all necessary adjustments, consisting only of
normal recurring adjustments, for a fair presentation of results as of the dates
and for the interim periods covered by the consolidated financial statements.
The results for the interim periods are not necessarily indicative of the
results of operations to be expected for the entire year.
20. 1996 DEVELOPMENTS (UNAUDITED)
Sale and Securitization of Finance Contracts -- On March 12, 1996, the
Company completed a sale of finance receivables to First Merchants Grantor Trust
1996-1 (the "Trust 1996-1") and the issuance of $55,761,186 of automobile
receivable-backed certificates of Trust 1996-1. The proceeds that the Company
received were used to repay borrowings under the Senior Revolving Credit
Facility. The Company retains a subordinated interest in Trust 1996-1. The
certificates have a pass-through interest rate of 5.90%. FSA issued a financial
guaranty insurance policy for the benefit of the investors. The Company
recognized a gain of $3,005,814 on the sale of finance receivables to Trust
1996-1. The gain represents the difference between the sales proceeds, net of
the transaction costs, and the Company's carrying value of the receivables sold,
plus the present value of the excess servicing rights.
On June 26, 1996, the Company completed a sale of finance receivables to
First Merchants Grantor Trust 1996-2 (the "Trust 1996-2") and the issuance of
$90,413,080 of automobile receivable-backed certificates of Trust 1996-2. The
proceeds that the Company received were used to repay borrowings under the
Senior Revolving Credit Facility. The Company retained a subordinated interest
in Trust 1996-2. The certificates have a pass-through interest rate of 6.85%.
FSA issued a financial guaranty insurance policy for the benefit of the
investors. The Company recognized a gain of $5,086,549 on the sale of finance
receivables to Trust 1996-2. The gain represents the difference between the
sales proceeds, net of the transaction costs, and the Company's carrying value
of the receivables sold, plus the present value of the excess servicing cash
flows.
Excess servicing receivable represents the Company's subordinated interest
in Trust 1996-1 and Trust 1996-2 (together known as the "Trusts"). The excess
servicing receivable is equal to the present value of estimated future
collections and recoveries on the finance receivables sold to the Trusts, less
the present value of required principal and interest payments to the investors,
base servicing fees payable to the Company at an annual rate of 2.5% of finance
receivables serviced and certain other fees. The calculation of excess servicing
receivable includes estimates of future credit losses and prepayment rates for
the remaining term of the finance receivables sold since these factors impact
the amount and timing of future collections and recoveries on the pool of
finance receivables. If future credit losses and prepayment rates exceed the
Company's estimates, the excess servicing receivable will be adjusted through a
charge to operations. Favorable credit loss and prepayment experience compared
to the Company's estimates would result in additional servicing fee income. The
excess servicing receivable is amortized using the interest method against
realized excess servicing fee income.
F-20
<PAGE> 70
FIRST MERCHANTS ACCEPTANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND (UNAUDITED) SIX MONTHS ENDED JUNE 30, 1995 AND 1996
At June 30, 1996, excess servicing receivable consists of the following:
<TABLE>
<S> <C>
Estimated future net cash flows before allowance for credit
losses........................................................ $ 30,635,435
Allowance for credit losses..................................... (14,140,629)
-----------
Estimated future net cash flows................................. 16,494,806
Unamortized discount............................................ (3,492,593)
-----------
Balance at June 30, 1996........................................ $ 13,002,213
===========
</TABLE>
On September 26, 1996, the Company completed a sale of $117,522,432
automobile receivable-backed certificates and notes, Series 1996-B. The
certificates and notes were issued by First Merchants Auto Receivables
Corporation II, a wholly-owned special purpose subsidiary of First Merchants
Acceptance Corporation. The proceeds that the Company received were used to
repay borrowings under the Senior Revolving Credit Facility. Of these
certificates and notes, $82,266,000 have a floating interest rate of 0.12% over
one-month LIBOR, $30,556,000 have a fixed interest rate of 6.80% and the
remaining $4,700,432 have a fixed interest rate of 7.00%. FSA issued a financial
guaranty insurance policy for the benefit of the investors. The Company
recognized a gain on the sale of finance receivables representing the difference
between sales proceeds, net of the transaction costs, and the Company's carrying
value of the receivables sold, plus the present value of the excess servicing
rights.
In an effort to reduce the Company's exposure to potential increases in
interest rates, the Company entered into an interest rate swap agreement on
September 26, 1996 with an initial notional amount of $82,266,000, whereby the
Company pays a fixed rate of 6.30% and receives a variable rate of one-month
LIBOR. The notional amount declines, as specified in the swap agreement, at each
month-end during the term of the agreement, which expires in March 1999.
Senior Revolving Credit Facility -- On February 28, 1996, the Senior
Revolving Credit Facility was increased to $205.0 million with a group of nine
banks. Borrowings under the Senior Revolving Credit Facility are secured by a
substantial portion of the assets of the Company. The Company has the option to
either borrow at LIBOR plus 1.60% or at the reference prime rate. On May 1,
1996, the Company amended the loan agreement relating to the Senior Revolving
Credit Facility to provide for an additional temporary credit facility (the
"Temporary Credit Facility") in the amount of $25.0 million which expires on
November 1, 1996 and bears interest at the reference prime rate. At June 30,
1996, there were no amounts outstanding under the Temporary Credit Facility. The
average interest rate on the Senior Revolving Credit Facility for the six months
ended June 30, 1996 and 1995 was 7.32% and 8.42%, respectively. At June 30,
1996, the interest rate on these borrowings was 7.14%. The Senior Revolving
Credit Facility expires on June 30, 1997.
Notes Payable -- Securitized Pool and Interest Rate Swap -- On May 21,
1996, the Company completed a $125,897,000 debt financing consisting of
automobile receivable-backed notes. Of these notes, $85,000,000 have a floating
interest rate of 0.17% over the one-month LIBOR and the remaining $40,897,000
have a fixed interest rate of 6.70%. The notes were issued by First Merchants
Auto Trust 1996-A, a trust formed specifically for purposes of the
securitization transaction.
In an effort to reduce the Company's exposure to potential increases in
interest rates, the Company entered into an interest rate swap agreement on May
21, 1996 with an initial notional amount of $85,000,000, whereby the Company
pays a fixed rate of 5.98% and receives a variable rate of one-month LIBOR. The
notional amount declines, as specified in the swap agreement, at each month-end
during the term of the agreement, which expires in May 1998. At June 30, 1996,
the notional amount was $76,700,000 and one-month LIBOR was 5.50%.
F-21
<PAGE> 71
FIRST MERCHANTS ACCEPTANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND (UNAUDITED) SIX MONTHS ENDED JUNE 30, 1995 AND 1996
The proceeds that the Company received from the issuance of the notes were
used to repay indebtedness under the Senior Revolving Credit Facility and the
Temporary Credit Facility. Principal and interest on the notes are payable
monthly from collections and recoveries on the pool of finance receivables. FSA
issued a financial guaranty insurance policy for the benefit of the noteholders.
The Company is required to establish and maintain cash reserve and
collection accounts with a trustee with respect to the securitized pool of
finance receivables. The amounts set aside would be used to supplement certain
shortfalls in payments, if any, to investors. These balances are subject to an
increase up to a maximum amount as specified in the securitization indenture and
are invested in certain instruments as permitted by the trust agreement. To the
extent balances on deposit exceed specified levels, distributions are made to
the Company and, at the termination of the transaction, any remaining amounts on
deposit are distributed to the Company. The indenture requires the Company to
maintain delinquency and credit loss covenants. The Company was in compliance
with these covenants at June 30, 1996.
Common Stock Options -- During the six months ended June 30, 1996, the
Company granted options to acquire a total of 285,400 shares of common stock at
prices ranging from $19.00 to $24.25 per share. Options exercisable and options
available for future grant were 223,397 and 561,250, respectively, at June 30,
1996. At the Annual Meeting held on May 14, 1996, the Company's stockholders
voted to amend the 1994 Equity Incentive Plan (the "Plan") to increase the
aggregate number of shares of common stock available under the Plan from 300,000
to 750,000 and make certain other modifications.
Data Processing Agreement -- In May 1996, the Company entered into a six
year contract for a systems configuration and the receipt of data processing
services. The contract, which expires in May 2002, requires minimum service fees
as follows:
<TABLE>
<S> <C>
1996............................................................. $ 792,000
1997............................................................. 2,331,000
1998............................................................. 2,194,000
1999............................................................. 2,194,000
2000............................................................. 2,194,000
thereafter....................................................... 3,290,000
-----------
$12,995,000
===========
</TABLE>
Impact of New Accounting Pronouncements -- Statement of Financial
Accounting Standards No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Liabilities" ("SFAS 125"), effective for the Company in
1997, provides new methods of accounting and reporting for transfers and
servicing of financial assets and extinguishments of liabilities. The Company
will apply SFAS 125 to securitization transactions occurring on or after January
1, 1997. The effect of adopting SFAS 125 is not expected to have a material
effect on the Company's financial position or results of operations.
F-22
<PAGE> 72
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS OR ANY
DEALER OR AGENT. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF ANY OFFER TO BUY, ANY OF THE 1996 NOTES 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, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary..................... 3
Risk Factors........................... 9
Use of Proceeds........................ 13
Capitalization......................... 14
Selected Financial and Operating
Data................................. 15
Supplemental Financial Information..... 17
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 18
Business............................... 28
Management............................. 37
Description of the 1996 Notes.......... 39
Underwriting........................... 46
Legal Matters.......................... 46
Experts................................ 47
Available Information.................. 47
Incorporation of Certain Documents by
Reference............................ 48
Index to Financial Statements.......... F-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
$45,000,000
[FIRST MERCHANTS LOGO]
FIRST MERCHANTS
ACCEPTANCE CORPORATION
SUBORDINATED RESET
NOTES DUE 2006
------------------------
PROSPECTUS
------------------------
J.C. BRADFORD & CO.
PIPER JAFFRAY INC.
KEEFE, BRUYETTE & WOODS, INC.
STIFEL, NICOLAUS & COMPANY
INCORPORATED
, 1996
------------------------------------------------------
------------------------------------------------------
<PAGE> 73
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses (other than the underwriting
discounts and commissions) expected to be incurred in connection with the
Offering. All such expenses will be borne by the Company. All amounts are
estimated except the Commission registration fee, the NASD filing fee and the
rating agency fee.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee................ $ 15,682
NASD Filing Fee.................................................... 5,675
Blue Sky Fees and Expenses......................................... 10,000
Printing and Engraving Expenses.................................... 75,000
Legal Fees and Expenses............................................ 90,000
Accounting Fees and Expenses....................................... 55,000
Trustee Fees and Expenses.......................................... 3,000
Rating Agency Fee.................................................. 29,600
Miscellaneous...................................................... 16,043
--------
Total............................................................ $300,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law ("DGCL"), inter alia,
empowers a Delaware corporation to indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action,
suit or proceeding (other than an action by or in the right of the corporation)
by reason of the fact that such person is or was a director, officer, employee
or agent of the corporation or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation or
other enterprise, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if he acted in good faith and in
a manner he reasonably believed to be in or not opposed to the best interests of
the corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. Similar indemnity is
authorized for such persons against expenses (including attorneys' fees)
actually and reasonably incurred in connection with the defense or settlement of
any such threatened, pending or completed action or suit by or in the right of
the corporation if such person acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the corporation, and
provided further that (unless a court of competent jurisdiction otherwise
provides) such person shall not have been adjudged liable to the corporation.
Any such indemnification may be made only as authorized in each specific case
upon a determination by the stockholders or disinterested directors or by
independent legal counsel in a written opinion that indemnification is proper
because the indemnitee has met the applicable standard of conduct. The Bylaws of
the Company provide that directors and officers shall be indemnified as
described above in this paragraph to the fullest extent permitted by the DGCL;
provided, however, that any such person seeking indemnification in connection
with a proceeding (or part thereof) initiated by such person shall be
indemnified only if such proceeding (or part thereof) was authorized by the
Board of Directors of the Company.
Section 145 further authorizes a corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation or enterprise,
against any liability asserted against him and incurred by him in any such
capacity, or arising out of his status as such, whether or not the corporation
would otherwise have the power to indemnify him under Section 145.
The Certificate of Incorporation of the Company provides that no director
of the Company shall be personally liable to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a
II-1
<PAGE> 74
director, except (i) for a breach of the director's duty of loyalty to the
Company or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the DGCL (relating to the declaration of dividends and purchase
or redemption of shares in violation of the DGCL), or (iv) for any transaction
from which the director derived an improper personal benefit.
Reference is made to Section 8 of the Underwriting Agreement filed as
Exhibit 1.1 hereto for a description of the indemnification arrangements for the
Offering. Reference is also made to Section 9 of the Underwriting Agreement
filed as Exhibit 1.1 to the Company's Registration Statement on Form S-1 (File
No. 33-81070), Section 9 of the Underwriting Agreement filed as Exhibit 1.1 to
the Company's Registration Statement on Form S-1 (File No. 33-88244), Section 8
of the Underwriting Agreement filed as Exhibit 1.1 to the Company's Registration
Statement on Form S-1 (File No. 33-96310) and Section 7 of the Registration
Rights Agreement filed as Exhibit 10.11 to the Company's Registration Statement
on Form S-1 (File No. 33-96310) for a description of certain other
indemnification arrangements relating to directors and officers of the Company.
ITEM 16. EXHIBITS
<TABLE>
<S> <C>
1.1 Form of Underwriting Agreement.
4.1 Form of 1996 Indenture between the Company and LaSalle Bank, as Trustee, including
the form of 1996 Note.
5.1 Opinion of Sonnenschein Nath & Rosenthal, counsel for the Company.
12.1 Statement regarding computation of ratio of earnings to fixed charges.
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Sonnenschein Nath & Rosenthal (included in Exhibit 5.1).
24.1 Power of Attorney (included on signature page hereto).
25.1 Form T-1, Statement of Eligibility of Trustee.
</TABLE>
ITEM 17. UNDERTAKINGS.
(a) Filings Incorporating Subsequent Exchange Act Documents by Reference.
The undersigned registration hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of any
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement 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.
(b) Acceleration of Effectiveness.
Insofar as indemnification for liabilities arising under Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant 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 registrant 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 expressed in the Act and will be governed by the final adjudication of
such issue.
II-2
<PAGE> 75
(c) Information Omitted from Form of Prospectus Pursuant to Rule 430A.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, 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 of 1933, 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> 76
SIGNATURES
Pursuant to 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 S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the Village of Deerfield, State of Illinois, on the 10th day of
October, 1996.
FIRST MERCHANTS ACCEPTANCE CORPORATION
By: /s/ MITCHELL C. KAHN
------------------------------------
Mitchell C. Kahn, President and
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitute and appoints Mitchell C. Kahn, Thomas R. Ehmann and each of
them, his or her true and lawful attorneys-in-fact and agents, with full power
of substitution and resubstitution, for him or her and in his or her name, place
and stead, in any and all capacities, to sign any and all amendments (including
pre-effective and post-effective amendments) to this Registration Statement, and
any registration statement for the same offering that is to be effective upon
filing pursuant to Rule 462(b) under the Securities Act of 1933, and to file the
same, with all exhibits thereto, and all documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done, in and about the
premises, as fully to all intents and purposes as he or she might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact, and
each of them, and agents or their substitutes may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirement of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- --------------------------- ------------------
<C> <S> <C>
/s/ MITCHELL C. KAHN President and Chief October 10, 1996
- --------------------------------------------- Executive Officer, Director
Mitchell C. Kahn (Principal Executive
Officer)
/s/ THOMAS R. EHMANN Vice President and Chief October 10, 1996
- --------------------------------------------- Financial Officer,
Thomas R. Ehmann Assistant Secretary
(Principal Accounting
Officer and Principal
Financial Officer)
/s/ THOMAS A. HIATT Director October 10, 1996
- ---------------------------------------------
Thomas A. Hiatt
/s/ WILLIAM N. PLAMONDON Director October 10, 1996
- ---------------------------------------------
William N. Plamondon
</TABLE>
II-4
<PAGE> 77
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- --------------------------- ----------------
<C> <S> <C>
/s/ MARCY H. SHOCKEY Director October 10, 1996
- ---------------------------------------------
Marcy H. Shockey
/s/ RICHARD J. UHL Director October 10, 1996
- ---------------------------------------------
Richard J. Uhl
/s/ SOLOMON A. WEISGAL Director October 10, 1996
- ---------------------------------------------
Solomon A. Weisgal
/s/ STOWE W. WYANT Director October 10, 1996
- ---------------------------------------------
Stowe W. Wyant
</TABLE>
II-5
<PAGE> 78
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- ------- ------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement.
4.1 Form of 1996 Indenture between the Company and LaSalle National Bank, as Trustee,
including the Form of 1996 Note.
5.1 Opinion of Sonnenschein Nath & Rosenthal, counsel for the Company.
12.1 Statement regarding computation of ratio of earnings to fixed charges.
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Sonnenschein Nath & Rosenthal (included in Exhibit 5.1).
24.1 Power of Attorney (included on the signature page of this Registration Statement).
25.1 Form T-1, Statement of Eligibility of Trustee.
</TABLE>
<PAGE> 1
EXHIBIT 1.1
FIRST MERCHANTS ACCEPTANCE CORPORATION
$45,000,000
Subordinated Reset Notes Due 2006
UNDERWRITING AGREEMENT
____________, 1996
J.C. BRADFORD & CO.
PIPER JAFFRAY INC.
KEEFE, BRUYETTE & WOODS, INC.
STIFEL, NICOLAUS & COMPANY, INCORPORATED
As Representatives of the Several Underwriters
c/o J.C. Bradford & Co.
J.C. Bradford Financial Center
330 Commerce Street
Nashville, Tennessee 37201
Ladies and Gentlemen:
First Merchants Acceptance Corporation, a Delaware corporation (the
"Company"), proposes to sell to the underwriters named in Schedule I hereto
(the "Underwriters") for whom you are acting as the representatives (the
"Representatives") an aggregate $45,000,000 principal amount of its
Subordinated Reset Notes Due 2006 (the "Firm Notes"). The Firm Notes are to be
sold to the Underwriters, acting severally and not jointly, in such amounts as
are set forth in Schedule I hereto opposite the name of such Underwriter. The
Company also proposes to grant to the Underwriters an option to purchase up to
$6,750,000 in principal amount of Subordinated Reset Notes Due 2006 of the
Company as provided for in Section 2 of this Agreement (the "Option Notes").
The Firm Notes and the Option Notes purchased pursuant to this Agreement are
herein called the "Notes." The Notes are to be issued pursuant to an
Indenture, to be dated as of ___________ ___, 1996, between the Company and
LaSalle National Bank, Chicago, Illinois, as trustee (the "Trustee"). Such
Indenture, as amended and supplemented, is herein referred to as the
"Indenture."
1. Representations and Warranties of the Company. The Company
represents and warrants to, and agrees with, each of the Underwriters that:
<PAGE> 2
(a) The Company meets the requirements for use of, and
has filed with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the
"Securities Act"), a registration statement on Form S-3 (Registration
No. 333-_______), including the related preliminary prospectus and a
Statement of Eligibility on Form T-1 with respect to the Trustee (File
No. 22-_______) pursuant to the Trust Indenture Act of 1939, as
amended (the "Trust Indenture Act"), has filed such amendments
thereto, if any, and such amended preliminary prospectuses as may have
been required to the date hereof, and will file such additional
amendments thereto and such amended prospectuses as may hereafter be
required, relating to the Notes. Copies of such registration
statement and any amendments, including any post-effective amendments,
and all forms of the related prospectuses contained therein and any
supplements thereto, have been delivered to you. Such registration
statement, including the prospectus, Part II, the information
incorporated by reference, all financial schedules and exhibits
thereto, and all information deemed to be a part of such registration
statement pursuant to Rule 430A under the Securities Act, as amended
at the time when it shall become effective, together with any
registration statement filed by the Company pursuant to Rule 462(b) of
the Securities Act, is herein referred to as the "Registration
Statement," and the prospectus included as part of the Registration
Statement on file with the Commission that discloses all the
information that was omitted from the prospectus on the effective date
pursuant to Rule 430A of the Rules and Regulations (as defined below)
and in the form filed pursuant to Rule 424(b) under the Securities Act
is herein referred to as the "Final Prospectus." The prospectus
included as part of the Registration Statement on the date when the
Registration Statement becomes effective is referred to herein as the
"Effective Prospectus." Any prospectus included in the Registration
Statement and in any amendment thereto prior to the effective date of
the Registration Statement is referred to herein as a "Preliminary
Prospectus." For purposes of this Agreement, "Rules and Regulations"
mean the rules and regulations promulgated by the Commission under
either the Securities Act, or the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), or the Trust Indenture Act, as
applicable.
(b) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus, and each Preliminary
Prospectus, at the time of filing thereof, complied with the
requirements of the Securities Act and the Rules and Regulations, and
did not include any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under
which they were made, not misleading; except that the foregoing does
not apply to statements or omissions made in reliance upon and in
conformity with written information furnished to the Company by any
Underwriter specifically for use therein (it being understood that the
only information so provided is the information included in the last
paragraph on the cover page and under the caption "Underwriting" in
the Final Prospectus). When the Registration Statement becomes
effective and at all times subsequent thereto up to and including the
First Closing Date (as hereinafter defined), (i) the Registration
Statement, the Effective Prospectus and Final
2
<PAGE> 3
Prospectus and any amendments or supplements thereto will contain all
statements which are required to be stated therein in accordance with
the Securities Act, the Exchange Act, the Trust Indenture Act and the
Rules and Regulations and will comply with the requirements of the
Securities Act, the Exchange Act, the Trust Indenture Act and the
Rules and Regulations, and (ii) neither the Registration Statement,
the Effective Prospectus nor the Final Prospectus nor any amendment or
supplement thereto will include any untrue statement of a material
fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein, in light of the
circumstances in which they are made, not misleading; except that the
foregoing does not apply to statements or omissions made in reliance
upon and in conformity with written information furnished to the
Company by any Underwriter specifically for use therein (it being
understood that the only information so provided is the information
included in the last paragraph on the cover page and in the first,
third, fourth and sixth paragraphs under the caption "Underwriting"
in the Final Prospectus).
(c) The documents which are incorporated by reference in
any Preliminary, Effective and Final Prospectus or from which
information is so incorporated by reference, were timely filed and
(after giving effect to any amendments filed prior to the date hereof)
complied in all material respects with the requirements of the
Securities Act or the Exchange Act, as applicable, and the Rules and
Regulations, and any documents so filed prior to the termination of
this offering and incorporated by reference subsequent to the
effective date of the Registration Statement shall, when they are
filed with the Commission, conform in all material respects with the
requirements of the Securities Act and the Exchange Act, as
applicable, and the Rules and Regulations.
(d) Except for First Merchants Auto Receivables
Corporation, a Delaware corporation, First Merchants Auto Receivables
Corporation II, a Delaware corporation and First Merchants Auto
Receivables Corporation III, a Delaware corporation, which are
wholly-owned by the Company and were formed solely for the purpose of
facilitating the securitization of the Company's finance receivables,
the Company has no subsidiaries in any form, either directly or
indirectly, wholly-owned or other than wholly-owned. As used herein,
the term "subsidiary" includes any corporation, joint venture or
partnership in which the Company or any subsidiary of the Company has
an ownership interest.
(e) The Company and each subsidiary of the Company is
duly organized and validly existing and in good standing under the
laws of the respective jurisdictions of their organization or
incorporation, as the case may be, with full power and authority
(corporate, partnership and other, as the case may be) to own their
properties and conduct their business as now conducted and are duly
qualified or authorized to do business and are in good standing in all
jurisdictions wherein the nature of their business or the character of
property owned or leased may require them to be qualified or
authorized to do business, except for jurisdictions in which the
failure to so qualify would not have a material adverse effect on the
Company and its subsidiaries taken as a whole. The
3
<PAGE> 4
Company and its subsidiaries hold all licenses, consents and
approvals, and have satisfied all eligibility and other similar
requirements imposed by federal and state regulatory bodies,
administrative agencies or other governmental bodies, agencies or
officials, in each jurisdiction in which the Company or one of its
subsidiaries has an office and any other jurisdiction in which such
license, permit, consent, appraisal or requirement is material to the
conduct of the respective businesses in which they are engaged as
described in the Effective Prospectus and the Final Prospectus.
(f) The outstanding stock of each of the Company's
corporate subsidiaries is duly authorized, validly issued, fully paid
and nonassessable. All of the outstanding stock of each of the
Company's corporate subsidiaries is owned by the Company, free and
clear of any lien, encumbrance, pledge, equity or claim of any kind.
Neither the Company nor any of its subsidiaries is a partner or joint
venturer in any partnership or joint venture.
(g) The capitalization of the Company as of August 31,
1996 is as set forth under the caption "Capitalization" in the
Effective Prospectus and the Final Prospectus, and the Company's
capital stock conforms to the description thereof contained or
incorporated by reference in the Effective Prospectus and the Final
Prospectus. All the issued shares of capital stock of the Company
have been duly authorized and validly issued, are fully paid and
nonassessable. None of the issued shares of capital stock of the
Company have been issued in violation of any preemptive or similar
rights. The Notes have been duly and validly authorized and, when
executed, authenticated and delivered in accordance with the Indenture
and paid for by the Underwriters pursuant to this Agreement and the
Indenture, will constitute legal and binding obligations of the
Company entitled to the benefits of the Indenture and will conform in
all material respects to the description thereof contained in the
Effective Prospectus and the Final Prospectus. Upon the effective
date of the offering of the Notes, there will be no preemptive rights
or other rights to subscribe for or to purchase, or any restriction
upon the transfer of, any shares of capital stock of the Company
pursuant to the Company's certificate of incorporation, by-laws or
other governing documents or any agreement or other instrument to
which the Company is a party or by which it may be bound, except as
described in the Effective Prospectus and the Final Prospectus and
except for restrictions imposed under applicable securities laws.
Neither the filing of the Registration Statement nor the offer or sale
of the Notes as contemplated by this Agreement gives rise to any
rights, other than those which have been waived or satisfied, for or
relating to the registration of any shares of capital stock of the
Company or any other securities of the Company. The Underwriters will
receive good and marketable title to the Notes to be issued and
delivered hereunder, free and clear of all liens, encumbrances,
claims, security interests, restrictions, shareholders' agreements and
voting trusts whatsoever.
(h) All offers and sales of the Company's securities
prior to the date hereof were at all relevant times duly registered or
the subject of an available exemption from the registration
requirements of the Securities Act, and were duly registered or the
subject of
4
<PAGE> 5
an available exemption from the registration requirements of the
applicable state securities or Blue Sky laws.
(i) The Company has full legal right, power and authority
to enter into this Agreement and the Indenture and to sell and deliver
the Notes to the Underwriters as provided herein, and this Agreement
and the Indenture have been duly authorized, executed and delivered by
the Company and constitute valid and binding agreements of the Company
enforceable against the Company in accordance with their terms,
subject to applicable bankruptcy, insolvency, reorganization,
moratorium, fraudulent transfer, fraudulent conveyance and similar
laws affecting creditors' rights and subject, as to enforceability, to
general principles of equity (regardless of whether enforcement is
sought in a proceeding in equity or at law) and to the application of
principles of public policy. No consent, approval, authorization or
order of any court or governmental agency or body or third party is
required for the performance of this Agreement or the Indenture by the
Company or the consummation by the Company of the transactions
contemplated hereby or thereby, except such as have been obtained and
such as may be required by the National Association of Securities
Dealers, Inc. ("NASD") or under the Securities Act, the Trust
Indenture Act or state securities or Blue Sky laws in connection with
the purchase and distribution of the Notes by the Underwriters. The
issue and sale of the Notes by the Company, the Company's performance
of this Agreement and the Indenture and the consummation of the
transactions contemplated hereby and thereby will not result in a
breach or violation of, or conflict with, any of the terms and
provisions of, or constitute a default by the Company under, any
indenture, mortgage, deed of trust, loan agreement, lease or other
agreement or instrument to which the Company is a party or to which
the Company or any of its properties is subject, the certificate of
incorporation, by-laws or other governing instruments of the Company
or any statute or any judgment, decree, order, rule or regulation of
any court or governmental agency or body applicable to the Company or
any of its properties. The Company is not in violation of its
certificate of incorporation, by-laws or other governing instruments
or any law, administrative rule or regulation or arbitrators' or
administrative or court decree, judgment or order or in violation or
default (there being no existing state of facts which with notice or
lapse of time or both would constitute a default) in the performance
or observance of any obligation, agreement, covenant or condition
contained in any contract, indenture, deed of trust, mortgage, loan
agreement, note, lease, agreement or other instrument or permit to
which it is a party or by which it or any of its properties is or may
be bound.
(j) The financial statements and the related notes of the
Company included or incorporated by reference in the Registration
Statement, the Effective Prospectus and the Final Prospectus present
fairly the financial position, results of operations and changes in
financial position and cash flow of the Company at the dates and for
the periods to which they relate, and have been prepared in accordance
with generally accepted accounting principles applied on a consistent
basis throughout the periods indicated. The other financial
statements and schedules included or incorporated by reference in or
attached as
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<PAGE> 6
schedules to the Registration Statement and the Prospectus conform to
the requirements of the Securities Act, the Exchange Act, the Trust
Indenture Act and the Rules and Regulations and present fairly the
information presented therein for the periods shown. The financial
and statistical data set forth in the Effective Prospectus and the
Final Prospectus under the captions "Prospectus Summary," "Use of
Proceeds," "Capitalization," "Selected Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" and "Business" fairly presents the information set forth
therein on the basis stated in the Effective Prospectus and the Final
Prospectus. Deloitte & Touche LLP, whose report appears in the
Effective Prospectus and the Final Prospectus, are independent
accountants as required by the Securities Act and the Rules and
Regulations.
(k) Subsequent to December 31, 1995, neither the Company
nor any subsidiary has sustained any material loss or interference
with its business or properties from fire, flood, hurricane,
earthquake, accident or other calamity, whether or not covered by
insurance, or from any labor dispute or court or governmental action,
order or decree, which is not disclosed in the Effective Prospectus
and the Final Prospectus and which is material to the Company and its
subsidiaries taken as a whole; and subsequent to the respective dates
as of which information is given in the Registration Statement, the
Effective Prospectus and the Final Prospectus, (i) neither the Company
nor any of its subsidiaries has incurred any material liabilities or
obligations, direct or contingent, or entered into any material
transactions not in the ordinary course of business, and (ii) there
has not been any change in the capital stock, long-term debt,
obligations under capital leases or short-term borrowings of the
Company or its subsidiaries or any issuance of options, warrants or
rights to purchase the capital stock of the Company or any of its
subsidiaries, or any material adverse change, or any development
involving a prospective material adverse change, in the general
affairs, management, business, prospects, financial position, net
worth or results of operations of the Company and its subsidiaries
taken as a whole, except in each case as described in or contemplated
by the Effective Prospectus and the Final Prospectus.
(l) Except as described in the Effective Prospectus and
the Final Prospectus, there is not pending, or to the knowledge of the
Company threatened, any legal or governmental action, suit, claim,
proceeding, inquiry or investigation, to which the Company, any of its
subsidiaries or any of their respective officers or directors is a
party, or to which the property of the Company or any subsidiary is
subject, before or brought by any court or governmental agency or
body, wherein an unfavorable decision, ruling or finding could prevent
or materially hinder the consummation of this Agreement or result in a
material adverse change in the business condition (financial or
other), prospects, financial position, net worth or results of
operations of the Company and its subsidiaries taken as a whole.
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<PAGE> 7
(m) There are no contracts or other documents
required by the Securities Act or by the Rules and Regulations
to be described in the Registration Statement, the Effective
Prospectus or the Final Prospectus or to be filed or incorporated by
reference as exhibits to the Registration Statement which have not
been described, filed or incorporated by reference as required. All
such contracts to which the Company or any of its subsidiaries is a
party have been duly authorized, executed and delivered by the Company
or any of its subsidiaries, as the case may be, constitute valid and
binding agreements of the Company or its subsidiary and are
enforceable against the Company or its subsidiary in accordance with
the terms thereof. Each of the Company and its subsidiaries has
performed all its obligations required to be performed by it, and is
neither in default nor has it received notice of default, under any
such contract or other material instrument to which it is a party or
by which its property is bound or affected. To the best knowledge of
the Company, no other party under any such contract or other material
instrument to which it or any of its subsidiaries is a party is in
default in any material respect thereunder.
(n) Except as described in the Effective Prospectus and
the Final Prospectus, the Company and each of its subsidiaries have
good and marketable title to all real and material personal property
owned by them, free and clear of all liens, charges, encumbrances or
defects, except those reflected in the financial statements
hereinabove described. The real and personal property and buildings
referred to in the Effective Prospectus and the Final Prospectus which
are leased from others by the Company or any of its subsidiaries are
held under valid, subsisting and enforceable leases. The Company and
its subsidiaries own or lease all such properties as are necessary to
their respective operations as now conducted.
(o) The Company's system of internal accounting controls
taken as a whole is sufficient to meet the broad objectives of
internal accounting control insofar as those objectives pertain to the
prevention or detection of errors or irregularities in amounts that
would be material in relation to the Company's financial statements.
Neither the Company nor any of its subsidiaries nor any director,
officer, agent, employee or other person acting on behalf of the
Company or any of its subsidiaries has, directly or indirectly used,
or authorized the use of, any corporate or other funds for unlawful
contributions, gifts, entertainment or other unlawful expenses
relating to political activity; made any unlawful payment to foreign
or domestic government officials or employees or to foreign or
domestic political parties or campaigns from corporate funds; violated
any provision of the Foreign Corrupt Practices Act of 1977, as
amended; made any bribe, rebate, payoff, influence payment kickback or
other unlawful payment; or received or retained any funds in violation
of any law, rule or regulation.
(p) The Company and its subsidiaries have filed all
foreign, federal, state and all material local income, excise and
franchise tax returns required to be filed through the date hereof and
have paid all taxes shown as due therefrom to the extent such taxes
have
7
<PAGE> 8
become due and are not being contested in good faith; and there is no
tax deficiency that has been, nor does the Company or any of its
subsidiaries have knowledge of any tax deficiency which is likely to
be, asserted against the Company or any of its subsidiaries, which if
determined adversely could materially and adversely affect the
earnings, assets, affairs, business prospects or condition (financial
or other) of the Company or its subsidiaries taken as a whole.
(q) The Company and its subsidiaries operate their
business in conformity in all material respects with all applicable
statutes, common laws, ordinances, decrees, orders, rules and
regulations of governmental bodies. The Company and its subsidiaries
have all licenses, permits, approvals or consents to operate its
business in all locations in which such business is currently being
operated, and the Company and its subsidiaries are not aware of any
existing or imminent statutory, regulatory or administrative matter
which may adversely impact its operations or business prospects other
than as specifically disclosed in the Effective Prospectus and the
Final Prospectus. Neither the Company nor any of its subsidiaries has
engaged in any activity, whether alone or in concert with one of its
customers, creating the potential for exposure to material civil or
criminal monetary liability or other material sanctions under federal
or state laws regulating consumer credit transactions or debt
collection practices.
(r) Neither the Company nor any of its subsidiaries has
failed to file with the applicable regulatory authorities any
statement, report, information or form required by any applicable law,
regulation or order where the failure to file the same would have a
material adverse effect on the Company and its subsidiaries taken as a
whole or on its ability to conduct business in any state; all such
filings or submissions were in material compliance with applicable
laws when filed, and no deficiencies have been asserted by any
regulatory commission, agency or authority with respect to such
filings or submissions. Neither the Company nor any of its
subsidiaries failed to maintain in full force and effect any license,
certification, registration or permit necessary or proper for the
conduct of their business, or received any notification that any
revocation or limitation thereof is threatened or pending, and, except
as disclosed in the Effective Prospectus and the Final Prospectus,
there is not pending any change under any law, regulation, license or
permit which could materially adversely affect its business,
operations, property or business prospects. Neither the Company nor
any of its subsidiaries has received any notice of violation of or
been threatened with a charge of violating and is not, to the best of
its knowledge, under investigation with respect to a possible
violation of any provision of any law, regulation or order.
(s) No labor dispute exists or is imminent with the
Company's employees or with employees of its subsidiaries which could
materially adversely affect the Company or any of its subsidiaries.
The Company is not aware of any existing or imminent labor disturbance
by its employees or by any employees of its subsidiaries which could
be expected to materially adversely effect the condition (financial or
otherwise), results of
8
<PAGE> 9
operations, properties, affairs, management, business affairs or
business prospects of the Company or any of its subsidiaries.
(t) Except as disclosed in the Effective Prospectus and
the Final Prospectus, each of the Company and its subsidiaries owns or
possesses, or can acquire on reasonable terms, the patents, licenses,
copyrights, trademarks, service marks and trade names presently
employed by it in connection with the businesses now operated by it,
and neither the Company nor any of its subsidiaries has received any
notice of infringement of or conflict with asserted rights of others
with respect to any of the foregoing which, alone or in the aggregate,
if the subject of an unfavorable decision, ruling or finding, would
result in any material adverse change in the condition, financial or
otherwise, or in the earnings, business affairs or business prospects
of the Company or its subsidiaries.
(u) Neither the Company nor any of its subsidiaries nor
any of the directors, officers, employees or agents of the Company and
its subsidiaries has taken and will not take, directly or indirectly,
any action designed to cause or result in, or which has constituted or
which might be expected to constitute, stabilization or manipulation
of the price of the capital stock of the Company.
(v) Each of the Company and its subsidiaries is insured
by insurers of recognized financial responsibility against such losses
and risks and in such amounts as are prudent and customary in the
businesses in which it is engaged; and neither the Company nor any of
its subsidiaries has reason to believe that it will not be able to
renew its existing insurance coverage as and when such coverage
expires or to obtain similar coverage from similar insurers as may be
necessary to continue its business at a comparable cost.
(w) Neither the Company nor any of its subsidiaries is,
will not become as a result of the transactions contemplated hereby,
and does not intend to conduct its business in a manner that would
cause it to become, an "investment company" or a company "controlled"
by an "investment company" within the meaning of the Investment
Company Act of 1940.
(x) The Company has filed with the Commission and the NASD
all reports, documents and statements required to be filed by the
Company pursuant to the Securities Act, the Exchange Act, the Rules
and Regulations and all the rules and regulations of the NASD relating
to the Company's capital stock, and each of such reports, documents
and statements, at the time that they were filed, complied in all
material respects with the requirements of the Securities Act, the
Exchange Act and the Rules and Regulations.
9
<PAGE> 10
2. Purchase, Sale and Delivery of the Notes.
(a) On the basis of the representations, warranties,
agreements and covenants herein contained and subject to the terms and
conditions herein set forth, the Company agrees to sell to each of the
Underwriters, and each of the Underwriters, severally and not jointly,
agrees to purchase at a purchase price of $___ per $1,000 principal
amount, the number of Firm Notes set forth opposite such Underwriter's
name in Schedule I hereto.
(b) The Company also grants to the Underwriters an option
to purchase, solely for the purpose of covering over-allotments in
the sale of Firm Notes, all or any portion of the Option Notes at the
purchase price set forth above plus accrued interest. The option
granted hereby may be exercised as to all or any part of the Option
Notes at any time (but only once) within 30 days after the date of the
Final Prospectus. The Underwriters shall not be under any obligation
to purchase any Option Notes prior to the exercise of such option.
The option granted hereby may be exercised by the Underwriters by the
Representatives giving written notice to the Company setting forth the
amount of Option Notes to be purchased and the date and time for
delivery of and payment for such Option Notes and stating that the
Option Notes referred to therein are to be used for the purpose of
covering over-allotments in connection with the distribution and sale
of the Firm Notes. If such notice is given prior to the First Closing
Date (as defined herein), the date set forth therein for such delivery
and payment shall not be earlier than two full business days
thereafter or the First Closing Date, whichever occurs later. If such
notice is given on or after the First Closing Date, the date set forth
therein for such delivery and payment shall not be earlier than three
full business days thereafter. In either event, the date so set forth
shall not be more than 15 full business days after the date of such
notice. The date and time set forth in such notice is herein called
the "Option Closing Date." Upon exercise of the option, the Company
shall become obligated to sell to the Underwriters, and, subject to
the terms and conditions herein set forth, the Underwriters shall
become obligated to purchase, for the account of each Underwriter,
from the Company, severally and not jointly, the amount of Option
Notes specified in such notice. Option Notes shall be purchased for
the accounts of the Underwriters in proportion to the amount of Firm
Notes set forth opposite such Underwriter's name in Schedule I hereto,
except that the respective purchase obligations of each Underwriter
shall be adjusted so that no Underwriter shall be obligated to
purchase fractional Option Notes.
(c) Certificates in definitive form for the Firm Notes
which each Underwriter has agreed to purchase hereunder shall be
delivered by or on behalf of the Company to the Underwriters for the
account of such Underwriter against payment by such Underwriter or on
its behalf of the purchase price therefor by certified or official
bank check payable in next day funds to the order of the Company at
the offices of J.C. Bradford & Co. ("Bradford"), 330 Commerce Street,
Nashville, Tennessee 37201, or at such other place as may be agreed
upon by Bradford and the Company, at 10:00 A.M., Nashville time, on
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<PAGE> 11
the third full business day after this Agreement becomes effective, or
at the election of the Representatives, on the fourth full business
day after this Agreement becomes effective, if it becomes effective
after 4:30 P.M. eastern time, or at such other time not later than the
seventh full business day thereafter as the Representatives and the
Company may determine, such time of delivery against payment being
herein referred to as the "First Closing Date." The First Closing
Date and the Option Closing Date are herein individually referred to
as the "Closing Date" and collectively referred to as the "Closing
Dates." Certificates in definitive form for the Option Notes which
each Underwriter shall have agreed to purchase hereunder shall be
similarly delivered by or on behalf of the Company on the Option
Closing Date. The certificates in definitive form for the Notes to be
delivered will be in good delivery form and in such denominations and
registered in such names as Bradford may request not less than 48
hours prior to the First Closing Date or the Option Closing Date, as
the case may be. Such certificates will be made available for
checking and packaging at a location in New York, New York as may be
designated by you, at least 24 hours prior to the First Closing Date
or the Option Closing Date, as the case may be. It is understood that
you may (but shall not be obligated to) make payment on behalf of any
Underwriter or Underwriters for the Notes to be purchased by such
Underwriter or Underwriters. No such payment shall relieve such
Underwriter or Underwriters from any of its or their obligations
hereunder.
3. Offering by the Underwriters. After the Registration
Statement becomes effective, the several Underwriters propose to offer for sale
to the public the Firm Notes and any Option Notes which may be sold at the
price and upon the terms set forth in the Final Prospectus.
4. Covenants of the Company. The Company covenants and agrees
with each of the Underwriters that:
(a) The Company shall comply with the provisions of and
make all requisite filings with the Commission pursuant to Rules 424
and 430A of the Rules and Regulations and shall notify you promptly
(in writing, if requested) of all such filings. The Company shall
notify you promptly of any request by the Commission for any amendment
of or supplement to the Registration Statement, the Effective
Prospectus or the Final Prospectus or for additional information; the
Company shall prepare and file with the Commission, promptly upon your
request, any amendments of or supplements to the Registration
Statement, the Effective Prospectus or the Final Prospectus which, in
your opinion, may be necessary or advisable in connection with the
distribution of the Notes; and the Company shall not file any
amendment of or supplement to the Registration Statement, the
Effective Prospectus or the Final Prospectus which is not approved by
you after reasonable notice thereof. The Company shall advise you
promptly of the issuance by the Commission or any jurisdiction or
other regulatory body of any stop order or other order suspending the
effectiveness of the Registration Statement, suspending or preventing
the use of any Preliminary Prospectus, the Effective Prospectus or the
Final Prospectus or suspending the qualification of the Notes for
offering or sale in any jurisdiction, or of the
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<PAGE> 12
institution of any proceedings for any such purpose; and the Company
shall use its best efforts to prevent the issuance of any stop order
or other such order and, should a stop order or other such order be
issued, to obtain as soon as possible the lifting thereof.
(b) The Company will take or cause to be taken all
necessary action and furnish to whomever you direct such information
as may be reasonably required in qualifying the Notes for offer and
sale under the securities or Blue Sky laws of such jurisdictions as
the Underwriters may designate and will continue such qualifications
in effect for as long as may be reasonably necessary to complete the
distribution of the Notes.
(c) Within the time during which a Final Prospectus
relating to the Notes is required to be delivered under the Securities
Act, the Company shall comply with all requirements imposed upon it by
the Securities Act, as now and hereafter amended, and by the Rules and
Regulations, as from time to time in force, so far as is necessary to
permit the continuance of sales of or dealings in the Notes as
contemplated by the provisions hereof and the Final Prospectus. If
during such period any event occurs as a result of which the Final
Prospectus as then amended or supplemented would include an untrue
statement of a material fact or omit to state a material fact
necessary to make the statements therein, in the light of the
circumstances then existing, not misleading, or if during such period
it is necessary to amend the Registration Statement or supplement the
Final Prospectus to comply with the Securities Act, the Company shall
promptly notify you and shall amend the Registration Statement or
supplement the Final Prospectus (at the expense of the Company) so as
to correct such statement or omission or effect such compliance.
(d) The Company will furnish without charge to the
Representatives and make available to the Underwriters copies of the
Registration Statement (four of which shall be signed and shall be
accompanied by all exhibits, including any which are incorporated by
reference, which have not previously been furnished), each Preliminary
Prospectus, the Effective Prospectus and the Final Prospectus, and all
amendments and supplements thereto, including any prospectus or
supplement prepared after the effective date of the Registration
Statement, in each case as soon as available and in such quantities as
the Underwriters may reasonably request.
(e) The Company will (i) deliver to you at such office or
offices as you may designate as many copies of the Preliminary
Prospectus and Final Prospectus as you may reasonably request, and
(ii) for a period of not more than nine months after the Registration
Statement becomes effective, send to the Underwriters as many
additional copies of the Final Prospectus and any supplement thereto
as you may reasonably request.
(f) The Company shall make generally available to its
security holders, in the manner contemplated by Rule 158(b) under the
Securities Act as promptly as practicable and in any event no later
than 45 days after the end of its fiscal quarter in which the first
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<PAGE> 13
anniversary of the effective date of the Registration Statement
occurs, an earning statement satisfying the provisions of Section
11(a) of the Securities Act covering a period of at least 12
consecutive months beginning after the effective date of the
Registration Statement.
(g) The Company will apply the net proceeds from the sale
of the Notes as set forth under the caption "Use of Proceeds" in the
Final Prospectus.
(h) During a period of five years from the effective date
of the Registration Statement, the Company will furnish to the
Representatives copies of all reports and other communications
(financial or other) furnished by the Company to its stockholders and,
as soon as available, copies of any reports or financial statements
furnished or filed by the Company to or with the Commission or any
national securities exchange on which any class of securities of the
Company may be listed.
(i) The Company will, from time to time, after the
effective date of the Registration Statement file with the Commission
such reports as are required by the Securities Act, the Exchange Act
and the Rules and Regulations, and shall also file with foreign, state
and other governmental securities commissions in jurisdictions where
the Notes have been sold by you (as you shall have advised us in
writing) such reports as are required to be filed by the securities
acts and the regulations of those foreign jurisdictions or states.
(j) If at any time during the 25 day period after the
Registration Statement is declared effective, any rumor, publication
or event relating to or affecting the Company shall occur as a result
of which, in your opinion, the market price for the Notes has been or
is likely to be materially affected (regardless of whether such rumor,
publication or event necessitates a supplement to or amendment of the
Final Prospectus), the Company will, after written notice from you
advising it as to the effect set forth above, prepare, consult with
you concerning the substance of and disseminate a press release or
other public statement, reasonably satisfactory to you, responding to
or commenting on such rumor, publication or event.
(k) The Company will not take, directly or indirectly, any
action designed to cause or result in, or which might constitute or be
expected to constitute, stabilization or manipulation of the price of
the capital stock of the Company and the Company will use its best
efforts to assure that its officers, directors and affiliates take no
such action.
(l) Within the time during which a Final Prospectus
relating to the Notes is required to be delivered under the Securities
Act in connection with the sale of the Notes, the Company will conduct
its business and operations as described in the Final Prospectus or,
if the Company or any of its subsidiaries makes any material change to
its business or operations as so conducted, promptly disclose such
change generally to the Representatives and, if appropriate or
necessary, to the Company's security holders.
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<PAGE> 14
5. Expenses. The Company agrees with the Underwriters that (a)
whether or not the transactions contemplated by this Agreement are consummated
or this Agreement becomes effective or is terminated, the Company will pay all
fees and expenses incident to the performance of the obligations of the Company
hereunder, including, but not limited to, (i) the Commission's registration
fee, (ii) the expenses of printing (or reproduction) and distributing the
Registration Statement (including the financial statements therein and all
amendments and exhibits thereto), each Preliminary Prospectus, the Effective
Prospectus, the Final Prospectus, any amendments or supplements thereto, any
audio or visual materials supplied by the Company expressly for use in
connection with the marketing of the Notes, including without limitation,
slides, videos, films and tape recordings, the Indenture and this Agreement and
other underwriting documents, including Underwriter's Questionnaires,
Underwriter's Powers of Attorney, Blue Sky Memoranda, Selected Dealer
Agreements and Agreements Among Underwriters, (iii) fees and expenses of
accountants and counsel for the Company, (iv) expenses of registration or
qualification of the Notes under state Blue Sky and securities laws, including
the fees and disbursements of counsel to the Underwriters in connection
therewith, (v) filing fees paid or incurred by the Underwriters and related
fees and expenses of counsel to the Underwriters in connection with filings
with the NASD, (vi) all travel, lodging and reasonable living expenses incurred
by the Company in connection with marketing, dealer and other meetings attended
by the Company and the Underwriters in marketing the Notes, (vii) the costs and
charges of the Company's transfer agent and registrar and the cost of preparing
the certificates for the Notes, (viii) the fees and expenses of the Trustee in
connection with the Indenture and the Notes and (ix) all other costs and
expenses incident to the performance of the Company's obligations hereunder not
otherwise provided for in this Section; and (b) all out-of-pocket expenses,
including counsel fees, disbursements and expenses, incurred by the
Underwriters in connection with investigating, preparing to market and
marketing the Notes and proposing to purchase and purchasing the Notes under
this Agreement, will be borne and paid by the Company if the sale of the Notes
provided for herein is not consummated by reason of (i) the termination of this
Agreement by the Company pursuant to Section 12(a)(i), (ii) by reason of
termination of this Agreement by the Underwriters pursuant to Sections
12(b)(iii), 12(b)(iv) or 12(b)(v), or (iii) because of any failure or refusal
on the part of the Company to comply with the terms or fulfill any of the
conditions of this Agreement.
6. Conditions of the Underwriters' Obligations. The respective
obligations of the Underwriters to purchase and pay for the Firm Notes shall be
subject, in their discretion, to the accuracy of the representations and
warranties of the Company herein as of the date hereof and as of the Closing
Date as if made on and as of the Closing Date, to the accuracy of the
statements of the Company's officers made pursuant to the provisions hereof, to
the performance by the Company of all of its covenants and agreements hereunder
and to the following additional conditions:
(a) The Registration Statement and all post-effective
amendments thereto shall have become effective not later than 5:30
P.M., Washington, D.C. time, on the day following the date of this
Agreement, or such later time and date as shall have been consented to
by the Representatives and all filings required by Rule 424 and Rule
430A
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<PAGE> 15
of the Rules and Regulations shall have been made; no stop order
suspending the effectiveness of the Registration Statement shall have
been issued and no proceedings for that purpose shall have been
instituted or threatened or, to the knowledge of the Company or the
Underwriters, shall be contemplated by the Commission; any request of
the Commission for additional information (to be included in the
Registration Statement or the Final Prospectus or otherwise) shall
have been complied with to your satisfaction; and the NASD, upon
review of the terms of the public offering of the Notes, shall not
have objected to such offering, such terms or the Underwriters'
participation in the same.
(b) No Underwriter shall have advised the Company that
the Registration Statement, Preliminary Prospectus, the Effective
Prospectus or Final Prospectus, or any amendment or any supplement
thereto, contains an untrue statement of fact which, in your judgment,
is material, or omits to state a fact which, in your judgment, is
material and is required to be stated therein or necessary to make the
statements therein not misleading and the Company shall not have cured
such untrue statement of fact or stated a statement of fact required
to be stated therein.
(c) The Representatives shall have received an opinion,
dated the Closing Date, from Sonnenschein Nath & Rosenthal, counsel
for the Company, to the effect that:
(i) The Company has been duly organized and is
validly existing in good standing as a corporation under the
laws of the State of Delaware, with corporate power and authority
to own its properties and conduct its business as now conducted,
and is duly qualified to do business as a foreign corporation in
good standing in all other jurisdictions where the failure to so
qualify would have a material adverse effect upon the Company.
To such counsel's knowledge, the Company holds all licenses,
certificates, permits, franchises and authorizations from
governmental authorities which are material to the conduct of its
business in all locations known to such counsel after reasonable
investigation in which such business is currently being
conducted.
(ii) As of the dates specified therein, the
Company had authorized and issued capital stock as set forth
under the caption "Capitalization" in the Final Prospectus. All
of the outstanding shares of the capital stock of the Company
have been duly authorized and are validly issued, fully paid and
nonassessable, and none of the issued shares have been issued in
violation of or subject to any preemptive rights provided for by
law or by the Company's certificate of incorporation. The Notes
have been duly and validly authorized and, when executed,
authenticated and delivered in accordance with the Indenture,
will constitute legal and binding obligations of the Company
entitled to the benefits of the Indenture. There are no
preemptive rights or other rights to subscribe for or to
purchase, or any restriction upon the transfer of, the Notes that
have not been waived pursuant to the Company's certificate of
incorporation, by-laws or other governing documents or
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<PAGE> 16
any agreement or other instrument to which the Company is a
party or by which it may be bound, except as described in the
Effective Prospectus and Final Prospectus and except for
restrictions on transfer imposed under applicable securities
laws. Neither the filing of the Registration Statement nor the
offer or sale of the Notes as contemplated by this Agreement and
the Indenture gives rise to any rights, other than those which
have been waived or satisfied, for or relating to the
registration of any shares of capital stock of the Company or any
other securities of the Company. Upon issuance and delivery
thereof and payment therefor as provided in the Underwriting
Agreement, the Underwriters will receive good and marketable
title to the Notes to be issued and delivered pursuant to this
Agreement, free and clear of all liens, encumbrances, claims,
security interests, restrictions, shareholders agreements and
voting trusts whatsoever. The Notes conform to the description
thereof contained in the Final Prospectus. All offers and sales
of the Company's securities prior to the date hereof were at all
relevant times duly registered or exempt from the registration
requirements of the Securities Act and were duly registered or
the subject of an exemption from the registration requirements of
applicable state securities or Blue Sky laws.
(iii) The Company has full legal right, power and
authority to enter into this Agreement and the Indenture and to
issue, sell and deliver the Notes to be sold by it to the
Underwriters as provided herein, and this Agreement and the
Indenture have been duly authorized, executed and delivered by
the Company and each constitutes the valid and legally binding
obligation of the Company enforceable against the Company in
accordance with its terms, except as enforceability may be
limited by general equitable principles, bankruptcy, insolvency,
reorganization, moratorium, fraudulent transfer, fraudulent
conveyance or other laws affecting creditors' rights generally
and public policy restrictions on the enforceability of
indemnification provisions. The Indenture has been qualified
under the Trust Indenture Act.
(iv) To such counsel's knowledge, no consent,
approval, authorization or order of any court or governmental
or regulatory agency or body or third party is required for the
performance of this Agreement and the Indenture by the Company or
the consummation by the Company of the transactions contemplated
hereby and thereby, except such as have been obtained under the
Securities Act and such as may be required by the NASD and under
state securities or Blue Sky laws in connection with the purchase
and distribution of the Notes by the several Underwriters, as to
which such counsel expresses no opinion. The performance of this
Agreement and the Indenture by the Company and the consummation
by the Company of the transactions contemplated hereby and
thereby will not conflict with or result in a breach or violation
by the Company of any of the terms or provisions of, or
constitute a default by the Company under, any indenture,
mortgage, deed of trust, loan agreement, lease or other agreement
or instrument,
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<PAGE> 17
known to such counsel, to which the Company is a party or to
which the Company or its properties is subject, the certificate
of incorporation or by-laws of the Company, any statute, or any
judgment, decree, order, rule or regulation of any court or
governmental agency or body (other than state securities or blue
sky laws, as to which such counsel expresses no opinion) known to
such counsel to be applicable to the Company or its properties.
In addition to the matters set forth above, such opinion shall also
include a statement to the effect that nothing has come to the attention of
such counsel which leads them to believe that the Registration Statement, the
Effective Prospectus and the Final Prospectus or any amendment or supplement
thereto contains an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading (except that such counsel need express no view as to
financial statements, schedules and other financial or statistical information
included or incorporated by reference therein).
The opinions to be rendered pursuant to paragraph (c) may be limited
to federal law, and as to state law matters, to the laws of the states in which
such counsel is admitted to practice. Such counsel may also rely on opinion of
other counsel as to matters of local law provided that such counsel shall state
that they believe both they and you are justified in relying on such opinion.
(d) The Representatives shall have received an opinion,
dated the Closing Date, from Richard P. Vogelman, Vice President,
Secretary and General Counsel of the Company, to the effect that:
(i) Except for First Merchants Auto Receivables
Corporation, a Delaware corporation and First Merchants Auto
Receivables Corporation II, a Delaware corporation and First
Merchants Auto Receivables Corporation III, a Delaware
corporation, which were formed solely for the purpose of
facilitating the securitization of the Company's finance
receivables, the Company has no subsidiaries in any form, whether
directly or indirectly, wholly-owned or other than wholly-owned.
Each of the Company's subsidiaries is validly existing and in
good standing under the laws of the state of its incorporation or
organization, as the case may be, with power and authority to own
its properties and conduct its business as now conducted, and is
duly qualified or authorized to do business and is in good
standing in all other jurisdictions where the failure to so
qualify would have a material adverse effect upon the business of
the Company and its subsidiaries taken as a whole. The
outstanding stock of each of the Company's subsidiaries is duly
authorized, validly issued, fully paid and nonassessable. All of
the outstanding stock of each of the corporate subsidiaries is
owned beneficially and of record by the Company, free and clear
of all liens, encumbrances, equities and claims. No options or
warrants or other rights to purchase, agreements or other
obligations to issue or other rights to convert any obligations
into any shares of capital stock or of ownership interests in any
of the Company's subsidiaries are
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<PAGE> 18
outstanding. Each of the Company's subsidiaries holds all
licenses, certificates, permits, franchises and authorizations
from governmental authorities which are material to the conduct
of its business in all locations in which such business is
currently being conducted.
(ii) Except as described in the Final Prospectus,
there is not pending, or, to such counsel's knowledge,
threatened, any action, suit, proceeding, inquiry or
investigation, to which the Company is a party, or to which the
property of the Company is subject, before or brought by any
court or governmental agency or body, which, if determined
adversely to the Company, could result in any material adverse
change in the business, financial position, net worth or results
of operations, or could materially adversely affect the
properties or assets, of the Company.
(iii) To such counsel's knowledge, no default exists,
and no event has occurred which with notice or after the lapse of
time to cure or both, would constitute a default, in the due
performance and observance of any term, covenant or condition of
any indenture, mortgage, deed of trust, loan agreement, lease or
other agreement or instrument to which the Company is a party or
to which it or its properties is subject, or of the certificate
of incorporation or by-laws of the Company which could result in
any material adverse change in the business, financial condition,
net worth or results of operations, or could materially adversely
affect the properties or assets of the Company.
(iv) Neither the Company nor any of its subsidiaries
is in violation of any law, ordinance, administrative or
governmental rule or regulation applicable to the Company or any
of its subsidiaries and material to the Company and its
subsidiaries taken as a whole or any decree of any court or
governmental agency or body having jurisdiction over the Company
or any of its subsidiaries (other than violations of state
securities or blue sky laws, as to which such counsel expresses
no opinion).
(v) The Registration Statement and all
post-effective amendments thereto have become effective under
the Securities Act, and, to the knowledge of such counsel, no
stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose
have been instituted or are threatened, pending or contemplated
by the Commission. All filings required by Rule 424 and Rule
430A of the Rules and Regulations have been made; the
Registration Statement, the Effective Prospectus and Final
Prospectus, and any amendments or supplements thereto (except for
the financial statements and schedules included or incorporated
by reference therein as to which such counsel need express no
opinion), as of their respective effective or issue dates,
complied as to form in all material respects with the
requirements of the Securities
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<PAGE> 19
Act and the Rules and Regulations; the descriptions in the
Registration Statement, the Effective Prospectus and the Final
Prospectus of statutes, regulations, legal and governmental
proceedings, and contracts and other documents are accurate in
all material respects and present fairly the information required
to be stated; and such counsel does not know of any pending or
threatened legal or governmental proceedings, statutes or
regulations required to be described in the Final Prospectus
which are not described as required nor of any contracts or
documents of a character required to be described in the
Registration Statement or the Final Prospectus or to be filed as
exhibits to the Registration Statement which are not described
and filed as required.
(vi) The Company is not, and will not be as a
result of the consummation of the transactions contemplated by
this Agreement, an "investment company" within the meaning of the
Investment Company Act of 1940, as amended.
In addition to the matters set forth above, such opinion shall also
include a statement to the effect that nothing has come to the attention of
such counsel which leads them to believe that the Registration Statement, the
Effective Prospectus and the Final Prospectus or any amendment or supplement
thereto contains an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading (except that such counsel need express no view as to
financial statements, schedules and other financial or statistical information
included or incorporated by reference therein).
The opinions to be rendered pursuant to paragraph (d) may be limited
to federal law, and as to state law matters, to the laws of the states in which
such counsel is admitted to practice. Such counsel may also rely on opinion of
other counsel as to matters of local law provided that such counsel shall state
that he believes both he and you are justified in relying on such opinion.
(e) The Underwriters shall have received an opinion or
opinions, dated the Closing Date, of Bass, Berry & Sims PLC, counsel
for the Underwriters, with respect to the Registration Statement and
the Final Prospectus, and such other related matters as the
Underwriters may require, and the Company shall have furnished to such
counsel such documents as they may reasonably request for the purpose
of enabling them to pass upon such matters.
(f) The Representatives shall have received from Deloitte
& Touche LLP, a letter dated the date hereof and, at the Closing Date,
a second letter dated the Closing Date, in form and substance
satisfactory to the Representatives, stating that they are independent
public accountants with respect to the Company within the meaning of
the Securities Act and the applicable Rules and Regulations, and to
the effect that:
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<PAGE> 20
(i) In their opinion, the audited
financial statements and schedules examined by them and
included or incorporated by reference in the Registration
Statement comply as to form in all material respects with the
applicable accounting requirements of the Securities Act and the
published Rules and Regulations and are presented in accordance
with generally accepted accounting principles consistently
applied; and the selected financial data, and/or condensed
financial statements are derived from audited financial
statements of the Company;
(ii) The unaudited selected financial information
included in the Preliminary Prospectus and the Final Prospectus
under the captions "SUMMARY FINANCIAL DATA," "SELECTED FINANCIAL
AND OPERATING DATA" and "SUPPLEMENTAL FINANCIAL DATA" for each of
the fiscal years ended December 31, 1993, 1994 and 1995, agrees
with the corresponding amounts in the audited financial
statements included or incorporated by reference in the Final
Prospectus or previously reported on by them;
(iii) On the basis of a reading of the latest
available interim financial statements (unaudited) of the
Company and its subsidiaries, if any, a reading of the minute
books of the Company and its subsidiaries, inquiries of officials
of the Company responsible for financial and accounting matters
and other specified procedures, all of which have been agreed to
by the Representatives, nothing came to their attention that
caused them to believe that:
(A) Any unaudited interim financial
statements included in the Final Prospectus do not
comply as to form in all material respects with the
applicable accounting requirements of the federal
securities laws and the published rules and regulations
thereunder or are not in conformity with generally accepted
accounting principles applied on a basis substantially
consistent with the basis for the audited financial
statements contained or incorporated by reference in the
Registration Statement;
(B) at a specified date not more than
five days prior to the date of delivery of such
respective letter, there was any change in the capital
stock, decline in stockholders' equity or increase in
long-term debt of the Company or any of its subsidiaries,
or other items specified by the Underwriters in each case
as compared with amounts shown in the latest balance sheets
included in the Final Prospectus, except in each case for
changes, decreases or increases which the Final Prospectus
discloses have occurred or may occur or which are described
in such letters; and
(C) for the period from the closing date
of the latest statements of income included in the
Effective Prospectus and the Final Prospectus to a
specified date not more than five days prior to the date of
delivery of such
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<PAGE> 21
respective letter, there were any decreases in total
revenues or net income of the Company, or other items
specified by the Underwriters, or any increases in any
items specified by the Underwriters, in each case as
compared with the corresponding period of the preceding
year, except in each case for decreases which the Final
Prospectus discloses have occurred or may occur or which
are described in such letter.
(iv) They have carried out certain specified
procedures, not constituting an audit, with respect to certain
amounts, percentages and financial information specified by you
which are derived from the general accounting records of the
Company, which appear in the Effective Prospectus and the Final
Prospectus and have compared and agreed such amounts, percentages
and financial information with the accounting records of the
Company and its subsidiaries or to analyses and schedules
prepared by the Company and its subsidiaries from its detailed
accounting records.
In the event that the letters to be delivered referred to above set
forth any such changes, decreases or increases, it shall be a further
condition to the obligations of the Underwriters that the Underwriters
shall have determined, after discussions with officers of the Company
responsible for financial and accounting matters that such changes,
decreases or increases as are set forth in such letters do not reflect
a material adverse change in the stockholders' equity or long-term
debt of the Company as compared with the amounts shown in the latest
balance sheets of the Company included in the Final Prospectus, or a
material adverse change in total net revenues or net income of the
Company, in each case as compared with the corresponding period of the
prior year.
(g) There shall have been furnished to the
Representatives a certificate, dated the Closing Date and addressed to
you, signed by the Chief Executive Officer and by the Chief Financial
Officer of the Company to the effect that:
(i) the representations and warranties of the
Company in Section 1 of this Agreement are true and
correct, as if made at and as of the Closing Date, and the
Company has complied with all the agreements and satisfied all
the conditions on its part to be performed or satisfied at or
prior to the Closing Date;
(ii) no stop order suspending the effectiveness of
the Registration Statement has been issued, and no proceedings
for that purpose have been initiated or are pending, or to their
knowledge, threatened under the Securities Act;
(iii) all filings required by Rule 424 and Rule 430A of
the Rules and Regulations have been made;
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<PAGE> 22
(iv) they have carefully examined the
Registration Statement, the Effective Prospectus and the Final
Prospectus, and any amendments or supplements thereto, and such
documents do not include any untrue statement of a material fact
or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading; and
(v) since the effective date of the Registration
Statement, there has occurred no event required to be set forth
in an amendment or supplement to the Registration Statement, the
Effective Prospectus or the Final Prospectus which has not been
so set forth.
(h) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Final
Prospectus, and except as stated therein, neither the Company nor any
of its subsidiaries has sustained any material loss or interference
with its business or properties from fire, flood, hurricane,
earthquake, accident or other calamity, whether or not covered by
insurance, or from any labor dispute or any court or governmental
action, order or decree, or become a party to or the subject of any
litigation which is material to the Company or its subsidiaries taken
as a whole, nor shall there have been any material adverse change, or
any development involving a prospective material adverse change, in
the business, properties, key personnel, capitalization, net worth,
results of operations or condition (financial or other) of the Company
and its subsidiaries taken as a whole, which loss, interference,
litigation or change, in your judgment shall render it unadvisable to
commence or continue the offering of the Notes at the offering price
to the public set forth on the cover page of the Prospectus or to
proceed with the delivery of the Notes.
All such opinions, certificates, letters and documents delivered
pursuant to this Agreement will comply with the provisions hereof only if they
are reasonably satisfactory to the Representatives and their counsel. The
Company shall furnish to the Representatives such conformed copies of such
opinions, certificates, letters and documents in such quantities as the
Representatives shall reasonably request.
The respective obligations of the Underwriters to purchase and pay for
the Option Notes shall be subject, in their discretion, to each of the
foregoing conditions to purchase the Firm Notes, except that all references to
the "Closing Date" shall be deemed to refer to the Option Closing Date, if it
shall be a date other than the Closing Date.
7. Condition of the Company's Obligations. The obligations
hereunder of the Company are subject to the condition set forth in Section 6(a)
hereof.
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<PAGE> 23
8. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless
each Underwriter, and each person, if any, who controls any
Underwriter within the meaning of the Securities Act, against any
losses, claims, damages or liabilities, joint or several, to which
such Underwriter or controlling person may become subject under the
Securities Act or otherwise, insofar as such losses, claims, damages
or liabilities (or actions in respect thereof) arise out of or are
based in whole or in part upon: (i) any inaccuracy in the
representations and warranties of the Company contained herein; (ii)
any failure of the Company to perform its obligations hereunder or
under law; (iii) any untrue statement or alleged untrue statement of
any material fact contained in (A) the Registration Statement, any
Preliminary Prospectus, the Effective Prospectus or Final Prospectus,
or any amendment or supplement thereto or (B) in any Blue Sky
application or other written information furnished by the Company
filed in any state or other jurisdiction in order to qualify any or
all of the Notes under the securities laws thereof (a "Blue Sky
Application"); or (iv) the omission or alleged omission to state in
the Registration Statement, any Preliminary Prospectus, the Effective
Prospectus or Final Prospectus or any amendment or supplement thereto,
or any Blue Sky Application a material fact required to be stated
therein or necessary to make the statements therein not misleading,
and will reimburse each Underwriter and each such controlling person
for any legal or other expenses reasonably incurred by such
Underwriter or such controlling person in connection with
investigating or defending any such loss, claim, damage, liability or
action as such expenses are incurred; provided, however, that the
Company will not be liable in any such case to the extent that any
such loss, claim, damage, or liability arises out of or is based upon
any untrue statement or alleged untrue statement or omission or
alleged omission made in the Registration Statement, the Preliminary
Prospectus, the Effective Prospectus or Final Prospectus or such
amendment or such supplement thereto, or any Blue Sky Application in
reliance upon and in conformity with written information furnished to
the Company by any Underwriter specifically for use therein (it being
understood that the only information so provided by the Underwriters
is the information included in the last paragraph on the cover page
and under the caption "Underwriting" in any Preliminary Prospectus and
the Final Prospectus and the Effective Prospectus).
(b) Each Underwriter will indemnify and hold harmless the
Company, each of its directors, each of its officers who signed the
Registration Statement and each person, if any, who controls the
Company within the meaning of the Securities Act against any losses,
claims, damages or liabilities to which the Company or any such
director, officer or controlling person may become subject, under the
Securities Act or otherwise, insofar as such losses, claims, damages
or liabilities (or actions in respect thereof) arise out of or are
based upon any untrue statement or alleged untrue statement of any
material fact contained in the Registration Statement, any Preliminary
Prospectus, the Effective Prospectus or Final Prospectus, or any
amendment or supplement thereto, or any Blue Sky Application, or arise
out of or are based upon the omission or the alleged omission to state
23
<PAGE> 24
in the Registration Statement, any Preliminary Prospectus, the
Effective Prospectus or Final Prospectus or any amendment or
supplement thereto or any Blue Sky Application a material fact
required to be stated therein or necessary to make the statements
therein not misleading, in each case to the extent, but only to the
extent, that such untrue statement or alleged untrue statement or
omission or alleged omission was made in reliance upon and in
conformity with written information furnished to the Company by any
Underwriter specifically for use therein (it being understood that the
only information so provided is the information included in the last
paragraph on the cover page and under the caption "Underwriting" in
any Preliminary Prospectus and in the Effective Prospectus and the
Final Prospectus);
(c) Promptly after receipt by an indemnified party under
this Section 8 of notice of the commencement of any action, including
governmental proceedings, such indemnified party will, if a claim in
respect thereof is to be made against the indemnifying party under
this Section 8 notify the indemnifying party of the commencement
thereof; but the omission so to notify the indemnifying party will not
relieve it from any liability which it may have to any indemnified
party otherwise than under this Section 8. In case any such action is
brought against any indemnified party, and it notifies the
indemnifying party of the commencement thereof, the indemnifying party
will be entitled to participate therein, and to the extent that it may
wish, jointly with any other indemnifying party similarly notified, to
assume the defense thereof, with counsel satisfactory to such
indemnified party; and after notice from the indemnifying party to
such indemnified party of its election to so assume the defense
thereof, the indemnifying party will not be liable to such indemnified
party under this Section 8 for any legal or other expenses
subsequently incurred by such indemnified party in connection with the
defense thereof other than reasonable costs of investigation except
that the indemnified party shall have the right to employ separate
counsel if, in the indemnified party's reasonable judgment, it is
advisable for the indemnified party and any other Underwriter to be
represented by separate counsel, and in that event the fees and
expenses of separate counsel shall be paid by the indemnifying party.
The Company will not, without prior written consent of each
Representative, settle or compromise or consent to the entry of any
judgment in any pending or threatened claim, action, suit or
proceeding (or related cause of action or portion thereof) in respect
of which indemnification may be sought hereunder (whether or not such
Underwriter is a party to such claim, action, suit or proceeding),
unless such settlement, compromise or consent includes an
unconditional release of such Underwriter from all liability arising
out of such claim, action, suit or proceeding (or related cause of
action or portion thereof).
(d) In order to provide for just and equitable
contribution in circumstances in which the indemnity agreement
provided for in the preceding part of this Section 8 is for any reason
held to be unavailable to the Underwriters, or the Company or is
insufficient to hold harmless an indemnified party, then the Company
shall contribute to the damages
24
<PAGE> 25
paid by the Underwriters, and the Underwriters shall contribute to the
damages paid by the Company provided, however, that no person guilty
of fraudulent misrepresentation (within the meaning of Section 11(f)
of the Securities Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. In
determining the amount of contribution to which the respective parties
are entitled, there shall be considered the relative benefits received
by each party from the offering of the Notes (taking into account the
portion of the proceeds of the offering realized by each), the
parties' relative knowledge and access to information concerning the
matter with respect to which the claim was asserted, the opportunity
to correct and prevent any statement or omission, and any other
equitable considerations appropriate under the circumstances. The
Company and the Underwriters agree that it would not be equitable if
the amount of such contribution were determined by pro rata or per
capita allocation (even if the Underwriters were treated as one entity
for such purpose). No Underwriter or person controlling such
Underwriter shall be obligated to make contribution hereunder which in
the aggregate exceeds the underwriting discount applicable to the
Notes purchased by such Underwriter under this Agreement, less the
aggregate amount of any damages which such Underwriter and its
controlling persons have otherwise been required to pay in respect of
the same or any similar claim. The Underwriters' obligations to
contribute hereunder are several in proportion to their respective
underwriting obligations and not joint. For purposes of this Section,
each person, if any, who controls an Underwriter within the meaning of
Section 15 of the Securities Act shall have the same rights to
contribution as such Underwriter, and each director of the Company,
each officer of the Company who signed the Registration Statement, and
each person, if any, who controls the Company within the meaning of
Section 15 of the Securities Act, shall have the same rights to
contribution as the Company.
(e) The obligations of the Company under this Section 8
shall be in addition to any liability which the Company may otherwise
have and shall extend, upon the same terms and conditions, to each
person, if any, who controls any Underwriter within the meaning of the
Securities Act; and the obligations of the Underwriters under this
Section 8 shall be in addition to any liability which the respective
Underwriters may otherwise have and shall extend, upon the same terms
and conditions, to each officer and director of the Company and to
each person, if any, who controls the Company within the meaning of
the Securities Act.
9. Default of Underwriters. If any Underwriter defaults in its
obligation to purchase Notes hereunder and if the total amount of Notes which
such defaulting Underwriter agreed but failed to purchase is ten percent or
less of the total amount of Notes to be sold hereunder, the non-defaulting
Underwriters shall be obligated severally to purchase (in the respective
proportions which the amount of Notes set forth opposite the name of each
non-defaulting Underwriter in Schedule I hereto bears to the total amount of
Notes set forth opposite the names of all the non-defaulting Underwriters), the
Notes which such defaulting Underwriter or Underwriters agreed but failed to
purchase. If any Underwriter so defaults and the total number of Notes with
respect
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<PAGE> 26
to which such default or defaults occur is more than ten percent of the
total amount of Notes to be sold hereunder, and arrangements satisfactory to
the other Underwriters and the Company for the purchase of such Notes by other
persons (who may include the non-defaulting Underwriters) are not made within
36 hours after such default, this Agreement, insofar as it relates to the sale
of the Notes, will terminate without liability on the part of the
non-defaulting Underwriters or the Company except for (i) the provisions of
Section 8 hereof, and (ii) the expenses to be paid or reimbursed by the Company
pursuant to Section 5. As used in this Agreement, the term "Underwriter"
includes any person substituted for an Underwriter under this Section 9.
Nothing herein shall relieve a defaulting Underwriter from liability for its
default.
10. Survival Clause. The respective representations, warranties,
agreements, covenants, indemnities and other statements of the Company, its
officers and the Underwriters set forth in this Agreement or made by or on
behalf of them, respectively, pursuant to this Agreement shall remain in full
force and effect, regardless of (i) any investigation made by or on behalf of
the Company, any of its officers or directors, any Underwriter or any
controlling person, (ii) any termination of this Agreement and (iii) delivery
of and payment for the Notes.
11. Effective Date. This Agreement shall become effective at
whichever of the following times shall first occur: (i) at 11:30 A.M., eastern
time, on the next full business day following the date on which the
Registration Statement becomes effective or (ii) at such time after the
Registration Statement has become effective as the Representatives shall
release the Firm Notes for sale to the public; provided, however, that the
provisions of Sections 5, 8, 10, and 11 hereof shall at all times be effective.
For purposes of this Section 11, the Firm Notes shall be deemed to have been so
released upon the release by the Representatives for publication, at any time
after the Registration Statement has become effective, of any newspaper
advertisement relating to the Firm Notes or upon the release by the
Representatives of telegrams offering the Firm Notes for sale to securities
dealers, whichever may occur first.
12. Termination.
(a) The Company's obligations under this Agreement may be
terminated by the Company by notice to the Representatives (i) at any
time before it becomes effective in accordance with Section 11 hereof,
or (ii) in the event that the condition set forth in Section 7 shall
not have been satisfied at or prior to the First Closing Date.
(b) This Agreement may be terminated by the
Representatives by notice to the Company (i) at any time before it
becomes effective in accordance with Section 11 hereof; (ii) in the
event that at or prior to the First Closing Date the Company shall
have failed, refused or been unable to perform any agreement on the
part of the Company to be performed hereunder or any other condition
to the obligations of the Underwriters hereunder is not fulfilled;
(iii) if at or prior to the Closing Date trading in securities on the
New York Stock Exchange, the American Stock Exchange or the
over-the-counter market shall have been suspended or materially
limited or minimum or maximum prices shall have
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<PAGE> 27
been established on either of such exchanges or such market, or a
banking moratorium shall have been declared by Federal or state
authorities; (iv) if at or prior to the Closing Date trading in
securities of the Company shall have been suspended; or (v) if there
shall have been such a material change in general economic, political
or financial conditions or if the effect of international conditions
on the financial markets in the United States shall be such as, in
your reasonable judgment, makes it inadvisable to commence or continue
the offering of the Notes at the offering price to the public set
forth on the cover page of the Prospectus or to proceed with the
delivery of the Notes.
(c) Termination of this Agreement pursuant to this
Section 12 shall be without liability of any party to any other party
other than as provided in Sections 5 and 8 hereof.
13. Notices. All communications hereunder shall be in writing
and, if sent to any of the Underwriters, shall be mailed or delivered or
telegraphed and confirmed in writing to the Representatives in care of J.C.
Bradford & Co., J.C. Bradford Financial Center, 330 Commerce Street, Nashville,
Tennessee 37201, Attention: Michael C. Nunan, or if sent to the Company shall
be mailed, delivered or telegraphed and confirmed in writing to the Company at
570 Lake Cook Road, Suite 126, Deerfield, IL 60015, Attention: Mitchell C.
Kahn.
14. Miscellaneous. This Agreement shall inure to the benefit of
and be binding upon the several Underwriters and, the Company and their
respective successors and legal representatives. Nothing expressed or
mentioned in this Agreement is intended or shall be construed to give any other
person any legal or equitable right, remedy or claim under or in respect of
this Agreement. This Agreement and all conditions and provisions hereof are
intended to be for the sole and exclusive benefit of the Company and the
several Underwriters and for the benefit of no other person except that (i) the
representations and warranties of the Company contained in this Agreement shall
also be for the benefit of any person or persons who control any Underwriter
within the meaning of Section 15 of the Securities Act, and (ii) the
indemnities by the Underwriters shall also be for the benefit of the directors
of the Company, officers of the Company who have signed the Registration
Statement, any person or persons who control the Company within the meaning of
Section 15 of the Securities Act. No purchaser of Notes from any Underwriter
will be deemed a successor because of such purchase. The validity and
interpretation of this Agreement shall be governed by the laws of the State of
Tennessee. This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument. You hereby represent and warrant to the Company
that you have authority to act hereunder on behalf of the several Underwriters,
and any action hereunder taken by you will be binding upon all the
Underwriters.
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[SIGNATURES ON THE FOLLOWING PAGE]
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If the foregoing is in accordance with your understanding of
our agreement, please indicate your acceptance thereof in the space provided
below for that purpose, whereupon this letter shall constitute a binding
agreement between the Company and each of the several Underwriters.
Very truly yours,
FIRST MERCHANTS ACCEPTANCE CORPORATION
By:_________________________________
Title: _____________________________
Confirmed and accepted as of the
date first above written.
J.C. BRADFORD & CO.
PIPER JAFFRAY INC.
KEEFE, BRUYETTE & WOODS, INC.
STIFEL, NICOLAUS & COMPANY, INCORPORATED
For themselves and as Representatives
of the several Underwriters
J.C. BRADFORD & CO.
By:________________________________
Title:___________________________
PIPER JAFFRAY INC.
By:_____________________________________
Title:________________________________
KEEFE, BRUYETTE & WOODS, INC.
By: ________________________________
Title: ___________________________
STIFEL, NICOLAUS & COMPANY, INCORPORATED
By: ________________________________
Title: ___________________________
29
<PAGE> 30
SCHEDULE I
UNDERWRITERS
<TABLE>
<CAPTION>
Principal Amount of Firm Underwriter
Notes to Be Purchased
------------------------------------
<S> <C>
J.C. Bradford & Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $___________
Piper Jaffray Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $___________
Keefe, Bruyette & Woods, Inc. . . . . . . . . . . . . . . . . . . . . . . . . $___________
Stifel, Nicolaus & Company, Incorporated . . . . . . . . . . . . . . . . . . $___________
----------------------------
TOTAL $45,000,000
=============================
</TABLE>
<PAGE> 1
Exhibit 4.1
FIRST MERCHANTS ACCEPTANCE CORPORATION
AND
LASALLE NATIONAL BANK
TRUSTEE
___________________
INDENTURE
DATED AS OF ___________________, 1996
___________________
$51,750,000
SUBORDINATED RESET NOTES
DUE 2006
================================================================================
<PAGE> 2
FIRST MERCHANTS ACCEPTANCE CORPORATION
SUBORDINATED RESET NOTES DUE 2006
TIE-SHEET
of provisions of Trust Indenture Act of 1939 and the Indenture dated as of
___________________________, 1996, between First Merchants Acceptance
Corporation and LaSalle National Bank, Trustee.
<TABLE>
<CAPTION>
TRUST INDENTURE
ACT OF 1939
SECTION INDENTURE SECTION
----------------------------------------- ---------------------------------------------
<S> <C>
310(a)(1)(2) . . . . . . . . . . . . . . 10.1 and 10.12
(a)(3) . . . . . . . . . . . . . . . . Not applicable
(a)(4) . . . . . . . . . . . . . . Not applicable
(b) . . . . . . . . . . . . . . . 10.8 and 10.9
(c) . . . . . . . . . . . . . . . Not applicable
311(c) . . . . . . . . . . . . . . . . . Not applicable
312(a) . . . . . . . . . . . . . . . . . 4.1(A), (B)
(b) . . . . . . . . . . . . . . . 4.1(C)
(c) . . . . . . . . . . . . . . . 4.1(D)
313(a) . . . . . . . . . . . . . . . . . 4.3
(b) . . . . . . . . . . . . . . . Not applicable
(c) . . . . . . . . . . . . . . . 4.3
(d) . . . . . . . . . . . . . . . 4.3
314(a) . . . . . . . . . . . . . . . . . 4.2(A) and (B)
(b) . . . . . . . . . . . . . . . Not applicable
(c) . . . . . . . . . . . . . . . 15.3
(d) . . . . . . . . . . . . . . . Not applicable
(e) . . . . . . . . . . . . . . . 15.3
315(a) . . . . . . . . . . . . . . . . . 10.2(A)
(b) . . . . . . . . . . . . . . . 7.2
(c) . . . . . . . . . . . . . . . 10.2(B)
(d) . . . . . . . . . . . . . . . 10.2(C)
(e) . . . . . . . . . . . . . . . 7.13
316(a)(1) . . . . . . . . . . . . . . . . 7.6 and 7.16
(a)(2) . . . . . . . . . . . . . . Not applicable
(b) . . . . . . . . . . . . . . . 7.12
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C>
317(a) . . . . . . . . . . . . . . . . . 7.8 and 7.10
(b) . . . . . . . . . . . . . . . 3.2(B), (C)
318(a) . . . . . . . . . . . . . . . . . 15.6
- ---------------
</TABLE>
This tie-sheet does not constitute a part of the Indenture.
<PAGE> 4
TABLE OF CONTENTS
PAGE
PARTIES
RECITALS
FORM OF NOTE
ARTICLE 1
<TABLE>
<S> <C>
DEFINITIONS
SECTION 1.1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
affected . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Alternate Comparable Maturity Treasury Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Authenticating Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
"Board of Directors" or "Board". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
business day . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
capital stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Certified Resolution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
"Company Order" and "Company Request" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Comparable Maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Consolidated Net Worth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Daily Newspaper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
date of this Indenture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
day . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Defaulted Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Default Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Effective Interest Rate on Comparable Maturity U.S. Treasury Obligations . . . . . . . . . . . . . . 12
Event of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Executive Officer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Federal Bankruptcy Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Indenture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Interest Payment Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Interest Rate Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Interest Reset Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
</TABLE>
i
<PAGE> 5
<TABLE>
<S> <C>
Interest Rate Reset Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
main office . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
"maturity" or "mature" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
"Note" or "Notes". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
"Note Co-Registrar". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
"Note Register" and "Note Registrar" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
"Noteholder," "holder of the Notes," "Holder" or "holder". . . . . . . . . . . . . . . . . . . . . . 13
Officers' Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Opinion of Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Original Issue Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Original Purchasers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Over-allotment Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
paying agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
person . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
place of payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
predecessor Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Proceeding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Regular Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Responsible Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Senior Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Special Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Special Redemption Event . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Stated Maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Subsequent Interest Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
"supplemental indenture" or "indenture supplemental hereto". . . . . . . . . . . . . . . . . . . . . 16
Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
"Trust Indenture Act" or "TIA" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Weekly Comparable Maturity Treasury Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
ARTICLE 2
ISSUE, DESCRIPTION, EXECUTION, REGISTRATION
AND EXCHANGE OF NOTES
SECTION 2.1 Designation, Amount and Issue of Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
SECTION 2.2 Form of Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
SECTION 2.3 Denominations, Dates, Interest Payment, Interest Reset Dates, Interest Rate Periods, and Record
Dates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
SECTION 2.4 Numbers and Legends on Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
SECTION 2.5 Execution of Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
SECTION 2.6 Registration of Transfer of Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
</TABLE>
ii
<PAGE> 6
<TABLE>
<S> <C>
SECTION 2.7 Exchange and Registration of Transfer of Notes . . . . . . . . . . . . . . . . . . . . . . . . 21
SECTION 2.8 Temporary Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
SECTION 2.9 Recognition of Registered Holders of Definitive Notes and Temporary Notes . . . . . . . . . . . 22
SECTION 2.10 Mutilated, Destroyed, Lost or Stolen Notes . . . . . . . . . . . . . . . . . . . . . . . . . . 22
SECTION 2.11 Form and Authentication of Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
SECTION 2.12 Surrender and Cancellation of Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
ARTICLE 3
PARTICULAR COVENANTS OF THE COMPANY
SECTION 3.1 Will Punctually Pay Principal and Interest on the Notes . . . . . . . . . . . . . . . . . . . . 23
SECTION 3.2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
(A) Office or Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
(B) Appointment of Trustee as Paying Agent; Duty of Paying Agent Other Than Trustee . . . . . . . . 24
(C) Duty of Company Acting as Paying Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
(D) Delivery to Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
(E) All Sums to be Held Subject to Section 15.2 . . . . . . . . . . . . . . . . . . . . . . . . . . 25
SECTION 3.3 Will Pay Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
SECTION 3.4 Will Maintain Office . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
SECTION 3.5 Will Keep, and Permit Examination of, Records and Books of Account and Will Permit Visitation
of Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
SECTION 3.6 Corporate Existence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
SECTION 3.7 Maintenance of Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
SECTION 3.8 Payment of Taxes and Other Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
SECTION 3.9 Restrictions on Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
SECTION 3.10 Limitation on Dividends and Other Payments . .. . . . . . . . . . . . . . . . . . . . . . . . . 27
SECTION 3.11 Compliance Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
ARTICLE 4
NOTEHOLDER LISTS AND REPORTS BY THE COMPANY
AND THE TRUSTEE
SECTION 4.1 Noteholder lists, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
SECTION 4.2 Reports by Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
SECTION 4.3 Reports by Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
</TABLE>
iii
<PAGE> 7
ARTICLE 5
<TABLE>
<S> <C>
REDEMPTION OF NOTES AT COMPANY'S OPTION
SECTION 5.1 Election by Company to Redeem Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
SECTION 5.2 Notice of Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
SECTION 5.3 Deposit of Redemption Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
SECTION 5.4 Date on Which Notes Cease to Bear Interest, Etc. . . . . . . . . . . . . . . . . . . . . . . . 31
SECTION 5.5 All Notes Delivered . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
ARTICLE 6
REDEMPTION OF NOTES AT HOLDER'S OPTION
SECTION 6.1 Redemption Right at Holder's Option Upon an Interest Rate Reset Notice or Upon Death of a Holder 32
SECTION 6.2 Redemption Procedure at Holder's Option Upon an Interest Reset Date or Upon Death of a Holder . 32
SECTION 6.3 Withdrawal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
SECTION 6.4 Redemption Register . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
SECTION 6.5 Redemption Upon Special Redemption Event . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
SECTION 6.6 Redemption of Notes Subject to Article 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
ARTICLE 7
REMEDIES OF TRUSTEE AND NOTEHOLDERS UPON DEFAULT
SECTION 7.1 Definition of Default and Event of Default . . . . . . . . . . . . . . . . . . . . . . . . . . 35
SECTION 7.2 Trustee to Give Noteholders Notice of Defaults . . . . . . . . . . . . . . . . . . . . . . . . 36
SECTION 7.3 Declaration of Principal and Accrued Interest Due Upon Default; Holders of Specified Percentage
of Notes May Waive Default Declaration . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
SECTION 7.4 Power of Trustee to Protect and Enforce Rights . . . . . . . . . . . . . . . . . . . . . . . . 37
SECTION 7.5 Remedies Cumulative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
(A) Delay, Etc. Not a Waiver of Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
(B) Waiver of Default Not to Extend to Subsequent Defaults . . . . . . . . . . . . . . . . . . . . 38
SECTION 7.6 Holders of Specified Percentage of Notes May Direct Judicial Proceedings by Trustee . . . . . . 38
SECTION 7.7 Intentionally Omitted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
SECTION 7.8 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
(A) Payment of Principal and Interest to Trustee Upon Occurrence of Certain Defaults; Judgment May be
Taken by Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
(B) Enforcement of Rights by Trustee During Continuance of an Event of Default . . . . . . . . . . 39
</TABLE>
iv
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<TABLE>
<S> <C>
(C) Application of Moneys Collected by Trustee . . . . . . . . . . . . . . . . . . . . . . . . 39
SECTION 7.9 Possession of Notes Unnecessary in Action by Trustee . . . . . . . . . . . . . . . . . . . . . 40
SECTION 7.10 Trustee May File Necessary Proofs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
SECTION 7.11 Limitation Upon Right of Noteholders to Institute Certain Legal Proceedings . . . . . . . . . 40
SECTION 7.12 Right of Noteholder to Receive and Enforce Payment Not Impaired . . . . . . . . . . . . . . . 41
SECTION 7.13 Court May Require Undertaking to Pay Costs . . . . . . . . . . . . . . . . . . . . . . . . . . 41
SECTION 7.14 Unenforceable Provision Inoperative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
SECTION 7.15 If Enforcement Proceedings Abandoned, Status Quo is Established . . . . . . . . . . . . . . . 42
SECTION 7.16 Noteholders May Waive Certain Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
ARTICLE 8
EVIDENCE OF RIGHTS OF NOTEHOLDERS
AND OWNERSHIP OF NOTES
SECTION 8.1 Evidence of Ownership of Definitive Notes and Temporary Notes Issued Hereunder in Registered
Form . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
ARTICLE 9
CONSOLIDATION, MERGER AND SALE
SECTION 9.1 Company May Merge, Consolidate, Etc., Upon Certain Terms . . . . . . . . . . . . . . . . . . . 43
SECTION 9.2 Successor Corporation to be Substituted . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
SECTION 9.3 Opinion of Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
SECTION 9.4 Article 9 Subject to Provision of Section 6.5 . . . . . . . . . . . . . . . . . . . . . . . . . 44
ARTICLE 10
CONCERNING THE TRUSTEE
SECTION 10.1 Requirement of Corporate Trustee, Eligibility . . . . . . . . . . . . . . . . . . . . . . . . 44
SECTION 10.2 Acceptance of Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
SECTION 10.3 Disclaimer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
SECTION 10.4 Trustee May Own Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
SECTION 10.5 Trustee May Rely on Certificates, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
SECTION 10.6 Money Held in Trust Not Required to be Segregated . . . . . . . . . . . . . . . . . . . . . . 47
SECTION 10.7 Compensation, Reimbursement, Indemnity, Security . . . . . . . . . . . . . . . . . . . . . . . 47
SECTION 10.8 Conflict of Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
SECTION 10.9 Resignation, Removal, Appointment of Successor Trustee . . . . . . . . . . . . . . . . . . . . 53
SECTION 10.10 Acceptance by Successor Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
SECTION 10.11 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
(A) Notice, Etc. on Behalf of Company Delivered to Trustee . . . . . . . . . . . . . . . . . . 55
(B) Cash, Securities, Etc. to be Held by Trustee . . . . . . . . . . . . . . . . . . . . . . . 55
</TABLE>
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<PAGE> 9
<TABLE>
<S> <C>
SECTION 10.12 Merger or Consolidation of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
SECTION 10.13 Authenticating Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
ARTICLE 11
DISCHARGE OF INDENTURE
SECTION 11.1 Acknowledgment of Discharge .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
SECTION 11.2 Money Held in Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
ARTICLE 12
MEETING OF NOTEHOLDERS
SECTION 12.1 Purposes for Which Meetings May be Called . . . . . . . . . . . . . . . . . . . . . . . . . . 58
SECTION 12.2 Call of Meetings by Trustee; Generally . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
SECTION 12.3 Call of Meetings by Trustee; Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
SECTION 12.4 Meetings, Notice and Entitlement to be Present . . . . . . . . . . . . . . . . . . . . . . . . 59
SECTION 12.5 Regulations May be Made by Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
SECTION 12.6 Manner of Voting at Meetings and Record to be Kept . . . . . . . . . . . . . . . . . . . . . . 61
SECTION 12.7 Evidence of Action by Holders of Specified Percentage of Notes . . . . . . . . . . . . . . . . 61
SECTION 12.8 Exercise of Right of Trustee or Noteholders May Not be Hindered or Delayed by Call of Meeting of
Noteholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
ARTICLE 13
SUPPLEMENTAL INDENTURES
SECTION 13.1 Purposes for Which Supplemental Indentures May be Executed by Company and Trustee . . . . . . 61
SECTION 13.2 Modification of Indenture by Written Consent of Noteholders . . . . . . . . . . . . . . . . . 62
SECTION 13.3 Requirements for Execution; Duties and Immunities of Trustee . . . . . . . . . . . . . . . . . 64
SECTION 13.4 Supplemental Indentures Part of Indenture . . . . . . . . . . . . . . . . . . . . . . . . . . 64
SECTION 13.5 Notes Executed After Supplemental Indenture to be Approved by Trustee . . . . . . . . . . . . 64
SECTION 13.6 Supplemental Indentures Required to Comply with Trust Indenture Act of 1939 . . . . . . . . . 64
ARTICLE 14
IMMUNITY OF INCORPORATORS, STOCKHOLDERS,
OFFICERS AND DIRECTORS
SECTION 14.1 Immunity of Certain Persons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
</TABLE>
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<PAGE> 10
ARTICLE 15
<TABLE>
<S> <C>
MISCELLANEOUS
SECTION 15.1 Benefits Restricted to Parties and to Holders of Notes . . . . . . . . . . . . . . . . . . . . 65
SECTION 15.2 Deposits for Notes Not Claimed for Specified Period to be Returned to Company on Demand . . . 65
SECTION 15.3 Formal Requirements of Certificates and Opinions Hereunder . . . . . . . . . . . . . . . . . . 66
SECTION 15.4 Evidence of Act of the Noteholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
SECTION 15.5 Parties to Include Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . 67
SECTION 15.6 In Event of Conflict with Trust Indenture Act of 1939, Provisions Therein to Control . . . . . 67
SECTION 15.7 Request, Notices, Etc. to Trustee or Company . . . . . . . . . . . . . . . . . . . . . . . . . 67
SECTION 15.8 Manner of Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
SECTION 15.9 Severability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
SECTION 15.10 Payments Due on Days When Banks Closed . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
SECTION 15.11 Backup Withholding Forms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
SECTION 15.12 Titles of Articles of This Indenture Not Part Thereof . . . . . . . . . . . . . . . . . . . . 69
SECTION 15.13 Execution in Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
SECTION 15.14 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
ARTICLE 16
SUBORDINATION
SECTION 16.1 Agreement to Subordinate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
SECTION 16.2 Permitted Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
SECTION 16.3 Restricted Principal Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
SECTION 16.4 Liquidation; Dissolution; Bankruptcy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
SECTION 16.5 Restrictions on Acceleration of Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
SECTION 16.6 When Distribution Must be Paid Over . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
SECTION 16.7 Overlapping Powers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
SECTION 16.8 Relative Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
SECTION 16.9 Subordination May Not Be Impaired by Company . . . . . . . . . . . . . . . . . . . . . . . . . 72
SECTION 16.10 Reinstatement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
SECTION 16.11 Subrogation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
</TABLE>
vii
<PAGE> 11
This INDENTURE, dated as of _______________, 1996, between FIRST
MERCHANTS ACCEPTANCE CORPORATION, a Delaware corporation (herein called the
"Company") and LASALLE NATIONAL BANK, a national banking association organized
under the laws of the United States, the mailing address of which is 135 South
LaSalle Street, Chicago, Illinois, (herein, together with each successor as
such trustee hereunder, called the "Trustee").
WITNESSETH:
WHEREAS, for its lawful corporate purposes, the Company has duly
authorized the issue of its Subordinated Reset Notes due December 15, 2006
(hereinafter sometimes called the "Notes") in the aggregate principal amount of
up to $51,750,000 and, to provide the terms and conditions upon which the Notes
are to be authenticated, issued and delivered, the Company has duly authorized
the execution of this Indenture;
WHEREAS, the Notes and the Trustee's certificate of authentication to
be borne by the Notes are to be substantially in the following forms,
respectively:
[FORM OF FACE OF NOTES]
NO. FIRST MERCHANTS ACCEPTANCE CORPORATION $
SUBORDINATED RESET NOTE DUE 2006
Interest Rate per annum to December 15, 2001: [ ]%
Interest Payment Dates: December 15, 1996 and the 15th day of each
March, June, September and December thereafter if this Note is then
outstanding
(Interest Rate to be reset as described hereinbelow)
First Merchants Acceptance Corporation, a corporation organized and
existing under the laws of the State of Delaware (hereinafter called the
"Company," which term shall include any successor corporation as defined in the
Indenture referred to on the reverse side hereof), for value received, hereby
promises to pay to __________________, or registered assigns, the sum of
____________________ Dollars on December 15, 2006 (or on such earlier date at
which the Company may redeem this Note as set forth hereinbelow), in such coin
or currency of the United States of America as at the time of payment is legal
tender for public and private debts, and to pay interest (calculated on the
basis of a 360-day year of twelve 30-day months) on the unpaid principal
amount hereof in like coin or currency from the Interest Payment Date to which
interest hereon has been paid immediately preceding the date hereof (unless the
date hereof is an Interest Payment Date to which interest has been paid, in
which case from the date hereof) or, if no interest has been paid on this Note
since the Original Issue Date hereof, as defined in the Indenture referred to
on the reverse side hereof, from such Original Issue Date, on the fifteenth day
of March, June, September
1
<PAGE> 12
and December, commencing December 15, 1996, until the principal hereof shall
have been paid or duly provided for. Until December 15, 2001, this Note shall
bear interest at the rate set forth on its face. Thereafter, on or before
thirty (30) days prior to December 15, 2001 or any subsequent Interest Reset
Date (as defined herein), the Company shall establish, at its option, the
interest rate per annum (rounded to the nearest five hundredths of a percentage
point) (a "Subsequent Interest Rate"). Any such Subsequent Interest Rate shall
not be less than 105% of the Effective Interest Rate on Comparable Maturity
U.S. Treasury Obligations (as defined herein) established prior to the
commencement of each such subsequent Interest Rate Period. In the event that
the Company determines on the November 15 preceding such Interest Reset Date
that during the ten (10) calendar days preceding such November 15 no Weekly
Comparable Maturity Treasury Rate (as defined herein) has been published and
the Alternate Comparable Maturity Treasury Rate (as defined herein) could not
be determined, the Company shall establish such Subsequent Interest Rate in its
discretion without limitation. If the Company decides not to establish a
Subsequent Interest Rate for a subsequent Interest Rate Period (as defined
herein), the interest rate for the prior Interest Rate Period shall continue in
effect, for the next year and each year thereafter, unless and until the
Company shall establish a Subsequent Interest Rate on or before November 15 of
any subsequent year for a subsequent Interest Rate Period, commencing with
December 15 of such subsequent year. Until establishment of such a Subsequent
Interest Rate for a subsequent Interest Rate Period, each December 15 shall be
deemed for all purposes to be an Interest Reset Date. Notwithstanding the
foregoing, at all times during the continuance of any Event of Default (as
defined in the Indenture), interest shall accrue upon the indebtedness
evidenced hereby at the Default Rate (as defined herein).
In the event that the Company establishes a Subsequent Interest Rate
for a subsequent Interest Rate Period, the Company shall notify the Trustee of
each Subsequent Interest Rate and Interest Rate Period on or before thirty (30)
days prior to an Interest Reset Date. Not later than the second Business Day
after notification of such Subsequent Interest Rate and Interest Rate Period,
the Trustee shall mail such notice to each Holder of the Notes. In the event
that the Company decides not to establish a Subsequent Interest Rate for a
subsequent Interest Rate Period, the Company shall so notify the Trustee on or
before thirty (30) days prior to an Interest Reset Date. Not later than the
second Business Day after such notification, the Trustee will mail such notice
to each Holder of the Notes.
The interest so payable on any Interest Payment Date will be paid to
the person in whose name this Note is registered at the close of business on
the seventh day of each month immediately preceding such Interest Payment Date
(whether or not such seventh day shall be a regular business day), unless the
Company shall default in the payment of interest due on such Interest Payment
Date, in which case such defaulted interest shall be paid to the person in
whose name this Note is registered at the close of business on a Special Record
Date for the payment of such defaulted interest established by notice to the
registered holders of Notes given by mail to said holders as their names and
addresses appear in the Note Register (as defined in the Indenture referred to
on the reverse side hereof) not less than ten (10) days preceding such Special
Record Date. The principal hereof and the interest hereon shall be payable at
the main office of LaSalle National Bank, Trustee under the Indenture referred
to on the reverse side hereof, in Chicago, Illinois; provided, however, that
the interest on this Note may be payable, at the option of the Company, by
check mailed to the
2
<PAGE> 13
person entitled thereto as such person's address shall appear on the Note
Register (including the records of any Note Co-Registrar).
Reference is hereby made to the further provisions of this Note set
forth on the reverse side hereof, and such further provisions shall for all
purposes have the same effect as though fully set forth at this place.
This Note shall not be entitled to any benefit under the Indenture
referred to on the reverse side hereof, or be or become valid or obligatory for
any purpose, until the authentication certificate endorsed hereon shall have
been signed by LaSalle National Bank, Trustee under such Indenture, or a
successor trustee thereto under such Indenture.
IN WITNESS WHEREOF, FIRST MERCHANTS ACCEPTANCE CORPORATION has caused
this Note to be signed in its name by its President and Chief Executive Officer
or one of its Vice Presidents by his signature or a facsimile thereof, and its
corporate seal to be affixed or printed or engraved hereon, or a facsimile
thereof, and attested by its Secretary or one of its Assistant Secretaries by
his signature or a facsimile thereof.
Dated: FIRST MERCHANTS ACCEPTANCE CORPORATION
By:
-------------------------
Title:
----------------------
Attest:
- -------------------------
Title:
-------------------
3
<PAGE> 14
[FORM OF TRUSTEE'S AUTHENTICATION CERTIFICATE]
TRUSTEE'S AUTHENTICATION CERTIFICATE
This Note is one of the Notes described or provided for in the
Indenture referred to on the reverse side hereof.
LaSalle National Bank,
as Trustee
By:
-------------------
Authorized Officer
[FORM OF REVERSE OF NOTE]
FIRST MERCHANTS ACCEPTANCE CORPORATION
SUBORDINATED RESET NOTE DUE 2006
This Note is one of a duly authorized issue of Notes of the Company
designated as its Subordinated Reset Notes due 2006 (herein called the
"Notes"), limited in aggregate principal amount of $51,750,000 (except for
Notes authenticated and delivered upon transfer of, or in exchange for or in
lieu of other Notes), all issued and to be issued only in fully registered form
without coupons under an indenture (herein, together with any indenture
supplemental thereto, called the "Indenture"), dated as of __________________,
1996, duly executed and delivered by First Merchants Acceptance Corporation to
LaSalle National Bank, Chicago, Illinois, Trustee (the Trustee, together with
its successors being herein called the "Trustee"), to which Indenture (which is
hereby made a part hereof and to all of which the holder by acceptance hereof
assents) reference is hereby made for a description of the respective rights of
and restrictions upon the Company and the holders of the Notes, and the holders
of Senior Indebtedness (as defined in the Indenture), and the rights,
limitations of rights, duties and immunities of the Trustee in respect thereof.
As used herein, the following capitalized terms shall have the
following meanings:
"Alternate Comparable Maturity Treasury Rate" means the average yields
to maturity of the daily closing bids (or less frequently if daily quotations
shall not be available), quoted by at least three recognized U.S. Government
securities dealers selected by the Company, for all marketable U.S. Treasury
securities with a maturity of not less than three (3) months shorter nor more
than three (3) months longer than the applicable Comparable Maturity from the
November 15 preceding an Interest Reset Date (other than securities which can,
at the option of the Holder, be surrendered at face value in payment of any
Federal estate tax) for the most recent five (5) consecutive business days
during which there had been at least three (3) days on which daily closing bids
were quoted within the 25-calendar day period preceding such November 15.
4
<PAGE> 15
"Comparable Maturity" means, with respect to an Interest Rate Period
of one (1), two (2), three (3) or five (5) years, one (1), two (2), three (3)
or five (5) years, respectively.
"Default Rate" means the lesser of (i) the rate that is two and
one-half percentage points (2.5%) in excess of the rate at which interest
accrues upon the indebtedness evidenced hereby, as adjusted from time to time
pursuant to the terms of this Note, or (ii) the maximum rate of interest
allowed to be charged by applicable law.
"Effective Interest Rate on Comparable Maturity U.S. Treasury
Obligations" means as of the November 15 preceding an Interest Reset Date (i)
if available, the most recent Weekly Comparable Maturity Treasury Rate
published during the 25-calendar day period preceding such November 15 or (ii)
if such Weekly Comparable Maturity Treasury Rate is not available, the
Alternate Comparable Maturity Treasury Rate as of such November 15.
"Interest Rate Period" means a period of one (1), two (2), three (3)
or five (5) years (but never extending beyond December 15, 2006), commencing
with an Interest Reset Date and ending on, but not including, the December 15
of such first, second, third or fifth year, as the case may be.
"Interest Reset Date" means December 15, 2001 or the expiration date
of any subsequent Interest Rate Period.
"Weekly Comparable Maturity Treasury Rate" means the weekly average
yield to maturity values adjusted to a constant maturity of the Comparable
Maturity as read from the yield curves of the most actively traded marketable
U.S. Treasury fixed interest rate securities constructed daily by the U.S.
Treasury Department as published by the Federal Reserve Board or any Federal
Reserve Bank or by an United States Government department or agency.
The payment of the principal of and of interest on this Note is
expressly subordinated, as provided in the Indenture, to the payment of all
Senior Indebtedness (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 Indebtedness, to be bound by the provisions of the
Indenture relating to such subordination and authorizes and appoints, as his
attorney-in-fact, the Trustee to take such action in his behalf as may be
necessary or appropriate to effectuate such subordination.
The Notes are redeemable at the option of the Company as a whole prior
to maturity on each Interest Reset Date on not less than thirty (30) nor more
than sixty (60) days' notice given as provided in the Indenture, upon payment
of the redemption price described hereinbelow, together in each case with
accrued and unpaid interest to the date fixed for redemption, all subject to
the conditions more fully set forth in the Indenture. The redemption price
shall be 100% of the face amount of the Note.
Unless the Notes have been declared due and payable prior to maturity
by reason of an Event of Default, the holder of this Note has the right to
present it, together with all other Notes held by such holder, for payment not
later than five (5) business days before any Interest Reset Date, and the
Company will redeem the same on the Interest Reset Date.
5
<PAGE> 16
The Company will at any time upon the death of any holder redeem Notes
(or any portion of the principal amount thereof which is $1,000 or an integral
multiple thereof, as the holder may specify) within sixty (60) days following
receipt by the Trustee of a written request therefor from such holder's
personal representative, or surviving joint tenant(s), tenant by the entirety
or tenant(s) in common, subject to the limitations that the Company will not be
obligated to redeem, during the period beginning with the Original Issue Date
of the Notes and ending December 15, 1997, or during any 12-month period ending
December 15 thereafter, (i) the portion of a Note or Notes of a holder
exceeding an aggregate principal amount of $25,000 or (ii) Notes in an
aggregate principal amount exceeding $2,250,000 (plus, to the extent that the
Original Purchasers exercise the Over-allotment Option, up to 5% of the
principal amount of the Notes purchased upon exercise of such Option; provided
that, in no event, shall the maximum aggregate principal amount of Notes which
the Company may be obligated to redeem in any such 12-month period exceed
$2,587,500; further references herein to the $2,250,000 aggregate principal
amount limitation shall be deemed to include such higher figure, not exceeding
$2,587,500, to the extent the Original Purchasers exercise the Over-allotment
Option.) Such $25,000 and $2,250,000 limitations are non-cumulative. Any
acquisition of Notes by the Company other than by redemption at the death of
any holder shall not be included in the computation of either the $25,000 or
$2,250,000 limitation for any period. Notes will be redeemed in order of their
receipt by the Trustee. Notes not redeemed because of either the $25,000 and
$2,250,000 limitation will be held for redemption in the succeeding 12-month
redemption period.
In the event that there shall occur a Special Redemption Event (as
defined in the Indenture), then the holder of this Note shall have the right,
subject to certain conditions stated in the Indenture, to present it for
payment prior to maturity, and the Company will redeem the same (or any portion
of the principal amount thereof which is $1,000 or an integral multiple
thereof, as the holder shall specify). The $25,000 individual and $2,250,000
aggregate redemption limitations shall not apply to any such redemption.
Notes may be presented for redemption by delivering to the Trustee:
(i) a written request for redemption, in form satisfactory to the Trustee,
signed by the registered holder(s) or his duly authorized representative, (ii)
the Note to be redeemed and (iii) in the case of a request made by reason of
the death of a holder, appropriate evidence of death and, if made by a
representative or surviving joint tenant of a deceased holder, appropriate
evidence of authority to make such request. No particular forms of request for
redemption or authority to request redemption are necessary. The price to be
paid by the Company for all Notes or portions thereof presented to it for
redemption is 100% of the principal amount or respective portions thereof plus
accrued but unpaid interest to the date of payment.
For purposes of a holder's request for redemption, a Note held in
tenancy by the entirety, joint tenancy or tenancy in common will be deemed to
be held by a single holder and the death of a tenant by the entirety, joint
tenant or tenant in common will be deemed the death of a holder. The death of
a person, who, during his lifetime, was entitled to substantially all of the
beneficial ownership interests of a Note will be deemed the death of the
holder, regardless of the registered holder, if such beneficial interest can be
established to the satisfaction of the Trustee. For purposes of a holder's
request for redemption and a request for redemption on behalf of a deceased
holder, a beneficial
6
<PAGE> 17
interest shall be deemed to exist in cases of street name or nominee
ownership, ownership under the Uniform Gifts to Minors Act, community property
or other joint ownership arrangements between a husband and wife (including
individual retirement accounts or Keogh [H.R. 10] plans maintained solely by or
for the holder or decedent or by or for the holder or decedent and his spouse),
and trusts and certain other arrangements where a person has substantially all
of the beneficial ownership interests in the Notes during his lifetime.
Beneficial ownership interests shall include the power to sell, transfer or
otherwise dispose of a Note and the right to receive the proceeds therefrom, as
well as interest and principal payable with respect thereto.
In the case of Notes registered in the names of banks, trust companies
or broker-dealers who are members of a national securities exchange or the
National Association of Securities Dealers, Inc. ("Qualified Institutions"),
the $25,000 limitation shall apply to each beneficial owner of Notes held by a
Qualified Institution and the death of such beneficial owner shall entitle a
Qualified Institution to seek redemption of such Notes as if such deceased
beneficial owner were the record holder. Such Qualified Institution, in its
request for redemption on behalf of beneficial owners, must submit evidence,
satisfactory to the Trustee, that it holds Notes on behalf of such beneficial
owners and must certify that the aggregate amount of requests for redemption
tendered by such Qualified Institution on behalf of such beneficial owner in
the initial period or in any subsequent 12-month period does not exceed
$25,000.
In the case of any Notes which are presented for redemption in part
only, upon redemption the Company shall execute and the Trustee shall
authenticate and deliver to or on the order of the holder of such Notes,
without service charge, a new Note(s), of any authorized denomination or
denominations as requested by such holder, in aggregate principal amount equal
to the unredeemed portion of the principal amount of the Notes so presented.
Any Notes presented for redemption by the holder may be withdrawn by
the person(s) presenting the same upon delivery of a written request for such
withdrawal to the Trustee (a) in the case of redemption on an Interest Reset
Date, not later than five (5) business days before the Interest Reset Date, or
(b) in the case of a Special Redemption Event, on the date set for redemption,
or (c) prior to the issuance of a check in payment thereof in the case of Notes
presented by reason of the death of a holder.
If the Company shall deposit with the Trustee in trust funds
sufficient to pay the principal of all of the Notes, and all interest payable
on such Notes to the date on which they become due and payable, at maturity or
upon redemption or otherwise, and shall comply with the other provisions of the
Indenture in respect thereof, then from and after said date (or prior thereto
as provided in the Indenture), such Notes shall no longer be entitled to any
benefit under the Indenture and, as respects the Company's liability thereon,
such Notes shall be deemed to have been paid.
To the extent permitted by, and as provided in, the Indenture, the
Company may, by entering into an indenture or indentures supplemental to the
Indenture, modify, alter, add to or eliminate in any manner any provisions of
the Indenture, or the rights of the Noteholders or the rights and obligations
of the Company, upon the consent, as in the Indenture provided, of the holders
of not less than a majority in principal amount of the Notes then Outstanding.
Notwithstanding the foregoing,
7
<PAGE> 18
no supplemental indenture shall, without the consent of the holder of each
Outstanding Note affected thereby, change the Stated Maturity of the principal
of, or any installment of interest on any Note, or reduce the principal amount
thereof or the rate of interest thereon, reduce the percentage of the aggregate
principal amount of Outstanding Notes the consent of the holders of which is
required for any supplemental indenture or for any waiver of compliance with
certain provisions of the Indenture, or modify any of the provisions of the
Indenture relating to the foregoing, all except as provided in the Indenture.
Subject to the provisions of Article 16 of the Indenture governing the
respective rights of holders of the Notes and the Senior Indebtedness, if an
Event of Default (as defined in the Indenture) shall have occurred and be
continuing, the principal of and all interest accrued on all the Outstanding
Notes under the Indenture may be declared, and upon such declaration shall
become, immediately due and payable, in the manner, with the effect and subject
to the conditions provided in the Indenture. The Indenture provides that such
declaration and its consequence may be waived by the holders of a majority in
principal amount of the Notes then Outstanding.
The Notes are issuable as registered Notes without coupons in
denominations of integral multiples of $1,000. Subject to the provisions of
the Indenture, the transfer of this Note is registrable by the registered
holder hereof, in person or by his attorney duly authorized in writing, at the
main office of LaSalle National Bank, in Chicago, Illinois, on books of the
Company to be kept for that purpose at said office, upon surrender and
cancellation of this Note duly endorsed by, or accompanied by a written
instrument of transfer in form satisfactory to the Company and the Trustee, and
thereupon a new fully registered Note of the same series, of the same aggregate
principal amount and in authorized denominations, will be issued to the
transferee or transferees in exchange therefor; and this Note, with or without
others of the same series, may in like manner be exchanged for one or more new
fully registered Notes of the same series of other authorized denominations but
of the same aggregate principal amount; all as provided in the Indenture. No
service charge shall be made for any such transfer, but the Company may require
payment of a sum sufficient to cover any tax or other governmental charge or
expense that may be imposed in relation thereto.
Prior to due presentment for registration of transfer, the Company,
the Trustee or any agent of the Company or the Trustee may deem and treat the
person in whose name this Note shall be registered at any given time upon the
Note Register as the absolute owner of this Note for the purpose of receiving
any payment of, or on account of, the principal and interest on this Note and
for all other purposes whether or not this Note be overdue; and neither the
Company nor the Trustee, nor any agent of the Company or the Trustee shall be
bound by any notice to the contrary.
No recourse under any obligation, covenant or agreement contained in
the Indenture or in any Note, or because of the creation of the indebtedness
represented hereby, shall be had against any incorporator, any past, present or
future stockholder, or any officer or director of the Company or any successor
corporation, as such under any rule of law, statute or constitution.
In any case where the date fixed for the payment of principal or
interest on any of the Notes or the date fixed for redemption thereof shall not
be a business day, then payment of such principal
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<PAGE> 19
or interest 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 date
fixed for such payment or redemption, and no interest shall accrue for the
period from or after such date.
All terms used in this Note which are defined in the Indenture shall
have the meanings assigned to them in the Indenture.
[END OF FORM OF NOTES]
WHEREAS, this Indenture is subject to the provisions of the Trust
Indenture Act of 1939, as amended, that are required to be part of this
Indenture and shall, to the extent applicable, be governed by such provisions;
WHEREAS, 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 these presents a valid 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;
NOW THEREFORE, THIS INDENTURE WITNESSETH:
That in order to declare the terms and conditions upon which the Notes
are, and are to be, authenticated, issued and delivered, and in consideration
of the premises, of the purchase and acceptance of the Notes by the holders
thereof and of the sum of one dollar duly paid to it by the Trustee at the
execution of these presents, the receipt whereof is hereby acknowledged, the
Company covenants and agrees with the Trustee for the equal and proportionate
benefit of the respective holders from time to time of the Notes, as follows:
ARTICLE 1
DEFINITIONS
SECTION 1.1. The terms defined in this Article 1 shall (except as
herein otherwise expressly provided) for all purposes of this Indenture, have
the respective meanings specified in this Article and include the plural as
well as the singular. Any term defined in the Trust Indenture Act of 1939,
either directly or by reference therein, and not defined in this Indenture,
unless the context otherwise specifies or requires, shall have the meaning
assigned to such term therein as in force on the date of this Indenture.
"Act" when used with respect to any Noteholder has the meaning
specified in Section 15.4.
"affected" has the meaning specified in Section 13.2.
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<PAGE> 20
"Affiliate" means any person which directly or indirectly controls, is
controlled by, or is under direct or indirect common control with, the Company.
A person shall be deemed to control a corporation, partnership or other entity,
for the purpose of this definition, if such person possesses, directly or
indirectly, the power to direct or cause the direction of the management and
policies of such corporation, partnership or other entity, whether through the
ownership of voting securities, by contract, or otherwise.
"Alternate Comparable Maturity Treasury Rate" means the average yields
to maturity of the daily closing bids (or less frequently if daily quotations
shall not be available), quoted by at least three recognized U.S. Government
securities dealers selected by the Company, for all marketable U.S. Treasury
securities with a maturity of not less than three (3) months shorter nor more
than three (3) months longer than the applicable Comparable Maturity from any
November 15 preceding an Interest Reset Date (other than securities which can,
at the option of the Holder, be surrendered at face value in payment of any
Federal estate tax) for the most recent five (5) consecutive business days
during which there had been at least three (3) days on which daily closing bids
were quoted within the 25-calendar day period preceding such November 15.
"Authenticating Agent" means the agent of the Trustee which at the
time shall be appointed and acting pursuant to Section 10.13.
"Board of Directors" or "Board" means the Board of Directors of the
Company or any committee of such Board of Directors, however designated,
authorized to exercise the powers of such Board of Directors in respect of the
matters in question.
"business day" means any day which is not a Saturday, Sunday or other
day on which national banks having their principal office in the State of
Illinois are authorized or obligated by law or required by executive order to
close.
"capital stock" includes any and all shares, interests, participations
or other equivalents (however designated) of corporate stock of any
corporation.
"Certified Resolution" means a copy of a resolution or resolutions
certified, by the Secretary or an Assistant Secretary of the corporation
referred to, as having been duly adopted by the Board of Directors of such
corporation or any committee of such Board of Directors, however designated,
authorized to exercise the powers of such Board of Directors in respect of the
matters in question and to be in full force and effect on the date of such
certification.
"common stock" means any capital stock of a corporation which is not
preferred as to the payment of dividends or the distribution of assets on any
voluntary or involuntary liquidation over shares of any other class of capital
stock of such corporation, including, without limitation, in the case of the
Company, its Common Stock, par value $.01 per share, and its Non-Voting Common
Stock, par value $.01 per share.
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<PAGE> 21
"Company" means and includes First Merchants Acceptance Corporation, a
Delaware corporation, until any successor corporation shall have become such
pursuant to the applicable provisions of this Indenture, and thereafter
"Company" shall mean such successor corporation.
"Company Order" and "Company Request" mean, respectively, a written
order or request signed in the name of the Company by its President and Chief
Executive Officer or any Vice President and its Secretary or Assistant
Secretary and delivered to the Trustee.
"Comparable Maturity" means, with respect to an Interest Rate Period
of one (1), two (2), three (3) or five (5) years, one (1), two (2), three (3)
or five (5) years, respectively.
"Consolidated Net Worth" means the excess, after making appropriate
deductions for any minority interest in net worth of any Subsidiary, of (a) the
tangible assets of the Company and its Subsidiaries (excluding inter-company
items) which, in accordance with generally accepted accounting principles, are
tangible assets, after deducting adequate reserves in each case where, in
accordance with generally accepted accounting principles, a reserve is proper,
over (b) all Indebtedness of the Company and its Subsidiaries (excluding
inter-company items); provided, however, that (i) inventory shall be accounted
for on the basis of the costs or current market value, whichever is lower, (ii)
in no event shall there be included as such tangible assets patents,
trademarks, tradenames, copyrights, licenses, goodwill or treasury stock or any
securities or Indebtedness of the Company or a Subsidiary or any other
securities unless the same are readily marketable in the United States of
America or Canada or entitled to be used as a credit against federal income tax
liabilities, (iii) securities included as such tangible assets shall be taken
into account at their current market price or costs, whichever is lower, and
(iv) any write-up in the book value of any assets shall not be taken into
account, and provided further that, to the extent any adjustments are required
by clauses (i), (ii), (iii) or (iv), such adjustments shall be measured net of
any related income tax effects in accordance with generally accepted accounting
principles.
"corporation" means and includes corporations, associations, companies
and business trusts.
"Daily Newspaper" means a newspaper in the English language of general
circulation in New York, New York and customarily published on each business
day of the year, whether or not such newspaper is published on Saturdays,
Sundays and legal holidays.
"date of this Indenture" means _____________, 1996.
"day" means a calendar day.
"Default" has the meaning specified in Section 7.2.
"Defaulted Interest" has the meaning specified in Section 2.3.
"Default Rate" has the meaning specified in the form of the Notes.
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<PAGE> 22
"Effective Interest Rate on Comparable Maturity U.S. Treasury
Obligations" means as of the November 15 preceding an Interest Reset Date (i)
if available, the most recent Weekly Comparable Maturity Treasury Rate
published during the twenty-five (25) calendar day period preceding such
November 15 or (ii) if such Weekly Comparable Maturity Treasury Rate is not
available, the Alternate Comparable Maturity Treasury Rate as of such November
15.
"Event of Default" means any act or occurrence of the character
specified in Section 7.1.
"Executive Officer" means, with respect to any corporation, the
Chairman of the Board, the Vice Chairman of the Board, the President, the
Executive Vice President, any other Vice President or the Treasurer of such
corporation.
"Federal Bankruptcy Act" means Title I of the Bankruptcy Reform Act of
1978, as amended, and codified at Title 11 of the United States Code and the
Federal Rules of Bankruptcy Procedure as in effect as of the date hereof or as
hereafter amended.
"Indebtedness" means (i) any liability of any person (a) for borrowed
money, (b) evidenced by a note, debenture or similar instrument (including a
purchase money obligation) given in connection with the acquisition of any
property or assets (other than inventory or similar property acquired in the
ordinary course of business), including securities, or (c) for the payment of
money relating to a capitalized lease obligation; provided, however, that
Indebtedness shall not include any liability, the payment or performance of
which is secured by a security interest in any property or asset, if recourse
by the obligee under such liability upon the non-payment or non-performance
thereof is limited to realization pursuant to such security interest upon such
property or asset; (ii) any guarantee by any person of, or any commitment
relating to, any liability of others described in the preceding clause (i); and
(iii) any amendment, renewal, extension or refunding of any liability referred
to in clause (i) and (ii) above.
"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.
"Interest Payment Date" means the 15th day of March, June, September
and December.
"Interest Rate Period" means a period of one (1), two (2), three (3)
or five (5) years (but never extending beyond December 15, 2006), commencing
with an Interest Reset Date and ending on, but not including, the December 15
of such first, second, third or fifth year, as the case may be.
"Interest Reset Date" means December 15, 2001 or the expiration date
of any subsequent Interest Rate Period.
"Interest Rate Reset Notice" means the notice described in Section 2.3
pursuant to which, prior to an Interest Reset Date, the Company provides notice
to the Trustee of the related Subsequent
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<PAGE> 23
Interest Rate and Interest Rate Period, copies of which shall be mailed by the
Trustee to Noteholders within two Business Days thereafter pursuant to Section
2.3.
"Lien" means any mortgage, lien, pledge, charge or other security
interest or encumbrance of any kind.
"main office" with reference to the Trustee shall mean the principal
corporate trust office of the Trustee, which office is, on the date of this
Indenture, located at 135 South LaSalle Street, Chicago, Illinois.
"maturity" or "mature," 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 Stated Maturity or by declaration of acceleration,
call for redemption at the option of the Company pursuant to Article 5 or
presentment for repayment as provided in Article 6 hereof, or otherwise.
"Note" or "Notes" mean one or more of the notes comprising the
Company's issue of Notes issued, authenticated and delivered under this
Indenture.
"Note Co-Registrar" has the meaning specified in Section 2.6.
"Note Register" and "Note Registrar" have the respective meanings
specified in Section 2.6.
"Noteholder," "holder of the Notes," "Holder" or "holder" or other
similar terms mean any person in whose name, as of any particular date, a Note
is registered on the Note Register.
"Officers' Certificate" means a certificate signed by the President or
a Vice President and the Secretary or an Assistant Secretary of the Company,
and delivered to the Trustee. Each such certificate, to the extent required,
shall comply with the provisions of Section 15.3 hereof.
"Opinion of Counsel" means an opinion in writing signed by legal
counsel, who may be an employee of or counsel to the Company and who shall be
reasonably satisfactory to the Trustee. Each such opinion shall include the
statements provided for in Section 15.3 if and to the extent required by the
provisions of such Section.
"Original Issue Date" with respect to any Note (or portion thereof)
means the earlier of (A) the date of such Note or (B) the date of any Note (or
portion thereof) for which such Note was issued (directly or indirectly) on
registration of transfer, exchange or substitution.
"Original Purchasers" means the original purchasers of the Notes
pursuant to that certain Underwriting Agreement by and among those parties and
the Company dated as of __________________, 1996.
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<PAGE> 24
"Outstanding" means, as of the date of determination, all Notes which
theretofore shall have been authenticated and delivered by the Trustee under
this Indenture, except (A) Notes theretofore canceled by the Trustee or
delivered to the Trustee for cancellation, (B) Notes or portions thereof for
the payment or redemption of which money in the necessary amount shall have
been deposited with the Trustee or any paying agent in trust for the holders of
the Notes; provided, however, that in the case of redemption, any notice
required shall have been given or have been provided for to the satisfaction of
the Trustee, and (C) Notes in exchange or substitution for or in lieu of which
other Notes have been authenticated and delivered under any of the provisions
of this Indenture. Notwithstanding the foregoing provision of this paragraph,
Notes in exchange or substitution for or in lieu of which other Notes have been
authenticated and delivered under Section 2.10 hereof and which have not been
surrendered to the Trustee for cancellation or the payment of which shall not
have been duly provided for, shall be deemed to be Outstanding. In determining
whether the Noteholders of the requisite principal amount of Notes Outstanding
have given any request, demand, authorization, direction, notice, consent or
waiver hereunder, Notes owned by the Company or any other obligor upon the
Notes or any Affiliate of the Company, including any Subsidiary, or such other
obligor shall be disregarded and deemed not 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 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 a
Subsidiary or such other obligor.
"Over-allotment Option" means the option granted by the Company to the
Original Purchasers to purchase up to $6,750,000 aggregate principal amount of
the Notes to cover over-allotments pursuant to the Underwriting Agreement by
and among the Company and such parties.
"paying agent" means any person authorized by the Company to pay the
principal of and interest on any Notes on behalf of the Company.
"person" means any individual, partnership, corporation, trust,
unincorporated association, joint venture, government or any department or
agency thereof, or any other entity.
"place of payment" means such place as designated in Section 2.3
hereof.
"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; and, for the purposes of this definition, any Note
authenticated and delivered under Section 2.10 in lieu of a lost, destroyed or
stolen Note shall be deemed to evidence the same debt as the lost, destroyed or
stolen Note.
"Proceeding" means any suit in equity, action at law or other legal,
equitable, administrative or similar proceeding.
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<PAGE> 25
"Regular Record Date" has the meaning specified in Section 2.3.
"Responsible Officers" of the Trustee means the Chairman of the Board
of Directors, every Vice Chairman of the Board of Directors, the President, the
Chairman or any Vice Chairman of the Executive Committee of the Board, the
Chairman of the Trust Committee, every Vice President, every Assistant Vice
President, the Cashier, every Assistant Cashier, the Secretary, every Assistant
Secretary, the Treasurer, every Assistant Treasurer, every Trust Officer, every
Assistant Trust Officer, the Controller, every Assistant Controller, and every
other officer and assistant officer of the Trustee customarily performing
functions similar to those performed by the persons who at the time shall be
any such officers and also means, with respect to a particular corporate trust
matter, any other officer to whom such corporate trust matter is referred
because of his knowledge and familiarity with a particular subject.
"Senior Indebtedness" means the principal of and interest on any and
all Indebtedness of the Company, other than the Notes and the Company's 11%
Subordinated Reset Notes due 2005 issued pursuant to an Indenture between the
Company and LaSalle National Bank dated as of January 1, 1995, incurred in
connection with the borrowing of money from or guaranteed to banks, trust
companies, insurance companies, investment companies as defined in the
Investment Company Act of 1940, real estate investment trusts, pension or
profit sharing trusts or other financial institutions or institutional
investors, outstanding on the date of execution of this Indenture or thereafter
created, incurred or assumed, and all renewals, extensions and refundings of
any such Indebtedness; unless, in the instrument creating or evidencing any
such Indebtedness or pursuant to which such Indebtedness is outstanding, it is
provided that such Indebtedness, or such renewal, extension or refunding
thereof, is not senior in right of payment of principal or interest to the
Notes.
"Special Record Date" for the payment of any Defaulted Interest means
a date fixed by the Trustee pursuant to Section 2.3.
"Special Redemption Event" means the occurrence of any one or more of
the following: (A) the Company shall consolidate with or merge into any other
corporation or partnership (except in a transaction in which the Company is the
surviving entity and is not itself the subsidiary of another entity), or
convey, transfer or lease all or substantially all of its assets to any person,
other than as part of a loan securitization or sale entered into in the
ordinary course of its business; or (B) any person or group of persons acting
in concert who was not or were not a common stockholder or common stockholders
of the Company immediately prior to the transaction (or the first of a series
of transactions) shall purchase or otherwise acquire in one or more
transactions beneficial ownership of fifty percent (50%) or more of the common
stock of the Company outstanding on the date immediately prior to the last such
purchase or other acquisition, provided, however, that a change of fifty
percent (50%) or more of the beneficial ownership of such common stock
resulting directly from an underwritten public offering of such common stock,
duly approved by the Company's Board of Directors shall not be a Special
Redemption Event. For purposes of this definition, "outstanding common stock
of the Company" shall include all common stock of the Company issued and
outstanding on the date of such notice, any non-voting common stock of the
Company issued and outstanding on the date of such notice, and all common stock
of the Company which is issuable
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<PAGE> 26
upon exercise of all warrants or options exercisable within sixty (60) days
after the date of such notice.
"Stated Maturity," when used with respect to any Note means the date
specified in such Note as the fixed date on which the principal of such Note is
due and payable.
"Subsequent Interest Rate" has the meaning specified in Section 2.3.
"Subsidiary" means any corporation more than fifty percent (50%) of
whose shares of stock having general voting power under ordinary circumstances
to elect a majority of the board of directors of such corporation irrespective
of whether or not at the time stock of any other class or classes shall or
might have voting power by reason of the happening of any contingency, is owned
or controlled directly or indirectly by the Company.
"supplemental indenture" or "indenture supplemental hereto" mean any
indenture hereafter duly authorized and entered into in accordance with the
provisions of this Indenture.
"Trustee" means LaSalle National Bank, and, subject to the provisions
of the Indenture, shall also include any successor trustee.
"Trust Indenture Act" or "TIA" means the Trust Indenture Act of 1939,
as in force at the date of which this instrument was executed.
"Weekly Comparable Maturity Treasury Rate" means the weekly average
yield to maturity values adjusted to a constant maturity of the Comparable
Maturity as read from the yield curves of the most actively traded marketable
U.S. Treasury fixed interest rate securities constructed daily by the U.S.
Treasury Department as published by the Federal Reserve Board or any Federal
Reserve Bank or by an United States Government department or agency.
All accounting terms used in this Indenture shall have the meanings
assigned to them in accordance with generally accepted accounting principles
and practices employed at the time by the Company.
ARTICLE 2
ISSUE, DESCRIPTION, EXECUTION, REGISTRATION
AND EXCHANGE OF NOTES
SECTION 2.1 DESIGNATION, AMOUNT AND ISSUE OF NOTES. The Notes shall
be designated as set forth in the form of Note hereinabove recited. Notes in
the aggregate principal amount of up to $51,750,000 (and as otherwise provided
in Section 2.10), upon the execution of this Indenture, or from time to time
within 30 days thereafter, may be executed by the Company and delivered to the
Trustee for authentication, and the Trustee shall thereupon authenticate and
deliver said Notes
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<PAGE> 27
to or upon the written order of the Company, signed by its President or any
Vice President, without any further action by the Company hereunder.
SECTION 2.2 FORM OF NOTES. The Notes and the Trustee's certificate
of authentication to be borne by the Notes shall be substantially in the form
as in this Indenture hereinabove recited. Any of the Notes may have imprinted
thereon such legends or endorsements as the officers executing the same may
approve (execution thereof to be conclusive evidence of such approval) and as
are not inconsistent with the provisions of this Indenture, or as may be
required to comply with any law or with any rule or regulation made pursuant
thereto or with any rule or regulation of any stock exchange on which the Notes
may be listed, or to conform to usage.
SECTION 2.3 DENOMINATIONS, DATES, INTEREST PAYMENT, INTEREST RESET
DATES, INTEREST RATE PERIODS, AND RECORD DATES. The Notes shall be issuable as
registered Notes without coupons in the denominations of $1,000 and any
integral multiple of $1,000, and shall be numbered, lettered, or otherwise
distinguished in such manner or in accordance with such plan as the officers of
the Company executing the same may determine with the approval of the Trustee.
The Notes shall be dated the date of authentication thereof by the
Trustee. The Stated Maturity of the Notes is December 15, 2006. The Notes
shall bear interest at the rate set forth on their titles (calculated on the
basis of a 360-day year of twelve 30-day months) payable quarterly in each
year, from the Interest Payment Date immediately preceding the date of such
Note to which interest on the Notes has been paid (unless the date of such Note
is the date to which interest on the Notes has been paid, in which case from
the date of such Note), or, if no interest has been paid on the Notes since the
Original Issue Date of such Note, from such Original Issue Date, until payment
of the principal thereof becomes due by virtue of either maturity or
redemption, and at the same applicable rate per annum on any overdue principal
and (to the extent legally enforceable) on any overdue installment of interest;
and shall be payable as to principal and interest at the main office of the
Trustee and at such other office or agency as provided in this Indenture.
The Notes shall bear interest from their Original Issue Date until
December 15, 2001 at the rate set forth on their faces. Thereafter, the Notes
shall bear interest in accordance with the following procedures: On or before
thirty (30) days prior to December 15, 2001 or the expiration date of any
subsequent Interest Rate Period (December 15, 2001 and each such subsequent
expiration date being referred to as an "Interest Reset Date"), the Company
shall establish, at its option, the interest rate per annum (rounded to the
nearest five hundredths of a percentage point; each such rate, a "Subsequent
Interest Rate") and the period for which such Subsequent Interest Rate shall be
paid (an "Interest Rate Period") of one (1), two (2), three (3) or five (5)
years (but never extending beyond December 15, 2006), commencing with such
Interest Reset Date and ending on, but not including, the March 15 of such
first, second, third or fifth year, as the case may be. Any such Subsequent
Interest Rate shall not be less than 105% of the Effective Interest Rate on
Comparable Maturity U.S. Treasury Obligations established prior to the
commencement of each such subsequent Interest Rate Period. In the event that
the Company determines on the November 15 preceding such Interest Reset Date
that during the ten (10) calendar days preceding such
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<PAGE> 28
November 15 no Weekly Comparable Maturity Treasury Rate has been published and
the Alternate Comparable Maturity Treasury Rate could not be determined, the
Company shall establish such Subsequent Interest Rate in its discretion without
limitation.
In the event that the Company establishes a Subsequent Interest Rate
for a subsequent Interest Rate Period, the Company will notify the Trustee of
each Subsequent Interest Rate and subsequent Interest Rate Period on or before
30 days prior to an Interest Reset Date. Upon receipt from the Company of the
Interest Rate Reset Notice regarding any Subsequent Interest Rate and the
related Interest Rate Period, the Trustee shall promptly mail to each
Noteholder (and to beneficial owners as required by applicable laws), but in no
event later than two (2) Business Days after receipt of notice from the
Company, a notice that shall state, among other things, (a) that the Company
has exercised its option to reset the interest rate, (b) the Subsequent
Interest Rate and the related Interest Rate Period, (c) that the Noteholder
must exercise his option to have his Notes redeemed not later than the fifth
Business Day before the Interest Reset Date (as defined in Section 6.2) and
procedures to be followed by the Noteholder to exercise such option, (d) that
if a Noteholder elects to revoke his exercise of such option prior to the
redemption of his Notes, he must do so not later than the fifth Business Day
before the Interest Reset Date and the procedures to be followed to revoke the
exercise of such option, and (e) such other information as the Company may
provide.
If the Company decides not to establish a Subsequent Interest Rate for
a subsequent Interest Rate Period as provided above, the interest rate for the
prior Interest Rate Period shall continue to be the interest rate in effect,
for the next year and each year thereafter, unless and until the Company shall
establish a Subsequent Interest Rate on or before November 15 of any subsequent
year in which an Interest Reset Date occurs for a subsequent Interest Rate
Period as provided above, commencing with December 15 of such year. Until
establishment of such a Subsequent Interest Rate for a subsequent Interest Rate
Period, each December 15 shall be deemed for purposes of this Indenture to be
an Interest Reset Date.
In the event that the Company decides not to establish a Subsequent
Interest Rate for a subsequent Interest Rate Period, the Company shall so
notify the Trustee on or before 30 days prior to an Interest Reset Date. Upon
receipt by the Company of such notice, the Trustee shall promptly mail to each
Noteholder (and to beneficial owners as required by applicable laws), but in no
event later than two (2) business days after receipt of notice from the
Company, a notice that shall state, among other things, (a) that the Company
has elected not to reset the interest rate, (b) that the Noteholder must
exercise his option to have his Notes redeemed not later than the fifth
Business Day before the Interest Reset Date and procedures to be followed by
the Noteholder to exercise such option, (c) that if a Noteholder elects to
revoke his exercise of such option prior to the redemption of his Notes, he
must do so not later than the fifth Business Day before the Interest Reset Date
and the procedures to be followed to revoke the exercise of such option, and
(d) such other information as the Company may provide.
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<PAGE> 29
Notwithstanding anything contained in this Indenture to the contrary,
at all times during the continuance of an Event of Default, interest shall
accrue upon the indebtednesses evidenced by the Notes at the Default Rate.
Notwithstanding the foregoing, so long as there is no existing default
in the payment of interest on the Notes, all Notes authenticated by the Trustee
between the Regular Record Date (as hereinafter defined) for any Interest
Payment Date and such Interest Payment Date shall bear interest from such
Interest Payment Date; provided, however, that if and to the extent that the
Company shall default in the payment of the interest due on such Interest
Payment Date, then any such Note shall bear interest from the Interest Payment
Date immediately preceding the date of such Note to which interest on the Notes
has been paid, or if no interest has been paid on such Notes since the Original
Issue Date of such Notes from such Original Issue Date or from such other date
as shall have been fixed by this Indenture or any supplemental indenture
hereto.
Interest on any Note which is payable, and is punctually paid or duly
provided for, on any Interest Payment Date 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 interest as specified in this
Section 2.3. The term "Regular Record Date" with respect to a regular Interest
Payment Date for the Notes shall mean the close of business on the seventh day
of the month (whether or not a business day) in which such Interest Payment
Date occurs.
Any 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") shall forthwith cease to be payable to the registered holder on the
relevant Regular Record Date by virtue of having been such holder; and such
Defaulted Interest may be paid by the Company, at its election in each case, as
provided in clause (A) or clause (B) below:
(A) The Company may elect to make payment of any
Defaulted Interest 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 (the "Special Record Date") for the payment
of such Defaulted Interest, which shall be fixed in the following
manner. The Company shall notify the Trustee in writing of the amount
of Defaulted Interest 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 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 as in this clause provided. Thereupon the Trustee
shall fix a Special Record Date for the payment of such Defaulted
Interest which shall be not more than twenty (20) nor less than ten
(10) days prior to the date of the proposed payment and not less than
thirty-five (35) 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 and the Special Record
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Date therefor to be mailed, first class postage prepaid, to each
Noteholder at his address as it appears in the Note Register, not less
than ten (10) days prior to such Special Record Date. The Trustee
may, in its discretion, in the name and at the expense of the Company,
cause a similar notice to be published at least once in a Daily
Newspaper in each place of payment, but such publication shall not be
a condition precedent to the establishment of such Special Record
Date. Notice of the proposed payment of such Defaulted Interest and
the Special Record Date therefor having been mailed as aforesaid, such
Defaulted Interest shall be paid to the persons in whose names the
Notes (or their respective predecessor Notes) are registered on such
Special Record Date and shall no longer be payable pursuant to the
following clause (B).
(B) The Company may make payment of any Defaulted
Interest in any other lawful manner if, after notice given by the
Company to the Trustee of the proposed payment pursuant to this
clause, such payment shall be deemed practicable by the Trustee.
Subject to the foregoing provisions of this Section, each Note
delivered under this Indenture upon 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.
The principal of and the interest on the Notes shall be paid at the
office or agency of the Company which shall be located at the main office of
the Trustee (the "place of payment") in such coin or currency of the United
States of America as at the time of payment shall be legal tender for the
payment of public and private debts; provided, however, that principal of and
interest on any Notes may be payable, at the option of the Company, by check
mailed to the person entitled thereto as such person's address shall appear on
the Note Register.
SECTION 2.4 NUMBERS AND LEGENDS ON NOTES. Notes may bear such
numbers, letters or other marks of identification or designation, may be
endorsed with or have incorporated in the text thereof such legends or recitals
with respect to transferability or in respect of the Note or Notes for which
they are exchangeable, and may contain such provisions, specifications and
descriptive words, not inconsistent with the provisions of this Indenture, as
may be determined by the Company or as may be required to comply with any law
or with any rule or regulation made pursuant thereto.
SECTION 2.5 EXECUTION OF NOTES. Each Note shall be signed in the
name and on behalf of the Company by one of its officers. The signature of an
officer of the Company may, if permitted by law, be in the form of a facsimile
signature and may be imprinted or otherwise reproduced on the Notes. In case
any officer of the Company who shall have signed, or whose facsimile signature
shall be borne by, any of the Notes shall cease to be such officer of the
Company before the Notes so executed shall be actually authenticated and
delivered by the Trustee, such Notes shall nevertheless bind the Company and
may be authenticated and delivered as though the person whose signature appears
on such Notes had not ceased to be such officer of the Company.
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SECTION 2.6 REGISTRATION OF TRANSFER OF NOTES. The Company shall
keep or cause to be kept at the main office of the Trustee books for the
registration of transfer of Notes issued hereunder (herein sometimes referred
to as the "Note Register") and upon presentation for such purpose at such
office the Company will register or cause to be registered the transfer
therein, under such reasonable regulations as it may prescribe, of such Notes.
The Trustee is hereby appointed "Note Registrar" for the purpose of registering
Notes and transfers of Notes as herein provided. The Company may appoint one
or more "Note Co-Registrars" for such purpose as the Board of Directors may
determine where Notes may be presented or surrendered for registration,
registration of transfer or exchange and such books, at all reasonable times,
shall be open for inspection by the Trustee.
SECTION 2.7 EXCHANGE AND REGISTRATION OF TRANSFER OF NOTES. Whenever
any Note shall be surrendered to the Company at an office or agency referred to
in Section 3.2, for registration of transfer or exchange, duly endorsed or
accompanied by a proper written instrument or instruments of assignment and
transfer thereof or for exchange in form satisfactory to the Company and the
Trustee, or any Note Registrar or Note Co-Registrar, duly executed by the
holder thereof or his attorney duly authorized in writing, the Company shall
execute, and the Trustee shall authenticate and deliver, in exchange therefor,
a Note or Notes in the name of the designated transferee, as the case may
require, for a like aggregate principal amount and of such authorized
denomination or denominations as may be requested. All Notes issued upon any
registration of transfer or exchange of Notes shall be the 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.
The Company, at its option, may require the payment of a sum
sufficient to reimburse it for any stamp tax or other governmental charge or
expense that may be imposed in connection with any exchange or transfer of
Notes other than exchanges pursuant to Section 2.8 or Section 13.5 not
involving any transfer. No service charge will be made for any such
transaction.
The Company shall not be required to issue or to make registrations of
transfer or exchanges of Notes after the fifteenth (15th) day immediately
preceding the date, if any, the Company elects to redeem the Notes. The
Company shall not be required to issue or to make registrations of transfer or
exchanges of any Notes which have been selected for redemption.
Upon delivery by any Note Co-Registrar of a Note in exchange for a
Note surrendered to it in accordance with the provisions of this Indenture, the
Note so delivered shall for all purposes of this Indenture be deemed to be duly
registered in the Note Register; provided, however, that in making any
determination as to the identity of persons who are holders, the Trustee shall,
subject to the provisions of Section 10.2, be fully protected in relying on the
Note Register kept at the main office of the Trustee.
SECTION 2.8 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 may be printed, lithographed,
typewritten, mimeographed or otherwise
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reproduced. Temporary Notes shall be issuable in any authorized denomination,
and substantially of the tenor of the definitive Notes in lieu of which they
are issued, but with such omissions, insertions and variations as may be
appropriate for temporary Notes, all as may be determined by the officers of
the Company executing such Notes as evidenced by their execution of such Notes.
Every such temporary Note shall be authenticated by the Trustee upon the same
conditions and in substantially the same manner, and with the same effect, as
the definitive Notes. If temporary Notes are issued, without unreasonable
delay, the Company will execute and deliver to the Trustee definitive Notes and
thereupon any and all temporary Notes may be surrendered in exchange therefor,
at the offices referred to in Section 3.2, and the Trustee shall authenticate
and deliver in exchange for such temporary Notes an equal aggregate principal
amount of definitive Notes of authorized denominations. Such exchange shall be
made by the Company at its own expense and without any charge therefor. Until
so exchanged, the temporary Notes shall in all respects be entitled to the same
benefits under this Indenture as definitive Notes authenticated and delivered
hereunder.
SECTION 2.9 RECOGNITION OF REGISTERED HOLDERS OF DEFINITIVE NOTES AND
TEMPORARY NOTES. The Company, the Trustee or any agent of the Company or the
Trustee may deem and treat (A) the registered holder of any temporary Note, and
(B) the registered holder of any definitive Note, as the absolute owner of such
Note in accordance with Section 8.1.
SECTION 2.10 MUTILATED, DESTROYED, LOST OR STOLEN NOTES. In case any
Note shall become mutilated or be destroyed, lost or stolen, then upon the
satisfaction of the conditions hereinafter set forth in this Section 2.10 the
Company (A) shall, in the case of any mutilated Note, and (B) shall, in the
case of any destroyed, lost or stolen Note, in the absence of notice to the
Company or the Trustee that such Note has been acquired by a bona fide
purchaser, execute, and upon the written request of the Company, the Trustee
shall authenticate and deliver, a new Note of like principal amount bearing a
number not contemporaneously outstanding, in exchange and substitution for and
upon surrender and cancellation of the mutilated Note or in lieu of and
substitution for the Note so destroyed, lost or stolen; provided, however, that
if any such mutilated, destroyed, lost or stolen Note shall have become or
shall be about to become due and payable, or shall have been selected or called
for redemption, the Company may instead of issuing a substituted Note, pay such
Note without requiring the surrender thereof, except that such mutilated Note
shall be surrendered. The applicant for such substituted Note shall furnish to
the Company and to the Trustee evidence satisfactory to them, in their
discretion, of the ownership of and the destruction, loss or theft of such Note
and shall furnish to the Company and to the Trustee and any Note Registrar such
security or indemnity as may be required by them to save each of them harmless,
and, if required, shall reimburse the Company for all expenses (including any
tax or other governmental charge and the fees and expenses of the Trustee) in
connection with the preparation, authentication and delivery of such
substituted Note, and shall comply with such other reasonable regulations as
the Company, the Trustee, or either of them, may prescribe.
Every new Note issued pursuant to this Section 2.10 in lieu of any
destroyed, lost or stolen Note shall constitute an original additional
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
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to all the benefits of this Indenture equally and proportionally with any and
all other Notes duly issued hereunder.
The provisions of this Section 2.10 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 2.11 FORM AND AUTHENTICATION OF NOTES. Subject to the
qualifications hereinbefore set forth, the Notes to be secured hereby shall be
substantially of the tenor and effect set forth in the recitals hereto, and no
Notes shall be secured hereby or entitled to the benefit hereof, or shall be or
become valid or obligatory for any purpose unless there shall be endorsed
thereon an authentication certificate, substantially in the form set forth in
the recitals hereto, executed by the Trustee; and such certificate on any Note
issued by the Company shall be conclusive evidence and the only competent
evidence that it has been duly authenticated and delivered hereunder.
SECTION 2.12 SURRENDER AND CANCELLATION OF NOTES. All Notes
surrendered for payment, redemption, transfer, exchange or conversion shall, if
surrendered to any person other than the Trustee, be delivered to the Trustee
and, if not already canceled, shall be promptly canceled 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 canceled by
the Trustee. No Notes shall be authenticated in lieu of or in exchange for any
Notes canceled as provided in this Section 2.12, except as expressly permitted
by this Indenture. The Trustee shall deliver all canceled Notes held by it to
the Company at least annually.
ARTICLE 3
PARTICULAR COVENANTS OF THE COMPANY
Anything in this Indenture or in any Note to the contrary
notwithstanding, the Company, expressly for the equal and ratable benefit of
the original and future holders of the Notes, covenants and agrees as follows:
SECTION 3.1 WILL PUNCTUALLY PAY PRINCIPAL AND INTEREST ON THE NOTES.
The Company will duly and punctually pay, or cause to be paid, the principal
and interest to become due in respect of the Notes Outstanding according to the
provisions hereof and thereof.
SECTION 3.2.
(A) OFFICE OR AGENCY. The Company will maintain an office or
agency in the place of payment 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
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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 of any change in the location, of such office or
agency. If at any time the Company shall fail to maintain such 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 main office of the Trustee, and the Company
hereby appoints the Trustee its agent to receive all 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 of the purposes specified above in this
Section 3.2(A) and may from time to time rescind such designations, as
the Company may deem desirable or expedient; provided, however, that
no such designation or rescission shall in any manner relieve the
Company of its obligation to maintain an office or agency in each
place of payment for such purposes. The Company will give prompt
written notice to the Trustee of any such designation and any change
in the location of any such other office or agency.
(B) APPOINTMENT OF TRUSTEE AS PAYING AGENT; DUTY OF
PAYING AGENT OTHER THAN TRUSTEE. The Company hereby appoints the
Trustee as paying agent and the Company covenants that, if it shall
appoint a paying agent other than the Trustee, it will cause such
paying agent 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 3.2,
(1) that such paying agent shall hold all sums
held by it as such agent for the payment of the principal of
or the interest on any of the Notes in trust for the benefit
of the holders of such Notes or the Trustee;
(2) that such paying agent shall give the Trustee
notice of any Default of the Company in making any payment of
the principal of or the interest on the Notes when the same
shall be due and payable; and
(3) at any time during the continuance of any
such Default, upon the written request of the Trustee,
forthwith to pay to the Trustee all sums so held in trust by
such paying agent.
(C) DUTY OF COMPANY ACTING AS PAYING AGENT. The Company
covenants and agrees that, if it should at any time act as its own
paying agent, it will, on or before each due date of the principal of
or the interest on the Notes set aside and segregate and hold in trust
for the benefit of the holders of the Notes a sum sufficient to pay
such principal or interest so becoming due until such sums shall be
paid to such holders or otherwise disposed of as herein provided and
will notify the Trustee of its action or of any failure to take such
action.
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Whenever the Company shall have one or more paying agents, it
will, prior to each due date of the principal of or interest on, any
Notes, deposit with one or more paying agents a sum sufficient to pay
the principal or interest, so becoming due, such sum to be held in
trust for the benefit of the holders of Notes entitled to such
principal 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.
(D) DELIVERY TO TRUSTEE. Anything in this Section 3.2 to
the contrary notwithstanding, the Company may at any time, for the
purposes of obtaining the satisfaction and discharge of this Indenture
or for any other reason, pay, or by Company Order direct any paying
agent to pay, to the Trustee all sums held in trust by the Company or
any paying agent as required by this Section 3.2, such sums to be held
by the Trustee upon the trusts contained in this Indenture. 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.
(E) ALL SUMS TO BE HELD SUBJECT TO SECTION 15.2.
Anything in this Section 3.2 to the contrary notwithstanding, the
holding of sums in trust as provided in this Section 3.2 is subject to
the provisions of Section 15.2 hereof.
SECTION 3.3 WILL PAY INDEBTEDNESS. The Company will pay or cause to
be paid all Indebtedness of the Company and of each Subsidiary (but, in the
case of Indebtedness of a Subsidiary on which the Company is not liable, the
Company shall be obligated so to do only to the extent that such Subsidiary's
assets shall be insufficient for the purpose), as and when same shall become
due and payable, and will observe, perform and discharge in accordance with
their terms all of the covenants, conditions and obligations which are imposed
on it by any and all mortgages, indentures and other agreements evidencing or
securing Indebtedness of the Company or pursuant to which such Indebtedness is
issued, so as to prevent the occurrence of any act or omission which is a
default thereunder, and which remains uncured or is not waived for a period of
thirty (30) days. The Company will notify the Trustee of any breach of the
covenants contained in this Section 3.3 within ten (10) days after the Company
has knowledge of such breach.
SECTION 3.4 WILL MAINTAIN OFFICE. The Company will maintain an
office of the Company, which shall be and remain the principal place of
business of the Company, in Deerfield, Illinois; provided, however, that upon
at least thirty (30) days' prior written notice to the Trustee, the Company may
move such office and records to any other address as set forth in such notice.
SECTION 3.5 WILL KEEP, AND PERMIT EXAMINATION OF, RECORDS AND BOOKS
OF ACCOUNT AND WILL PERMIT VISITATION OF PROPERTY. The Company will (A) keep
proper records and books of account in accordance with generally accepted
accounting principles consistently applied, reflecting all financial
transactions of the Company and each Subsidiary, and (B) permit or cause to
permit the Trustee, personally or by its agents, accountants and attorneys, to
visit or inspect any of the properties, examine the records and books of
account and discuss the affairs, finances and accounts, of the Company and each
Subsidiary, with the officers of the Company and Subsidiaries
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at such reasonable times as may be requested by the Trustee. The Trustee shall
be under no duty to make any such visit, inspection or examination.
The Company covenants that books of record and account will be kept in
which full, true and correct entries will be made of all dealings or
transactions of, or in relation to, the properties, business and affairs of the
Company.
SECTION 3.6 CORPORATE EXISTENCE. The Company will do or cause to
be done all things necessary to preserve and keep in full force and effect its
corporate existence, and that of each Subsidiary and the rights (charter and
statutory) and franchises of the Company and its Subsidiaries; provided,
however, that the Company shall not be required to preserve any such right or
franchise if the Company shall determine that the preservation thereof is no
longer desirable in the conduct of the business of the Company and its
Subsidiaries considered as a whole and that the loss thereof is not
disadvantageous in any material respect to the holders of the Notes.
SECTION 3.7 MAINTENANCE OF PROPERTIES. The Company will cause
all properties used or useful in the conduct of its business or the business of
any Subsidiary 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 the connection therewith may be properly and
advantageously conducted at all times; provided, however, that nothing in this
Section shall prevent the Company or any Subsidiary from discontinuing the
operation and maintenance of any such properties, or disposing of any of them,
if such discontinuance or disposal is, in the judgment of the Company or of the
Subsidiary concerned, desirable in the conduct of its business or the business
of any Subsidiary and not disadvantageous in any material respect to the
holders of the Notes.
SECTION 3.8 PAYMENT OF TAXES AND OTHER CLAIMS. The Company will
pay or discharge or cause to be paid or discharged, before the same shall
become delinquent, (i) all taxes, assessments and governmental charges levied
or imposed upon the Company or any Subsidiary or upon the income, profits or
property of the Company or any Subsidiary, and (ii) all lawful claims for
labor, materials and supplies which, if unpaid, might by law become a lien upon
the property of the Company or any Subsidiary; provided, however, that the
Company shall not be required to pay or discharge or cause to be paid or
discharged any such tax, assessment, charge or claim whose amount,
applicability or validity is being contested in good faith by appropriate
proceedings and the Company shall have set aside on its books adequate reserves
with respect thereto (segregated to the extent required by generally accepted
accounting principles).
SECTION 3.9 RESTRICTIONS ON INDEBTEDNESS. The Company covenants that
(i) it will not, nor will it permit any Subsidiary to, incur, create, assume or
otherwise become liable with respect to any Indebtedness unless the Company is
in compliance with all the terms, conditions and provisions of the Indenture
and (ii) it will not permit its Indebtedness and that of its Subsidiaries,
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consolidated in accordance with generally accepted accounting principles, to
exceed six (6) times the Company's Consolidated Net Worth.
SECTION 3.10 LIMITATION ON DIVIDENDS AND OTHER PAYMENTS. The Company
will not declare or pay any of the following (each, a "Restricted Payment"):
(i) any dividend or other distribution of property or assets other than a
dividend payable solely in shares of capital stock of the Company or (ii) any
repurchase by the Company of its capital stock other than from an employee of
the Company or a Subsidiary in connection with the termination of his
employment. Notwithstanding the foregoing, the Company may declare or pay a
Restricted Payment, if such Restricted Payment, when aggregated with all other
Restricted Payments made by the Company after September 30, 1996, is less than
the sum of (A) $3,000,000 ; (B) fifty percent (50%) of the cumulative
consolidated net income of the Company and its Subsidiaries, computed in
accordance with generally accepted accounting principles, for the period
commencing on January 1, 1996 and ending on the date on which the Restricted
Payment is made (treated as one accounting period); and (C) the cumulative cash
and non-cash proceeds to the Company of all public or private offerings of its
capital stock during the period between October 1, 1996 and the date on which
the Restricted Payment is made; provided that, notwithstanding the foregoing,
the Company shall make no Restricted Payment if the making of the Restricted
Payment would cause the Company not to be in compliance with the terms,
conditions and provisions of this Indenture or any Senior Indebtedness on the
date on which such Restricted Payment is made.
SECTION 3.11 COMPLIANCE NOTICES. The Company will deliver to the
Trustee, within thirty (30) days after the end of each of its fiscal quarters,
commencing with the quarter ending December 31, 1996, an Officer's Certificate
stating that
(1) review of the activities of the Company during such
quarter and of performance under this Indenture has been made under
his supervision; and
(2) to the best of his knowledge, based on such review,
the Company has fulfilled all its obligations under this Indenture
throughout the quarter, or, if there has been a default in the
fulfillment of any such obligation, specifying each such default known
to him and the nature and status thereof.
ARTICLE 4
NOTEHOLDER LISTS AND REPORTS BY THE COMPANY
AND THE TRUSTEE
SECTION 4.1 NOTEHOLDER LISTS, ETC.
(A) The Company will furnish or cause to be furnished to
the Trustee, quarterly, not more than fifteen (15) days after each
Regular Record Date a list, in such form as the Trustee may reasonably
require, of the names and addresses of the holders of Notes as of
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such Regular Record Date, and at such other times, as the Trustee may
request in writing, within thirty (30) days after 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 so long as the Trustee is the sole
Note Registrar, no such list shall be required to be furnished.
(B) The Trustee shall preserve, in as current a form as
is reasonably practicable, the names and addresses of the holders of
Notes received by the Trustee in its capacity as Note Registrar
contained in the most recent list furnished to it as provided in
subdivision (A) of this Section 4.1. The Trustee may destroy any list
furnished to it as provided in subdivision (A) of this Section 4.1,
upon receipt of a new list so furnished.
(C) In case holders of Notes aggregating not less than
ten percent (10%) of the aggregate principal amount of all Outstanding
Notes (hereinafter called "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 (6) months
preceding the date of such application, and such application states
that the Applicants desire to communicate with other holders of Notes
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 (5) business days after the receipt of such
application, at its election, either
(1) afford to such Applicants access to the
information preserved at the time by the Trustee in accordance
with the provisions of subdivision (B) of this Section 4.1; or
(2) inform such Applicants as to the approximate
number of holders of Notes whose names and addresses appear in
the information preserved at the time by the Trustee, in
accordance with the provisions of subdivision (B) of this
Section 4.1, 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 to such Applicants access to
such information, the Trustee shall, upon the written request of such
Applicants, mail to each Noteholder whose name and address appears in
the information preserved at the time by the Trustee in accordance
with the provisions of subdivision (B) of this Section 4.1, 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 (5) days
after such tender the Trustee shall mail to such Applicants and file
with the Securities and Exchange 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
interests of the holders of Notes, or would be in violation of
applicable law. Such written
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statement shall specify the basis of such opinion. If said
Commission, after opportunity for a hearing upon the objections
specified in the written statement so filed, shall enter an order
refusing to sustain any of such objections or if, after the entry of
an order sustaining one (1) or more of such objections, said
Commission shall find, after notice and opportunity for a 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 of such tender; otherwise the Trustee shall
be relieved of any obligation or duty to such Applicants respecting
their application.
(D) Every holder of the Notes, by receiving and holding
the same, agrees with the Company and the Trustee that neither the
Company nor the Trustee, nor any paying agent shall be held
accountable by reason of the disclosure of any such information as to
the names and addresses of the holders of Notes in accordance with the
provisions of subdivision (C) of this Section 4.1, 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 said subdivision (C).
SECTION 4.2 REPORTS BY COMPANY. The Company covenants and agrees:
(A) To file with the Trustee within fifteen (15) days
after the Company files the same with the Securities and Exchange
Commission, copies of the annual reports and of the information,
documents, and other reports (or copies of such portions of any of the
foregoing as such Commission may from time to time by rules and
regulations prescribe) which the Company may be required to file with
such Commission pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934; or, if the Company is not required to
file information, documents, or reports pursuant to either of such
Sections, then the Company will file with the Trustee and the
Securities and Exchange Commission, in accordance with rules and
regulations prescribed from time to time by said Commission, such of
the supplementary and periodic information, documents, and reports
which may be required pursuant to Section 13 of the Securities
Exchange Act of 1934 in respect of a security listed and registered on
a national securities exchange as may be prescribed from time to time
in such rules and regulations;
(B) To file with the Trustee and the Securities and
Exchange Commission, in accordance with the rules and regulations
prescribed from time to time by said Commission, such additional
information, documents and reports with respect to compliance by the
Company with the conditions and covenants provided for in this
Indenture as may be required from time to time by such rules and
regulations, including, in the case of annual reports, if required by
such rules and regulations, certificates or opinions of independent
public accountants, conforming to the requirements, if any, of Section
15.3 hereof, as to compliance with conditions or covenants, compliance
with which is subject to verification by accountants;
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(C) To transmit to the holders of the Notes, in
the manner and to the extent provided in subsection (c) of
section 313 of the TIA, such summaries of any information, documents,
and reports required to be filed by the Company pursuant to
subdivision (A) or subdivision (B) as may be required by the rules and
regulations promulgated by the Securities and Exchange Commission; and
(D) To furnish to the Trustee with or as a part of each
annual report and each other document or report filed with the Trustee
pursuant to subdivision (A), (B) or (C) of this Section 4.2, an
Officers' Certificate stating that in the opinion of each of the
signers such annual report or other document or report complies with
the requirements of such subdivision (A) or subdivision (B).
Each certificate furnished to the Trustee pursuant to the provisions
of this Section 4.2 shall conform to the requirements of Section 15.3 hereof.
SECTION 4.3 REPORTS BY TRUSTEE. The Trustee shall transmit to the
Noteholders as provided in TIA Section 313(c), if required thereunder, within
sixty (60) days after January 1, 1997 and each January 1 thereafter, a brief
report as provided in TIA Section 313(a). A copy of each such report shall, at
the time of such transmission to the Noteholders, be filed by the Trustee with
each stock exchange upon which the Notes are listed (if any) and also with the
Securities and Exchange Commission.
ARTICLE 5
REDEMPTION OF NOTES AT COMPANY'S OPTION
SECTION 5.1 ELECTION BY COMPANY TO REDEEM NOTES. The Notes shall be
redeemable prior to the Stated Maturity thereof on any Interest Reset Date,
upon notice as provided in this Article 5, as a whole, at the option of the
Company; provided, however, that the Company may not redeem any Notes pursuant
to such option prior to December 15, 2001. Any such redemption shall be at the
redemption price of 100% of the principal amount of the Notes redeemed,
together with accrued and unpaid interest on the principal amount to be
redeemed to the redemption date.
The election of the Company to redeem any Notes shall be evidenced by
a Certified Resolution. Whenever any of the Notes Outstanding are to be
redeemed pursuant to this Section 5.1, the Company shall give the Trustee at
least sixty (60) days' written notice (or such shorter period of time as is
acceptable to the Trustee) prior to the Interest Reset Date fixed for
redemption.
SECTION 5.2 NOTICE OF REDEMPTION. Notice of redemption shall be
given by first-class mail, postage prepaid, mailed not less than thirty (30)
nor more than sixty (60) days prior to the Interest Reset Date fixed for
redemption, to each holder of Notes, at his last address appearing in the Note
Register.
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All notices of redemption shall state:
(A) The redemption date;
(B) The redemption price;
(C) That on the date of redemption the redemption price
of each of the Notes to be redeemed will become due and payable, and
that interest thereon shall cease to accrue from and after said date;
and
(D) The place where such Notes are to be surrendered for
payment of the redemption price, which shall be the office or agency
of the Company in the place of payment.
Notice of redemption of Notes to be redeemed shall be given by the
Company or, at the Company's request, by the Trustee in the name and at the
expense of the Company.
Failure to give notice of redemption, or any defect therein, to any
holder of any Note selected for redemption shall not impair or affect the
validity of the redemption of any other Note.
SECTION 5.3 DEPOSIT OF REDEMPTION PRICE. On or before the business
day immediately preceding any Interest Reset Date upon which redemption is to
take place, the Company shall deposit with the Trustee or with a paying agent
(or, if the Company is acting as its own paying agent, segregate and hold in
trust as provided in Section 3.2(C) hereof) an amount of money sufficient to
pay the redemption price of all principal of, and accrued interest on, the
Notes which are to be redeemed on that date.
SECTION 5.4 DATE ON WHICH NOTES CEASE TO BEAR INTEREST, ETC. Notice
of redemption having been given as aforesaid, the Notes so to be redeemed
shall, on the redemption date, become due and payable at the redemption price
therein specified and from and after such date (unless the Company shall
default in the payment of the redemption price) such Notes shall cease to bear
interest. Upon surrender of any such Note for redemption in accordance with
said notice, such Note shall be paid by the Company at the redemption price
together with accrued interest thereon to the Redemption Date; provided,
however, that installments of interest whose Stated Maturity is on or prior to
the redemption date shall be payable to the holders of such Notes, or one or
more predecessor Notes, registered as such on the relevant Regular Record Dates
according to the terms and provisions of Section 2.3 hereof.
If any Note called for redemption shall not be so paid upon surrender
thereof for redemption, the principal shall, until paid, bear interest from the
redemption date at the rate borne by the Note.
SECTION 5.5 ALL NOTES DELIVERED. All Notes redeemed pursuant to
Section 5.1 hereof shall be canceled and destroyed by the Trustee in accordance
with the existing regulations of (or
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those hereafter promulgated by) the Securities Exchange Commission, and the
Trustee shall deliver its certificate thereof to the Company.
ARTICLE 6
REDEMPTION OF NOTES AT HOLDER'S OPTION
SECTION 6.1 REDEMPTION RIGHT AT HOLDER'S OPTION UPON AN INTEREST RATE
RESET NOTICE OR UPON DEATH OF A HOLDER. Unless pursuant to the terms of
Section 7.1 the Notes have been declared due and payable prior to their
maturity by reason of an Event of Default and such Event of Default has not
been waived and such declaration has not been rescinded or annulled, a holder
has the right to present all but not less than all of his Notes for payment
prior to their maturity during the period from the date of the Interest Rate
Reset Notice (or the date of the notice that the Interest Rate will not be
reset pursuant to Section 2.3, as the case may be), pertaining to an Interest
Reset Date to the fifth business day preceding the Interest Reset Date, and the
Company will redeem the same on the Interest Reset Date if Notes have been
properly presented for payment on behalf of beneficial holders who are natural
persons. Further, the personal representative of a deceased Holder, or the
surviving joint tenant or tenant by the entirety of a deceased Holder, may
tender his Notes for redemption in whole (or any portion of the principal
amount thereof which is $1,000 or an integral multiple thereof, as the Holder
may specify), subject to the limitation that the Company will not be obligated
to redeem during an initial period beginning with the Original Issue Date and
ending December 15, 1997 or during any 12-month period thereafter beginning on
December 15 of any year and ending on the March 15 of the succeeding year (A)
the portion of a Note or Notes presented by the Holder exceeding an aggregate
principal amount of $25,000 per Holder or (B) Notes in an aggregate principal
amount exceeding $2,250,000 (plus to the extent that the Original Purchasers
exercised the Over-Allotment Option, 5% of the principal amount of the Notes
purchased upon exercise of the Over-Allotment Option; provided that, in no
event, shall the maximum aggregate principal amount of Notes which the Company
may be obligated to redeem in any such 12-month period exceed $2,587,500);
further references herein to the $2,250,000 aggregate principal amount
limitation shall be deemed to include such higher figure not exceeding
$2,587,500, to the extent the Original Purchasers exercise the Over-Allotment
Option. Such $25,000 and $2,250,000 limitations are non-cumulative. The
Company will redeem Notes tendered upon the death of the Holders thereof in
order of their receipt, subject to the aforesaid limitations and the redemption
procedures set forth in Section 6.2.
SECTION 6.2 REDEMPTION PROCEDURE AT HOLDER'S OPTION UPON AN INTEREST
RESET DATE OR UPON DEATH OF A HOLDER. Redemption of Notes presented for
payment by a Holder exercising his option to have his Notes redeemed on an
Interest Reset Date will be redeemed on such Interest Reset Date. Holders of
Notes presented for redemption shall be entitled to and shall receive scheduled
quarterly payments of interest thereon on scheduled Interest Payment Dates
until their Notes are redeemed. Subject to the $25,000 and $2,250,000
limitations, the Company will, at any time upon the death of any holder, redeem
Notes within sixty (60) days following receipt by the
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Trustee of a written request therefor from such holder's personal
representative, or surviving joint tenant(s), tenant by the entirety or
tenant(s) in common.
Notes may be presented for redemption by delivering to the Trustee:
(A) a written request for redemption, in form satisfactory to the Trustee,
signed by the registered holder(s) or his duly authorized representative, (B)
the Note to be redeemed, free and clear of any liens or encumbrances of any
kind, and (C) in the case of a request made by reason of the death of a holder,
appropriate evidence of death and, if made by a representative of a deceased
holder, appropriate evidence of authority to make such request and such other
additional documents as the Trustee shall require, including, but not limited
to, inheritance or estate tax waivers. No particular forms of request for
redemption or authority to request redemption are necessary. The price to be
paid by the Company for all Notes or portions thereof presented to it pursuant
to the provisions described in this Article 6 is 100% of the principal amount
thereof or portion thereof plus accrued but unpaid interest on the principal
amount redeemed to the redemption date. Any acquisition of Notes by the
Company other than by redemption at the option of any holder pursuant to this
Section shall not be included in the computation of either the $25,000 or
$2,250,000 limitation for any period.
For purposes of this Section 6.2, a Note held in tenancy by the
entirety, joint tenancy or tenancy in common will be deemed to be held by a
single holder and the death of a tenant by the entirety, joint tenant or tenant
in common will be deemed the death of a holder. The death of a person, who,
during his lifetime, was entitled to substantially all of the beneficial
interests of ownership of a Note will be deemed the death of the holder,
regardless of the registered holder, if such beneficial interest can be
established to the satisfaction of the Trustee. For purposes of a holder's
request for redemption and a request for redemption on behalf of a deceased
holder, such beneficial interest shall be deemed to exist in cases of street
name or nominee ownership, ownership under the Uniform Gifts to Minors Act,
community property or other joint ownership arrangements between a husband and
wife (including individual retirement accounts or Keogh [H.R. 10] plans
maintained solely by or for the holder or decedent or by or for the holder or
decedent and his spouse), and trusts and certain other arrangements where a
person has substantially all of the beneficial ownership interests in the Notes
during his lifetime. Beneficial interests shall include the power to sell,
transfer or otherwise dispose of a Note and the right to receive the proceeds
therefrom, as well as interest and principal payable with respect thereto.
In the case of Notes registered in the names of banks, trust companies
or broker-dealers who are members of a national securities exchange or the
National Association of Securities Dealers, Inc. ("Qualified Institutions"),
the $25,000 limitation shall apply to each beneficial owner of Notes held by a
Qualified Institution and the death of such beneficial owner shall entitle a
Qualified Institution to seek redemption of such Notes as if the deceased
beneficial owner were the record holder. Such Qualified Institution, in its
request for redemption on behalf of such beneficial owners, must submit
evidence, satisfactory to the Trustee, that it holds Notes on behalf of such
beneficial owner and must certify that the aggregate amount of requests for
redemption tendered by such Qualified Institution on behalf of such beneficial
owner in the initial period or in any subsequent twelve (12) month period does
not exceed $25,000.
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In the case of any Notes which are presented for redemption in part
only, upon such redemption the Company shall execute and the Trustee shall
authenticate and deliver to or on the order of the holder of such Notes,
without service charge, a new Note(s), of any authorized denomination or
denominations as requested by such holder, in aggregate principal amount equal
to the unredeemed portion of the principal of the Notes so presented.
Nothing herein shall prohibit the Company from redeeming, in
acceptance of tenders made pursuant hereto, Notes in excess of the principal
amount that the Company is obligated to redeem, nor from purchasing any Notes
in the open market. However, the Company may not use any Notes purchased in
the open market as a credit against its redemption obligations hereunder.
SECTION 6.3 WITHDRAWAL. Any Notes presented for redemption at the
option of the holder may be withdrawn by the person(s) presenting the same upon
delivery of a written request for such withdrawal to the Trustee (A) in the
case of redemption on an Interest Reset Date, not later than five (5) business
days before the relevant Interest Reset Date or, (B) in the case of a Special
Redemption Event, on the Repurchase Date (as defined in Section 6.5), or (C)
prior to the issuance of a check in payment thereof in the case of Notes
presented by reason of the death of a holder.
SECTION 6.4 REDEMPTION REGISTER. The Trustee shall maintain at its
main office a register (the "Redemption Register") in which it shall record, in
order of receipt, all requests for redemption received by the Trustee under
Section 6.2. Unless withdrawn, all such requests shall remain in effect during
the period in which they are received and thereafter from period to period,
until the Notes which are the subject of such request have been redeemed.
SECTION 6.5 REDEMPTION UPON SPECIAL REDEMPTION EVENT. In the event
that there shall occur a Special Redemption Event with respect to the Company,
then each holder shall have the right, at the holder's option, to require the
Company to redeem such holder's Notes, including any portion thereof which is
$1,000 or any integral multiple thereof on the date (the "Repurchase Date")
that is seventy-five (75) days after the occurrence of the Special Redemption
Event at the redemption price in cash of 100% of the principal amount thereof
or portion thereof plus accrued but unpaid interest to the date of payment.
Forty (40) days after the occurrence of a Special Redemption Event,
the Company promptly, but in any event within three (3) business days after
expiration of such 40-day period, shall give notice to the Trustee, who shall
promptly, but in any event within five (5) days of receipt of notice from the
Company, notify the Noteholders, of the occurrence of such Special Redemption
Event, of the date before which a holder must notify the Trustee of such
holder's intention to exercise the redemption option, which date shall be not
more than three (3) business days prior to the Repurchase Date and of the
procedure which such holder must follow to exercise such right. To exercise
the redemption, the holder of a Note or Notes must deliver to the Trustee on or
before the Repurchase Date: (A) written notice of such holder's election to
redeem pursuant to this Section 6.5; in form satisfactory to the Trustee,
signed by the registered holder(s) or his duly authorized representative and
(B) the Note or Notes to be redeemed, free and clear of any liens or
encumbrances of any kind.
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In the case of any Notes which are presented for redemption in part
only, upon such redemption the Company shall execute and the Trustee shall
authenticate and deliver to or on the order of the holder of such Notes,
without service charge, a new Note(s), of any authorized denomination or
denominations as requested by such holder, in aggregate principal amount equal
to the unredeemed portion of the principal of the Notes so presented.
SECTION 6.6 REDEMPTION OF NOTES SUBJECT TO ARTICLE 5. In the case of
any Notes or portion thereof which are presented for redemption pursuant to
this Article 6 and which have not been redeemed at the time the Company gives
notice of its election to redeem Notes pursuant to Article 5, such Notes or
portion thereof shall first be subject to redemption pursuant to Article 5 and
if any such Notes or portion thereof are not redeemed pursuant to Article 5
they shall remain subject to redemption pursuant to Article 6.
ARTICLE 7
REMEDIES OF TRUSTEE AND NOTEHOLDERS UPON DEFAULT
SECTION 7.1 DEFINITION OF DEFAULT AND EVENT OF DEFAULT. The
following events are hereby defined for all purposes of this Indenture (except
where the term is otherwise defined for specific purposes) as "Events of
Default" (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):
(A) Failure to make any payment of the principal of any
Note for a period of five (5) days or more after the same shall become
due and payable; or
(B) Failure to pay any installment of interest upon any
Note for a period of ten (10) days or more after the same shall have
become due and payable; or
(C) The acceleration of all or any portion of any Senior
Indebtedness or the foreclosure upon any collateral securing payment
of any Senior Indebtedness; or
(D) The occurrence of any default or event of default
under any Senior Indebtedness if, as a result of such default or event
of default, the date of payment of all or any portion of such Senior
Indebtedness may be accelerated or foreclosure upon any collateral
securing such Senior Indebtedness may occur, if such default or event
of default shall remain uncured for a period of 180 consecutive days
following the date of occurrence thereof; or
(E) The entry of a decree or order by a court or
regulatory authority having jurisdiction in the premises adjudging the
Company or any Subsidiary as bankrupt or insolvent, or approving as
properly filed a petition seeking reorganization, arrangement,
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adjustment or composition of or in respect of the Company or any
Subsidiary under the Federal Bankruptcy Act or any other applicable
Federal or State law, or appointing a receiver, liquidator, assignee,
trustee or sequestrator (or other similar official) of the Company or
any Subsidiary, 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; or
(F) The institution by the Company or any Subsidiary of
proceedings to be adjudicated as bankrupt or insolvent, 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 the Federal Bankruptcy Act or
any other applicable Federal or State law, or the consent by it to the
filing of any such petition or to the appointment of a receiver,
liquidator, assignee, trustee or sequestrator (or other similar
official) of the Company or any Subsidiary, 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 action by the Company or any Subsidiary in
furtherance of any such action; or
(G) The occurrence of any default in the performance, or
any breach, of any covenant of the Company in this Indenture (other
than a default that is covered by any other subsection of this Section
7.1), which continues for a period of not less than thirty (30)
consecutive days after such occurrence; or
(H) A court having jurisdiction in the premises shall
have entered a final non-appealable judgment, order or decree for
payment of money against the Company or any Subsidiary that results in
a liability (after provision for any proceeds of any policy of
insurance applicable to such liability) in excess of $15,000,000.
SECTION 7.2 TRUSTEE TO GIVE NOTEHOLDERS NOTICE OF DEFAULTS. The
Trustee shall, within sixty (60) days after the occurrence of any event that
with the giving of notice, the passage of time or both would constitute an
Event of Default (a "Default"), give by mail to (i) all Noteholders, as their
names and addresses appear in the Note Register, (ii) to such holders of the
Notes as have, within the two (2) years preceding the mailing of notice, filed
their names and addresses with the Trustee for that purpose and (iii) to such
holders of the Notes whose names and addresses are provided the Trustee in
accordance with Section 312 of the TIA, notice of all Defaults known to the
Trustee, unless such Defaults shall have been cured or waived before the giving
of such notice; provided, however, that except in the case of Default in the
payment of the principal of or the interest on any of the Notes, the Trustee
shall be protected in withholding such notice if and so long as the board of
directors, board of trustees, executive committee, or a trust committee of
directors, trustees or Responsible Officers, of the Trustee in good faith
determines that the withholding of such notice is in the interests of the
Noteholders.
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SECTION 7.3 DECLARATION OF PRINCIPAL AND ACCRUED INTEREST DUE UPON
DEFAULT; HOLDERS OF SPECIFIED PERCENTAGE OF NOTES MAY WAIVE DEFAULT
DECLARATION. In the event that (1) an Event of Default has occurred and is
continuing under subsections 7.1 (A), (B), (C), (D), (G) or (H) hereof, and (2)
the holders of not less than twenty-five percent (25%) of the aggregate
principal amount of the Outstanding Notes shall direct Trustee in writing to
accelerate the indebtedness evidenced by the Notes, then the Trustee shall, by
written notice to the Company, immediately declare the entire unpaid principal
amount of all of the Notes and all accrued interest thereon to be immediately
due and payable in full, and such principal and interest shall thereupon become
immediately due and payable in full. In the event that (1) an Event of Default
under subsections 7.1 (A), (B), (C), (D), (G) or (H) hereof has occurred and
has continued for a period of more than 180 consecutive days (regardless of
whether any holders of the Notes have directed Trustee to accelerate the
Notes), or (2) any other Event of Default has occurred and is continuing under
Section 7.1 hereof, then the Trustee may, at its election, by written notice to
the Company, declare the entire unpaid principal amount of all of the Notes and
all accrued interest thereon to be immediately due and payable in full, and
such principal and interest shall thereupon become and be immediately due and
payable in full. Notwithstanding the foregoing, any acceleration of the Notes
pursuant to this Section 7.3 shall be subject to the provisions of Section 16.5
hereof and to the right of the holders of not less than a majority in principal
amount of all Outstanding Notes, by written notice to the Company and to the
Trustee thereafter to consent to a waiver of such past Default before any final
judgment or decree for the payment of the moneys due shall have been obtained
or entered as hereinafter provided and if before such judgment or decree all
covenants with respect to which Default shall have been made shall be fully
performed or made good to the reasonable satisfaction of the Trustee, and all
arrears of interest with interest upon overdue installments of interest (to the
extent that payment of such interest is enforceable under applicable law) at
the interest rate per annum applicable to the Notes and the principal of all
Outstanding Notes which shall have become due otherwise than by acceleration
under this Section 7.3 and all sums paid or advanced by the Trustee hereunder
and the reasonable compensation, disbursements, expenses and advances of the
Trustee, its agents and attorneys, and all other indebtedness secured hereby,
except the principal of any Notes not then due by their terms and except
interest accrued on such Notes since the last Interest Payment Date, shall be
paid, or the amount thereof shall be paid to the Trustee for the benefit of
those entitled thereto; in which event, such Default and its consequences shall
thereupon be deemed to have been cured and such declaration of the maturity of
the Notes shall be void and of no further effect, but no such cure shall extend
to or affect any subsequent Default or impair any right consequent thereon.
SECTION 7.4 POWER OF TRUSTEE TO PROTECT AND ENFORCE RIGHTS. Upon the
occurrence of one or more Events of Default and the acceleration of the
indebtedness evidenced by the Notes, the Trustee by such officer or agent as it
may appoint in its discretion, with or without entry, may proceed to protect
and enforce its rights and the rights of holders of the Outstanding Notes by a
suit or suits in equity or an action or actions at law, whether for the
specific performance of any covenant or agreement contained herein, or in aid
of the execution of any power herein granted, or for the enforcement of any
other appropriate legal or equitable remedy, as the Trustee shall deem most
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effectual to protect and enforce any of its rights or duties and the rights of
holders of the Outstanding Notes.
Upon the written request of the holders of a majority in principal
amount of the then Outstanding Notes, in case an Event of Default shall have
occurred and the indebtedness evidenced by the Notes shall be accelerated as
aforesaid, subject to Sections 10.2 and 10.5, it shall be the duty of the
Trustee upon being indemnified as provided in Section 7.11, to exercise such
one or more of the remedies available for the protection and enforcement of its
rights and the rights of the Noteholders (including the taking of appropriate
judicial proceedings by action, suit or otherwise) as the Trustee shall deem
best.
SECTION 7.5 REMEDIES CUMULATIVE. No remedy herein conferred upon or
reserved to the Trustee or the Noteholders is intended to be exclusive of any
other right or remedy, but each and every such right or remedy shall be
cumulative, and shall be in addition to every other remedy given hereunder as
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.
(A) DELAY, ETC. NOT A WAIVER OF RIGHTS. No delay or omission
to exercise any right or power accruing upon any Event of Default
shall impair any such right or power or shall be construed to be a
waiver of any such Event of Default or an acquiescence therein; and
every such right and power may be exercised from time to time and as
often as may be deemed expedient.
(B) WAIVER OF DEFAULT NOT TO EXTEND TO SUBSEQUENT DEFAULTS.
No waiver of any Event of Default whether by the Trustee or by the
Noteholders, shall extend to or shall affect any subsequent Event of
Default or shall impair any rights or remedies consequent thereon.
SECTION 7.6 HOLDERS OF SPECIFIED PERCENTAGE OF NOTES MAY DIRECT
JUDICIAL PROCEEDINGS BY TRUSTEE. The holders of not less than a majority in
principal amount of the Notes at the time Outstanding hereunder may direct the
time, method and place of conducting any proceeding for any remedy available to
the Trustee or exercising any power conferred upon the Trustee; provided,
however, that such direction shall not be otherwise than in accordance with the
provisions of law and this Indenture and the Trustee may take any other action
deemed proper by them, or either of them, which is not inconsistent with such
direction.
SECTION 7.7 INTENTIONALLY OMITTED.
SECTION 7.8.
(A) PAYMENT OF PRINCIPAL AND INTEREST TO TRUSTEE UPON
OCCURRENCE OF CERTAIN DEFAULTS; JUDGMENT MAY BE TAKEN BY TRUSTEE. The
Company covenants that if an Event of Default specified in
subdivisions (A) or (B) of Section 7.1 shall occur, then upon demand
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of the Trustee, the Company will pay to the Trustee, for the benefit
of the holders of the Notes, the whole amount that then shall have
become due and payable on all such Notes for principal and interest,
with interest upon the overdue principal and (to the extent that
payment of such interest is enforceable under applicable law) upon the
overdue installments of interest at the respective applicable 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.
In case the Company shall fail to pay the same forthwith upon
such demand, the Trustee, in its name and as trustee of an express
trust, may institute a judicial proceeding for the collection of the
sums so due and unpaid, and 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.
(B) ENFORCEMENT OF RIGHTS BY TRUSTEE DURING CONTINUANCE
OF AN EVENT OF DEFAULT. If an Event of Default occurs and is
continuing, the Trustee, may in the exercise of discretion proceed to
protect and enforce its rights and the rights of the Noteholders by
such appropriate judicial proceedings as deemed most effectual to
protect and enforce any such rights, whether for the specific
enforcement of any covenant or agreement in this Indenture or in aid
of the exercise of any power granted herein, or to enforce any other
proper remedy.
(C) APPLICATION OF MONEYS COLLECTED BY TRUSTEE. Any
moneys collected by the Trustee under this Section 7.8 shall be
applied by the Trustee:
FIRST. To the payment of the costs and expenses reasonably
incurred (including any sums due the Trustee) in the proceedings
resulting in the collection of such moneys.
SECOND. To the payment of the amounts then due and unpaid
upon the Outstanding Notes for principal of and the interest on the
Outstanding Notes, with interest on the overdue principal and (to the
extent that payment of such interest is enforceable under applicable
law) on overdue installments of interest at the interest rate per
annum applicable to the Notes; and in case such proceeds shall be
insufficient to pay in full the amounts so due and unpaid, then to the
payment thereof ratably, according to the aggregate of such principal
and interest, without preference or priority as to any Outstanding
Note over any other Outstanding Note or of principal or interest over
principal or interest, or of any installment of interest over any
other installment of interest, upon presentation of such Notes and
their surrender if fully paid, or for proper notation if only
partially paid.
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SECTION 7.9 POSSESSION OF NOTES UNNECESSARY IN ACTION BY TRUSTEE.
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 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 holders of the Outstanding Notes in respect of which
such judgment has been recovered.
SECTION 7.10 TRUSTEE MAY FILE NECESSARY PROOFS. The Trustee,
(irrespective of whether the principal of the Notes shall then be due and
payable as therein expressed and irrespective of whether the Trustee, shall
have made any demand for such payment), may file such proofs of claim and other
papers or documents as may be necessary or advisable in order to have the
claims of the Trustee, and of the Noteholders allowed in any judicial
proceedings relative to the Company or its creditors or property. In case of
any receivership, insolvency, bankruptcy, reorganization or other similar
proceedings affecting the Company or its property, the Trustee, (irrespective
of whether the principal of the Notes shall then be due and payable and
irrespective of whether the Trustee, shall have made any demand for such
payment) shall be entitled and empowered either in its name or as trustee of an
express trust or as attorney in fact for the holders of the Notes, or in any
one or more of such capacities, to file a proof of claim for the whole amount
of principal and interest (with interest upon such overdue principal and, to
the extent that payment of such interest is enforceable under applicable law,
upon overdue installments of interest at the interest rate per annum applicable
to 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 any such
proceedings and to collect and receive any moneys or other property payable or
deliverable on any such claims and to distribute the same; and any receiver,
assignee, trustee, liquidator, sequestrator (or other similar official) in any
such judicial proceeding is hereby authorized by each Noteholder 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 the Trustee, for the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel, and any
other amounts due the Trustee, under Section 10.7.
Nothing herein contained shall be deemed to authorize the Trustee, to
authorize or consent to or accept or adopt on behalf of any Noteholder 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 Noteholder in any such proceeding.
SECTION 7.11 LIMITATION UPON RIGHT OF NOTEHOLDERS TO INSTITUTE
CERTAIN LEGAL PROCEEDINGS. No Noteholder shall have any right to institute any
suit, action or proceeding in equity or at law for the foreclosure of this
Indenture, or for the execution of any trust hereunder, including the
appointment of a receiver or trustee, or for any other remedy hereunder,
including without limitation the institution of nonjudicial foreclosure
proceedings, unless (A) such holder previously
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shall have delivered to the Trustee written notice that one or more
Events of Default, which Events of Default shall be specified in such notice,
has occurred and is continuing, and (B) the holders of not less than twenty-
five percent (25%) in principal amount of the then Outstanding Notes shall have
requested the Trustee in writing and shall have afforded to it reasonable
opportunity either to proceed to exercise the powers hereinbefore granted, or
to institute such action, suit or proceeding in its own name, and (C) one or
more Noteholders shall have offered to the Trustee adequate security and
indemnity, satisfactory to it, against the costs, expenses and liabilities to
be incurred therein or thereby and the Trustee, shall have refused or neglected
to act on such notification, request and offer of indemnity for at least sixty
(60) days and no direction inconsistent with such notification shall have been
given to the Trustee by holders of not less than a majority in principal amount
of the Outstanding Notes; and such notification, request and offer of indemnity
are hereby declared, in every such case, at the option of the Trustee, to be
conditions precedent to the exercise of the powers and trusts of this Indenture
and to any action or cause of action for foreclosure, including the appointment
of a receiver or trustee, or for any other remedy hereunder; it being
understood and intended that no Noteholder shall have any right in any manner
whatsoever by his action to affect, disturb or prejudice the rights of any
other holder, or obtain or seek to obtain priority or preference over any other
holder, or to enforce any right hereunder, except in the manner herein provided
to the extent permitted by law, and that all proceedings at law or in equity
shall be instituted, had or maintained in the manner herein provided, and for
the equal and ratable benefit of all holders of the Outstanding Notes.
SECTION 7.12 RIGHT OF NOTEHOLDER TO RECEIVE AND ENFORCE PAYMENT NOT
IMPAIRED. Notwithstanding any other provision of this Indenture, the right of
any holder of any Note to receive payment of the principal of and interest on
such Note, on or after the respective Stated Maturities expressed in such Note,
or to institute suit for the enforcement of any such payment on or after such
respective Stated Maturities, shall not be impaired or affected without the
consent of such holder, except that no Noteholder may institute any such suit
if and to the extent that the institution or prosecution thereof or the entry
of judgment therein would, under applicable law, result in the surrender,
impairment, waiver, or loss under this Indenture upon any property subject
hereto.
SECTION 7.13 COURT MAY REQUIRE UNDERTAKING TO PAY COSTS. All parties
to this Indenture agree, and each holder of any Note by his 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 or omitted by it, 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; but to the extent permitted by law the provisions of
this Section 7.13 shall not apply to any suit instituted by the Trustee, to any
suit instituted by any Noteholder or group of Noteholders holding in the
aggregate more than twenty-five percent (25%) in aggregate principal amount of
the Outstanding Notes, or to any suit instituted by any Noteholder for the
enforcement of the payment of the principal of or interest on any Note on or
after the respective
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Stated Maturities expressed in such Note (or, in the case of redemption, on or
after the Redemption Date).
SECTION 7.14 UNENFORCEABLE PROVISION INOPERATIVE. To the extent that
any provision of this Article 7 may be invalid or unenforceable under any
applicable law, such provision shall be deemed inoperative and inapplicable and
shall not be included in the terms of this Indenture.
SECTION 7.15 IF ENFORCEMENT PROCEEDINGS ABANDONED, STATUS QUO IS
ESTABLISHED. In case the Trustee or any Noteholder shall have proceeded to
enforce any right or remedy under this Indenture, and such proceedings shall
have been discontinued or abandoned for any reason, or shall have been
determined adversely to the Trustee or to such Noteholder, then and in every
such case the Company, the Trustee and the Noteholders, subject to any
determination in such proceedings, shall be restored severally and respectively
to their former positions and rights hereunder, and thereafter all rights,
remedies and powers of the Trustee and Noteholders shall continue as if no such
proceedings had been instituted.
SECTION 7.16 NOTEHOLDERS MAY WAIVE CERTAIN DEFAULTS. The holders of
not less than the required percentage in principal amount of the Outstanding
Notes specified in Section 7.3 may on behalf of the holders of all the Notes
waive any past Default hereunder and its consequences, except a Default:
(A) in the payment of the principal of or interest on any
Note, or
(B) in respect of a covenant or provision hereof which
under Article 13 cannot be modified or amended without the consent of
the holder of each Outstanding Note affected.
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.
ARTICLE 8
EVIDENCE OF RIGHTS OF NOTEHOLDERS
AND OWNERSHIP OF NOTES
SECTION 8.1 EVIDENCE OF OWNERSHIP OF DEFINITIVE NOTES AND TEMPORARY
NOTES ISSUED HEREUNDER IN REGISTERED FORM. Prior to due presentment for
registration of transfer of any Note, the Company, the Trustee, any Note
Registrar, or any agent of the Company or the Trustee may deem and treat the
person in whose name any Note shall be registered at any given time upon the
Note Register as the absolute owner of such Note for the purpose of receiving
any payment of, or on account of, the principal and interest on such Note and
for all other purposes whether or not such Note be overdue; and neither the
Company nor the Trustee, nor any agent of the Company or the Trustee shall be
bound by any notice to the contrary. All such payments made in accordance with
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the provisions of this Section 8.1 shall be valid, and, to the extent
of the sum or sums so paid, effectual to satisfy and discharge the
liability for moneys payable upon any such Note.
ARTICLE 9
CONSOLIDATION, MERGER AND SALE
SECTION 9.1 COMPANY MAY MERGE, CONSOLIDATE, ETC., UPON CERTAIN TERMS.
The Company covenants that it will not merge or consolidate with any other
corporation or, other than as part of a loan securitization or sale entered
into in the ordinary course of its business, sell or convey all or
substantially all of its assets to any person, firm or corporation, unless (i)
either the Company shall be the continuing or surviving corporation, or the
successor corporation (if other than the Company) shall be a corporation
organized under the laws of the United States of America or any State thereof
and shall expressly assume the due and punctual payment of the principal of and
interest on all the Notes, according to their tenor, and the due and punctual
performance and observance of all of the covenants and conditions of this
Indenture to be performed by the Company, by supplemental indenture
satisfactory to the Trustee, executed and delivered to the Trustee by such
corporation, and (ii) the Company or such successor corporation, as the case
may be, shall not, immediately after such merger or consolidation, or such sale
or conveyance, be in default in the performance of any such covenant or
condition.
SECTION 9.2 SUCCESSOR CORPORATION TO BE SUBSTITUTED. In case of any
such consolidation, merger, sale or conveyance, and upon any such assumption by
the successor corporation, such successor corporation shall succeed to and be
substituted for the Company, with the same effect as if it had been named
herein as the Company, and the Company shall thereupon be released from all
obligations hereunder and under the Notes and the Company as the predecessor
corporation may thereupon or at any time thereafter be dissolved, wound up or
liquidated. Such successor corporation thereupon may cause to be signed, and
may issue either in its own name or in the name of the Company any or all of
the Notes issuable hereunder which theretofore shall not have been signed by
the Company and delivered to the Trustee; and, upon the order of such successor
corporation instead of the Company and subject to all the terms, conditions and
limitations in this Indenture prescribed, the Trustee shall authenticate and
shall deliver any Notes which previously shall have been signed and delivered
by the officers of the Company to the Trustee for authentication, and any Notes
which such successor corporation thereafter shall cause to be signed and
delivered to the Trustee for that purpose.
In case of any such consolidation, merger, sale or conveyance such
changes in phraseology and form (but not in substance) may be made in the Notes
thereafter to be issued as may be appropriate.
SECTION 9.3 OPINION OF COUNSEL. The Trustee, subject to TIA Section
315(a), (c) and (d) and to Section 10.5, may receive an Opinion of Counsel as
conclusive evidence that any such
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consolidation, merger, sale or conveyance and any such assumption complies with
the provisions of this Article 9.
SECTION 9.4 ARTICLE 9 SUBJECT TO PROVISION OF SECTION 6.5.
Notwithstanding the foregoing, the transactions contemplated by Article 9 are
subject to the redemption provisions of Section 6.5, if applicable.
ARTICLE 10
CONCERNING THE TRUSTEE
SECTION 10.1 REQUIREMENT OF CORPORATE TRUSTEE, ELIGIBILITY. There
shall at all times be a Trustee hereunder which shall be a banking corporation
organized and doing business under the laws of the United States of America or
of any State, authorized under such laws to exercise corporate trust powers,
having a combined capital and surplus of at least $60,000,000 subject to
supervision or examination by Federal or State authority, or any affiliate of
such a banking corporation, which also is a corporation organized and doing
business under the laws of the United States of America or of any State,
authorized under such laws to exercise corporate trust powers, having a
combined capital and surplus of at least $10,000,000 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 the aforesaid supervising or examining authority, then for the purposes of
this Section 10.1 the combined capital and surplus of the Trustee 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 10.1, it shall
resign immediately in the manner and with the effect hereinafter specified in
this Article 10.
SECTION 10.2 ACCEPTANCE OF TRUST. The Trustee accepts the trusts
hereby created upon the terms and conditions in this Indenture specified, to
all of which the Company and the holders of Outstanding Notes by their
acceptance thereof agree:
(A) Except during the continuance of an Event of Default,
(1) the Trustee undertakes to perform such duties
and only such duties as are specifically set forth in this
Indenture, and no implied covenants or obligations shall be
read into this Indenture against the Trustee, and;
(2) 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 it, 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
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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.
(B) 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 use the same degree of care and
skill in their exercise, as a prudent man would exercise or use under
the circumstances in the conduct of his own affairs.
(C) 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
(1) this subdivision shall not be construed to
limit the effect of subdivision (A) of this Section;
(2) 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 pertinent facts;
(3) 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 not less
than a majority in 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 exercising any trust or power conferred upon the
Trustee under this Indenture;
(4) none of the provisions contained in 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 hereunder or in the exercise
of any of its rights or powers, if there is reasonable ground
for believing that the repayment of such funds or adequate
indemnity against such risk or liability is not reasonably
assured to it; and
(5) the permissive right of the Trustee to do
things enumerated in this Indenture shall not be construed as
a duty, and the Trustee shall not be answerable for other than
its negligence or willful default.
(D) 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.
(E) The Trustee shall not be required to take notice or
be deemed to have notice of any Event of Default hereunder except
failure by the Company to cause to be made any
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of the payments to the Trustee required to be made to the Trustee by
any provision hereof or failure by the Company to file with the
Trustee any document required by this Indenture to be so filed
subsequent to the issuance of the Notes, unless the Trustee shall be
specifically notified in writing of such Default by the Company or by
the holders of at least twenty-five percent (25%) in aggregate
principal amount of Outstanding Notes, and all notices or other
instruments required by this Indenture to be delivered to the Trustee
must, in order to be effective, be delivered at the main office of the
Trustee, and in the absence of such notice so delivered the Trustee
may conclusively assume there is no Event of Default except as
aforesaid.
SECTION 10.3 DISCLAIMER. The recitals contained herein and in the
Notes (except as contained in the Trustee's certificate of authentication)
shall be taken as the statements of the Company, and the Trustee assumes no
responsibility for the correctness of the same. The Trustee makes no
representations as to the validity or sufficiency of this Indenture or of the
Notes issued hereunder. The Trustee shall be under no responsibility or duty
with respect to the disposition of any Notes authenticated and delivered
hereunder or the application or use of the proceeds thereof or the application
or use of any moneys paid to the Company under any of the provisions hereof.
SECTION 10.4 TRUSTEE MAY OWN NOTES. The Trustee, the paying agent,
the Note Registrar or any Note Co- Registrar or other agent of the Company or
of the Trustee may become the owner or pledgee of Notes and, subject to
Sections 10.9 and 10.10, if operative, may otherwise deal with the Company with
the same rights it would have if it were not a Trustee, paying agent, Note
Registrar, Note Co-Registrar or other agent of the Company or of the Trustee.
SECTION 10.5 TRUSTEE MAY RELY ON CERTIFICATES, ETC. To the extent
permitted by Section 10.2 hereof:
(A) The Trustee may rely and shall be protected in acting
upon any resolution, certificate, opinion, notice, request, consent,
order, appraisal, report, 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;
(B) The Trustee may consult with counsel, who may be
counsel to the Company, and the written advice of such counsel or any
Opinion of Counsel shall be full and complete authorization and
protection in respect of any action taken or suffered by it hereunder
in good faith and in reliance thereon;
(C) 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 may be sufficiently
evidenced by a Certified Resolution;
(D) 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
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action hereunder, the Trustee (unless other evidence be herein
specifically prescribed) may, in the absence of bad faith, rely upon
an Officers' Certificate;
(E) 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 holders pursuant to this Indenture,
unless such holders shall have offered to the Trustee reasonable
security or indemnity against the costs, expenses and liabilities
which might be incurred, as the case may be, in compliance with such
request or direction;
(F) The Trustee shall not be bound to make any
investigation into the facts or matters stated in any such document
set forth in Section 10.5(A), but the Trustee, in its exercise of
discretion, may make such further inquiry or investigation into such
facts or matters as may seem necessary, and, if the Trustee shall
determine to make such further inquiry or investigation, the Trustee
shall be entitled to examine the books, records and premises of the
Company, personally or by agent or attorney;
(G) The Trustee may execute any of the trusts or powers
hereunder or perform any duties hereunder either directly or by or
through agents or attorneys and the Trustee shall not be responsible
for any misconduct or negligence on the part of any agent or attorney
appointed with due care hereunder; and
(H) The Trustee shall not be required to give any
debenture or surety in respect of the execution of the said trusts and
powers or otherwise in respect of the premises.
SECTION 10.6 MONEY HELD IN TRUST NOT REQUIRED TO BE SEGREGATED.
Subject to the provisions of Section 15.2 hereof, all moneys received by the
Trustee hereunder or in respect of the Notes shall, until used or applied as
herein provided, be held in trust for the purposes for which they were
received, but need not be segregated from other funds except to the extent
required by law.
Any interest allowed on or income or other return arising from any
such moneys shall be paid from time to time to the Company upon Company Order
in accordance with the provisions hereof; provided, however, that no such
interest, income or return shall be paid to the Company during any period
during which an Event of Default has occurred and is continuing.
SECTION 10.7 COMPENSATION, REIMBURSEMENT, INDEMNITY, SECURITY. The
Company covenants and agrees to pay to the Trustee from time to time, and the
Trustee shall be entitled to receive, reasonable compensation for all services
rendered by it in the execution of the trusts hereby created and in the
exercise and performance of all services rendered hereunder, which compensation
shall not be limited by any provision of law in regard to the compensation of a
trustee of an express trust, and except as otherwise expressly provided herein,
the Company will upon request of the Trustee reimburse the Trustee for all
reasonable advances made or incurred 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
or disbursement as
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may be attributable to negligence or bad faith). The Company also covenants to
indemnify the Trustee for, and to hold it harmless against, any loss, liability
or expense incurred without negligence or bad faith on the part of the Trustee
arising out of or in connection with the acceptance or administration of this
trust, including the costs and expenses of defending against any claim or
liability in connection with the exercise or performance of any of the powers
or duties hereunder.
If, and to the extent that the Trustee and its counsel and other
agents do not receive compensation for services rendered, reimbursements of its
advances, expenses and disbursements, or indemnity, as herein provided, as the
result of allowances made in any reorganization, bankruptcy, receivership,
liquidation or other proceeding or by any plan of reorganization or
readjustment of obligations of the Company or the Trustee shall be entitled, in
priority to the holders of the Notes, to receive any distributions of any
securities, dividends or other disbursements which would otherwise be made to
the holders of Notes in any such proceeding or proceedings and the Trustee is
hereby constituted and appointed, irrevocably, the attorney in fact for the
holders of the Notes and each of them to collect and receive, in their name,
place and stead, such distributions, dividends or other disbursements, to
deduct therefrom the amounts due to the Trustee its counsel and other agents on
account of services rendered, advances, expenses, and disbursements made or
incurred, or indemnity, and to pay and distribute the balance, pro rata, to the
holders of the Notes.
SECTION 10.8 CONFLICT OF INTEREST.
(A) If the Trustee has or shall acquire any conflicting
interest, as defined in this Section 10.8, the Trustee shall within
ninety (90) days after ascertaining that there is such conflicting
interest, either eliminate such conflicting interest or resign in the
manner and with the effect hereinafter specified in this Article 10.
(B) In the event that the Trustee shall fail to comply
with the provisions of the preceding subdivision (A) of this Section
10.8, the Trustee shall within ten (10) days after the expiration of
such ninety (90) day period transmit notice of such failure to the
Noteholders, in the manner and to the extent provided in Section 4.3.
(C) For the purposes of this Section, the Trustee shall
be deemed to have a conflicting interest if there is an Event of
Default (as defined in Section 7.1 but exclusive of any grace period
or notice requirement) and:
(1) 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 or is trustee for more than one (1)
outstanding series of securities under a single indenture of
the Company unless such other indenture is a collateral trust
indenture under which the only collateral consists of Notes
issued under this Indenture; provided, however, that there
shall be excluded from the operation of this clause (1) any
indenture under which other securities, or certificates of
interest or participation in other securities, of the Company
are outstanding, if the
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Company shall have sustained the burden of proving, on
application to the Securities and Exchange Commission and
after opportunity for hearing thereon, that trusteeship under
this Indenture and such other indenture 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
this Indenture or such other indenture or indentures;
(2) the Trustee or any of the directors or
executive officers of the Trustee is an obligor upon the Notes
or an underwriter for the Company;
(3) the Trustee directly or indirectly controls
or is directly or indirectly controlled by or is under direct
or indirect common control with the Company or an underwriter
for the Company;
(4) the Trustee or any of the directors or
executive officers of the Trustee is a director, officer,
employee, appointee or representative of the Company, or of an
underwriter (other than the Trustee) for the Company who is
currently engaged in the business of underwriting, except that
(a) one (1) individual may be a director or an executive
officer, or both, of the Trustee and a director or an
executive officer, or both, of the Company, but may not be at
the same time an executive officer of the Trustee and the
Company; (b) if and so long as the number of directors of any
Trustee in office is more than nine (9), one (1) additional
individual may be a director or an executive officer, or both,
of such Trustee and a director of the Company; and (c) the
Trustee may be designated by the Company or by an 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, subject to
the provisions of paragraph (1) of this subdivision (C), to
act as trustee, whether under an indenture or otherwise;
(5) ten percent (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
twenty percent (20%) or more of such voting securities is
beneficially owned, collectively, by any two (2) or more of
such persons; or ten percent (10%) or more of the voting
securities of the Trustee is beneficially owned either by an
underwriter for the Company or by any director or executive
officer thereof, or is beneficially owned, collectively, by
any two (2) or more such persons;
(6) the Trustee is the beneficial owner of or
holds as collateral security for an obligation which is in
default (as hereinafter in this subdivision (C) of this
Section 10.8 defined), (a) five percent (5%) or more of the
voting securities or ten percent (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
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under which the Trustee is also trustee, or (b) ten percent
(10%) or more of any class of security of an underwriter for
the Company;
(7) the Trustee is the beneficial owner of, or
holds as collateral security for an obligation which is in
default (as hereinafter in this subdivision (C) of this
Section 10.8 defined), five percent (5%) or more of the voting
securities of any person who, to the knowledge of the Trustee
owns ten percent (10%) or more of the voting securities of, or
controls directly or indirectly or is under direct or indirect
common control with, the Company;
(8) the Trustee is the beneficial owner of or
holds as collateral security for an obligation which is in
default (as hereinafter in this subdivision (C) of this
Section 10.8 defined), ten percent (10%) or more of any class
of security of any person who, to the knowledge of the Trustee
owns fifty percent (50%) or more of the voting securities of
the Company;
(9) the Trustee owns on the date of any Default
on the Notes, or any anniversary of such Default so long as
such Default 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 twenty-five percent (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 clause (6), (7)
or (8) of this subdivision (C). 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 (2) years from the date of
such acquisition, to the extent that such securities included
in such estate do not exceed twenty-five percent (25%) of such
voting securities or twenty-five percent (25%) of any such
class of security. Promptly after the dates of any Default on
the Notes and annually in each succeeding year that the Notes
remain in Default, the Trustee shall make a check of its or
his 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 principal or interest upon the Notes when
and as the same becomes due and payable, and such failure
continues for thirty (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 thirty-day period and after such date,
notwithstanding the foregoing provisions of this clause (9),
all such securities so held by the Trustee with sole or joint
control over such securities vested in it or him, shall, but
only so long as such failure shall continue, be considered as
though beneficially owned by the Trustee for the purposes of
clauses (6), (7) and (8) of this subdivision (C); or
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(10) the Trustee shall be or become a
creditor of the Company (except under the
circumstances described under paragraphs (1), (3),
(4), (5) or (6) of Section 311(b) of the TIA.
The specifications of percentages in clauses (5) to (9), inclusive, of
this subdivision (C) shall not be construed as indicating that the ownership of
such percentages of the securities of a person is or is not necessary or
sufficient to constitute direct or indirect control for the purposes of clause
(3) or (7) of this subdivision (C).
For the purposes of clauses (6), (7), (8) and (9) of this subdivision
(C) only, (a) 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, (b) an obligation shall be deemed to
be in default when a default in payment of principal shall have continued for
thirty (30) days or more and shall not have been cured; and (c) the Trustee
shall not be deemed to be the owner or holder of (i) any security which it
holds as collateral security (as trustee or otherwise) for an obligation which
is not in default as above defined, or (ii) any security which it holds as
collateral security under this Indenture, irrespective of any Default
hereunder, or (iii) any security which it holds as agent for collection, or as
custodian, escrow agent or depositary, or in any similar representative
capacity.
(D) The percentages of voting securities and other
securities specified in this Section 10.8 shall be calculated in
accordance with the following provisions:
(1) A specified percentage of the voting
securities of the Trustee, the Company or any other person
referred to in this Section 10.8 (each of whom is referred to
as a "person" in this subdivision (D)) 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.
(2) A specified percentage of a class of
securities of a person means such percentage of the aggregate
amount of securities of the class outstanding.
(3) 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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(4) 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:
(a) securities of an issuer held in a
sinking fund relating to securities of the issuer of
the same class;
(b) 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;
(c) securities pledged by the issuer
thereof as security for an obligation of the issuer
not in default as to principal or interest or
otherwise; or
(d) securities held in escrow if placed
in escrow by the issuer thereof;
provided, however, 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.
(5) 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, however, 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.
(E) For the purposes of this Section 10.8, unless
otherwise provided:
(1) The term "underwriter" when used with
reference to the Company means every person, who, within one
(1) 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 has 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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(2) The term "director" means any
director of a corporation, or any individual
performing similar functions with respect to any
organization whether incorporated or unincorporated.
(3) 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
clause, the term "trust" shall include only a trust where the
interest or interests of the beneficiary or beneficiaries are
evidenced by a security.
(4) 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.
(5) The term "Company" means any obligor upon
the Notes.
(6) 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.
SECTION 10.9 RESIGNATION, REMOVAL, APPOINTMENT OF SUCCESSOR TRUSTEE.
(A) No resignation or removal of the Trustee, and no
appointment of a successor Trustee pursuant to this Article 10 shall
become effective until the acceptance of appointment by the successor
Trustee under this Section 10.9 and Section 10.10.
(B) 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
thirty (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.
(C) 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.
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(D) If at any time:
(1) the Trustee shall fail to comply with Section
10.8 after written request therefor by the Company or by any
Noteholder who has been a bona fide holder of a Note for at
least six (6) months, or
(2) the Trustee shall cease to be eligible under
Section 10.1 and shall fail to resign after written request
therefor by the Company or by any such Noteholder, or
(3) 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, (a) the Company by a Certified Resolution may remove
the Trustee or (b) subject to Section 7.13, any Noteholder who has been a bona
fide holder of a Note for at least six (6) months may, 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.
(E) If the Trustee shall resign, be removed or become
incapable of acting, or if a vacancy shall occur in the office of the
Trustee for any cause, the Company, by a Certified Resolution, shall
promptly appoint a successor Trustee. If, within one (1) year after
such resignation, removal or incapability, or the occurrence of such
vacancy, a successor Trustee shall be appointed by Act of the holders
of a majority in principal amount of the Outstanding Notes delivered
to the Company and the retiring Trustee, the successor Trustee so
appointed shall, forthwith upon its acceptance of such appointment,
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 hereinafter provided, any Noteholder who has been a bona
fide holder of a Note for at least six months may, on behalf of
himself and all others similarly situated, petition any court of
competent jurisdiction for the appointment of a successor Trustee.
(F) The Company shall give notice of each resignation and
each removal of a Trustee and each appointment of a successor Trustee
by mailing written notice of such event by first-class mail, postage
prepaid, to the holders of Notes in the manner and to the extent
provided in of Section 4.3. Each notice shall include the name of the
successor Trustee and address of the main office of the successor
Trustee.
SECTION 10.10 ACCEPTANCE BY SUCCESSOR TRUSTEE. 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
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conveyance, shall become vested with all the rights, powers, trusts and duties
of the retiring Trustee; but, on request of the Company or the respective
successor Trustee, the respective retiring Trustee shall, upon payment of its
charges, execute and deliver an instrument transferring to such respective
successor Trustee all the rights, powers and trusts of the retiring respective
Trustee, and shall duly assign, transfer and deliver to such respective
successor Trustee all property and money held by such respective retiring
Trustee hereunder, subject nevertheless to its lien, if any, provided for in
Section 10.7. Upon request of any such respective 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 10 to the extent operative.
SECTION 10.11.
(A) NOTICE, ETC. ON BEHALF OF COMPANY DELIVERED TO
TRUSTEE. Except as herein expressly provided to the contrary, any
notice, request, or other writing by or on behalf of the Company
delivered to the Trustee shall be deemed to have been delivered to the
Trustee hereunder as effectually as if delivered to each of them.
(B) CASH, SECURITIES, ETC. TO BE HELD BY TRUSTEE.
Notwithstanding anything herein contained to the contrary, all cash
collected by, or payable to, the Trustee pursuant to this Indenture
shall be paid to and deposited with, and all stocks, debentures and
other obligations or securities shall be held by, the Trustee, except
as otherwise required by law.
Whenever any moneys, debentures, shares of stock or other
obligations are, under any provisions of this Indenture, paid or
delivered to or deposited with the Trustee, the same shall be deemed
for all purposes hereunder to be part of the security for the Notes
issued hereunder, but nothing contained in this Section 10.11 shall be
deemed to affect or impair any power or right conferred by any
provision of this Indenture upon the Trustee to apply, disburse or
otherwise act or deal with respect to any moneys, debentures, shares
of stock or other obligations received or held by it as aforesaid.
SECTION 10.12 MERGER OR CONSOLIDATION OF TRUSTEE. Any corporation
into which the Trustee may be merged 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 such corporation shall be otherwise
qualified and eligible under this Article 10, to the extent operative, without
the execution or filing of any paper or the performance of any further act on
the part of any other parties hereto, anything herein to the contrary
notwithstanding. In case any of the Notes shall have been authenticated, but
not delivered, by the Trustee then in office, any such successor to the Trustee
by merger, conversion or consolidation may
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adopt such authentication and deliver the said Notes so authenticated with the
same effect as if such successor Trustee had itself authenticated such Notes.
SECTION 10.13 AUTHENTICATING AGENT. As long as any of the Notes
remain Outstanding, upon a Company Order there shall be an authenticating agent
appointed by the Trustee for such period as the Company shall elect, to act on
behalf of the Trustee and subject to its direction in connection with the
authentication of the Notes as set forth in this Indenture. Such
authenticating agent shall at all times be a banking corporation organized and
doing business under the laws of the United States or any State, authorized
under such laws to exercise corporate trust powers, having a combined capital
and surplus of at least $60,000,000 subject to supervision or examination by
Federal or State authority, or an affiliate of such banking corporation, which
is also a corporation organized and doing business under the laws of the United
States or of any State, authorized under such laws to exercise corporate trust
powers, having a combined capital and surplus of at least $10,000,000 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 the aforesaid supervising or examining authority,
then for the purposes of this Section 10.13 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.
Whenever 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.
Any corporation in which any 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 any authenticating agent
shall be a party, or any corporation succeeding to the corporate agency
business of any authenticating agent, shall continue to be the authenticating
agent without the execution or filing of any paper or any further act on the
part of the Trustee or the authenticating agent.
Any authenticating agent may at any time resign by giving written
notice of resignation to the Trustee and to the Company. The Trustee may at
any time terminate the agency of any authenticating agent by giving written
notice of termination 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 any authenticating agent shall cease to be eligible in accordance
with the provisions of this Section 10.13, the Trustee promptly shall appoint a
successor authenticating agent, shall give written notice of such appointment
to the Company and shall mail notice of such appointment to all holders of
Notes as the names and addresses of such holders appear on the Note Register.
Any successor authenticating agent upon acceptance of its appointment hereunder
shall become vested with all the rights, powers, duties and responsibilities of
its predecessor hereunder. No successor authenticating agent shall be
appointed unless eligible under the provisions of this Section 10.13.
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The Trustee agrees to pay to the authenticating agent from
time to time reasonable compensation for its services, and the Trustee
shall be entitled to be reimbursed for such payments from the Company
subject to the provisions of Section 10.7. The provisions of Section
8.1, 10.3 and 10.4 shall be applicable to any authenticating agent.
ARTICLE 11
DISCHARGE OF INDENTURE
SECTION 11.1 ACKNOWLEDGMENT OF DISCHARGE. This Indenture shall
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
rights to receive payments of interest thereon), and the Trustee, on demand of
and at the expense of the Company, shall execute proper instruments
acknowledging satisfaction, cancellation and discharge of this Indenture, when
(A) either
(1) all Notes theretofore authenticated and
delivered other than (a) Notes which have been destroyed, lost
or stolen and which have been replaced or paid as provided in
Section 2.10, and (b) Notes for whose payment money has
theretofore been deposited in trust or segregated and held in
trust by the Company and thereafter repaid to the Company or
discharged from such trust, as provided in Section 15.2 have
been delivered to the Trustee for cancellation; or
(2) all such Notes not theretofore delivered to
the Trustee for cancellation
(a) have become due and payable, or
(b) will become due and payable at their
Stated Maturity within one (1) year, or
(c) are to be called for redemption
within one (1) 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 (a), (b) or (c) 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 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;
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(B) the Company has paid or caused to be paid all other
sums payable hereunder by the Company; and
(C) 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 10.7 shall survive.
SECTION 11.2 MONEY HELD IN TRUST. All money deposited with the
Trustee pursuant to Section 11.1 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 interest for whose payment such money has been
deposited with the Trustee; but such money need not be segregated from other
funds except to the extent required by law. The Trustee shall give notice in
the name and at the expense of the Company of the immediate availability of the
money deposited with the Trustee pursuant to Section 11.1 to the persons
entitled to such money.
ARTICLE 12
MEETING OF NOTEHOLDERS
SECTION 12.1 PURPOSES FOR WHICH MEETINGS MAY BE CALLED. A meeting of
the Noteholders may be called at any time and from time to time pursuant to the
provisions of this Article 12 for any of the following purposes:
(A) To give any notice to the Company or to the Trustee,
or to give any directions to the Trustee, or to consent to the waiving
of any Event of Default hereunder and its consequences, or to take any
other action authorized to be taken by the Noteholders pursuant to any
of the provisions of Article 2;
(B) To remove the Trustee and appoint a successor trustee
pursuant to any of the provisions of Article 10;
(C) To consent to the execution of an indenture or
indentures supplemental hereto pursuant to the provisions of Article
13; or
(D) To take any other action authorized to be taken by or
on behalf of Noteholders of any specified aggregate principal amount
of the Notes under any other provisions of this Indenture, or
authorized or permitted by law.
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SECTION 12.2 CALL OF MEETINGS BY TRUSTEE; GENERALLY. Meetings of
Noteholders may be held at such place or places and at such time or times in
any place of payment as the Trustee or, in case of its failure to act, the
Company or the Noteholders calling the meeting, shall from time to time
determine.
SECTION 12.3 CALL OF MEETINGS BY TRUSTEE; NOTICE. The Trustee may at
any time call a meeting of the Noteholders to take any action specified in
Section 12.1, to be held at such time and at such place designated in Section
12.2 as the Trustee shall determine. Notice of every meeting of the
Noteholders, setting forth the time and place of such meeting and in general
terms the action proposed to be taken at such meeting, and specifying each
series of Notes which would be affected by the proposed action, shall be mailed
by the Trustee at the expense of the Company, first class postage prepaid, to
the Noteholders at their last addresses as they shall appear upon the Note
Register, not less than twenty (20) nor more than one hundred twenty (120) days
prior to the date fixed for the meeting. Any defect in said notice shall not,
however, in any way impair or affect the validity of any such meeting.
The Trustee may in its discretion determine, subject to the meaning of
the term "affected" as set forth in Section 13.2, whether or not Notes of any
particular series would be affected by action proposed to be taken at a meeting
and any such determination shall be conclusive upon the holders of Notes of
such series and all other series. Subject to the provisions of Section 10.2,
the Trustee shall not be liable for any such determination made in good faith.
Any meeting of the Noteholders shall be valid without notice if
Noteholders, holding all Notes then Outstanding, which would be affected by the
action proposed to be undertaken, are present in person or by proxy or have
waived notice before or after the meeting by Noteholders, and if the Company
and the Trustee are either present by duly authorized representatives or have,
before or after the meeting, waived notice.
In case at any time the Company, pursuant to a Certified Resolution,
or Noteholders holding at least ten percent (10%) in aggregate principal amount
of the Notes then Outstanding, which would be affected by the action proposed
to be undertaken, shall have requested the Trustee to call a meeting of the
Noteholders to take any action authorized by Section 12.1, by written request
setting forth in reasonable detail the action proposed to be taken at the
meeting, and the Trustee shall not have mailed the notice of such meeting
within twenty (20) days after receipt of such request, then the Company or
Noteholders holding the amount above specified may determine the time and the
place for such meeting and may call such meeting for such purpose by giving
notice thereof in the manner provided in this Section 12.3.
SECTION 12.4 MEETINGS, NOTICE AND ENTITLEMENT TO BE PRESENT. Only
Noteholders holding Notes, which would be affected by the action proposed to be
undertaken, and persons appointed by an instrument in writing as proxy for such
a Noteholder by such a Noteholder are entitled to notice of and to vote at any
meeting of the Noteholders. The only persons who shall be entitled to be
present or to speak at any meeting of the Noteholders shall be the persons
entitled to
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vote at such meeting and their counsel, any representatives of the Trustee and
its counsel, and any representatives of the Company and its counsel.
SECTION 12.5 REGULATIONS MAY BE MADE BY TRUSTEE. Notwithstanding any
other provisions of this Indenture, the Trustee may make such reasonable
regulations as it may deem advisable for any meeting of the Noteholders, in
regard to proof of the holding of Notes and of the appointment of proxies, and
in regard to the appointment and duties of inspectors of votes, the submission
and examination of proxies, certificates and other evidence of the right to
vote, and such other matters concerning the conduct of the meeting as it shall
deem appropriate.
Such regulations (A) may provide for the closing of the Note Register
for such period as the Trustee may deem necessary or (B) may fix a record and
time for determining the record Noteholders of the Notes entitled to vote at
such meeting. All Noteholders seeking to attend or vote at a meeting in person
or by proxy must, if required by any authorized representative of the Trustee
or the Company or by any other Noteholder, produce the Notes claimed to be
owned or represented at such meeting, and every one seeking to attend or vote
shall, if required as aforesaid, produce such further proof of Note ownership
or personal identity as shall be satisfactory to the authorized representative
of the Trustee, or if none be present then to the inspectors of votes
hereinafter provided for.
The Trustee shall, by an instrument in writing, appoint a temporary
chairman of the meeting, unless the meeting shall have been called by the
Company or by the Noteholders as provided in Section 12.3, in which case the
Company or the Noteholders calling the meeting, as the case may be, shall in
like manner appoint a temporary chairman. A permanent chairman and a permanent
secretary of the meeting may be elected by vote of Noteholders holding a
majority in principal amount of the Notes represented at the meeting and
entitled to vote.
At any meeting each Noteholder or proxy shall be entitled to one vote
for each $1,000 principal amount of Notes then Outstanding owned by such
Noteholder or represented by such proxy; provided, however, that no vote shall
be cast or counted at any meeting in respect of any Notes challenged as not
Outstanding and ruled by the temporary or permanent chairman of the meeting to
be not Outstanding. The temporary or permanent chairman of the meeting shall
have no right to vote other than by virtue of Notes held by him or instruments
in writing as aforesaid duly designating him as the person to vote on behalf of
other Noteholders.
At any meeting of Noteholders, the presence of persons holding or
representing Notes in an aggregate principal amount sufficient under the
appropriate provision of this Indenture to take action upon the business for
the transaction of which such meeting was called shall constitute a quorum.
Any meeting of holders duly called pursuant to Section 12.3 may be adjourned
from time to time by vote of the holders (or proxies for the holders) of a
majority in aggregate principal amount of the Notes represented at the meeting
and entitled to vote, whether or not a quorum shall be present; and the meeting
may be held as so adjourned without further notice.
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SECTION 12.6 MANNER OF VOTING AT MEETINGS AND RECORD TO BE KEPT. The
vote upon any resolution submitted to any meeting of the Noteholders shall be
by written ballots on which shall be subscribed the signatures of the
Noteholders or of their representatives by proxy and the principal amount of
the Notes voted by the ballot. The temporary or permanent chairman of the
meeting shall appoint two (2) inspectors of votes, who shall count all votes
cast at the meeting for or against any resolution and who shall make and file
with the secretary of the meeting their verified written reports in duplicate
of all votes cast at the meeting. A record at least in duplicate of the
proceedings of each meeting of the Noteholders shall be prepared by the
secretary of the meeting and there shall be attached to said record the
original reports of the inspectors of votes on any vote by ballot taken thereat
and affidavits by one (1) or more persons having knowledge of the facts setting
forth a copy of the notice of the meeting and showing that said notice was
mailed as provided in Section 12.3. The record shall be signed and verified by
the affidavits of the permanent chairman and secretary of the meeting and one
copy thereof shall be delivered to the Company and another to the Trustee to be
preserved by the Trustee, the latter to have attached thereto the ballots voted
at the meeting.
Any record so signed and verified shall be conclusive evidence of the
matters therein stated.
SECTION 12.7 EVIDENCE OF ACTION BY HOLDERS OF SPECIFIED PERCENTAGE OF
NOTES. Whenever in this Indenture it is provided that the holders of a
specified percentage in aggregate principal amount of the Notes of any series
may take any action (including the making of any demand or request, the giving
of any notice, consent, or waiver or the taking of any other action) the fact
that at the time of taking any such action the holders of such specified
percentage have joined therein may be evidenced (A) by any instrument or any
number of instruments of similar tenor executed by holders in person or by
agent or proxy appointed in writing, or (B) by the record of the holders of
Notes voting in favor thereof at any meeting of holders duly called and held in
accordance with the provisions of this Article 12, or (C) by a combination of
such instrument or instruments and any such record of such a meeting of
holders.
SECTION 12.8 EXERCISE OF RIGHT OF TRUSTEE OR NOTEHOLDERS MAY NOT BE
HINDERED OR DELAYED BY CALL OF MEETING OF NOTEHOLDERS. Nothing in this Article
12 contained shall be deemed or construed to authorize or permit, by reason of
any call of a meeting of the Noteholders or any rights expressly or impliedly
conferred hereunder to make such call, any hindrance or delay in the exercise
of any right or rights conferred upon or reserved to the Trustee or to the
Noteholders under any of the provisions of this Indenture or of the Notes.
ARTICLE 13
SUPPLEMENTAL INDENTURES
SECTION 13.1 PURPOSES FOR WHICH SUPPLEMENTAL INDENTURES MAY BE
EXECUTED BY COMPANY AND TRUSTEE. Without the consent of the holders of any
Notes, the Company, when authorized by a Certified Resolution of its Board of
Directors, and the Trustee may at any time and
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from time to time, enter into an indenture or indentures supplemental hereto,
in form satisfactory to the Trustee, for one or more of the following purposes:
(A) To evidence the succession of another corporation to
the Company, or successive successions, and the assumption by the
successor corporation of the covenants, agreements and obligations of
the Company pursuant to Article 9 hereof;
(B) To add to the covenants of the Company such further
covenants for the protection of the Noteholders, to insure the
enforcement of the remedies of the Trustee and Noteholders upon an
Event of Default by the Company, or to surrender any right or power
herein conferred upon the Company as the Board of Directors shall
consider to be necessary for the protection of the Noteholders, and to
make the occurrence and continuance of a default under any of such
additional covenants a Default permitting the enforcement of all or
any of the several remedies provided in this Indenture; provided,
however, that in respect of any such additional covenant, such
supplemental indenture may provide for a particular period of grace
after default (which period may be shorter or longer than that allowed
in the case of other Defaults) or may provide for an immediate
enforcement of said remedy or remedies upon such default or may limit
the remedies available to the Trustee upon such default or may
authorize the holders of not less than a majority in aggregate
principal amount of the Outstanding Notes to waive such default and
prescribe limitations on such rights of waiver; or
(C) To cure any ambiguity or to correct or supplement any
provision contained in this Indenture which may be inconsistent with
any other provision contained herein or in any supplemental indenture,
or to make such other provisions in regard to matters or questions
arising under this Indenture as shall not be inconsistent with the
provisions and purposes of this Indenture, provided any such action
shall not adversely affect the interest of the Noteholders.
Nothing contained in this Article 13 shall affect or limit the right
or obligation of the Company to execute and deliver to the Trustee any
instrument of further assurance or other instrument which elsewhere in this
Indenture it is provided shall be delivered to the Trustee.
The Trustee is hereby authorized and directed to join with the Company
in the execution of any such supplemental indenture, to make any further
appropriate agreements and stipulations which may be herein contained and to
accept the conveyance, transfer and assignment of any property thereunder, but
the Trustee shall not be obligated to enter into any such supplemental
indenture which, in its opinion, does not afford adequate protection to the
Trustee or adversely affects the Trustee's own rights, duties or immunities
under this Indenture or otherwise or adversely affects the interests of the
Noteholders.
SECTION 13.2 MODIFICATION OF INDENTURE BY WRITTEN CONSENT OF
NOTEHOLDERS. With the consent (evidenced as provided in Article 12) of the
holders of not less than a majority in
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aggregate principal amount of the Outstanding Notes by Act of said holders
delivered to the Company and the Trustee, the Company (when authorized by a
Certified Resolution) and the Trustee at any time and from time to time, by
entering into an indenture or indentures supplemental hereto, may modify,
alter, add to or eliminate in any manner (with the approval of any governmental
agency if required by law) any provisions of this Indenture or the rights of
the Noteholders or the rights and obligations of the Company; provided,
however, that no such supplemental indenture shall, without the consent of the
holder of each Outstanding Note affected thereby:
(A) change the Stated Maturity of the principal of, or
any installment of interest on, any Note, or reduce the principal
amount thereof or the rate of interest thereon, or the coin or
currency in which, any Note or the interest thereon is payable, or
impair the right to institute suit 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 impair the right to
require redemption as set forth in Section 6.5, or
(B) reduce the percentage(s) of the aggregate principal
amount of Outstanding Notes, the consent of the holders of which is
required for any such supplemental indenture, or the consent of whose
holders 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
(C) modify any of the provisions of this Section 13.2 or
Section 7.16, 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 Note affected
thereby.
Notes shall be deemed to be "affected" by a supplemental indenture, if
such supplemental indenture adversely affects or diminishes the rights of
holders thereof against the Company or against the property of the Company.
The Trustee may in the exercise of its discretion, subject to Section 10.2,
determine whether or not any Notes would be affected by any supplemental
indenture and any such determination shall be conclusive upon the holders of
all Notes, whether theretofore or thereafter authenticated and delivered
hereunder.
It shall not be necessary for any Act of Noteholders under this
Section 13.2 to approve the particular form of any proposed supplemental
indenture, but it shall be sufficient if such Act shall approve the substance
thereof.
Any supplemental indenture authorized by the provisions of this
Section 13.2 shall be executed by the Company and the Trustee in accordance
with the terms of Section 13.3.
Promptly after the execution by the Company and the Trustee of any
supplemental indenture pursuant to the provisions of Section 13.3, the Company
shall mail to the holders of the Notes at their last addresses as they shall
appear on the Note Register of the Company a notice setting forth in general
terms the substance of such supplemental indenture. Any failure of the Company
to mail
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such notice, or any defect therein, shall not, however, in any way impair or
affect the validity of any such supplemental indenture.
SECTION 13.3 REQUIREMENTS FOR EXECUTION; DUTIES AND IMMUNITIES OF
TRUSTEE. Prior to the execution of any supplemental indenture, the Trustee
shall receive a Company Request, accompanied by a Certified Resolution
authorizing the execution of any supplemental indenture pursuant to Section
13.1 or Section 13.2, and, if pursuant to Section 13.2, evidence filed with the
Trustee of the Act of Noteholders as aforesaid.
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 10.2 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 and stating such other matters as
the Trustee may reasonably request. The Trustee may, but shall not be
obligated to, enter into any such supplemental indenture which affects the
Trustee's rights, duties or immunities under this Indenture or otherwise.
SECTION 13.4 SUPPLEMENTAL INDENTURES PART OF INDENTURE. Upon the
execution of any supplemental indenture pursuant to the provisions of this
Article 13, this Indenture shall be, and shall be deemed to be, modified and
amended in accordance therewith and the respective rights, limitations, duties
and obligations under this Indenture of the Company, the Trustee and the
Noteholders, and each of them, shall thereafter be determined, exercised and
enforced hereunder, subject in all respects to such modifications and
amendments, and all the terms and conditions of any such supplemental indenture
shall be, and shall be deemed to be, part of the terms and conditions of this
Indenture for any and all purposes, as if originally contained herein.
SECTION 13.5 NOTES EXECUTED AFTER SUPPLEMENTAL INDENTURE TO BE
APPROVED BY TRUSTEE. Notes authenticated and delivered after the execution of
any supplemental indenture pursuant to the provisions of this Article 13 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 and the Trustee shall so determine, new Notes modified so as to
conform, in the opinion of the Trustee and the Board of Directors of the
Company, to any modification of this Indenture contained in any such
supplemental indenture, may be prepared by the Company, authenticated by the
Trustee and delivered without expense to the holders of the Outstanding Notes,
upon surrender of such Notes, the new Notes so issued to be in an aggregate
principal amount equal to the aggregate principal amount of those so
surrendered.
SECTION 13.6 SUPPLEMENTAL INDENTURES REQUIRED TO COMPLY WITH TRUST
INDENTURE ACT OF 1939. No supplemental indenture shall be entered into
pursuant to any authorization contained in this Indenture which shall not
comply with the provisions of the Trust Indenture Act of 1939 as then in
effect.
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ARTICLE 14
IMMUNITY OF INCORPORATORS, STOCKHOLDERS,
OFFICERS AND DIRECTORS
SECTION 14.1 IMMUNITY OF CERTAIN PERSONS. No recourse for the
payment of the principal of or interest on any Note, or for any claim based
thereon or otherwise in respect thereof, and no recourse under or upon any
obligation, covenant or agreement of the Company, contained in this Indenture
or in any supplemental indenture, or in any Note, or because of the creation of
any indebtedness represented thereby, shall be had against any incorporator,
stockholder, officer or director, as such, past, present or future, of the
Company or any successor corporation, either directly or through the Company or
any successor corporation, whether by virtue of any constitution, statute or
rule of law, or by the enforcement of any assessment or penalty or otherwise;
it being expressly understood that all such liability is hereby expressly
waived and released as a condition of, and as a consideration for, the
execution of this Indenture and the issue of the Notes.
ARTICLE 15
MISCELLANEOUS
SECTION 15.1 BENEFITS RESTRICTED TO PARTIES AND TO HOLDERS OF NOTES.
Except as provided herein, nothing in this Indenture, expressed or implied, is
intended, or shall be construed, to confer upon, or to give to, any person
other than the parties hereto and the holders of the Notes Outstanding
hereunder any right, remedy, or claim under or by reason of this Indenture or
any covenant, condition, stipulation, promise or agreement hereof, and all the
covenants, conditions, stipulations, promises and agreements contained in this
Indenture by and on behalf of the Company shall be for the sole and exclusive
benefit of the parties hereto, and of the holders of the Notes Outstanding
hereunder.
SECTION 15.2 DEPOSITS FOR NOTES NOT CLAIMED FOR SPECIFIED PERIOD TO
BE RETURNED TO COMPANY ON DEMAND. Any moneys deposited with the Trustee or any
paying agent, or then held by the Company, in trust for the payment of the
principal of or interest on any Note and remaining unclaimed for six (6) years
after the date upon which the principal of or interest on such Notes shall have
become due and payable, shall be paid to the Company upon Company Request, or,
if then held by the Company, shall be discharged from such trust; and the
holder shall thereafter, as an unsecured general creditor, be entitled to look
only to the Company for payment thereof, and all liability of the Trustee or
any paying agent with respect to such trust money, and all liability of the
Company as trustee thereof, shall thereupon cease; provided, however, that,
before being required to make any such payment to the Company, the Trustee, or
any paying agent, may, at the expense of the Company, cause to be published
once in a Daily Newspaper in such areas as the Trustee, or any paying agent, as
the case may be, may deem necessary a notice that such moneys remain unclaimed
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and that, after a date named in said notice, the balance of such moneys then
unclaimed will be returned to the Company.
SECTION 15.3 FORMAL REQUIREMENTS OF CERTIFICATES AND OPINIONS
HEREUNDER.
(A) Each certificate or opinion which is specifically
required by the provisions of this Indenture to be delivered to the
Trustee with respect to compliance with a condition or covenant herein
contained shall include (1) a statement that each person signing such
certificate or opinion has read such covenant or condition; (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 opinions are based; (3) a statement that, in the
opinion of each such person, he has made such examination or
investigation as is necessary to enable him 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 or not in the opinion
of each such person such condition or covenant has been complied with.
(B) Every request or Application by the Company for
action by the Trustee shall be accompanied by an Officers' Certificate
stating that all conditions precedent, if any, to such action,
provided for in this Indenture (including any covenants compliance
with which constitutes a condition precedent) have been complied with
and an Opinion of Counsel stating that in the opinion of such counsel
all conditions precedent, if any, to such action, provided for in this
Indenture (including any covenants compliance with which constitutes a
condition precedent) have been complied with, except that in the case
of any such request or Application as to which the furnishing of such
documents is specifically required by any provision of this Indenture
relating to such particular request or Application, no additional
certificate or opinion need be furnished.
(C) 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.
SECTION 15.4 EVIDENCE OF ACT OF THE NOTEHOLDERS. 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 agent duly appointed in writing;
and, except as herein 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
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any purpose of this Indenture and (subject to Section 10.2) conclusive in favor
of the Trustee and the Company, if made in the manner provided in this Section.
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 the certificate of any notary public or other officer
authorized by law to take acknowledgments of deeds, certifying that the
individual signing such instrument or writing acknowledged to him the execution
thereof. Where such execution is by an officer of a corporation or a member of
a partnership, on behalf of such corporation or partnership, or by a fiduciary,
such certificate or affidavit shall also constitute sufficient proof of his
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.
Any request, demand, authorization, direction, notice, consent, waiver
or other action by the holder of any Note shall bind every future holder to the
same Note and the holder of every Note issued upon the transfer thereof or in
exchange therefor or in lieu thereof, in respect of anything done 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.
SECTION 15.5 PARTIES TO INCLUDE SUCCESSORS AND ASSIGNS. Subject to
the provisions of Articles 9 and 10 hereof, whenever in this Indenture any of
the parties hereto is named or referred to, such name or reference shall be
deemed to include the successors or assigns of such party, and all the
covenants and agreements in this Indenture contained by or on behalf of the
Company or by or on behalf of Trustee shall bind and insure to the benefit of
the respective successors and assigns of such parties whether so expressed or
not.
SECTION 15.6 IN EVENT OF CONFLICT WITH TRUST INDENTURE ACT OF 1939,
PROVISIONS THEREIN TO CONTROL. If any provision of this Indenture limits,
qualifies, or conflicts with another provision of this Indenture required to be
included herein by any of the provisions of the Trust Indenture Act of 1939
such required provision shall control. Provisions required by said Trust
Indenture Act to be included herein which are not included herein are hereby
incorporated herein by reference to said Trust Indenture Act.
SECTION 15.7 REQUEST, NOTICES, ETC. TO TRUSTEE OR COMPANY. Any
request, demand, authorization, direction, notice, consent, waiver or Act of
the Noteholders or other document provided or permitted by this Indenture to be
made upon, given or furnished to, or filed with:
(A) the Trustee by any Noteholder or by the Company shall
be sufficient for every purpose hereunder if made, given, furnished or
filed in writing to or with the Trustee at its main office, or
(B) the Company by the Trustee or by any Noteholders
shall be sufficient for every purpose hereunder (except as herein
otherwise provided) if in writing and mailed, firstclass, postage
prepaid, to the Company addressed to it at 570 Lake Cook Road, Suite
126,
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Deerfield, Illinois 60015 or at any other address previously furnished
in writing to the Trustee by the Company.
SECTION 15.8 MANNER OF NOTICE. Where this Indenture 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 Noteholder affected by such event, at his
address as it appears on the Note Register, not later than the latest date, and
not earlier than the earliest date, 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
Noteholder shall affect the sufficiency of such notice with respect to other
Noteholders, and any notice which is mailed in the manner herein provided shall
be conclusively presumed to have been duly given.
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 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 as a
result of a strike, work stoppage or similar activity, it shall be impractical
to mail notice of any event to Noteholders when such notice is required to be
given pursuant to any provision of this Indenture, then any manner of giving
such notice as shall be satisfactory to the Trustee shall be deemed to be a
sufficient giving of such notice.
SECTION 15.9 SEVERABILITY. 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 15.10 PAYMENTS DUE ON DAYS WHEN BANKS CLOSED. In any case
where the date of any Interest Payment Date or Redemption Date, or the Stated
Maturity of any Note, or any date on which any Defaulted Interest is proposed
to be paid or any date on which any other payment is to be made or any action
is to be taken shall not be a business day, then (notwithstanding any other
provision of the Notes or this Indenture) payment of the principal of or
interest on, any Notes or other payment or action need not be made or taken on
such date, but may be made or taken on the next succeeding business day with
the same force and effect as if made on the nominal date of any such Interest
Payment Date or Redemption Date or Stated Maturity or date for the payment of
Defaulted Interest or date for any other payment or action, as the case may be,
and no interest shall accrue for the period from and after any such nominal
date.
SECTION 15.11 BACKUP WITHHOLDING FORMS. The Company shall provide
the Trustee with Backup Withholding Forms prescribed by the Internal Revenue
Service and shall indemnify the Trustee for any penalties, expenses, costs and
liabilities assessed against the Trustee for using improper forms.
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SECTION 15.12 TITLES OF ARTICLES OF THIS INDENTURE NOT PART THEREOF.
The titles of the several Articles of this Indenture and the table of contents
shall not be deemed to be any part hereof.
SECTION 15.13 EXECUTION IN COUNTERPARTS. This Indenture is being
executed in several counterparts, each of which shall for all purposes be
deemed to be an original, and all such counterparts shall together constitute
but one and the same instrument.
SECTION 15.14 GOVERNING LAW. This Indenture and each Note issued
hereunder shall be governed by the laws of the State of Illinois as to all
matters affecting the duties, liabilities, privileges, rights and obligations
of the Noteholders, the Company and the Trustee and any agents of the
foregoing, including but not limited to, matters of validity, construction,
effect and performance.
ARTICLE 16
SUBORDINATION
SECTION 16.1 AGREEMENT TO SUBORDINATE. The Trustee, the Company and
each holder of a Note (the "Junior Lenders") hereby agree that the payment of
all obligations and indebtedness of the Company to the Junior Lenders pursuant
to this Indenture or the Notes is subordinated in right of payment to the
extent and in the manner provided herein to the prior payment in full of all
obligations and liabilities of the Company to holders of Senior Indebtedness,
whether now existing or hereafter arising, and that this subordination is for
the benefit of the holders of the Senior Indebtedness at present, or any future
holders of the Senior Indebtedness.
SECTION 16.2 PERMITTED PAYMENTS. The Trustee, the Company and the
Junior Lenders hereby agree that, until all Senior Indebtedness has been paid
in full, the Junior Lenders shall be permitted to retain only the following
payments of principal and interest paid by the Company in respect of the Notes
(all such payments being "Permitted Payments"), and all such payments that are
not Permitted Payments will be turned over by the Junior Lenders to the holders
of Senior Indebtedness or any agent therefor (a "Senior Agent") for benefit of
the Senior Lenders:
(i) principal payments of the Notes, whether (A) at the
Stated Maturity, or (B) on an Interest Reset Date, at the Company's
option, as provided in Section 5.1 or at the option of one or more
holders as provided in Section 6.1 or (C) as a result of death of one
or more holders as provided in Section 6.2, or (D) as a result of the
occurrence of a Special Redemption Event as provided in Section 6.5;
provided that all such principal payments are subject to the
restrictions set forth in Section 16.3 hereof; and
(ii) payments of interest in respect to the Notes prior to
the date on which the Senior Indebtedness is accelerated or the date
on which any holder or holders of the Senior Indebtedness or Senior
Agent exercises any judicial or non-judicial remedy with respect to
any collateral securing such Senior Indebtedness.
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SECTION 16.3 RESTRICTED PRINCIPAL PAYMENTS.
(a) During the continuance of any event which, upon the occurrence
thereof, the passage or time or the giving of notice would constitute a default
or an event of default under any Senior Indebtedness (a "Senior Event of
Default"), the Company may not make any principal payments described in
subsections 16.2 (i)(A), or 16.2(i)(B), or 16.2(i)(D) to the Junior Lenders
until the first to occur of the following:
(i) Such Senior Event of Default is cured, or
(ii) Such Senior Event of Default is waived by the holders
of such Senior Indebtedness, or
(iii) The expiration of 180 days after the commencement of
such Senior Event of Default, if the maturity of such Senior
Indebtedness has not been accelerated at such time or the holder or
holders of the Senior Indebtedness or Senior Agent has not exercised
any judicial or non-judicial remedy with respect to any collateral
securing such Senior Indebtedness at such time, and the provisions of
this Section 16 otherwise permit the payment at such time.
Upon payment in full of the Senior Indebtedness, payments of principal may be
made to the Junior Lenders.
SECTION 16.4 LIQUIDATION; DISSOLUTION; BANKRUPTCY. Upon a
distribution to creditors of the Company in a liquidation or dissolution of the
Company or in a bankruptcy, reorganization, insolvency, receivership, or
similar proceeding relating to the Company or its property or an assignment for
the benefit of creditors, or any marshalling of the Company's assets and
liabilities;
(a) the holders of the Senior Indebtedness shall be entitled to
receive payment in full of all Senior Indebtedness before any Junior Lender
shall be entitled to receive any payment with respect to the Notes; and
(b) until all Senior Indebtedness is paid in full, any
distribution in respect to the Notes to which any Junior Lender will be
entitled but for this Section 16.4 shall be made to the holders of the Senior
Indebtedness.
SECTION 16.5 RESTRICTIONS ON ACCELERATION OF NOTES. Notwithstanding
anything contained in the Notes or in Section 7.3 hereof to the contrary, if
any Event of Default shall have occurred and is continuing and the Trustee
shall have given notice thereof to the Company, the Trustee shall give written
notice thereof to holders of Senior Indebtedness (or the Senior Agent
therefor), and, unless such Event of Default has arisen under subsection 7.1(B)
hereof or such Event of Default has arisen under subsection 7.1(A) hereof and
the defaulted payment giving rise to such Event of Default under subsection
7.1(A) is due to the death of any holder of a Note, the Junior
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Lenders may not accelerate the maturity of the Notes or exercise their other
remedies with respect to the Notes until the first to occur of the following:
(a) The expiration of 180 days after the commencement of
such Event of Default, or
(b) The date on which the Senior Indebtedness is
accelerated, or
(c) The date on which any holder or holders of Senior
Indebtedness or any Senior Agent exercises any judicial or
non-judicial remedy with respect to any collateral securing the Senior
Indebtedness;
provided that if such acceleration of the Senior Indebtedness is rescinded by
any holder or holders thereof or any Senior Agent, the Junior Lenders agree
promptly to rescind any acceleration then in effect hereunder if such
acceleration was effected at a time when the Senior Indebtedness had already
been accelerated unless such acceleration is otherwise permitted under this
Section 16.5. Any exercise of remedies by the Trustee or Junior Lenders
hereunder will comply with the Junior Lenders' obligations under Section 16.7
below.
SECTION 16.6 WHEN DISTRIBUTION MUST BE PAID OVER. In the event that
a Junior Lender receives any payment on any of the Notes at the time when (i)
such Junior Lender has actual knowledge that such payment is prohibited
hereunder, or (ii) such payment would not be a Permitted Payment with respect
to any Senior Indebtedness, such payment shall be held by such Junior Lender in
trust for the benefit of, and shall be paid forthwith over and delivered to the
holders of the Senior Indebtedness or the Senior Agent therefor, for
application to the payment of obligations with respect to the Senior
Indebtedness remaining unpaid to any extent necessary to pay such obligations
in full in accordance with their terms, after giving effect to any concurrent
payment or distribution to or for the benefit of the holders of the Senior
Indebtedness.
SECTION 16.7 OVERLAPPING POWERS. The Junior Lenders and Trustee
acknowledge that the holders of Senior Indebtedness and the Junior Lenders,
respectively, are entitled to exercise certain rights and powers with respect
to the Company from time to time, whether before or after occurrence of an
Event of Default, and the exercise of any such right or power by one creditor
may preclude the exercise of a similar power or right by one or more other
creditors (any such right or power being herein called an "Exclusive Power").
To the extent that any holder or holders of Senior Indebtedness or any Senior
Agent actually exercises any Exclusive Power then the Trustee and Junior
Lenders agree to refrain from exercising any substantially similar Exclusive
Power to the extent necessary to permit the holders of Senior Indebtedness to
benefit from their actions.
The Junior Lenders and the Trustee agree to promptly give to Senior
Agent written notice (a "Notice of Default") of the occurrence of any default
under the Notes or this Indenture and contemporaneous written notice of any
acceleration of maturity, demand for payment or similar action.
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SECTION 16.8 RELATIVE RIGHTS. This Agreement defines the relative
rights of the holders of Senior Indebtedness and the Junior Lenders and the
holders of Senior Indebtedness and the Trustee, and nothing in this Agreement
shall
(a) impair, as between the Company and the Junior Lenders, the
Company and the Trustee and the Company and the holders of Senior Indebtedness,
the obligation of the Company, which is absolute and unconditional, to pay the
Notes and the Senior Indebtedness in accordance with their terms;
(b) affect the relative rights of the Junior Lenders, the Trustee,
the holders of Senior Indebtedness and creditors of the Company other than
holders of the Senior Indebtedness and the Notes; or
(c) prevent the Trustee or any Junior Lender from exercising their
available remedies upon an Event of Default, subject to Section 16.7 above or
the rights of the holders of the Senior Indebtedness to receive distributions
and payments otherwise payable to Junior Lenders.
SECTION 16.9 SUBORDINATION MAY NOT BE IMPAIRED BY COMPANY. No right
of the holders of any Senior Indebtedness to enforce their subordination of the
Notes shall be impaired by any act or failure to act by the Company, Trustee or
any Junior Lender or by the failure of the Company, Trustee or a Junior Lender
to comply with this Agreement.
SECTION 16.10 REINSTATEMENT. The provisions of this Article 16 shall
continue to be effective or reinstated, as the case may be, if at any time any
payment of the Senior Indebtedness is rescinded or unless returned by the
holder of the Senior Indebtedness or any such holder's agents upon the
insolvency, bankruptcy, or reorganization of the Company or otherwise, all as
though such payment had not been made.
SECTION 16.11 SUBROGATION. Subject to the payment in full of all
Senior Indebtedness, the holders of the Notes shall be subrogated to the rights
of the holders of such Senior Indebtedness to receive payments or distributions
of cash, property or securities of the Issuer applicable to such Senior
Indebtedness until all amounts owing on the Notes shall be paid in full, and,
as between the Company, its creditors other than holders of Senior
Indebtedness, and the holders of the Notes, no such payment or distribution
made to the holders of Senior Indebtedness by virtue of this Article 16 which
otherwise would not have been made to the holders of the Notes shall be deemed
to be a payment by the Company on account of the Senior Indebtedness, and no
such payments or distributions to the holders of the Notes of cash, property or
securities otherwise distributable to the holders of Senior Indebtedness shall,
as between the Company, its creditors other than the holders of Senior
Indebtedness, and the holders of the Notes, be deemed to be a payment by the
Company on account of the Notes, it being understood that the provisions of
this Article 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 Indebtedness, on the other hand.
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IN WITNESS WHEREOF, FIRST MERCHANTS ACCEPTANCE CORPORATION has caused
its name to be hereunto affixed, and this instrument to be signed by its
President or any Vice President and its corporate seal to be affixed hereto,
and the same to be attested by its Secretary or an Assistant Secretary; and
LaSalle National Bank, in token of its acceptance of the trust hereby created,
has caused its corporate name to be hereunto affixed, and this instrument to be
signed and sealed by one of its Vice Presidents and its corporate seal to be
attested by its Secretary or by one of its Assistant Secretaries, as of the day
and year first written above.
FIRST MERCHANTS ACCEPTANCE
CORPORATION
ATTEST: By:
------------------------------
President or Vice President
- --------------------------
Assistant Secretary
LASALLE NATIONAL BANK
ATTEST: By:
-------------------------------
Vice President
- ---------------------------
Attesting Officer
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EXHIBIT 5.1
[SONNENSCHEIN NATH & ROSENTHAL LETTERHEAD]
MITCHELL L. HOLLINS
(312) 876-8144
October 10, 1996
First Merchants Acceptance Corporation
570 Lake Cook Road, Suite 126
Deerfield, IL 60015
Gentlemen:
We have acted as counsel to First Merchants Acceptance Corporation, a
Delaware corporation (the "Company"), in connection with the public offering by
the Company of up to $51,750,000 principal amount of Subordinated Reset Notes
due 2006 (the "Notes") pursuant to the Company's Registration Statement on Form
S-3 to be filed with the Securities and Exchange Commission (the "Commission")
under the Securities Act of 1933, as amended (the "Act"), and to which this
opinion is an exhibit (together with all exhibits thereto, the "Registration
Statement"). This opinion is delivered in accordance with the requirements of
Item 601(b)(5) of Regulation S-K under the Act.
In connection with this opinion, we have examined and are familiar
with originals or copies, certified or otherwise identified to our
satisfaction, of (i) the Registration Statement, (ii) the Restated Certificate
of Incorporation of the Company as currently in effect, (iii) the Amended and
Restated Bylaws of the Company as currently in effect, (iv) the form of
Indenture (the "Indenture") between the Company and LaSalle National Bank, as
Trustee, filed as an exhibit to the Registration Statement, under which the
Notes are to be issued, and (v) resolutions of the Board of Directors of the
Company relating to the issuance and sale of the Notes, the filing of the
Registration Statement and related matters. We have also examined originals or
copies, certified or otherwise identified to our satisfaction, of such records
of the Company and such agreements, instruments, certificates of public
officials and others, and such other documents, certificates and records, and
have made such other investigations, as we have deemed necessary or appropriate
as a basis for the opinions set forth herein.
We have assumed the legal capacity of all natural persons, the
genuineness of all signatures, the authenticity of all documents submitted to
us as originals, the conformity to original documents of all documents
submitted to us as certified or photostatic copies and the authenticity of the
originals of such latter documents. In making our examination of documents
executed by parties other than the Company, we have assumed that such parties
had the power, corporate and otherwise, to enter into and perform their
respective obligations thereunder and have also assumed the due authorization
by all requisite action, corporate and otherwise, and the execution and
delivery by such parties of such documents
<PAGE> 2
[SONNENSCHEIN NATH & ROSENTHAL LETTERHEAD]
First Merchants Acceptance Corporation
October 10, 1996
Page 2
and the validity and binding effect thereof. As to any facts material to the
opinion expressed herein, we have relied upon oral or written statements and
representations of officers and other representatives of the Company and
others.
Based upon and subject to the foregoing, we are of the opinion that
the Notes have been legally authorized, and when executed, authenticated and
delivered by or on behalf of the Company against payment therefor in accordance
with the terms of the Indenture and the Notes (in substantially the forms set
forth in Exhibit 4.1 to the Registration Statement), will be legally issued,
and will be binding obligations of the Company, enforceable against the Company
in accordance with their terms.
The opinion rendered above relating to the enforceability of the
Indenture and the Notes is subject to the following exceptions, limitations and
qualifications: (i) the effect of bankruptcy, insolvency, reorganization,
moratorium, fraudulent conveyance or other similar laws now or hereafter in
effect relating to or affecting the rights and remedies of creditors and (ii)
the effect of general principles of equity, whether enforcement is considered
in a proceeding in equity or law, and the discretion of the court before which
any proceeding therefor may be brought.
We hereby consent to the filing of this opinion with the Commission as
Exhibit 5.1 to the Registration Statement. We also consent to the reference to
our firm under the caption "Legal Matters" in the prospectus contained in the
Registration Statement. We do not, in giving such consent, admit that we are
within the category of persons whose consent is required under Section 7 of the
Act.
Very truly yours,
SONNENSCHEIN NATH & ROSENTHAL
By: /s/ Mitchell L. Hollins
Mitchell L. Hollins
<PAGE> 1
EXHIBIT 12.1
HISTORICAL RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------------------------------- -------------------------
1991 1992 1993 1994 1995 1995 1996
--------- -------- ---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net earnings (loss) before
income taxes,
extraordinary item and
warrant accretion........ $(330,500) $327,379 $1,564,603 $ 4,498,632 $10,803,642 $ 4,086,332 $10,183,853
Provision for income
taxes.................... -- -- 626,000 1,710,000 4,103,000 1,553,000 3,972,000
-------- ------- --------- ---------- ---------- ---------- ----------
Add fixed charges:
Cost of borrowings....... 85,757 442,574 1,377,689 4,034,368 10,754,083 4,367,227 9,670,942
One third of rentals..... 3,811 24,063 71,830 149,170 258,586 108,267 228,738
-------- ------- --------- ---------- ---------- ---------- ----------
Total fixed
charges........... 89,568 466,637 1,449,519 4,183,538 11,012,669 4,475,494 9,899,680
-------- ------- --------- ---------- ---------- ---------- ----------
Total net earnings,
provision
for income taxes and
fixed
charges "earnings"(1).... $(240,932) $794,016 $3,640,122 $10,392,170 $25,919,311 $10,114,826 $24,055,533
======== ======= ========= ========== ========== ========== ==========
Ratio of earnings to fixed
charges.................. (2.69) 1.70 2.51 2.48 2.35 2.26 2.43
======== ======= ========= ========== ========== ========== ==========
</TABLE>
UNAUDITED PRO FORMA RATIO OF EARNINGS TO FIXED CHARGES
FOR THE SIX MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS AS ADJUSTED
FOR ISSUANCE FOR ISSUANCE
ACTUAL OF 1996 NOTES OF 1996 NOTES(3)
----------- ------------- ----------------
<S> <C> <C> <C>
Net earnings before income taxes...................... $10,183,853 $(827,623) $ 9,356,230
Provision for income taxes(2)......................... 3,972,000 (314,000) 3,658,000
---------- -------- ----------
Add fixed charges:
Cost of borrowings.................................. 9,670,942 827,623 10,498,565
One third of rentals................................ 228,738 -- 228,738
---------- -------- ----------
Total fixed charges............................ 9,899,680 827,623 10,727,303
---------- -------- ----------
Total net earnings, provision for income taxes and
fixed charges "earnings"............................ $24,055,533 $(314,000) $ 23,741,533
========== ======== ==========
Ratio of earnings to fixed charges.................... 2.43 (0.38) 2.21
========== ======== ==========
</TABLE>
<PAGE> 2
UNAUDITED PRO FORMA RATIO OF EARNINGS TO FIXED CHARGES
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS AS ADJUSTED
FOR ISSUANCE FOR ISSUANCE
ACTUAL OF 1996 NOTES OF 1996 NOTES(3)
----------- ------------- ----------------
<S> <C> <C> <C>
Net earnings before income taxes...................... $10,803,642 $ (1,272,540) $ 9,531,102
Provision for income taxes(2)......................... 4,103,000 (484,000) 3,619,000
---------- ------------ ------------
Add fixed charges:
Cost of borrowings.................................. 10,754,083 1,272,540 12,026,623
One third of rentals................................ 258,586 -- 258,586
---------- ------------ ------------
Total fixed charges............................ 11,012,669 1,272,540 12,285,209
---------- ------------ ------------
Total net earnings, provision for income taxes and
fixed charges "earnings"............................ $25,919,311 $ (484,000) $ 25,435,311
========== ============ ============
Ratio of earnings to fixed charges.................... 2.35 (0.38) 2.07
========== ============ ============
</TABLE>
- -------------------------
(1) For purposes of calculating the historical ratio of earnings to fixed
charges, earnings consist of income before income taxes and extraordinary
losses, warrant accretion and fixed charges. Fixed charges consist of
interest charges and one-third of rentals. Earnings were inadequate to cover
fixed charges in the amount of $330,500 for 1991.
(2) The pro forma provision for income taxes reflects the application of
corporate income taxes to the Company's earnings at the Company's 1995
effective tax rate of 38%.
(3) For purposes of calculating the unaudited pro forma ratio of earnings to
fixed charges, the historical results of operations of the Company have been
adjusted as if the Offering had been completed effective at the beginning of
the fiscal period applying the estimated net proceeds thereof to repay a
portion of the borrowings under the Senior Revolving Credit Facility. The
pro forma ratio of earnings to fixed charges reflects the decrease in
earnings which results from the interest expense from the 1996 Notes, net of
income taxes, which is partially offset by the increase in earnings which
results from the reduction in borrowings under the Senior Revolving Credit
Facility and related interest expense, net of income taxes.
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of First Merchants
Acceptance Corporation on Form S-3 of our report dated January 25, 1996 (October
10, 1996 as to Notes 16 and 17), appearing in the Prospectus, which is a part of
this Registration Statement, and to the reference to us under the headings
"Selected Financial and Operating Data" and "Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
Chicago, Illinois
October 10, 1996
<PAGE> 1
EXHIBIT 25.1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM T-1
STATEMENT OF ELIGIBILITY AND QUALIFICATION
UNDER THE TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
-----------------------
LASALLE NATIONAL BANK
(Exact name of trustee as specified in its charter)
36-1521370
(I.R.S. Employer
Identification No.)
135 South LaSalle Street, Chicago, Illinois 60603
(Address of principal executive offices) (Zip Code)
-----------------------
M. ROBERT K. QUINN
Senior Vice President and General Counsel
Telephone: (312) 904-2010
135 South LaSalle Street
Chicago, Illinois 60603
(Name, address and telephone number of agent for service)
-----------------------
FIRST MERCHANTS ACCEPTANCE CORPORATION
(Exact name of obligor as specified in its charter)
Delaware 36-3759045
(State or other jurisdiction (I.R.S. Employer
incorporation or organization) Identification No.)
570 Lake Cook Road, Suite 126
Deerfield, Illinois 60015
(Address of Principal Executive Offices) (Zip Code)
-----------------------
Subordinated Reset Notes due 2006
(Title of the indenture securities)
<PAGE> 2
ITEM 1. GENERAL INFORMATION
Furnish the following information as to the trustee:
(a) Name and address of each examining or supervising authority to
which it is subject.
1. Comptroller of the Currency, Washington D.C.
2. Federal Deposit Insurance Corporation, Washington,
D.C.
3. The Board of Governors of the Federal Reserve
Systems, Washington, D.C.
(b) Whether it is authorized to exercise corporate trust powers.
Yes.
ITEM 2. AFFILIATIONS WITH OBLIGOR AND UNDERWRITERS.
If the obligor or any underwriter for the obligor is an affiliate of the
trustee, describe each such affiliation.
Neither the obligor nor any underwriter for the obligor is an
affiliate of the trustee.
ITEM 3. VOTING SECURITIES OF THE TRUSTEE.
Furnish the following information as to each class of voting securities of the
trustee:
Not applicable
ITEM 4. TRUSTEESHIPS UNDER OTHER INDENTURES.
If the trustee is a trustee under another indenture under which any other
securities, or certificates of interest or participation in any other
securities, of the obligor are outstanding, furnish the following information:
(a) Title of the securities outstanding under each other
indenture.
First Merchants Acceptance Corporation 11%
Subordinated Reset Notes Due 3/15/2005 -
$14,375,000
(b) A brief statement of the facts relied upon as a
basis for the claim that no conflicting interest within the meaning of Section
310(b)(1) of the Act arises as a result of the trusteeship under such other
indenture, including a statement as to how the indenture securities will rank
as compared with the securities issued under such other indenture.
There is no conflict of interest because the securities are
identical in description and therefore equal in rank.
<PAGE> 3
ITEM 5. INTERLOCKING DIRECTORATES AND SIMILAR RELATIONSHIPS WITH THE OBLIGOR OR
UNDERWRITERS.
If the trustee or any of the directors or executive officers of the trustee is
a director, officer, partner, employee, appointee, or representative of the
obligor or of any underwriter for the obligor, identify each such person having
any such connection and state the nature of each such connection.
Not applicable
ITEM 6. VOTING SECURITIES OF THE TRUSTEE OWNED BY THE OBLIGOR OR ITS
OFFICIALS.
Furnish the following information as to the voting securities of the trustee
owned beneficially by the obligor and each director, partner and executive
officer of the obligor.
Not applicable
ITEM 7. VOTING SECURITIES OF THE TRUSTEE OWNED BY UNDERWRITERS OR THEIR
OFFICIALS.
Furnish the following information as to the voting securities of the trustee
owned beneficially by each underwriter for the obligor and each director,
partner, and executive officer of each such underwriter.
Not applicable
ITEM 8. SECURITIES OF THE OBLIGOR OWNED OR HELD BY THE TRUSTEE.
Furnish the following information as to securities of the obligor owned
beneficially or held as collateral security for obligations in default by the
trustee:
Not applicable
ITEM 9. SECURITIES OF THE UNDERWRITER OWNED OR HELD BY THE TRUSTEE.
If the trustee owns beneficially or holds as collateral security for
obligations in default any securities of an underwriter for the obligor,
furnish the following information as to each class of securities of such
underwriter any of which are so owned or held by the trustee.
Not applicable
ITEM 10. OWNERSHIP OR HOLDINGS BY THE TRUSTEE OF VOTING SECURITIES OF
CERTAIN AFFILIATES OR SECURITY HOLDERS OF THE OBLIGOR.
If the trustee owns beneficially or holds as collateral security for
obligations in default voting securities of a person who, to the knowledge of
the trustee (1) owns 10 percent or more of the voting securities of the obligor
or (2) is an affiliate, other than a subsidiary, of the obligor, furnish the
following information as to the voting securities of such person.
Not applicable
<PAGE> 4
ITEM 11. OWNERSHIP OR HOLDINGS BY THE TRUSTEE OF ANY SECURITIES OF A
PERSON OWNING 50 PERCENT OR MORE OF THE VOTING SECURITIES OF THE OBLIGOR.
If the trustee owns beneficially or holds as collateral security for
obligations in default any securities of a person who, to the knowledge of the
trustee, owns 50 percent or more of the voting securities of the obligor,
furnish the following information as to each class of securities of such person
any of which are so owned or held by the trustee.
Not applicable
ITEM 12. INDEBTEDNESS OF THE OBLIGOR TO THE TRUSTEE.
If the obligor is indebted to the trustee, furnish the following information.
LaSalle National Bank has a $33.6 million participation in a $230 million
revolving Credit Facility with First Merchants Acceptance Corporation of which
there is $11.8 million currently outstanding.
ITEM 13. DEFAULTS BY THE OBLIGOR.
a) State whether there is or has been a default with respect to the
securities under this indenture. Explain the nature of any such default.
Not applicable
b) If the trustee is a trustee under another indenture under which any
other securities, or certificates of interest or participation in any other
securities, of the obligor are outstanding, or is trustee for more than one
outstanding series of securities under the indenture, state whether there has
been a default under any such indenture or series, identify the indenture or
series affected, and explain the nature of any such default.
Not applicable
ITEM 14. AFFILIATIONS WITH THE UNDERWRITERS.
If any underwriter is an affiliate of the trustee, describe each such
affiliation.
Not applicable
ITEM 15. FOREIGN TRUSTEE.
Identify the order or rule pursuant to which the foreign trustee is authorized
to act as sole trustee under indentures qualified or to be qualified.
Not applicable
ITEM 16. LIST OF EXHIBITS.
List below all exhibits filed as part of this statement of eligibility and
qualification.
1. A copy of the Articles of Association of LaSalle
National Bank now in effect.
2. A copy of the certificate of authority to commence
business.
3. A copy of the authorization to exercise corporate
trust powers.
<PAGE> 5
4. A copy of the existing By-Laws of LaSalle National
Bank.
5. Not applicable.
6. The consent of the trustee required by Section 321(b)
of the Trust Indenture Act of 1939.
7. A copy of the latest report of condition of the
trustee published pursuant to law or the requirements
of its supervising or examining authority.
8. Not applicable.
9. Not applicable.
<PAGE> 6
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939,the trustee,
LaSalle National Bank, a corporation organized and existing under the laws of
the United States of America, has duly caused this statement of eligibility and
qualification to be signed on its behalf by the undersigned, thereunto duly
authorized, all in the City of Chicago, State of Illinois, on the 10th day of
October 1996.
LASALLE NATIONAL BANK
By: /s/ Sarah H. Webb
------------------------
Sarah H. Webb
Group Vice President
<PAGE> 7
EXHIBIT 1
ARTICLES OF ASSOCIATION
<PAGE> 8
ARTICLES
OF
ASSOCIATION
LA SALLE NATIONAL BANK (LOGO)
LA SALLE NATIONAL BANK
CHICAGO, ILLINOIS
<PAGE> 9
(LOGO)
LaSalle National Bank
ARTICLES OF ASSOCIATION
FIRST. The title of this association, which shall carry on the
business of banking under the laws of the United States shall be "LaSalle
National Bank."
SECOND. The place where the main banking house or office of this
association shall be located, its operations of discount and deposit carried
on, and its general business conducted, shall be Chicago, County of Cook, State
of Illinois.
THIRD. The Board of Directors of this association shall consist of
such number of its shareholders, not less than five nor more than twenty-five,
as from time to time shall be determined by a majority of the votes to which
all of its shareholders are at the time entitled. A majority of the Board of
Directors shall be necessary to constitute a quorum for the transaction of
business. The Board of Directors, by vote of a majority of the full board, may,
between annual meetings of shareholders increase the membership of the Board
where the number of directors last elected by shareholders was 15 or less, by
not more than two members, and where the number of directors last elected by
shareholders was 16 or more, by not more than four members and by a like vote
appoint qualified persons to fill the vacancies created thereby; provided that
the number of Directors shall at no time exceed twenty-five.
FOURTH. The regular annual meeting of the shareholders of this
association shall be held at its main banking house, or other convenient place
duly authorized by the board of directors on such day of each year as is
specified therefor in the bylaws.
FIFTH. The amount of capital stock which this association is
authorized to issue shall be Twenty Million Dollars ($20,000,000.00) divided
into 2,000,000 shares of common capital stock of the par value of $10.00 each;
but said capital stock may be increased or decreased from time to time, in
accordance with the provisions of the laws of the United States.
If the capital stock is increased by the sale of additional shares
thereof, other than to key officers and employees of the association upon the
exercise of options granted pursuant to the terms of a stock option plan then
in effect, as to which sales all pre-emptive rights are waived, each
shareholder shall be entitled to subscribe for such additional shares in
proportion to the number of shares of said capital stock owned by him at the
time the increase is authorized by the shareholders, unless another time
subsequent to the date of the shareholders' meeting is specified in a
resolution adopted by the shareholders at the time the increase is authorized.
The board of directors shall have the power to prescribe a reasonable period of
time within which the pre-emptive rights to subscribe to the new shares of
capital stock may be exercised.
The association, at any time and from time to time, may authorize and
issue debt obligations, whether or not subordinated, without the approval of
the shareholders.
SIXTH. The board of directors shall appoint one of its members
president of this association, who shall be chairman of the board, but the
board of directors may appoint a director in lieu of the president to be
chairman of the board, who shall perform such duties as may be designated by
the board of directors. The board of directors shall have the power to appoint
one or more vice presidents, a cashier and such other officers as may be
required to transact the business of this association; to fix the salaries to
be paid to all officers of this association; and to dismiss such officers, or
any of them.
The board of directors shall have the power to define the duties of
officers and employees of this association, to require bonds from them, and to
fix the penalty thereof; to regulate the manner in which directors shall be
elected
<PAGE> 10
or appointed, and to appoint judges of the election; to make all bylaws that it
may be lawful for them to make for the general regulation of the business of
this association and the management of its affairs; and generally to do and
perform all acts that it may be lawful for a board of directors to do and
perform.
SEVENTH. This association shall have succession from the date of its
organization certificate until such time as it be dissolved by act of its
shareholders in accordance with the provisions of the banking laws of the
United States, or until its franchise becomes forfeited by reason of violation
of law, or until terminated by either a general or a special act of Congress,
or until its affairs be placed in the hands of a receiver and finally wound up
by him.
EIGHTH. The board of directors of this association, or any three or
more shareholders owning, in the aggregate, not less than ten per centum of the
stock of this association, may call a special meeting of shareholders at any
time: Provided, however, that, unless otherwise provided by law, not less than
ten days prior to the date fixed for any such meeting, a notice of the time,
place, and purpose of the meeting shall be given by first-class mail, postage
prepaid, to all shareholders of record of this association at their respective
addresses as shown upon the books of the association. These articles of
association may be amended at any regular or special meeting of the
shareholders by the affirmative vote of the shareholders owning at least a
majority of the stock of this association, subject to the provisions of the
banking laws of the United States. The notice of any shareholders' meeting, at
which an amendment to the articles of association of this association is to be
considered, shall be given as herein-above set forth.
NINTH. Any person, his heirs, executors, or administrators, may be
indemnified or reimbursed by the association for reasonable expenses actually
incurred in connection with any action, suit, or proceeding, civil or criminal,
to which he or they shall be made a party by reason of his being or having been
a director, officer, or employee of the association or of any firm,
corporation, or organization which he served in any such capacity at the
request of the association: Provided, however, that no person shall be so
indemnified or reimbursed in relation to any matter in such action, suit, or
proceeding as to which he shall finally be adjudged to have been guilty of or
liable for negligence or wilful misconduct in the performance of his duties to
the association: And, provided further, that no person shall be so indemnified
or reimbursed in relation to any matter in such action, suit, or proceeding
which has been made the subject of a compromise settlement except with the
approval of a court of competent jurisdiction, or the holders of record of a
majority of the outstanding shares of the association, or the board of
directors, acting by vote of directors not parties to the same or substantially
the same action, suit, or proceeding, constituting a majority of the whole
number of the directors. The foregoing right of indemnification or
reimbursement shall not be exclusive of other rights to which such person, his
heirs, executors, or administrators, may be entitled as a matter of law.
********
May 17, 1982
Form No. 181, Rev 5/17/82 GW
<PAGE> 11
EXHIBIT 2
CERTIFICATE OF AUTHORITY
TO COMMENCE BUSINESS
<PAGE> 12
STATE OF ILLINOIS
AUDITOR'S OFFICE
NO. 333 (LOGO)
NATIONAL BANK TRUST CERTIFICATE
Springfield, FEBRUARY 15th 1928
I, OSCAR NELSON, Auditor of Public Accounts of the State of Illinois,
do hereby certify that the NATIONAL BUILDERS BANK OF CHICAGO located at
CHICAGO, County of COOK and State of Illinois, a corporation organized under
and by authority of the statutes of the United States governing National Banks
and authority granted by the Federal Reserve Act for the purpose of accepting
and executing trusts, has this day deposited in this office, securities in the
sum of TWO HUNDRED THOUSAND Dollars, $200,000.00 of the character designated by
Section 6 of the Act of the Legislature of the State of Illinois entitled "An
Act to provide for and regulate the administration of trusts by trust
companies,"
The said deposit is made for the benefit of the creditors of said
NATIONAL BUILDERS BANK OF CHICAGO under and by virtue of the provisions of the
Act above referred to and the said securities are now held by me in this office
in my official capacity as such Auditor of Public Accounts, for the uses and
purposes aforesaid.
I further certify that by virtue of the Acts aforesaid, the NATIONAL
BUILDERS BANK OF CHICAGO is hereby authorized to accept and execute trusts and
receive deposits of trust funds under the provisions and limitations of "An Act
to provide for and regulate the administration of trusts in Illinois.
IN TESTIMONY WHEREOF, I hereunto subscribe my name and
(SEAL) affix the seal of my office, the day and year first
above written.
/s/ Oscar Nelson
---------------------------
AUDITOR OF PUBLIC ACCOUNTS.
STATE OF ILLINOIS.
<PAGE> 13
NO. 13146.
TREASURY DEPARTMENT (LOGO)
OFFICE OF COMPTROLLER OF THE CURRENCY
Washington, D.C., NOVEMBER 29, 1927.
WHEREAS, by satisfactory evidence presented to the undersigned, it has
been made to appear that "NATIONAL BUILDERS BANK OF CHICAGO" in the CITY of
CHICAGO in the County of COOK and State of ILLINOIS has complied with all the
provisions of the Statutes of the United States, required to be complied with
before an association shall be authorized to commence the business of Banking;
NOW THEREFORE I, J.W. MCINTOSH, Comptroller of the Currency, do hereby
certify that "NATIONAL BUILDERS BANK OF CHICAGO" in the CITY of CHICAGO in the
County of COOK and State of ILLINOIS is authorized to commence the business of
Banking as provided in Section Fifty one hundred and sixty nine of the Revised
Statutes of the United States.
(SEAL) IN TESTIMONY WHEREOF witness my hand and Seal of (SEAL)
office this TWENTY-NINTH day of NOVEMBER, 1927.
/s/ J.W. McIntosh
---------------------------
Comptroller of the Currency
<PAGE> 14
CERTIFICATE OF CHANGE OF CORPORATE TITLE
(LOGO)
NO. 13146.
TREASURY DEPARTMENT
OFFICE OF THE COMPTROLLER OF THE CURRENCY
WASHINGTON, D.C., MAY 1, 1940.
WHEREAS, by satisfactory evidence presented to me, it appears that
under authority of sections 2, 3, and 4, of the Act of Congress approved May 1,
1886, entitled "An Act to enable national banking associations to increase
their capital stock and to change their names or location," shareholders owning
two-thirds of the stock of the national banking association heretofore known
as-- "NATIONAL BUILDERS BANK OF CHICAGO," located in CHICAGO, County of COOK,
State of ILLINOIS, have voted to change the name of said association to--
"LASALLE NATIONAL BANK," and have complied with all the provisions of the said
Act relative to national banking associations changing their name.
NOW, THEREFORE, IT IS HEREBY CERTIFIED, that the name of the said
association has been changed to-- "LASALLE NATIONAL BANK," and that such change
of name is hereby approved under authority conferred by said Act.
(SEAL) IN TESTIMONY WHEREOF, witness my hand and seal
of office this FIRST day of MAY, 1940.
-----------------------------------
ACTING Comptroller of the Currency.
<PAGE> 15
EXHIBIT 3
AUTHORIZATION TO EXERCISE
CORPORATE TRUST POWERS
<PAGE> 16
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM [LETTERHEAD]
WASHINGTON
May 9, 1940
LaSalle National Bank,
Chicago, Illinois.
Gentlemen:
The Board of Governors of the Federal Reserve System has been
officially advised by the Comptroller of the Currency that on May 1, 1940,
National Builders Bank of Chicago, Chicago, Illinois, changed its title to
LaSalle National Bank, and accordingly there is enclosed herewith a certificate
showing that LaSalle National Bank has authority to exercise the fiduciary
powers enumerated therein.
Kindly acknowledge receipt of this certificate.
Very truly yours,
/s/ S. R. Carpenter
-----------------------
S. R. Carpenter,
Assistant Secretary.
Enclosure
<PAGE> 17
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON
I, S. R. Carpenter, Assistant Secretary of the Board of Governors of
the Federal Reserve System (formerly known as the Federal Reserve Board), do
hereby certify that it appears from the records of the Board of Governors of
the Federal Reserve System that:
(1) Pursuant to the authority vested in the Federal Reserve Board by
an Act of Congress approved December 23, 1913, known as the Federal Reserve
Act, as amended, the Federal Reserve Board on December 8, 1927, granted to
National Builders Bank of Chicago, Chicago, Illinois, the right to act, when
not in contravention of State or local law, as trustee, executor,
administrator, registrar of stocks and bonds, guardian of estates, assignee,
receiver, committee of estates of lunatics, or in any other fiduciary capacity
in which State banks, trust companies or other corporations which come into
competition with national banks are permitted to act under the laws of the
State of Illinois;
(2) Under the provisions of an Act of Congress approved May 1, 1886,
National Builders Bank of Chicago, Chicago, Illinois, on May 1, 1940, changed
its title to LaSalle National Bank; and
(3) By virtue of the foregoing, LaSalle National Bank, Chicago,
Illinois, has authority to act, when not in contravention of State or local
law, as trustee, executor, administrator, registrar of stocks and bonds,
guardian of estates, assignee, receiver, committee of estates of lunatics, or
in any other fiduciary capacity in which State banks, trust companies or other
corporations which come into competition with national banks are permitted to
act under the laws of the State of Illinois, subject to regulations prescribed
by the Board of Governors of the Federal Reserve System.
IN WITNESS WHEREOF, I have hereunto subscribed my name and caused the
seal of the Board of Governors of the Federal Reserve System to be affixed at
the City of Washington in the District of Columbia.
/s/ S. R. Carpenter
--------------------
Assistant Secretary.
Dated May 9, 1940
<PAGE> 18
EXHIBIT 4
BY-LAWS OF LA SALLE NATIONAL BANK
<PAGE> 19
BYLAWS
OF
LA SALLE NATIONAL BANK
CHICAGO, ILLINOIS
LA SALLE NATIONAL BANK (LOGO)
Organized Under the National Banking Laws
of the United States
<PAGE> 20
BYLAWS
of the
LA SALLE NATIONAL BANK
(a National Banking Association which association
is herein referred to as the "bank")
ARTICLE I
MEETINGS OF SHAREHOLDERS
SECTION 1.1. ANNUAL MEETING. The regular annual meeting of the
shareholders for the election of directors and the transaction of whatever
other business may properly come before the meeting, shall be held at the main
office of the Bank, 135 South LaSalle Street, Chicago, Illinois, or such other
place as the Board of Directors may designate, at 9:00 A.M., on the third
Wednesday of March of each year. Notice of such meeting shall be mailed,
postage prepaid, at least ten days prior to the date thereof, addressed to each
shareholder at his address appearing on the books of the Bank. If for any
cause, an election of directors is not made on the said day, the Board of
Directors shall order the election to be held on some subsequent day as soon
thereafter as practicable, according to the provisions of law; and notice
thereof shall be given in the manner herein provided for the annual meeting.
SECTION 1.2. SPECIAL MEETINGS. Except as otherwise specifically
provided by statute, special meetings of the shareholders may be called for any
purpose at anytime by the board of directors or by any three or more
shareholders owning, in the aggregate, not less than ten percent of the stock
of the bank. Every such special meeting, unless otherwise provided by law,
shall be called by mailing, postage pre-paid, not less than ten days prior to
the date fixed for such meeting, to each shareholder at his address appearing
on the books of the bank, a notice stating the purpose of the meeting.
SECTION 1.3. NOMINATIONS FOR DIRECTOR. Nominations for election to
the board of directors may be made by the board of directors or by any
shareholder of any outstanding class of capital stock of the bank entitled to
vote for the election of directors. Nominations, other than those made by or on
behalf of the existing management of the bank, shall be made in writing and
shall be delivered or mailed to the president of the bank and to the
Comptroller of the Currency, Washington, D.C., not less than 14 days nor more
than 50 days prior to any meeting of shareholders called for the election of
directors, provided, however, that if less than 21 days' notice of the meeting
is given to the shareholders, such nomination shall be mailed or delivered to
the president of the bank and to the Comptroller of the Currency not later than
the close of business on the seventh day following the day on which the notice
of meeting was mailed. Such notification shall contain the following
information to the extent known to the notifying shareholder: (a) the name and
address of each proposed nominee; (b) the principal occupation of each proposed
nominee; (c) the total number of shares of capital stock of each proposed
nominee; (d) the name and address of the notifying shareholder; and (e) the
number of shares of capital stock of the bank owned by the notifying
shareholder. Nominations not made in accordance herewith, may, in his
discretion, be disregarded by the chairman of the meeting, and upon his
instructions, the vote tellers may disregard all votes cast for each such
nominee.
SECTION 1.4. JUDGES OF ELECTION. Every election of directors shall
be managed by three judges, who shall be appointed by the board of directors
prior to the time of said election. The judges of election shall hold and
conduct the election at which they are appointed to serve; and after the
election, they shall file with the cashier a certificate under their hands,
certifying the result thereof and the names of the directors elected. The
judges of election, at the request of the chairman of the meeting, shall act as
tellers of any other vote by ballot taken at such meeting, and shall certify
the result thereof.
1
<PAGE> 21
SECTION 1.5. PROXIES. Shareholders may vote at any meeting of the
shareholders by proxies duly authorized in writing, but no officer or employee
of this bank shall act as proxy. Proxies shall be valid only for one meeting,
to be specified therein, and any adjournments of such meeting. Proxies shall be
dated and shall be filed with the records of the meeting.
SECTION 1.6. QUORUM. A majority of the outstanding capital stock,
represented in person or by proxy, shall constitute a quorum at any meeting of
shareholders, unless otherwise provided by law; but less than a quorum may
adjourn any meeting, from time to time, and the meeting may be held, as
adjourned, without further notice. A majority of the votes cast shall decide
every question or matter submitted to the shareholders at any meeting, unless
otherwise provided by law or by the articles of association.
ARTICLE II
DIRECTORS
SECTION 2.1. BOARD OF DIRECTORS. The board of directors
(hereinafter referred to as the "board"), shall have power to manage and
administer the business affairs of the bank. Except as expressly limited by
law, all corporate powers of the bank shall be vested in and may be exercised
by said board.
SECTION 2.2. NUMBER. The board shall consist of not less than five
or more than twenty-five shareholders, the exact number within such minimum and
maximum limits to be fixed and determined from time to time by resolution of a
majority of the full board or by resolution of the shareholders at any meeting
thereof; provided, however, that a majority of the full board may not increase
the number of directors by more than two if the number of directors last
elected by shareholders was fifteen or less and by not more than four where the
number of directors last elected by shareholders was sixteen or more, provided
that in no event shall the number of directors exceed twenty-five.
SECTION 2.3. ORGANIZATION MEETING. The cashier, upon receiving the
certificate of the judges, of the result of any election, shall notify the
directors-elect of their election and of the time at which they are required to
meet at the main office of the bank for the purpose of organizing the new board
and electing and appointing officers of the bank for the succeeding year. Such
meeting shall be appointed to be held on the day of election or as soon
thereafter as practicable, and, in any event, within thirty days thereof. If,
at the time fixed for such meeting, there shall not be a quorum present the
directors present may adjourn the meeting, from time to time, until a quorum
is obtained.
SECTlON 2.4 REGULAR MEETINGS. The regular meetings of the board
shall be held, without notice, on the third Wednesday of each month at the main
office. When any regular meeting of the board falls upon a holiday, the meeting
shall be held on the next banking business day unless the board shall designate
some other day.
SECTION 2.5 SPECIAL MEETINGS. Special meetings of the board may
be called by the chairman of the board, the president, or at the request of
three or more directors. Each member of the board shall be given notice stating
the time and place, by telegram, letter or in person, of each such special
meeting.
SECTION 2.6. QUORUM. A majority of the directors shall constitute
a quorum at any meeting, except when otherwise provided by law; but a less
number may adjourn any meeting from time to time, and the meeting may be held,
as adjourned, without further notice.
SECTION 2.7. VACANCIES. When any vacancy occurs among the
directors, the remaining members of the board, in accordance with the laws of
the United States, may appoint a director to fill such vacancy at any regular
meeting of the board, or at a special meeting called for that purpose.
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<PAGE> 22
SECTION 2.8. RETIREMENT POLICY. A retirement policy adopted by the
board of directors shall be applicable to directors who are not active officers
of the bank.
ARTICLE III
COMMITTEES OF THE BOARD
SECTION 3.1. EXECUTIVE COMMITTEE. There shall be an executive
committee of the board. The members of the executive committee shall be chosen
by the board from time to time, shall hold office during its pleasure, and
shall consist of the chairman of the board, the chairman of the executive
committee selected by the board, who may but need not be the same person
designated to be president, and the president, ex officio, and not less than
seven additional members of the board who shall not be active officers of the
bank. It shall be the duty of this committee to exercise such powers and
perform such duties in respect to the making of loans and discounts as shall
from time to time be specified by resolution of the board. During such periods
as the board shall not be in session, the executive committee shall have and
may exercise all the powers of the board except such as are by law or by these
bylaws required to be exercised only by the board. The executive committee may
make rules for holding and conducting its meetings and keep in the minute book
of the bank a report of all action taken which shall be submitted for approval
at each regular meeting of the board and the action of the board shall be
recorded in the minutes of that meeting. A quorum of the executive committee
shall consist of not less than five of its members, at least three of whom
shall not be active officers of the bank. The chairman of the board, or in his
absence in the order named if present, the chairman of the executive committee
or the president, may designate any director who is not an active officer of
the bank, or a designated member, to serve as a member of the executive
committee at any specified meeting. Vacancies in the executive committee at any
time existing may be filled by appointment by the board. The board may at
anytime revise or change the membership and chairmanship of the executive
committee and make new or additional appointments thereto. The chairman of the
executive committee shall be ex officio a member of all committees except the
examining committee and the trust audit committee, and shall have such other
duties as may from time to time be assigned him by the board.
SECTION 3.2. OFFICERS' COMPENSATION COMMITTEE. There shall be an
officers' compensation committee of the board. The members of the officers'
compensation committee shall consist of the members ex officio provided for in
other sections of these bylaws and not less than three additional non-officer
members of the board who shall be appointed by the board each year at its first
meeting after the directors have been elected and qualified. It shall be the
duty of this committee to study the compensation of all officers of the bank
and from time to time report their recommendations to the board; and such other
duties, if any, as may from time to time be assigned to it by the board. A
majority of the committee, including at least two non-officer members, shall be
necessary for the committee to keep records of its action.
SECTION 3.3. EXAMINING COMMITTEE. There shall be an examining
committee of the board. The members of the examining committee shall consist of
the members ex officio provided for in other sections of these bylaws, but
exclusive of any active officer of the bank and not less than three additional
non-officer members of the board who shall be appointed by the board each year
at its first meeting after the directors have been elected and qualified. It
shall be the duty of this committee to make an examination at least twice each
year into the affairs of the bank or to cause the examinations to be made by
accountants (who may be the bank's own accountants) responsible only to the
board in such examinations, and to report the result of such examinations in
writing to the board at the next regular meeting thereafter, or it may, at its
sole discretion, submit the reports of the national bank examiner or of the
Chicago Clearing House Association examination, with or without additional
comments by the committee itself, for, and in lieu of its personal
examinations. Such reports shall state whether the bank is in sound condition,
whether adequate internal audit controls and procedures are being maintained
and shall recommend to the board such changes in the manner of doing business
or conducting the affairs of the bank as shall be deemed advisable.
3
<PAGE> 23
SECTION 3.4. OTHER COMMITTEES. The board may appoint, from time to
time, from its own members, other committees of one or more persons, for such
purposes and with such powers as the board may determine.
ARTICLE IV
OFFICERS AND EMPLOYEES
SECTION 4.1. CHAIRMAN OF THE BOARD. The board shall appoint one of
its members to be chairman of the board. The chairman of the board shall
supervise the carrying out of the policies adopted or approved by the board. He
shall have general executive powers, as well as the specific powers conferred
by these bylaws. He shall be ex officio a member of all committees, except the
examining committee and the trust audit committee. He shall have general
supervision and direction of the business, affairs and personnel of the bank.
He shall also have and may exercise such further powers and duties as from time
to time may be conferred upon, or assigned to him by the board.
SECTION 4. 2. VICE CHAIRMAN OF THE BOARD. The board may appoint one
of its members to be vice chairman of the board. He shall perform such duties
as may from time to time be assigned to him by the board.
SECTION 4.3. PRESIDENT. The board shall appoint one of its members
to be president of the bank. He shall be the chief executive officer and the
chief administrative officer of the bank and in the absence of the chairman of
the board, he shall preside at any meeting of the board at which he is present.
The president shall have general executive powers, and shall have and may
exercise any and all other powers and duties pertaining by law, regulation, or
practice to the office of president, or imposed by these bylaws. He shall be ex
officio a member of all committees, except the examining committee and trust
audit committee. He shall have general supervision of the business, affairs and
personnel of the bank and in the absence of the chairman of the board, shall
exercise the powers and perform the duties of the chairman of the board. He
shall also have and may exercise such further powers and duties as from time to
time may be conferred upon or assigned to him by the board.
SECTION 4.4. SENIOR OFFICERS. The board may appoint one or more
executive vice presidents and one or more senior vice presidents. Each such
senior officer shall have such powers and duties as may be assigned to him by
the board, the chairman of the board, or the president.
SECTION 4.5. VICE PRESIDENT. The board may appoint one or more
vice presidents. Each vice president shall have such powers and duties as may
be assigned to him by the board, the chairman of the board, or the president.
SECTION 4.6. CASHIER. The board shall appoint a cashier who shall
have such powers and duties as may be assigned to him by the board, the
chairman of the board, or the president. The cashier shall be custodian of the
corporate seal, records, documents and papers of the bank. He shall provide for
keeping of proper records of all transactions of the bank.
SECTION 4.7. SECRETARY. The board shall appoint a secretary who
shall be secretary of the bank. He shall also perform such duties as may be
assigned to him from time to time by the board. The board may appoint a
secretary of the board who shall keep accurate minutes of all meetings. He
shall attend to the giving of all notices; he shall also perform such other
duties as may be assigned to him from time to time by the board.
SECTION 4.8. OTHER OFFICERS. The board may appoint one or more
assistant vice presidents, one or more trust officers, one or more assistant
secretaries, one or more assistant cashiers, and such other officers and
attorneys-in- fact as from time to time may appear to the board to be required
or desirable to transact the business of
4
<PAGE> 24
the bank. Such officers, respectively, shall exercise such powers and perform
such duties as pertain to their several offices or as may be conferred upon or
assigned to them by the board the chairman of the board or the president.
SECTION 4.9. CLERKS AND AGENTS. The chairman of the board, the
president, or any other active officer of the bank authorized by the chairman
of the board, or the president, may appoint and dismiss all or any paying
tellers, receiving tellers, note tellers, vault custodians, bookkeepers and
other clerks, agents and employees as they may deem advisable for the prompt and
orderly transaction of the business of the bank, define their duties, fix the
salaries to be paid them and the conditions of their employment.
SECTION 4.10. RESPONSIBILITY FOR MONEYS, ETC. Each of the active
officers and clerks of this bank shall be responsible for all moneys, funds
valuables and property of every kind and description that may from time to time
be entrusted to his care or placed in his hands by the board or others, or that
otherwise may come into his possession as an active officer or clerk of this
bank.
SECTION 4.11. SURETY BONDS. All the active officers and clerks of
this bank may be covered by one of the blanket form bonds customarily written
by the surety companies, drawn for such an amount, and executed by such surety
company, as the board may from time to time require, and duly approve; or at
the discretion of the board, all such active officers and clerks shall, each
for himself, give such bond, with such security, and in such denominations as
the board may from time to time require and direct. All bonds approved by the
board shall assure the faithful and honest discharge of the respective duties
of such active officer or clerk and shall provide that such active officer or
clerk shall faithfully apply and account for all moneys, funds, valuables and
property of every kind and description that may from time to time come into his
hands or be entrusted to his care, and pay over and deliver the same to the
order of the board or to such other person or persons as may be authorized to
demand and receive the same.
SECTION 4.12. TERM OF OFFICE - OFFICER DIRECTOR. The chairman of
the board, the vice chairman of the board and the president, together with any
other active officers who may be duly elected members of the board, shall hold
their respective offices for the current year for which the board (of which
they shall be members) was elected and until their successors are appointed,
unless they shall resign, be disqualified, or be removed; and any vacancy
occurring in the office of the chairman of the board, the vice chairman of the
board, the president, or in the board, shall, if required by these bylaws, be
filled by the remaining members.
SECTION 4.13. TERM OF OFFICE - OFFICER. The executive vice
presidents, the senior vice presidents, the vice presidents, the assistant vice
presidents, the cashier, the secretary, the trust officers and all other
officers and attorneys-in-fact who are not duly elected members of the board,
shall be appointed to hold their offices, respectively, during the pleasure of
the board.
ARTICLE V
TRUST DEPARTMENT
SECTION 5.1. TRUST DEPARTMENT. There shall be a department of the
bank known as the trust department which shall perform the fiduciary
responsibilities of the bank.
SECTION 5.2. TRUST OFFICER. There shall be a senior vice president
and trust officer, or vice president and trust officer of this bank, who shall
be designated as the managing officer of the trust department and whose duties
shall be to manage, supervise and direct all the activities of the trust
department. He shall do, or cause to be done, all things necessary or proper in
carrying on the business of the trust department in accordance with provisions
of law and regulations. He shall act pursuant to opinion of counsel where such
opinion is deemed necessary. Opinions of counsel shall be retained on file in
connection with all important matters pertaining to fiduciary activities. The
trust officer shall be responsible for all assets and documents held by the
bank in connection with fiduciary matters.
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<PAGE> 25
The board may appoint such other officers of the trust department as it may
deem necessary, with such duties as may be assigned to them by the board, the
chairman of the board, or the president.
SECTION 5.3. TRUST INVESTMENT COMMITTEE. There shall be appointed
by the board a trust investment committee of this bank composed of not less
than four members, including members ex officio provided for in other sections
of these bylaws, who shall be capable and experienced officers or directors of
the bank. All investments of funds held in a fiduciary capacity shall be made,
retained or disposed of only with the approval of the trust investment
committee; and the committee shall keep minutes of all its meetings, showing
the disposition of all matters considered and passed upon by it. The committee
shall, promptly after the acceptance of an account for which the bank has
investment responsibilities, review the assets thereof, to determine the
advisability of retaining or disposing of such assets. The committee shall
conduct a similar review at least once during each calendar year thereafter and
within fifteen months of the last such review. A report of all such reviews,
together with the action taken as a result thereof, shall be noted in the
minutes of the committee. Three members of the trust investment committee shall
constitute a quorum, and any action approved by a majority of those present
shall constitute the action of the committee.
SECTION 5.4. TRUST AUDIT COMMITTEE. The board shall appoint a
committee of not less than three directors, including members ex officio
provided for in other sections of these bylaws, exclusive of any active
officers of the bank, which shall at least once during each calendar year and
within fifteen months of the last such audit make suitable audits of the trust
department, or cause suitable audits to be made, by auditors responsible only
to the board, and at such time shall ascertain whether the department has been
administered in accordance with law, Regulation 9, and sound fiduciary
principles. Notwithstanding the provisions of this Section, the board at any
time may assign to the Examining Committee, in addition to the duties of the
Examining Committee set forth in Section 3.3 of these bylaws, all of the duties
of the Trust Audit Committee and during such time as the Examining Committee is
performing the duties of both committees, the Trust Audit Committee shall cease
to function as a committee of this board. The board at any time may reassign
the duties provided for in this Section to the Trust Audit Committee.
SECTION 5.5. TRUST DEPARTMENT FILES. There shall be maintained in
the trust department, files containing all fiduciary records necessary to
assure that its fiduciary responsibilities have been properly undertaken and
discharged.
SECTION 5.6. TRUST INVESTMENTS. Funds held in a fiduciary capacity
shall be invested in accordance with the instrument establishing the fiduciary
relationship and local law. Where such instrument does not specify the
character and class of investments to be made and does not vest in the bank a
discretion in the matter, fund shield pursuant to such instrument shall be
invested in investments in which corporate fiduciaries may invest under local
law.
ARTICLE VI
STOCK AND STOCK CERTIFICATES
SECTION 6.1. TRANSFERS. Shares of capital stock shall be
transferable on the books of the bank and a transfer book shall be kept in
which all transfers of stock shall be recorded. Every person becoming a
shareholder be such transfer shall in proportion to his shares, succeed to all
rights and liabilities of the prior holder of such shares.
SECTION 6.2. STOCK CERTIFICATES. Certificates of capital stock
shall bear the signature of any one of, the chairman of the board, or the
president (which may be engraved, printed or impressed) and shall be signed
manually or by facsimile process by the secretary, assistant secretary,
cashier, assistant cashier, or any other officer appointed by the board for
that purpose, to be known as an authorized officer and the seal of the bank
shall be engraven thereon. Each certificate shall recite on its face that the
stock represented thereby is transferable, properly endorsed, only on the books
of the bank.
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<PAGE> 26
ARTICLE VII
CORPORATE SEAL
SECTION 7.1. CORPORATE SEAL. The chairman of the board, the
president, the cashier, the secretary or any assistant cashier or assistant
secretary, or other officer thereunto designated by the board, shall have
authority to affix the corporate seal to any document requiring such seal, and
to attest the same. Such seal shall be substantially in the form set forth
herein.
ARTICLE VIII
INDEMNIFYING OFFICERS AND DIRECTORS
SECTION 8.1. INDEMNIFYING OFFICERS AND DIRECTORS. Any person, his
heirs, executors or administrators, may be indemnified or reimbursed by the
bank for reasonable expenses actually incurred in connection with any action,
suit or proceeding, civil or criminal, to which he or they shall be made a
party by reason of his being or having been a director, officer or employee of
the bank or of any firm, corporation or organization which he served in any
such capacity at the request of the bank; provided, however, that no person
shall be so indemnified or reimbursed in relation to any matter in such action,
suit or proceeding as to which he shall finally be adjudged to have been guilty
of or liable for negligence or willful misconduct in the performance of his
duties to the bank; and, provided further, that no person shall be so
indemnified or reimbursed in relation to any matter in such action, suit or
proceeding which has been made the subject of a compromise settlement except
with the approval of a court of competent jurisdiction, or the holders of
record of a majority of the outstanding shares of the bank, or the board,
acting by vote of directors not parties to the same or substantially the same
action suit or proceeding, constituting a majority of the whole number of the
directors. The foregoing right of indemnification or reimbursement shall not be
exclusive of other rights to which such person, his heirs, executors or
administrators, may be entitled as a matter of law.
ARTICLE IX
MISCELLANEOUS PROVISIONS
SECTION 9.1. FISCAL YEAR. The fiscal year of the bank shall be the
calendar year.
SECTION 9.2. EXECUTION OF INSTRUMENTS. All agreements, indentures
mortgages, deeds, conveyances, transfers, certificates, declarations, receipts,
discharges, releases, satisfactions, settlements, petitions, schedules,
accounts, affidavits, bonds, undertakings, proxies and other instruments or
documents may be signed, executed, acknowledged, verified, delivered or
accepted for the bank by the chairman of the board, or the vice chairman of the
board, or the president, or any executive vice president, or any senior vice
president, or any vice president, or the secretary or the cashier, or, if in
connection with the exercise of fiduciary powers of the bank by any of said
officers or by any officer in the trust department. Any such instruments may
also be signed, executed, acknowledged, verified, delivered or accepted for the
bank in such other manner and by such other officers as the board may from time
to time direct. The provisions of this Section 9.2 are supplementary to any
other provisions of these bylaws.
SECTION 9.3. RECORDS. The articles of association, the bylaws, and
the proceedings of all meetings of the shareholders and of the board shall be
recorded in appropriate minute books provided for the purpose; where these
bylaws so provide, the proceedings of standing committees of the board shall be
recorded in appropriate minute books provided for the purpose.
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<PAGE> 27
ARTICLE X
EMERGENCIES
SECTION 10.1. CONTINUATION OF BUSINESS. In the event of a state of
emergency of sufficient severity to interfere with the conduct and management
of the affairs of this bank, the officers and employees will continue to
conduct the affairs of the bank under such guidance from the directors as may
be available except as to matters which by statute require specific approval of
the board of directors and subject to conformance with any governmental
directives during the emergency.
SECTION 10.2. DESIGNATION OF PLACE OF BUSINESS. The offices of the
bank at which its business shall be conducted shall be the main office thereof
located at 135 South LaSalle Street, Chicago, Illinois, and any other legally
authorized location which may be leased or acquired by this bank to carry on
its business. During an emergency resulting in any authorized place of business
of this bank being unable to function, the business ordinarily conducted at
such location shall be relocated elsewhere in suitable quarters, in addition to
or in lieu of the locations heretofore mentioned, as may be designated by the
board of directors or by the executive committee or by such persons as are
then, in accordance with resolutions adopted from time to time by the board of
directors dealing with the exercise of authority in the time of such emergency,
conducting the affairs of this bank. Any temporarily relocated place of
business of this bank shall be returned to its legally authorized location as
soon as practicable and such temporary place of business shall then be
discontinued.
ARTICLE XI
BYLAWS
SECTION 11.1 INSPECTION. A copy of the bylaws with all amendments
thereto, shall at all times be kept in a convenient place at the main office of
the bank and shall be open for inspection to all shareholders, during banking
hours.
SECTION 11.2 AMENDMENTS. The bylaws may be amended, altered or
repealed, at any regular meeting of the board, by a vote of a majority of the
whole number of the directors.
***
I........................................... hereby certify that I am
the................................ Cashier/Secretary of LaSalle National
Bank, Chicago, Illinois and that the foregoing is a true and correct copy of
the bylaws of this bank as amended and that the same are in full force and
effect ............. day of...................19........
----------------------------------
Cashier/Secretary.
December 15, 1982
(SEAL)
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<PAGE> 28
EXHIBIT 5
NOT APPLICABLE
<PAGE> 29
EXHIBIT 6
LaSalle National Bank hereby consents in accordance with the provisions of
Section 321(b) of the Trust Indenture Act of 1939, that reports of examinations
by Federal, State, Territorial and District authorities may be furnished by
such authorities to the Securities and Exchange Commission upon its request
therefor.
LA SALLE NATIONAL BANK
By: /s/ Sarah H. Webb
------------------------
Sarah H. Webb
Group Vice President
<PAGE> 30
EXHIBIT 7
Latest Report of Condition of
Trustee published pursuant to
law or the requirement of its
surviving or examining authority.
<PAGE> 31
LaSalle National Bank Call Date: 06/30/96 ST-BK: 17-1520 FFIEC 031
120 South LaSalle Street Vendor ID: D CERT: 15407 Page RC- 1
Chicago IL 60603
11
Transit Number: 71000505
CONSOLIDATED REPORT OF CONDITION FOR INSURED COMMERCIAL AND STATE-CHARTERED
SAVINGS BANKS FOR JUNE 30, 1996
All schedules are to be reported in thousands of dollars. Unless otherwise
indicated, report the amount outstanding as of the last business day of the
quarter.
SCHEDULE RC - BALANCE SHEET
Dollar Amounts in Thousands
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS
<C> <S> <C> <C> <C>
1. Cash and balances due from depository institutions (from Schedule RC-A): RCFD
----
a. Noninterest-bearing balances and currency and coin (1) ____________________ 0081. . 507,809 1.a
b. Interest-bearing balances (2) _____________________________________________ 0071. . 277 1.b
2. Securities:
a. Held-to-maturity securities (from Schedule RC-B, column A) ________________ 1754. . 1,102,928 2.a
b. Available-for-sale securities (from Schedule RC-B, column D ________________ 1773. . 2,459,147 2.b
3. Federal funds sold and securities purchased under agreements to resell in domestic
offices of the bank and of its Edge and Agreement subsidiaries, and in IBFs:
a. Federal funds sold __________________________________________________________ 0276. . 120,234 3.a
b. Securities purchased under agreements to resell ______________________________0277. . 0 3.b
4. Loans and lease financing receivables:
a. Loans and leases, net of unearned income RCFD
----
(from Schedule RC-C) ________________________________ 2122 . . 7,563,456 . . . . . . . 4.a
b. LESS: Allowable for loan and lease losses ____________3123 . . 139,202 . . . . . . . 4.b
c. LESS: Allocated transfer risk reserve ________________3128 . . 0 . . . . . . . 4.c
d. Loans and leases, net of unearned income,
allowance, and reserve (item 4.a minus 4.b and 4.c) ___________________________ 2125. . 7,424,254 4.d
5. Trading assets (from Schedule RC-D)_______________________________________________ 3545. . 81,926 5.
6. Premises and fixed assets (including capitalized leases)__________________________ 2145. . 33,088 6.
7. Other real estate owned (from Schedule RC-M) ___________________________________ 2150. . 7,379 7.
8. Investments in unconsolidated subidiaries and associated companies (from
Schedule RC-M)____________________________________________________________________ 2130. . 0 8.
9. Customers' liability to this bank on acceptances outstanding______________________ 2155. . 11,851 9.
10. Intangible assets(from Schedule RC-M)____________________________________________ 2143. . 22,632 10.
11. Other assets (from Schedule RC-F)_________________________________________________ 2160. . 266,451 11.
12. Total assets (sum of items 1 through 11)__________________________________________ 2170. . 12,027,976 12.
- --------------
(1) Includes cash items in process of collection and unposted debts
(2) Includes time certificates of deposit not held for trading.
</TABLE>
<PAGE> 32
LaSalle National Bank Call Date: 06/30/96 ST-BK: 17-1520 FFIEC 031
120 South LaSalle Street Vendor ID: D CERT: 15407 Page RC-2
Chicago IL 60603
12
Transit Number: 71000505
SCHEDULE RC - CONTINUED
Dollar Amounts in Thousands
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LIABILITIES
<C> <S> <C> <C> <C>
13. Deposits:
a. In domestic offices (sum of totals of RCON
----
columns A and C from Schedule RC-E, part I)____________________________________ 2200. . 6,072,781 13.a
RCON
----
(1) Non-interest bearing (1)___________________________ 6631. . 1,427,587 . . . . . . . 13.a.1
(2) Interest-bearing __________________________________ 6636. . 4,645,194 . . . . . . . 13.a.2
RCFN
b. In foreign offices, Edge and Agreement subsidiaries, and IBFs (from ----
Schedule RC-E, part II)__________________________________________________________ 2200. . 1,851,846 13.b
RCFN . . . . . . . 13.b.1
---- . . . . . . . 13.b.2
(1) Noninterest-bearing________________________________ 6631. . 0
(2) Interest-bearing___________________________________ 6636. . 1,851,846
14. Federal funds purchased and securities sold under agreements to repurchase in
domestic offices of the bank and of its Edge and Agreement subsidiaries, and
in IBFs: RCFD
----
a. Federal funds purchased__________________________________________________________ 0278. . 1,579,062 14.a
b. Securities sold under agreements to repurchase___________________________________ 0279. . 207,689 14.b
RCON
----
15. a. Demand notes issued to the U.S. Treasury___________________________________________ 2840. . 335,490 15.a
RCFD
----
b. Trading liabilities (from Schedule RC-D)___________________________________________ 3548. . 41,859 15.b
16. Other borrowed money:
a. With a remaning maturity of one year or less______________________________________ 2332. . 707,673 16.a
b. With a remaining maturity of more than one year___________________________________ 2333. . 79,069 16.b
17. Mortgage indebtedness and obligations under capitalized leases________________________ 2910. . 0 17.
18. Bank's liability on acceptances executed and outstanding______________________________ 2920. . 11,851 18.
19. Subordinated notes and debentures_____________________________________________________ 3200. . 242,500 19.
20. Other liabilities (from Schedule RC-G)________________________________________________ 2930. . 203,909 20.
21. Total liabilities (sum of items 13 through 20)________________________________________ 2948. . 11,333,729 21.
22. Limited-life preferred stock and related surplus______________________________________ 3282. . 0 22.
EQUITY CAPTIAL RCFD
----
23. Perpetual preferred stock and related surplus_________________________________________ 3838. . 0 23.
24. Common stock__________________________________________________________________________ 3230. . 18,417 24.
25. Surplus (exclude all surplus related to preferred stock)______________________________ 3839. . 126,213 25.
26. a. Undivided profits and capital reserves_____________________________________________ 3632. . 566,393 26.a
b. Net unrealized holding gains (losses) on available-for-sale securities_____________ 8434. . ( 16,776) 26.b
27. Cumulative foreign currency translation adjustments___________________________________ 3284. . 0 27.
28. Total equity capital (sum of items 23 through 27)_____________________________________ 3210. . 694,247 28.
29. Total liabilities, limited-life preferred stock, and equity capital (sum of
items 21, 22, and 28)_________________________________________________________________ 3300. . 12,027,976 29.
MEMORANDUM
To be reported only with March Report of Condition.
1. Indicate in the box at the right the number of the statement below that best describes
the most comprehensive level of auditing work performed for the bank by independent RCFD Number
---- ------
external auditors as of any date during 1995__________________________________________ 6724. . N/A M.1
</TABLE>
1 = Independent audit of the bank conducted in accordance with generally
accepted auditing standards by a certified public accounting firm which
submits a report on the bank
2 = Independent audit of the bank's parent holding company
conducted in accordance with generally accepted auditing
standards by a certified public accounting firm which submits a report on
the consolidated holding company (but not on the bank separately)
3 = Directors' examination of the bank conducted in accordance with generally
accepted auditing standards by a certified public accounting firm (may be
required by state chartering authority)
4 = Directors' examination of the bank performed by other external auditors
(may be required by state chartering authority)
5 = Review of the bank's financial statements by external auditors
6 = Compilation of the bank's financial statements by external auditors
7 = Other audit procedures (excluding tax preparation work)
8 = No external audit work
___________________
(1) Includes total demand deposits and noninterest-bearing time and savings
deposits.
<PAGE> 33
EXHIBIT 8
NOT APPLICABLE
<PAGE> 34
EXHIBIT 9
NOT APPLICABLE
