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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934 FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1996, OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER 0-24686
FIRST MERCHANTS ACCEPTANCE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 36-3759045
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
570 LAKE COOK ROAD, SUITE 126, 60015
DEERFIELD, ILLINOIS (Zip Code)
(Address of principal executive offices)
Registrant's Telephone Number Including Area Code: (847) 948-9300
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered pursuant to Section 12(g) of the Act: Common Stock, $.01
par value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 12 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registration's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the Registrant's voting Common Stock (based
on the closing price of such shares on the Nasdaq National Market on March 7,
1997) held by non-affiliates was approximately $54,975,966. Common Stock held by
each officer and director and each person who owns 5% or more of the outstanding
Common Stock has been excluded in that such persons may be deemed affiliates.
This determination of affiliate status is not necessarily a conclusive
determination for other purposes.
On March 7, 1997, the following number of shares of the Company's capital
stock were outstanding:
Common Stock 6,436,519
Class B Common Stock None
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the year ended December 31,
1996 are incorporated by reference into Part II in this report.
Portions of the 1997 Proxy Statement for the annual meeting of stockholders, to
be held on May 15, 1997, are incorporated by reference into Part III of this
report.
Index to Exhibits listed on pages 19 through 23.
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FIRST MERCHANTS ACCEPTANCE CORPORATION
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
ITEM PAGE
NO. NO.
- ---- ----
<C> <S> <C>
PART I
1. Business.................................................... 1
2. Properties.................................................. 13
3. Legal Proceedings........................................... 13
4. Submission of Matters to a Vote of Security Holders......... 13
PART II
5. Market for Registrant's Common Equity and Related 15
Stockholder Matters.........................................
6. Selected Financial Data..................................... 15
7. Management's Discussion and Analysis of the Financial 15
Condition and Results of Operations.........................
8. Financial Statements and Supplementary Data................. 15
9. Changes in and Disagreements with Accountants on Accounting 15
and Financial Disclosure....................................
PART III
10. Directors and Executive Officers of the Registrant.......... 16
11. Executive Compensation...................................... 16
12. Security Ownership of Certain Beneficial Owners and 16
Management..................................................
13. Certain Relationships and Related Transactions.............. 16
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 17
8-K.........................................................
</TABLE>
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PART I
ITEM 1. BUSINESS
GENERAL
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"). Since the Company's incorporation
in March 1991, it has targeted its marketing efforts to dealers (the "dealer"),
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
December 31, 1996, the Company serviced approximately 4,400 dealers in 37
states. The Company's total finance contract portfolio, which includes
receivables owned and sold with servicing retained, increased to approximately
$641.2 million at December 31, 1996 from approximately $284.2 million at
December 31, 1995 and $94.1 million at December 31, 1994, while maintaining net
charge-offs as a percentage of average net finance receivables-serviced of under
7.0% for such periods. The Company generated net earnings before extraordinary
item in 1996, 1995, and 1994 of approximately $10.5 million, $6.7 million and
$2.8 million, respectively.
The automobile dealer business is highly fragmented and includes businesses
principally selling new automobiles, while also offering used automobiles, that
are franchised by automobile manufacturers ("franchised dealers"), and
businesses exclusively selling used automobiles that are not affiliated with an
automobile manufacturer ("independent dealers"). During the year ended December
31, 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 independent dealers.
The finance contracts purchased by the Company are primarily with borrowers
who are relatively high credit risks due to various factors, including their
impaired credit history or the absence or limited extent of their credit
history. Referred to as "non-prime," these borrowers include young borrowers (18
to 25 years old) who are trying to establish a 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 and 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.
According to industry research, at December 31, 1996, there were
approximately 23,000 franchised dealers and approximately 64,000 independent
dealers in the United States. According to the Federal Reserve Board, as of
December 31, 1996, there was approximately $377.3 billion in automobile related
installment credit outstanding. The Company is unaware of any authoritative
estimates of the non-prime portion of this market,
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although various sources have estimated that the potential loan base in this
portion of the market is between $50 billion and $70 billion. 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 1996 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 utilizes its national sales force and
Regional 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, and certain large, regional franchised dealers and intends to develop
relationships with additional national used car superstores and 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. The Company has established a subsidiary to provide home
mortgages to non-prime borrowers that is expected to become operational in the
second half of 1997. This subsidiary will originate and service residential
mortgage loans initially on a wholesale basis to primary lenders in various
states. The Company is also considering diversifying into other areas of
consumer financial services. However, the Company anticipates that its primary
business strategy will continue 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 follow.
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, which coordinate with the sales
force to build and nurture dealer relationships, process and underwrite credit
applications, verify finance contracts and disburse funds to dealers; (iii)
Regional Account Service Centers, which perform all account servicing functions,
such as payment processing, delinquency follow-ups and cost-effective recoveries
of charged-off account balances; and (iv) the National Remarketing Center, which
arranges the disposition of repossessed collateral.
Experienced Management Personnel. The Company recruits experienced
management personnel at the executive, supervisory and managerial levels. The
Company believes that retaining experienced management personnel is critical to
maintaining credit quality, supervising operations and following flexible
strategies for growth in a changing business environment. The Company's
executive officers, senior managerial personnel and Regional Dealer Service
Center and Regional 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
associated with non-prime borrowers, the Company has developed sophisticated
risk management techniques for evaluating credit
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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
pricing system that provides guidance for the determination of the annual
percentage rate ("APR"), the discount from the principal amount of a finance
contract (the "discount") that the Company is able to charge to dealers 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
Regional 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 Regional
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 Regional Dealer Service Center
manager's maximum credit authority or does not meet the Company's guidelines,
the Regional Dealer Service Center manager must obtain approval from Operations
Risk Management.
Proactive Collection Management. The Company pursues a policy of proactive
collection management through its Regional 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 a Regional Dealer 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 a borrower misses more than three consecutive
monthly payments. 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 Regional
Dealer Service Center and Regional 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 Regional
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
Regional Dealer Service Centers, Regional Account Service Centers and the
National Recovery Center. In addition, senior 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."
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
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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 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 many dealers conduct business with the Company
because of the Company's prompt and reliable response to dealers. The Company
employs a nationwide hub and spoke strategy, whereby the sales force ("spokes")
contact dealers who channel credit applications to Regional Dealer Service
Centers ("hubs") for credit review and funding. The Company operates 14 Regional
Dealer Service Centers servicing dealers in 37 states. During 1996, the Company
consolidated Regional Dealer Service Centers to improve operating efficiencies
in accordance with the hub and spoke strategy, and the Company intends to
continuously review the operating efficiencies of its remaining Regional Dealer
Service Center network. The Company has strengthened its national sales force to
support the efforts of its Regional Dealer Service Centers to provide
consistent, reliable service to dealers. The Company has further focused its
operations by centralizing collections into two Regional Account Service
Centers, thus allowing Regional Dealer Service Centers to concentrate on
developing and nurturing dealer relationships and maintaining credit quality
with respect to new purchases of finance contracts.
OFFICES
The Company operates 14 Regional Dealer Service Centers, two Regional
Account Service Centers and the National Remarketing Center. The Company
maintains Regional 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 Regional
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." Regional Dealer
Service Center managers are evaluated and compensated based upon objective
financial and operational criteria relating to the performance of their
respective Regional Dealer Service Centers.
The Company considers each Regional Dealer Service Center as its own profit
center, having primary responsibility for business development and contract
acquisition. Each Regional Dealer Service Center functions independently of the
other centers and is operated by a full-time Regional Dealer Service Center
manager who reports to a Managing Director of Dealer Services. The Regional
Account Service Centers are primarily responsible for collections, including
recoveries of charged-off account balances, and payment processing. Each
Regional Account Service Center is operated by a Regional Account Service Center
manager who reports to the Vice President of Account Services. The National
Remarketing Center arranges for dispositions of repossessed collateral and is
supervised by a Managing Director. The Company's six 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
Regional Dealer Service Centers. In addition, Managing Directors of Dealer
Services provide day-to-day guidance to Regional Dealer Service Center managers
in making credit decisions.
When operational, the Company's home mortgage subsidiary will be a discrete
unit with all processing, funding and servicing operations in one location.
CONTRACT PROFILE
During 1996, 1995 and 1994, the Company purchased 45,488, 25,336 and 10,154
finance contracts, respectively, with aggregate initial principal balances of
approximately $525.8 million, $257.9 million and $91.4 million, respectively.
Finance contracts purchased during the twelve months ended December 31, 1996 had
an average initial principal balance of $11,559, a weighted average APR of
19.8%, a weighted average purchase discount of 3.6% and a weighted average
initial contract term of 55 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 21.0% in the year ended December 31,
1996 which, based on an average cost of borrowed funds of 8.0%, represents a net
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interest spread of 13.0%. During the year ended December 31, 1996, the Company's
owned finance contract portfolio generated a net portfolio yield of 14.7%.
During such period, accounts with payments 61 days or more past due averaged
less than 2.1% 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 Regional Dealer Service Centers. The Company evaluates each
dealer with which it establishes a financing relationship to endeavor to
purchase 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.
Each dealer with which the Company establishes a financing relationship
enters into a non-exclusive written dealer agreement ("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. Regional 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, Regional 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
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. Regional 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
Regional 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 Regional
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 Regional Dealer Service Center manager's
maximum credit authority or does not meet the Company's guidelines, the Regional
Dealer Service Center manager must obtain approval from Operations Risk
Management.
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After reviewing the credit application and the terms of the sale, the
Regional Dealer Service Center notifies the dealer whether or not the Company is
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 3 hours. The Company is selective in its
approval process. The Company historically has approved approximately 25% of all
submitted credit applications, and approximately 40% 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 the capacity to meet other
repayment obligations, Regional 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 Regional 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 taxes
and 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 taxes and 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 Regional Account Service Center collects payments,
accounts for and posts all payments received, responds to borrower inquiries,
takes all necessary action to maintain the security interest granted in the
financed automobile, investigates delinquencies and communicates with the
borrower to obtain timely payments and monitors the finance contract and its
related collateral. When necessary, the National Recovery Center contracts with
third parties to repossess and dispose of financed automobiles.
The Company's activities incorporate proactive procedures and systems. For
example, the Company contacts new borrowers, both in writing and by telephone,
and reviews 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 delinquent borrowers 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
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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 Regional Account Service Center review accounts that are
past due to assess collection efforts to date and to define the collection
strategy, if appropriate. Each Regional Account Service Center designs a
collection strategy that includes a specific deadline before which each
delinquent obligation should be collected. Each Regional Account Service Center
employs predictive dialing technology that automates the collection effort for
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 Regional Account Service Centers
for more intensive collection efforts. Accounts that have not been collected
prior to the deadline established by the Regional 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. Typically, after
repossession, recovery specialists based in the Regional 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 for loan
origination and processing which will become operational in the second quarter
of 1997. 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 composed of three subgroups
which monitor and review the Company's finance contract portfolio to reduce
risk: (i) Underwriting and Analysis, which performs ongoing analysis 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 analysis 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
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the Company's. 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 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 competes on the basis of service
and competitive pricing and flexibility in designing financing programs for the
dealers.
REGULATION
The Company's business is subject to regulation and licensing under various
federal, state and local statutes and regulations. As of December 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. The Credit Practices Rules of the FTC
impose 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.
EMPLOYEES
As of December 31, 1996, the Company employed 627 persons, none of whom is
covered by a collective bargaining agreement. The Company provides basic medical
insurance and other benefits for eligible employees. The Company generally
considers its relationships with employees to be good.
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<PAGE> 12
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Annual Report on Form 10-K contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities and Exchange Act of 1934, as amended. The Company,
or persons acting on behalf of the Company, from time to time, may make, in
writing or orally, "forward-looking" statements as defined under the Private
Securities Litigation Reform Act of 1995 (the "Act"). Forward-looking
statements, which are based on certain assumptions and describe future
initiatives, strategies and expectations of the Company, are generally
identifiable by use of the words "any," "will," "believe," "expect,"
"anticipate," "estimate," "should," "continue" or similar expressions. This Safe
Harbor Statement, when used in conjunction with an identified forward-looking
statement, is for the purpose of qualifying for the "Safe Harbor" provisions of
the Act and is intended to be a readily available written document that contains
factors which could cause results to differ materially from such forward-looking
statements. These factors are in addition to any other cautionary statement,
written or oral, which may be made or referred to in connection with any such
forward-looking statement.
The following matters, among others, may have a material adverse effect on
the business, financial condition, liquidity, results of operations or
prospects, financial or otherwise, of the Company. Reference to this Cautionary
Statement in the context of a forward-looking statement or statements shall be
deemed to be a statement that any one or more of the following factors may cause
actual results to differ materially from those in such forward-looking statement
or statements.
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."
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's. 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 consideration that is paid by the Company to dealers. Further
competition may result in additional reductions in such interest rate,
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 competes on the
basis of service and competitive pricing and flexibility in designing financing
programs for the dealers. See "Business -- Competition" and
"Business -- Contract Acquisition Process."
Regulation. The Company's business is subject to regulation and licensing
under various federal, state and local laws. Most states where the Company
operates 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 define 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
9
<PAGE> 13
operate or restricting the Company's ability to realize the value of the
collateral securing its finance contracts. An adverse change in 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."
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 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."
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.
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." 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. Management
believes that the resolution of this matter will not have a material impact on
the financial position of the Company, however, the ultimate outcome cannot be
determined.
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. One principal source of borrowings by
the Company is the $205 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 (the "Senior Revolving Credit Facility"). 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 programs as another integral component of its funding strategy.
The Company applies 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 securitization markets, interest notes 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
year ended December 31, 1996 and are likely
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<PAGE> 14
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 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.
Cash Flows Associated with Securitizations. Under the financial structures
the Company has used to date in its finance receivable 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. At December 31, 1996,
the dollar amount of contracts liquidated and certain other ratios exceeded the
portfolio performance tests contained in the servicing agreements for two of the
Company's securitization trusts. As a result, FSA and the Company have agreed
that the Company will maintain additional cash reserves with the trustee until
the tests are met. At December 31, 1996, the dollar amount of customer loan
extentions granted exceeded the limitations in the servicing agreements for four
of the Company's securitization trusts. On March 15, 1997, FSA granted a waiver
with respect to such extensions.
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 year ended December 31, 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 interest rates decline, a charge to earnings will be
taken in the period of adjustment.
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 in 2005 (the "1995
Notes") and the indenture (the "1996 Indenture") pursuant to which the Company
issued the Subordinated Reset Notes due in 2006 (the "1996 Notes") 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. 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, the 1995 Notes and
the 1996 Notes. On March 15, 1997, the Company received a waiver with respect to
certain covenants in the Senior Revolving Credit Facility pertaining to its
securitizations.
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
11
<PAGE> 15
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.
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.
Influence of Certain Stockholders. As of December 31, 1996, Middlewest
Ventures II, L.P. ("MW") and Finance Acquisition Corp. ("FAC") beneficially
owned an aggregate of approximately 22.5% of the outstanding shares of the
Company's common stock ("Common Stock") and each has two representatives on the
board of directors of the Company. Accordingly, MW and FAC, if they were to act
in concert, would have significant influence on the Company.
Possible Volatility of Stock Price. The Common Stock is quoted on the
Nasdaq Stock Market's National Market. The market price of the Common Stock
could be subject to significant fluctuations in response to variations in
quarterly operating results and other factors. In addition, the stock market in
recent years has experienced extreme price and volume fluctuations that have
often been unrelated or disproportionate to the operating performance of
affected companies. These broad fluctuations may adversely affect the market
price of the Common Stock.
Restrictions on the Payment of Dividends. The Company currently intends to
retain its earnings to finance the growth and development of its business and
has no present intention of paying any cash dividends in the foreseeable future.
In addition, the Senior Revolving Credit Facility, the 1995 Indenture and the
1996 Indenture limit the payment of dividends.
Effect of Certain Charter, Bylaw and Statutory Provisions. Certain
provisions of the Company's Restated Certificate of Incorporation (the
"Certificate of Incorporation") and Amended and Restated Bylaws (the "Bylaws")
could delay or frustrate the removal of incumbent directors and could make more
difficult a merger, tender offer or proxy contest involving the Company, even if
such events could be beneficial to the interests of the stockholders. For
example, the Certificate of Incorporation provides for certain limitations on
the calling of a special meeting of stockholders and the Bylaws require advance
notice of stockholder proposals and nominations of directors. The Company is
also subject to provisions of Delaware corporation law that prohibit a
publicly-held Delaware corporation from engaging in a broad range of business
combinations with a person who, together with affiliates and associates, owns
15% or more of the corporation's common stock (an "interested stockholder") for
three years after the person became an interested stockholder, unless the
transaction which resulted in the stockholder becoming an interested stockholder
or the business combination is approved in a prescribed manner. Those provisions
could discourage or make more difficult a merger, tender offer or similar
transaction, even if favorable to the Company's stockholders.
Authorized Preferred and Common Stock. Pursuant to the Certificate of
Incorporation, shares of preferred stock, par value $100 per share (the
"Preferred Stock"), and Common Stock may be issued in the future without further
stockholder approval and upon such terms and conditions, and, with respect to
the Preferred Stock, having such rights, privileges and preferences, as the
Board of Directors may determine. The rights of the holders of Common Stock will
be subject to, and may be adversely affected by, any Preferred Stock that may be
issued in the future. The issuance of Preferred Stock, while providing desirable
flexibility in connection with possible acquisitions and other corporate
transactions, could have the effect of making it more
12
<PAGE> 16
difficult for a third party to acquire, or effectively preventing a third party
from acquiring, a majority of the outstanding voting stock of the Company. The
Company is considering issuing Preferred Stock, however it is not currently
contemplating making any acquisitions nor is it considering any proposal from
any other person to acquire the Company.
ITEM 2. PROPERTIES
The principal executive office of the Company is located in Deerfield,
Illinois in a leased office facility of approximately 13,000 square feet, and
the lease for such office expires in March 1999. The Company entered a new lease
in February 1997 for a facility of approximately 26,000 square feet for its new
principal executive office, and that lease expires in June 2006. As of December
31, 1996, the Company leased office space for its regional operations ranging
from approximately 775 square feet to 17,200 square feet, and was obligated
under leases expiring on dates ranging from August 1997 to September 2001. The
Company does not believe that the particular locations of its Regional Dealer
Service Centers are material to its business and believes that other
satisfactory locations are available for lease at comparable rates and for
comparable terms in each locality served by the Company.
ITEM 3. 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 ("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.
Management believes that the resolution of this matter will not have a material
impact on the financial position of the Company, however, the ultimate outcome
cannot be determined. The Company is also involved from time to time in other
litigation incidental to its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
NAME AGE POSITION AND OFFICES HELD
---- --- -------------------------
<S> <C> <C>
Mitchell C. Kahn....................... 43 President and Chief Executive Officer, Director
John R. Griggs......................... 47 Executive Vice President and Chief Operating Officer
--Dealer Financial Services Division
Norman Smagley......................... 38 Senior Vice President and Chief Financial Officer
Alan J. Appelman....................... 39 Senior Vice President
Craig Adams............................ 36 Vice President
Thomas R. Ehmann....................... 44 Vice President
S. Mark Floyd.......................... 44 Vice President
Brian W. Hausmann...................... 41 Vice President
Allen D. Rice.......................... 40 Vice President
Paul M. Van Eyl........................ 31 Vice President
Richard P. Vogelman.................... 54 Vice President
</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, he
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. During the prior eleven years, Mr. Kahn held various senior
managerial positions in the consumer finance industry.
13
<PAGE> 17
Mr. Griggs joined the Company as Executive Vice President and Chief
Operating Officer -- Dealer Financial Services Division in March 1997. He served
as Senior Vice President and Manager of National Operations of Bank One Credit
Company, a national indirect financing company, primarily of automobiles, since
1996. From 1986 to 1996, Mr. Griggs held various positions at Household
International, a diversified consumer lender, including Division General Manager
and Senior Vice President. From 1980 to 1986, he worked for Citicorp Acceptance
Company, a national indirect financing company, and last held the title Chief
Financial Officer and Vice President of Operations.
Mr. Smagley joined the Company in February 1997 as Senior Vice President
and Chief Financial Officer. He served as Vice President -- Finance and Chief
Financial Officer of Trans Leasing International, Inc., a lessor of medical and
office technology equipment, from 1994 to 1997. Mr. Smagley was employed in
several financial management positions with firms in the pharmaceutical,
financial services, and energy fields from 1981 to 1993.
Mr. Appelman joined the Company in August 1995 as Vice President --
Operations Development and was named Vice President -- Risk Management in August
1996 and Senior Vice President and Chief Credit Officer in March 1997. From
October 1990 to August 1995, Mr. Appelman held various operation analysis
positions, including Manager -- Operations and Portfolio Analysis, at Hyundai
Motor Finance Company. From 1981 to 1988, Mr. Appelman held various positions,
including Staff Vice President at Citicorp.
Mr. Adams was named Vice President -- Account Services in March 1997. He
joined the Company in August 1996 as Manager -- Portfolio Analysis and was named
Manager -- Account Services in September 1996. Mr. Adams held several positions
in credit management with Sears, Roebuck and Company from 1986 to 1996.
Mr. Ehmann joined the Company in November 1992 as Vice President -- Finance
and Controller and Assistant Secretary, was Vice President and Chief Financial
Officer from June 1995 until February 1997, and holds the title Vice President
and Chief Information Officer as of December 1996. From May 1988 to November
1992, Mr. Ehmann was Vice President, Finance and Controller for 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 -- Financial
Institutions Group. From April 1990 to June 1996, Mr. Floyd was President and
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 in Texas.
Mr. Hausmann joined the Company in June 1991 as Vice
President -- Operations and was named Vice President -- Automotive Credit Group
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 and
Marketing, and was named Vice President -- First Merchants Capital Ltd. in March
1997. From January 1990 to March 1995, Mr. Rice was founder and President of
Aegis International, an international consulting firm specializing in marketing
and sales.
Mr. Van Eyl joined the Company in July 1993 as Director of Planning and
Analysis, became 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> 18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since September 23, 1994, the Common Stock has been quoted on The Nasdaq
Stock Market's National Market under the symbol "FMAC." As of March 7, 1997,
there were approximately 90 holders of record of the Common Stock, and the
Company estimates that as of such date there were approximately 4,000 beneficial
holders of the Common Stock. The Company has never paid a cash dividend on its
Common Stock and has no present intention of paying cash dividends in the
foreseeable future. In addition, the Senior Revolving Credit Facility and the
indentures relating to the Company's 1995 Notes and 1996 Notes limit the payment
of dividends. The Company's current policy is to retain earnings to provide
funds for the operation and expansion of its business and for the repayment of
indebtedness. Any determination in the future to pay dividends will depend on
the Company's financial condition, capital requirements, results of operations,
contractual limitations and other factors deemed relevant by the Board of
Directors. The information set forth under the caption entitled "Note
18 -- Quarterly Results (unaudited)" on page 44 of the Annual Report to
Stockholders for the year ended December 31, 1996, is incorporated herein by
reference.
ITEM 6. SELECTED FINANCIAL DATA
The information set forth under the caption "Selected Financial Data" on
page 12 of the Annual Report to Stockholders for the year ended December 31,
1996 is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information set forth under the caption "Management Discussion and
Analysis of Financial Condition and Results of Operations" on pages 13 through
21 of the Annual Report to Stockholders for the year ended December 31, 1996 is
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information set forth under the captions "Independent Auditors'
Report," "Consolidated Balance Sheets," "Consolidated Statements of Earnings,"
"Consolidated Statements of Changes in Stockholders' Equity," "Consolidated
Statements of Cash Flows" and "Notes to Consolidated Financial Statements" on
pages 21 through 44 of the Annual Report to Stockholders for the year ended
December 31, 1996, is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
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<PAGE> 19
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth in the Company's Proxy Statement for the Annual
Meeting of Stockholders to be held on May 15, 1997 (the "1997 Proxy Statement"),
under the captions "Election of Directors" and "Section 16(a) Beneficial
Ownership Reporting Compliance" is incorporated herein by reference. The
information required by Item 401 of Regulation S-K relating to the executive
officers of the Company is furnished in a separate item captioned "Executive
Officers of the Registrant" in Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the captions "Approval of the Amendment and
Restatement of the First Merchants Acceptance Corporation 1994 Non-Employee
Directors Stock Option Plan," "Attendance at Meetings and Compensation of
Directors," "1994 Non-Employee Directors Stock Option Plan," "Executive
Compensation," "Summary Compensation Table," "Option Grants in Last Fiscal
Year," "Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End
Option Values," "Compensation Committee Interlocks and Insider Participation,"
"Employment Agreement," "Management Purchase Agreements," "1994 Equity Incentive
Plan," "Incentive Stock Option Plan" and "Stock Option Agreements" in the
Company's 1997 Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "Common Stock Ownership of
Certain Beneficial Owners and Management" in the Company's 1997 Proxy Statement
is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Certain Transactions" in the
Company's 1997 Proxy Statement is incorporated herein by reference.
16
<PAGE> 20
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following consolidated financial statements contained in the Annual
Report to Stockholders for the year ended December 31, 1996 have been
incorporated by reference in Item 8.
<TABLE>
<CAPTION>
PAGE(S) IN ANNUAL
ITEM REPORT TO STOCKHOLDERS
---- ----------------------
<S> <C>
Independent Auditors' Report................................ 21
Consolidated Balance Sheets - December 31, 1996 and 1995.... 22-23
Consolidated Statements of Earnings - for the years ended
December 31, 1996, 1995 and 1994.......................... 24
Consolidated Statements of Changes in Stockholders' Equity
-for the years ended December 31, 1996, 1995 and 1994..... 25
Consolidated Statements of Cash Flows - for the years ended
December 31,1996, 1995 and 1994........................... 26-27
Notes to Consolidated Financial Statements.................. 28-44
</TABLE>
(a) 2. Financial Statement Schedules
All financial statement schedules have been omitted because they are either
inapplicable or not required under the instructions.
(b) Reports on Form 8-K
On October 22, 1996, the Company filed Form 8-K regarding the issuance of a
press release announcing its operating results with respect to the third quarter
of 1996.
On December 18, 1996, the Company filed Form 8-K regarding the closing of a
securitization of approximately $144.7 million of its motor vehicle retail
installment contract receivables by means of an institutional private placement
pursuant to Rule 144A under the Securities Act of 1933, as amended.
17
<PAGE> 21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on this 28th day of
March 1997.
First Merchants Acceptance Corporation
By: /s/ MITCHELL C. KAHN
------------------------------------
Mitchell C. Kahn
President and Chief Executive
Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report signed below by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ MITCHELL C. KAHN President and Chief Executive March 28, 1997
- --------------------------------------------- Officer, Director (Principal
Mitchell C. Kahn Executive Officer)
/s/ THOMAS R. EHMANN Vice President (Principal Accounting March 28, 1997
- --------------------------------------------- Officer and Principal Financial
Thomas R. Ehmann Officer)
/s/ THOMAS A. HIATT Director March 28, 1997
- ---------------------------------------------
Thomas A. Hiatt
/s/ WILLIAM N. PLAMONDON Director March 28, 1997
- ---------------------------------------------
William N. Plamondon
/s/ MARCY H. SHOCKEY Director March 28, 1997
- ---------------------------------------------
Marcy H. Shockey
/s/ RICHARD J. UHL Director March 28, 1997
- ---------------------------------------------
Richard J. Uhl
/s/ SOLOMON A. WEISGAL Director March 28, 1997
- ---------------------------------------------
Solomon A. Weisgal
/s/ STOWE W. WYANT Director March 28, 1997
- ---------------------------------------------
Stowe W. Wyant
</TABLE>
18
<PAGE> 22
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------- ----
<C> <S> <C>
3.1 Restated Certificate of Incorporation of the Company, filed
with the Commission as Exhibit 3.1 to the Company's
Registration Statement on Form S-1 (File No. 33-81070), is
incorporated herein by reference.
3.2 Amended and Restated Bylaws of the Company filed with the
Commission as Exhibit 3.2 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1995, is
incorporated herein by reference.
4.1 Specimen certificate for the Company's Common Stock, filed
with the Commission as Exhibit 4.1 to the Company's
Registration Statement on Form S-1 (File No. 33-81070), is
incorporated herein by reference.
4.2 Indenture dated January 1, 1995, between the Company and
LaSalle National Bank, as trustee, including the form of
note, filed with the Commission as Exhibit 4.2 to the
Company's Annual Report on Form 10-K for the fiscal year
ended May 31, 1995, is incorporated herein by reference.
4.3 Indenture dated as of November 17, 1995, among the Company,
First Merchants Auto Receivable Corporation and Harris Trust
and Savings Bank, as Trustee, including the form of note,
filed with the Commission as Exhibit 3 to the Company's Form
8-K dated November 17, 1995, is incorporated herein by
reference.
4.4 Indenture between First Merchants Auto Trust 1996-A as
Issuer and Harris Trust and Savings as Indenture Trustee,
filed with the Commission as Exhibit 10.8 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1996, is incorporated herein by reference.
4.5 Indenture dated as of September 1, 1996 between First
Merchants Acceptance Auto Trust 1996-B and Harris Trust and
Savings Bank, as Indenture Trustee filed with the Commission
as Exhibit 4 to the Company's 8-K dated September 26, 1996,
is incorporated herein by reference.
4.6 Indenture dated as of October 15, 1996, between the Company
as Issuer and LaSalle National Bank as Indenture Trustee, is
filed herewith..............................................
10.1 1994 Non-Employee Directors Stock Option Plan, filed with
the Commission as Exhibit 10.2 to the Company's Registration
Statement on Form S-1 (File No. 33-81070), is incorporated
herein by reference.
10.2 Incentive Stock Option Plan, filed with the Commission as
Exhibit 10.4 to the Company's Registration Statement on Form
S-1 (File No. 33-81070), is incorporated herein by
reference.
10.3 Third Amended and Restated Loan and Security Agreement, as
amended, among the Company, LaSalle National Bank, as agent,
and the lenders named therein, filed with the Commission as
Exhibit 10.5 to the Company's Annual Report on Form 10-K for
the fiscal year ended May 31, 1995, is incorporated herein
by reference.
10.4 Amended and Restated Registration Rights Agreement, dated as
of October 29, 1993, as amended, filed with the Commission
as Exhibit 10.11 to the Company's Registration Statement on
Form S-1 (File No. 33-81070), is incorporated herein by
reference.
10.5 Amended and Restated Stock Option Agreement dated as of
November 1, 1993 between the Company and Mitchell C. Kahn,
filed with the Commission as Exhibit 10.12 to the Company's
Registration Statement on Form S-1 (File No. 33-81070), is
incorporated herein by reference.
</TABLE>
19
<PAGE> 23
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------- ----
<C> <S> <C>
10.6 Second Stock Option Agreement dated as of April 15, 1994
between the Company and Mitchell C. Kahn, filed with the
Commission as Exhibit 10.13 to the Company's Registration
Statement on Form S-1 (File No. 33-81070), is incorporated
herein by reference.
10.7 Amended and Restated Stock Option Agreement dated as of
November 1, 1993 between the Company and Brian W. Hausmann,
filed with the Commission as Exhibit 10.14 to the Company's
Registration Statement on Form S-1 (File No. 33-81070), is
incorporated herein by reference.
10.8 Management Purchase Agreement dated as of May 23, 1991
between the Company and Brian W. Hausmann, as amended, filed
with the Commission as Exhibit 10.15 to the Company's
Registration Statement on Form S-1 (File No. 33-81070), is
incorporated herein by reference.
10.9 Management Purchase Agreement dated as of May 23, 1991
between the Company and Mitchell C. Kahn, as amended, filed
with the Commission as Exhibit 10.16 to the Company's
Registration Statement on Form S-1 (File No. 33-81070), is
incorporated herein by reference.
10.10 Office Building Lease dated as of July 2, 1992 between the
Company and The Travelers Insurance Company, as amended,
filed with the Commission as Exhibit 10.35 to the Company's
Registration Statement on Form S-1 (File No. 33-81070), is
incorporated herein by reference.
10.11 Agreement for Supreme Data Processing Services dated as of
May 5, 1993 between the Company and Norwest Financial
Information Services Group, Inc. and corresponding Master
Equipment Purchase Agreement and Software License dated as
of June 30, 1993, filed with the Commission as Exhibit 10.36
to the Company's Registration Statement on Form S-1 (File
No. 33-81070), is incorporated herein by reference.
10.12 Stock Option Agreement dated as of May 26, 1994 between the
Company and Stowe W. Wyant, filed with the Commission as
Exhibit 10.38 to the Company's Registration Statement on
Form S-1 (File No. 33-81070), is incorporated herein by
reference.
10.13 Management Purchase Agreement dated as of May 23, 1991
between the Company and Marilyn E. Millard, filed with the
Commission as Exhibit 10.43 to the Company's Registration
Statement on Form S-1 (File No. 33-81070), is incorporated
herein by reference.
10.14 Management Purchase Agreement dated as of May 23, 1991
between the Company and John W. McCarthy, filed with the
Commission as Exhibit 10.44 to the Company's Registration
Statement on Form S-1 (File No. 33-81070), is incorporated
herein by reference.
10.15 Management Purchase Agreement dated as of February 28, 1992
between the Company and Robert G. Mark, filed with the
Commission as Exhibit 10.45 to the Company's Registration
Statement on Form S-1 (File No. 33-81070), is incorporated
herein by reference.
10.16 Interest Rate Cap Agreement Confirmation dated as of
December 15, 1994 relating to the ISDA Master Agreement
dated as of January 10, 1994 between the Company and Firstar
Bank Milwaukee, N.A., filed as Exhibit 10.37 to the
Company's Registration Statement on Form S-1 (File No.
33-88244), is incorporated herein by reference.
10.17 Third Amendment dated May 5, 1995 to the Office Building
Lease filed as Exhibit 10.10, filed with the Commission as
Exhibit 10.52 to the Company's Annual Report on Form 10-K
for the fiscal year ended May 31, 1995, is incorporated
herein by reference.
</TABLE>
20
<PAGE> 24
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------- ----
<C> <S> <C>
10.18 Waiver and Consent dated as of September 22, 1995 pertaining
to the Third Amended and Restated Loan and Security
Agreement filed as Exhibit 10.3, filed with the Commission
as Exhibit 10.53 to the Company's Registration Statement on
Form S-1 (File No. 33-96310), is incorporated herein by
reference.
10.19 Purchase Agreement, dated November 10, 1995, among the
Company, First Merchants Auto Receivable Corporation and
Salomon Brothers, Inc., filed with the Commission as Exhibit
2 to the Company's Form 8-K dated November 17, 1995, is
incorporated herein by reference.
10.20 Sale and Servicing Agreement, dated November 17, 1995, among
the Company, First Merchants Auto Receivable Corporation and
Harris Trust and Savings Bank, as back up servicer, filed
with the Commission as Exhibit 4 to the Company's Form 8-K
dated November 17, 1995, is incorporated herein by
reference.
10.21 Amendment to Third Amended and Restated Loan and Security
Agreement, dated as of November 10, 1995, by and among the
Company, LaSalle National Bank, as agent and one of the
lenders, and other lenders named therein, filed with the
Commission as Exhibit 5 to the Company's Form 8-K dated
November 17, 1995, is incorporated herein by reference.
10.22 Form of Waiver pertaining to the Amended and Restated
Registered Rights Agreement filed as Exhibit 10.54 to the
Company's Registration Statement on Form S-1 (File No.
33-96310), is incorporated herein by reference.
10.23 Amendment to Third Amended and Restated Loan and Security
Agreement, dated as of December 18, 1995, by and among the
Company, LaSalle National Bank, as agent and one of the
lenders, and other lenders named therein filed with the
Commission as Exhibit 10.33 to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1995, is
incorporated herein by reference.
10.24 Purchase Agreement, dated March 4, 1996, among the Company,
First Merchants Auto Receivable Corporation II and Salomon
Brothers Inc., filed with the Commission as Exhibit 2 to the
Company's Form 8-K dated March 12, 1996, is incorporated
herein by reference.
10.25 Receivables Purchase Agreement, dated March 1, 1996, among
the Company and First Merchants Auto Receivable Corporation
II, filed with the Commission as Exhibit 3 to the Company's
Form 8-K dated March 12, 1996, is incorporated herein by
reference.
10.26 Pooling and Servicing Agreement, dated March 1, 1996, among
the Company, as Servicer, First Merchants Acceptance
Corporation II, as depositor and Harris Trust and Savings
Bank, as Trustee and backup Servicer filed with the
Commission as Exhibit 4 to the Company's Form 8-K dated
March 12, 1996, is incorporated herein by reference.
10.27 Fourth Amended and Restated Loan and Security Agreement,
dated as of February 28, 1996, by and among the Company,
LaSalle National Bank, NBD Bank, Firstar Bank of Milwaukee,
N.A., Harris Trust and Savings Bank, The Boatmen's National
Bank of St. Louis, First Bank, N.A., CoreStates Bank, N.A.,
Natwest Bank, filed with the Commission as Exhibit 10.4 to
the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1996, is incorporated herein by reference.
10.28 Amended and Restated First Merchants Acceptance Corporation
1994 Employee Stock Purchase Plan, dated May 15, 1996, filed
with the Commission as Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1996, is incorporated herein by reference.
10.29 Amended and Restated First Merchants Acceptance Corporation
1994 Equity Incentive Plan, dated May 15, 1996, filed with
the Commission as Exhibit 10.2 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1996, is
incorporated herein by reference.
</TABLE>
21
<PAGE> 25
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------- ----
<C> <S> <C>
10.30 Purchase Agreement, dated May 10, 1996, among the Company,
First Merchants Auto Receivable Corporation II and Salomon
Brothers Inc., filed with the Commission as Exhibit 10.3 to
the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1996, is incorporated herein by reference.
10.31 Receivables Purchase Agreement, dated May 1, 1996, among the
Company and First Merchants Auto Receivable Corporation II,
filed with the Commission as Exhibit 10.4 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1996, is incorporated herein by reference.
10.32 Sales and Servicing Agreement, dated May 1, 1996, among
First Merchants Auto Trust 1996-A as Issuer, First Merchants
Auto Receivables Corporation II, as seller, The Company, as
Servicer, and Harris Trust and Savings Bank, as Trustee and
backup Servicer, filed with the Commission as Exhibit 10.5
to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996, is incorporated herein by
reference.
10.33 Administrative Agreement, dated May 1, 1996, among First
Merchants Auto Trust 1996-A, the Company and First and
Harris Trust and Savings Bank, filed with the Commission as
Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1996, is incorporated herein
by reference.
10.34 Amended and Restated Trust Agreement, dated May 1, 1996,
among First Merchants Auto Receivables Corporation II as
Depositor and Chemical Bank Delaware as Owner Trustee, filed
with the Commission as Exhibit 10.7 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1996, is incorporated herein by reference.
10.35 Remote Outsourcing Agreement dated as of June 1, 1996
between the Company and Alltel Financial Information
Services, Inc., filed with the Commission as Exhibit 10.12
to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996, as amended, is incorporated
herein by reference.
10.36 Employment Agreement dated as of June 1, 1996 between the
Company and Mitchell C. Kahn, filed with the Commission as
Exhibit 10.13 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1996, as amended is
incorporated herein by reference.
10.37 Amendment No.1 dated May 1, 1996 to the Fourth Amended and
Restated Loan and Security Agreement by and among the
Company, LaSalle National Bank as agent, and the other
lenders named therein, filed with the Commission as Exhibit
10.14 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996, as amended, is incorporated
herein by reference.
10.38 Purchase Agreement, dated June 28, 1996, among the Company,
First Merchants Auto Receivable Corporation II, and Salomon
Brothers Inc., filed with the Commission as Exhibit 2 to the
Company's Form 8-K dated June 26, 1996, is incorporated
herein by reference.
10.39 Receivables Purchase Agreement, dated as of June 1, 1996
between the Company and First Merchants Auto Receivable
Corporation II, filed with the Commission as Exhibit 3 to
the Company's Form 8-K dated June 26, 1996, is incorporated
herein by reference.
10.40 Pooling and Servicing Agreement, dated June 19, 1996, among
the Company, as Servicer, First Merchants Acceptance
Corporation II, as depositor and Harris Trust and Savings
Bank, as Trustee and backup Servicer filed with the
Commission as Exhibit 4 to the Company's Form 8-K dated June
26, 1996, is incorporated herein by reference.
10.41 Third Amendment to Amended and Restated Registration Rights
Agreement dated June 15, 1996, among the Company and other
parties named therein, filed with the Commission as Exhibit
10.12 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996, is incorporated herein by
reference.
</TABLE>
22
<PAGE> 26
<TABLE>
<S> <C> <C> <C>
10.42 Stockholders Termination Agreement among the Company and other parties named therein, filed
with the Commission as Exhibit 10.13 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996, is incorporated herein by reference.
10.43 Amended and Restated Trust Agreement, dated as of September 1, 1996, between First Merchants
Auto Receivable Corporation II, as Depositor and Chase Manhattan Bank Delaware as Owner
Trustee, filed with the Commission as Exhibit 1 to the Company's 8-K dated September 26, 1996
is incorporated herein by reference.
10.44 Sales and Servicing Agreement dated as of September 1, 1996, among First Merchants Auto Trust
1996-B, as Issuer, First Merchants Auto Receivable Corporation II, as Seller, and the Company,
as Servicer, and Harris Trust and Savings Bank, as Indenture Trustee, Collateral Agent and
Backup Servicer, filed with the Commission as Exhibit 2 to the Company's 8-K dated September
26, 1996, is incorporated herein by reference.
10.45 Receivables Purchase Agreement, dated as of September 1, 1996, between the Company, and First
Merchants Auto Receivable Corporation II filed with the Commission as Exhibit 3 to the
Company's 8-K dated September 26, 1996, is incorporated herein by reference.
10.46 Consent and Amendment to Fourth Amended and Restated Loan and Security Agreement, dated as of
October 29, 1996, by and among the Company as Borrower; NBD Bank; Firstar Bank Milwaukee, N.A.;
Harris Trust and Savings Bank; The Boatmen's National Bank of St. Louis; First Bank, National
Association; CoreStates Bank, N.A., Fleet Bank, National Association, f/k/a Natwest Bank N.A.;
and Mellon Bank, N.A. as Lenders; and LaSalle National Bank as Lender and Agent for the
Lenders, is filed herewith.....................................................................
10.47 Second Amendment to Fourth Amended and Restated Loan and Security Agreement, dated as of
December 26, 1996, by and among the Company as Borrower; NBD Bank; Firstar Bank Milwaukee,
N.A.; Harris Trust and Savings Bank; The Boatmen's National Bank of St. Louis; First Bank,
National Association; CoreStates Bank, N.A., Fleet Bank, National Association; and Mellon Bank,
N.A. as Lenders; and LaSalle National Bank as Lender and Agent for the Lenders.................
10.48 Underwriting Agreement dated October 29, 1996 among the Company as Sellers; J.C. Bradford &
Co., Piper Jaffray Inc., Keefe, Bruyette & Woods, Inc., and Stifel, Nicolaus & Company,
Incorporated as Underwriters...................................................................
11.1 Statement regarding computation of earnings per share..........................................
13.1 First Merchants Acceptance Corporation Annual Report to Stockholders for the year ended
December 31, 1996 (Such report, except to the extent incorporated herein by reference, is being
furnished to the Commission for informational purposes only and is not to be deemed filed as
part of this annual report on Form 10-K.)......................................................
21.1 Subsidiaries of the Registrant.................................................................
23.1 Consent of Deloitte & Touche LLP...............................................................
27.1 Financial Data Schedule........................................................................
</TABLE>
23
<PAGE> 1
EXHIBIT 4.6
FIRST MERCHANTS ACCEPTANCE CORPORATION
AND
LASALLE NATIONAL BANK
TRUSTEE
_________________________
INDENTURE
DATED AS OF OCTOBER 15, 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
October 15, 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
317(a) . . . . . . . . . . . . . . . . . 7.8 and 7.10
(b) . . . . . . . . . . . . . . . . . 3.2(B), (C)
318(a) . . . . . . . . . . . . . . . . . 15.6
- ---------------
This tie-sheet does not constitute a part of the Indenture.
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PARTIES
RECITALS
FORM OF NOTE
ARTICLE 1
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, REGISTRATIONAND 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
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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
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ARTICLE 5
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
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(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 8EVIDENCE 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 9CONSOLIDATION, 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 10CONCERNING 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
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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
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ARTICLE 15
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 16.1 Reinstatement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
SECTION 16.11 Subrogation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
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This INDENTURE, dated as of October 15, 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: 9.5%
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
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<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:___________________
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<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 October 15, 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.
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<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.
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<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
8
<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
total assets of the Company and its Subsidiaries (excluding inter-company
items) determined, in accordance with generally accepted accounting principles
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 an asset, 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 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 October 15, 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 October 29, 1996.
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"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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"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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<PAGE> 30
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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<PAGE> 31
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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<PAGE> 32
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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<PAGE> 33
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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<PAGE> 36
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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<PAGE> 38
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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<PAGE> 1
EXHIBIT 10.46
CONSENT AND AMENDMENT TO FOURTH AMENDED
AND RESTATED LOAN AND SECURITY AGREEMENT
This Consent and Amendment to Fourth Amended and Restated Loan
and Security Agreement (this "Amendment") is dated as of the 29th day of
October, 1996, by and among First Merchants Acceptance Corporation
("Borrower"), LaSalle National Bank ("LaSalle"), NBD Bank, ("NBD"), Firstar
Bank Milwaukee, N.A. ("Firstar"), Harris Trust and Savings Bank ("Harris"), The
Boatmen's National Bank of St. Louis ("Boatmen's"), First Bank, National
Association ("First"), CoreStates Bank, N.A. ("CoreStates"), Fleet Bank,
National Association, f/k/a Natwest Bank N.A. ("Fleet"), and Mellon Bank, N.A.
("Mellon") (LaSalle, NBD, Firstar, Harris, Boatmen's, First, CoreStates, Fleet
and Mellon are hereinafter referred to individually as "Lender" and
collectively as "Lenders" and LaSalle in a separate capacity as Agent for
Lenders under the "Loan Agreement" (as hereinafter defined) is hereinafter
referred to as "Agent").
R E C I T A L S
A. Borrower, Lenders and Agent are parties to a Fourth
Amended and Restated Loan and Security Agreement dated as of February 28, 1996
(including all exhibits and riders thereto and as supplemented and amended
prior hereto or hereafter, referred to herein as the "Loan Agreement");
B. Borrower desires to amend the Loan Agreement to (i) permit
the issuance of $51,750,000 of Subordinated Reset Notes pursuant to an
Indenture dated as of October 15, 1996 between Borrower and LaSalle National
Bank, as trustee and (ii) provide certain modifications to the Loan Agreement
in connection therewith; and
C. Agent and Lenders are willing to consent to the issuance
of such Subordinated Reset Notes and to agree to such amendments on the terms
and conditions contained herein.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements of the parties contained herein and for other good and valuable
consideration, the receipt of which is hereby acknowledged, Borrower, Agent and
Lenders agree as follows:
Section 1. Recitals. The Recitals to this Amendment are hereby
incorporated herein in their entirety by this reference thereto and deemed to
be a part hereof.
Section 2. Amendments to Loan Agreement. Subject to the terms
of this Amendment, the Loan Agreement is hereby amended as follows:
2.1 Section 1 of the Loan Agreement is hereby amended to add
the following new defined terms:
"Additional Indenture" means that certain Indenture between
Borrower and LaSalle National Bank, as trustee dated as of
October 15, 1996.
2.2 The definitions of "Noteholders", "Notes" and
"Permitted Noteholder Payments" appearing in Section 1 of the Loan
Agreement are hereby amended and restated in their entirety to read as
follows:
<PAGE> 2
"Noteholders shall have the meanings ascribed thereto in the
Indenture and Additional Indenture."
"Notes shall have the meanings ascribed thereto in the Indenture
and Additional Indenture."
"Permitted Noteholder Payments shall mean Permitted Payments as
defined in Section 16.2 of the Indenture and Section 16.2 of the
Additional Indenture.:
2.3 Section 17(n) of the Loan Agreement is hereby amended by
adding the words "and Additional Indenture" after the word "Indenture" wherever
it appears in the first full sentence thereof, and by adding the words "or
Additional Indenture" after the word "Indenture" where it appears in the second
full sentence thereof.
2.4 Section 18(b)(iii) of the Loan Agreement is hereby amended
in its entirety to read as follows:
"(iii) Subordinated Indebtedness to Noteholders up to the
aggregate principal sum of $14,375,000, plus all interest, fees
and expenses payable by Borrower under the Indenture and
Subordinated Indebtedness to Noteholders up to the aggregate
principal sum of $51,750,000, plus all interest, fees and
expenses payable by Borrower under the Additional Indenture;"
2.5 Section 19(d) of the Loan Agreement is hereby amended in
its entirety to read as follows:
"(d) an "Event of Default" (as defined in the Indenture or
Additional Indenture) shall occur under the terms of the
Indenture or Additional Indenture, or Borrower or any of its
subsidiaries shall be in default of any term, covenant,
obligation or condition under the Securitization Transaction
Documents which has not been cured within the time provided
therein, if any;"
Section 3. Representation of the Warranties. To induce Lenders
to amend the Loan Agreement, Borrower represents and warrants to Lenders that:
3.1 Compliance with Loan Agreement. On the date hereof,
Borrower is in compliance with the terms and provisions of the Loan Agreement
and no Event of Default specified therein has occurred.
3.2 Representations and Warranties. On the date hereof, the
representations and warranties set forth in the Loan Agreement are true and
correct with the same effect as if such representations and warranties have
been made on the date hereof except to the extent such representations and
warranties expressly relate to an earlier date.
3.3 Authority of Borrower. Borrower has full power and
authority to enter into this Amendment and the Additional Indenture, which has
been duly authorized by all proper and necessary corporate action. No consent
or approval of any public authority or regulatory body
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<PAGE> 3
or any other party is required as a condition to the validity or enforceability
of this Amendment or the Additional Indenture.
3.4 Amendment as Binding Agreement. This Amendment
constitutes a valid and legally binding obligation of Borrower, fully
enforceable against Borrower in accordance with its terms.
Section 4. Conditions Precedent. The agreement by Lenders to
amend the Loan Agreement pursuant to the terms of this Amendment is subject to
the following conditions precedent:
4.1 Evidence of Authority. Agent shall have received evidence
of the authorization of Borrower to enter into this Amendment by its Board of
Directors in form acceptable to Agent.
Section 5. Consent. Subject to the terms hereof, Agent and
Lenders consent to Borrower entering into, executing and performing its
obligations under the Additional Indenture.
Section 6. General Provisions.
6.1 Except as amended by this Amendment, the terms and
provisions of the Loan Agreement are in all other respects ratified and
confirmed and remain in full force and effect. In the event of a conflict
between the terms of the Loan Agreement and the terms of this Amendment, the
terms of this Amendment shall be controlling.
6.2 After the effective date hereof, all references in the
Loan Agreement and in all related agreements and documents to "Agreement",
"hereof", or the like shall refer to the Loan Agreement as herein amended or
modified.
6.3 This Amendment shall not constitute a waiver of any
existing events of default or any other provisions of the Loan Agreement as
amended hereby, except as expressly set forth herein, and shall not constitute
a course of dealing with respect to any such events of default or an agreement
to further consents, amendments or waivers under the Loan Agreement. Agent and
Lenders expressly reserve their rights and remedies, none of which shall be
deemed to be waived hereby.
6.4 Borrower hereby agrees to pay all reasonable out-of-pocket
expenses incurred by Agent in connection with the preparation, negotiation and
consummation of this Amendment and all other documents related thereto,
including, without limitation, the fees and expenses of Agent's counsel.
6.5 This Amendment shall be construed in accordance with and
governed by the laws of the State of Illinois and the obligations of Borrower
under this Amendment are and shall arise absolutely unconditionally upon the
execution and delivery of this Amendment. This Amendment may be executed in
counterparts.
6.6 Capitalized terms used herein which are defined in the
Loan Agreement, shall unless otherwise defined herein, have the meanings
provided in the Loan Agreement.
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<PAGE> 4
IN WITNESS WHEREOF, Agent, Borrower and Lenders have caused this
Amendment to be duly executed as of the date first above written.
FIRST MERCHANTS ACCEPTANCE CORPORATION
By: _______________________________
Title: _______________________________
LASALLE NATIONAL BANK
By: _______________________________
Title: _______________________________
NBD BANK
By: _______________________________
Title: _______________________________
FIRSTAR BANK MILWAUKEE, N.A.
By: _______________________________
Title: _______________________________
HARRIS TRUST AND SAVINGS BANK
By: _______________________________
Title: _______________________________
FIRST BANK, NATIONAL ASSOCIATION
By: _______________________________
Title: _______________________________
THE BOATMEN'S NATIONAL BANK OF ST. LOUIS
By: _______________________________
Title: _______________________________
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<PAGE> 5
FLEET BANK, NATIONAL ASSOCIATION
By: _______________________________
Title: _______________________________
CORESTATES BANK, N.A.
By: _______________________________
Title: _______________________________
MELLON BANK, N.A.
By: _______________________________
Title: _______________________________
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<PAGE> 1
EXHIBIT 10.47
SECOND AMENDMENT TO FOURTH AMENDED
AND RESTATED LOAN AND SECURITY AGREEMENT
This Second Amendment to Fourth Amended and Restated Loan and
Security Agreement (this "Amendment") is dated as of the 26th day of December,
1996, by and among First Merchants Acceptance Corporation ("Borrower"), LaSalle
National Bank ("LaSalle"), NBD Bank, ("NBD"), Firstar Bank Milwaukee, N.A.
("Firstar"), Harris Trust and Savings Bank ("Harris"), The Boatmen's National
Bank of St. Louis ("Boatmen's"), First Bank, National Association ("First"),
CoreStates Bank, N.A. ("CoreStates"), Fleet Bank, National Association
("Fleet"), and Mellon Bank, N.A. ("Mellon") (LaSalle, NBD, Firstar, Harris,
Boatmen's, First, CoreStates, Fleet and Mellon are hereinafter referred to
individually as "Lender" and collectively as "Lenders" and LaSalle in a
separate capacity as Agent for Lenders under the "Loan Agreement" (as
hereinafter defined) is hereinafter referred to as "Agent").
R E C I T A L S
A. Borrower, Lenders and Agent are parties to a Fourth
Amended and Restated Loan and Security Agreement dated as of February 28, 1996
(including all exhibits and riders thereto and as supplemented and amended
prior hereto or hereafter, referred to herein as the "Loan Agreement").
B. Borrower desires to amend the Loan Agreement to provide
for the creation of operating Subsidiaries and the addition of such operating
Subsidiaries as additional borrowers under the Loan Agreement under certain
circumstances, the entry by Borrower into additional lines of business, and
certain other modifications in the terms thereof.
C. Lenders are willing to consent to such amendments on the
terms and conditions contained herein.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements of the parties contained herein and for other good and valuable
consideration, the receipt of which is hereby acknowledged, Borrower, Agent and
Lenders agree as follows:
SECTION 1. RECITALS. The Recitals to this Amendment are hereby
incorporated herein in their entirety by this reference thereto and deemed to
be a part hereof.
SECTION 2. AMENDMENTS TO LOAN AGREEMENT. Subject to the terms
of this Amendment, the Loan Agreement is hereby amended as follows:
<PAGE> 2
2.1 Section 1 of the Loan Agreement is hereby amended to add
the following new defined terms:
"Assumption Agreement" shall have the meaning set forth in Section 18(t)
of this Agreement.
"Borrower" shall mean, initially, First Merchants Acceptance
Corporation, and subsequent to the addition of any Subsidiary as a
Borrower hereunder pursuant to Section 39 of this Agreement, the term
Borrower shall refer individually to First Merchants Acceptance
Corporation and each such Subsidiary and collectively to First Merchants
Acceptance Corporation and all such Subsidiaries.
"FMRCC" shall mean First Merchants Residential Credit Corporation, a
wholly owned Subsidiary of First Merchants Acceptance Corporation.
"Subsidiary" shall mean, with respect to any Person, any corporation of
which the outstanding capital stock having more than 50% of the voting
power to elect a majority of the board of directors of such corporation
is at the time directly or indirectly owned by such Person.
2.2 Section 18(a) of the Loan Agreement is hereby amended to
insert the words "residential mortgage lending," immediately after the words
"home equity lending," where they appear therein.
2.3 Section 18(d) of the Loan Agreement is hereby amended in
its entirety to read as follows:
"(d) Investment. Borrower will not, without the prior written
consent of Lenders make, incur, assume or suffer to exist any Investment
in any other Person, except (i) Cash Equivalent Investments, Investments
in connection with Permitted Securitization Transactions, (ii)
Investments in FMRCC up to the aggregate sum of $1,500,000, and (iii)
Investments in Subsidiaries which become a Borrower hereunder pursuant
to Sections 18(t) and 39 of this Agreement up to the aggregate sum of
$500,000."
2.4 Section 18(h) of the Loan Agreement is hereby amended by
deleting the word "or" prior to Subsection (iv) thereof, deleting the period at
the end of Subsection (iv) thereof, and inserting a comma in substitution
therefor and adding the following:
"or (v) loans and advances to FMRCC up to the aggregate sum of
$500,000."
2.5 Section 18 of the Loan Agreement is hereby amended by
adding the following new Subsection (t) thereto:
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<PAGE> 3
"(t) Subsidiaries. Borrower shall not create any Subsidiaries
without the prior written consent of Lenders, except for (i) FMARC or
any other bankruptcy remote Subsidiary formed for the purposes of
completing a Permitted Securitization Transaction, (ii) FMRCC, and (iii)
any wholly owned Subsidiary (exclusive of those referenced in (i) and
(ii) above) formed by First Merchants Acceptance Corporation with prior
written notice to Agent and Lenders for the purpose of conducting
business activities of the nature permitted to be conducted by First
Merchants Acceptance Corporation hereunder and where such Subsidiary has
satisfied the following conditions:
(1) such Subsidiary has provided to Agent an executed
assumption agreement in form acceptable to Agent, whereby such
Subsidiary agrees to become a co-borrower under this Agreement
and agrees to assume the obligations of a Borrower hereunder and
grants to Agent on behalf of Lenders a first lien and security
interest in and to its assets, all in form and substance
acceptable to Agent ("Assumption Agreement");
(2) such Subsidiary is 100% owned by First Merchants
Acceptance Corporation;
(3) such Subsidiary has provided to Agent all UCC Financing
Statements and other agreements, instruments and documents
required by Agent to perfect Agent's lien and security interest
in and to the assets of such Subsidiary on behalf of the Lenders;
(4) such Subsidiary provides Agent a certificate executed by
its chief executive officer stating that to the best knowledge of
such officer after diligent inquiry and investigation (a) no
Default or Event of Default has occurred and is continuing, (b)
no litigation, investigation or proceeding, injunction, writ or
restraining order of the type described in Section 17(d) of this
Agreement is pending or threatened, (c) each of the
representations and warranties set forth in the Agreement are
true and correct as applied to Subsidiary, and (d) each of the
conditions precedent to the Subsidiary becoming a co-borrower
under this Agreement has been met or satisfied;
(5) such Subsidiary provided to Agent copies of insurance
required by this Agreement, together with lender's Loss Payable
Endorsements on Agent's required form, duly executed;
(6) such Subsidiary provides to Agent such Subsidiary's
certificate of incorporation certified by the state of
incorporation of such Subsidiary as of a date not more than
twenty (20) days prior to the date of the Assumption Agreement,
and a copy of its bylaws certified by its corporate secretary as
true, complete and correct;
-3-
<PAGE> 4
(7) such Subsidiary provides to Agent a good standing
certificate for such Subsidiary in the state of its incorporation
and in each other state in which it has an office, keeps
Collateral, or otherwise with a failure of such Subsidiary to be
qualified to transact business as a foreign corporation would
have a material adverse impact on such Subsidiary;
(8) such Subsidiary provides to Agent copies of resolutions of
its board of directors authorizing the execution and delivery of
and the consummation of the transactions contemplated by this
Agreement and the Assumption Agreement;
(9) such Subsidiary provides to Agent incumbency certificates
with respect to the officers of the Subsidiary executing the
Assumption Agreement and any related documents;
(10) such Subsidiary provides to Agent an Agency Agreement
establishing an Authorized Representative in each of such
Subsidiary's business locations as Agent's and Lender's agent to
perfect Agent's and Lender's lien on the Collateral coming into
the Subsidiary's possession.
(11) such Subsidiary and all other entities constituting a
Borrower hereunder have executed and delivered to each Lender a
replacement Revolving Credit Note in the amount of the Commitment
of such Lender in form acceptable to Agent and Lenders.
2.6 The Loan Agreement is hereby amended by adding a new
Section 39 thereto to provide as follows:
"Section 39. Addition of Co-Borrowers. Upon satisfaction by any
Subsidiary of the conditions set forth in Section 18(t)(iii) of this
Agreement (i) such Subsidiary shall become a co-borrower hereunder, (ii)
all references to Borrower herein shall be deemed to be a reference to
First Merchants Acceptance Corporation and such Subsidiary, and (iii)
First Merchants Acceptance Corporation shall calculate and report to
Agent and Lenders the financial covenants provided in Section 17 and 18
of this Agreement and the Borrowing Base on a consolidated basis.
2.7 Locations. Exhibit E to the Loan Agreement is hereby
deleted in its entirety and Exhibit A to this Amendment is inserted in
substitution therefor.
SECTION 3. CONSENT. Agent and Lenders hereby consent to the
incorporation of FMRCC as a wholly-owned Subsidiary of First Merchants
Acceptance Corporation, capitalization of such Subsidiary up to the maximum
amount of $1,500,000, and loans to such Subsidiary by First Merchants
Acceptance Corporation up to the aggregate sum of $500,000.
-4-
<PAGE> 5
SECTION 4. REPRESENTATION AND WARRANTIES. To induce Lenders to
amend the Loan Agreement, Borrower represents and warrants to Lenders that:
4.1 Compliance with Loan Agreement. On the date hereof,
Borrower is in compliance with the terms and provisions of the Loan Agreement
and no Event of Default specified therein has occurred.
4.2 Representations and Warranties. On the date hereof, the
representations and warranties set forth in the Loan Agreement are true and
correct with the same effect as if such representations and warranties have
been made on the date hereof except to the extent such representations and
warranties expressly relate to an earlier date.
4.3 Authority of Borrower. Borrower has full power and
authority to enter into this Amendment, which has been duly authorized by all
proper and necessary corporate action. No consent or approval of any public
authority or regulatory body or any other party is required as a condition to
the validity or enforceability of this Amendment.
4.4 Amendment as Binding Agreement. This Amendment
constitutes a valid and legally binding obligation of Borrower, fully
enforceable against Borrower in accordance with its terms.
SECTION 5. CONDITIONS PRECEDENT. The agreement by Lenders to
amend the Loan Agreement pursuant to the terms of this Amendment is subject to
the following conditions precedent:
5.1 Evidence of Authority. Agent shall have received evidence
of the authorization of Borrower to enter into this Amendment by its Board of
Directors in form acceptable to Agent.
SECTION 6. GENERAL PROVISIONS.
6.1 Except as amended by this Amendment, the terms and
provisions of the Loan Agreement are in all other respects ratified and
confirmed and remain in full force and effect. In the event of a conflict
between the terms of the Loan Agreement and the terms of this Amendment, the
terms of this Amendment shall be controlling.
6.2 After the effective date hereof, all references in the
Loan Agreement and in all related agreements and documents to "Agreement",
"hereof", or the like shall refer to the Loan Agreement as herein amended or
modified.
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<PAGE> 6
6.3 This Amendment shall not constitute a waiver of any
existing Events of Default or any other provisions of the Loan Agreement as
amended hereby, except as expressly set forth herein, and shall not constitute
a course of dealing with respect to any such Events of Default or an agreement
to further consents, amendments or waivers under the Loan Agreement. Agent and
Lenders expressly reserve their rights and remedies, none of which shall be
deemed to be waived hereby.
6.4 Borrower hereby agrees to pay all reasonable out-of-pocket
expenses incurred by Agent in connection with the preparation, negotiation and
consummation of this Amendment and all other documents related thereto,
including, without limitation, the fees and expenses of Agent's counsel.
6.5 This Amendment shall be construed in accordance with and
governed by the laws of the State of Illinois and the obligations of Borrower
under this Amendment are and shall arise absolutely unconditionally upon the
execution and delivery of this Amendment. This Amendment may be executed in
counterparts.
6.6 Capitalized terms used herein which are defined in the
Loan Agreement, shall unless otherwise defined herein, have the meanings
provided in the Loan Agreement.
IN WITNESS WHEREOF, the Borrower and Lenders have caused this
Amendment to be duly executed as of the date first above written.
FIRST MERCHANTS ACCEPTANCE CORPORATION
By: _______________________________
Title: _______________________________
LASALLE NATIONAL BANK
By: _______________________________
Title: _______________________________
NBD BANK
By: _______________________________
Title: _______________________________
-6-
<PAGE> 7
FIRSTAR BANK MILWAUKEE, N.A.
By: _______________________________
Title: _______________________________
HARRIS TRUST AND SAVINGS BANK
By: _______________________________
Title: _______________________________
FIRST BANK, NATIONAL ASSOCIATION
By: _______________________________
Title: _______________________________
THE BOATMEN'S NATIONAL BANK OF ST. LOUIS
By: _______________________________
Title: _______________________________
FLEET BANK, NATIONAL ASSOCIATION
By: _______________________________
Title: _______________________________
CORESTATES BANK, N.A.
By: _______________________________
Title: _______________________________
MELLON BANK, N.A.
By: _______________________________
Title: _______________________________
-7-
<PAGE> 1
EXHIBIT 10.48
FIRST MERCHANTS ACCEPTANCE CORPORATION
$45,000,000
Subordinated Reset Notes Due 2006
UNDERWRITING AGREEMENT
October 29, 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 October 15, 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. 333-14019), including the related preliminary prospectus and a
Statement of Eligibility on Form T-1 with respect to the Trustee
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
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<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, and First Merchants Auto
Receivables Corporation II, 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, and, except
for security interests in the stock of such subsidiaries securing the
Company's obligations under the Company's Senior Revolving Credit
Facility and Temporary Credit Facility (as those terms are defined in
the Registration Statement), is owned 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 June 30, 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.
4
<PAGE> 5
(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 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
5
<PAGE> 6
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
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,
6
<PAGE> 7
financial position, net worth or results of operations of the Company
and its subsidiaries taken as a whole.
(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.
7
<PAGE> 8
(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 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
8
<PAGE> 9
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 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.
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<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 $960 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 Sonnenschein Nath & Rosenthal, 8000 Sears Tower,
Chicago, Illinois 60606, or at such other place as may be agreed upon
by J.C. Bradford & Co. ("Bradford") and the Company, at 10:00 A.M.,
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<PAGE> 11
Chicago time, on 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 Notes 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,
16
<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, 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, and, except for security interests in the stock of
such subsidiaries securing the Company's obligations under
the Company's Senior Revolving Credit Facility and Temporary
Credit Facility (as those terms are defined in the
Registration Statement), is owned free and clear of all liens,
17
<PAGE> 18
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 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,
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<PAGE> 19
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 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.
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<PAGE> 20
(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:
(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
20
<PAGE> 21
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 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;
21
<PAGE> 22
(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;
(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
22
<PAGE> 23
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.
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
23
<PAGE> 24
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
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
24
<PAGE> 25
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 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.
25
<PAGE> 26
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 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.
26
<PAGE> 27
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 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
27
<PAGE> 28
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.
[SIGNATURES ON THE FOLLOWING PAGE]
28
<PAGE> 29
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
Principal Amount of Firm
Underwriter Notes to Be Purchased
J.C. Bradford & Co. . . . . . . . . . . . . . . . . . . . . . $11,250,000
Piper Jaffray Inc. . . . . . . . . . . . . . . . . . . . . . $11,250,000
Stifel, Nicolaus & Company, Incorporated . . . . . . . . . . $11,250,000
Keefe, Bruyette & Woods, Inc. . . . . . . . . . . . . . . . . $11,250,000
-----------
TOTAL $45,000,000
===========
<PAGE> 1
EXHIBIT 11.1
FIRST MERCHANTS ACCEPTANCE CORPORATION
Exhibit 11
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended December 31
-------------------------------
1996 1995 1994
-------------------------------
<S> <C> <C> <C>
Average number of common shares outstanding 6,526 4,677 2,882
Common equivalent shares outstanding:
Warrants - 96 228
Stock options 216 207 187
-------------------------------
Total common and common equivalent shares
outstanding 6,742 4,980 3,297
Net earnings before extraordinary item $10,520 6,701 2,789
Extraordinary item - - (1,168)
-------------------------------
Net earnings 10,520 6,701 1,621
Warrant accretion - - (127)
-------------------------------
Net earnings available to stockholders $10,520 6,701 1,494
===============================
Per share data:
Net earnings before extraordinary item $ 1.56 1.35 0.85
Extraordinary item - - (0.36)
-------------------------------
Net earnings 1.56 1.35 0.49
Warrant accretion - - (0.04)
-------------------------------
Net earnings available to stockholders $ 1.56 1.35 0.45
===============================
</TABLE>
Total common and common equivalent shares outstanding represent actual shares
outstanding and shares issued during the twelve months prior to the Company's
initial public offering as if issued at the beginning of all periods presented
applying the treasury stock method based upon the weighted average closing price
of the Common Stock. The estimated initial public offering price of $11 per
share was used prior to the initial public offering.
<PAGE> 1
EXHIBIT 13.1
FIRST MERCHANTS ACCEPTANCE CORPORATION
1996 ANNUAL REPORT
[Graphic]
From start to finish, first in creating financing solutions for unique borrowing
needs.
FMAC
<PAGE> 2
COMPANY PROFILE
First Merchants Acceptance Corporation is a national specialty
finance company. Our mission is creating financing solutions for our
customers' unique needs. We serve the expanding market for financing
used automobile purchases by consumers with limited access to
traditional credit sources. The Company acquires retail installment
contracts originated by franchised and independent automobile
dealers through a network of regional dealer service centers and
financial institution partners. First Merchants is also exploring
opportunities to provide home equity and other forms of credit to
its target markets.
<TABLE>
<S> <C>
1 Operating Highlights
1 Financial Highlights
2 Letter to Stockholders
11 Index to Financial Review
45 Directors and Officers
46 Corporate Information
</TABLE>
<PAGE> 3
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Dollars in thousands except per
common share data and non-financial
data DECEMBER 31,
1996 1995 % CHANGE
-------------------------------------------
<S> <C> <C> <C>
FOR THE YEAR
Installment Contracts Purchased $ 525,795 257,947 103.8%
Total Revenues 100,652 39,548 154.5%
Net Earnings 10,520 6,701 57.0%
-------------------------------------------
AT YEAR END
Net Finance Receivable Owned $ 244,362 251,908 -3.0%
(excluding held for sale)
Net Finance Receivables Serviced 641,199 284,173 125.6%
Stockholder's Equity 94,737 84,279 12.4%
-------------------------------------------
PER SHARE DATA
Net Earnings $ 1.56 1.35 15.6%
Market Value 19.13 18.50 3.4%
Book Value 14.51 12.92 12.3%
Weighted Average Common 6,742 4,980 35.4%
Shares Outstanding
-------------------------------------------
SELECTED RATIOS
Return on Average Assets 3.1% 4.0%
Return on Average Equity 11.7% 17.6%
Credit Loss Reserves as a
Percentage of Net Finance
Receivables - Serviced 8.2% 5.2%
Net Charge-offs as a Percentage
of Average Net Finance
Receivables - Serviced 6.8% 5.2%
-------------------------------------------
NON-FINANCIAL DATA
Number of Participating Dealers 4,367 1,983 121.2%
Numbers of States Served 37 30 23.3%
Number of Employees 627 300 109.0%
-------------------------------------------
</TABLE>
[BAR CHART] [BAR CHART] [BAR CHART]
NET EARNINGS BEFORE NET FINANCE RECEIVABLES- STOCKHOLDERS'
EXTRAORDINARY ITEM TOTAL PORTFOLIO SERVICED EQUITY
(in million dollars) (in million dollars) (in million dollars)
- -------------------------------------------------------------------------------
1996 10.5 641.2 94.7
---- ----- ----
1995 6.7 284.2 84.3
---- ----- ----
1994 2.8 94.1 25.7
---- ----- ----
- -------------------------------------------------------------------------------
<PAGE> 4
DEAR FELLOW STOCKHOLDERS
I am encouraged to report steady progress by First Merchants
Acceptance Corporation in 1996. Our performance results from a
conservative approach to balancing risk and profitability, driven by
a leading-edge credit scoring and risk management system supported
by a strong balance sheet. We are moving toward our strategic
objective of creating a diversified financial services company, with
brand recognition and loyalty, for the millions of potential
customers who do not have access to traditional lending sources.
[Photo]
Mitchell C. Kahn
President and CEO
As many of you know, the non-prime lending industry experienced some
upheaval in late 1996 and early 1997 as several companies fell
victim to financial woes. While these are unfortunate developments,
they do not alter our fundamental strategy. In fact, they reinforce
our strategy. First Merchants has been and will always be a
conservatively managed company, and we are confident that this
approach will serve our stockholders well over the long term.
The non-prime lending industry plays a critical role for those
consumers who are unable to qualify for traditional bank credit. The
need for this service has not diminished and, in the long run, the
industry will prosper and grow. We expect First Merchants to be in
the forefront of the industry.
FINANCIAL PERFORMANCE
For the year ended December 31, 1996, First Merchants reported $10.5
million in earnings, a 57 percent increase over the $6.7 million
earned in 1995. Net earnings for the fourth quarter declined to $1.0
million, from $2.5 million, in the year ago quarter. These results
reflect increased charge-offs and additions to the allowance for
credit losses in the fourth quarter.
<PAGE> 5
[Photo]
FIRST MERCHANTS IS ACCELERATING ITS PROGRESS THROUGH INVESTMENTS IN TECHNOLOGY,
NEW DISTRIBUTION CHANNELS, AND IMPROVED CREDIT RISK MANAGEMENT
<PAGE> 6
The allowance for credit losses at December 31, 1996 was $17.2
million or 7.0 percent of owned finance receivables (excluding
contracts held for sale) compared to $14.3 million, or 5.7 percent
of owned finance receivables a year earlier. Credit loss reserves,
including the allowance for credit losses and reserves attributable
to contracts sold or held for sale, increased to 8.2 percent of
serviced finance receivables compared with 7.6 percent at September
30, 1996. As of December 31, 1996, accounts 61 or more days past due
constituted 2.1 percent of net receivables-serviced, as compared to
0.7 percent a year earlier. Net charge-offs as a percentage of
average net finance receivables serviced were 6.8 percent for 1996,
as compared to 5.2 percent for the same period the prior year.
WE START 1997 IN SOUND FINANCIAL
CONDITION. WE REPORTED A STRONG
INCREASE IN REVENUES, A YEAR
OVER YEAR INCREASE IN NET
EARNINGS, AND STRONG TRENDS
IN EARNINGS PER SHARE FOR 1996.
The bulk of the charge-offs in 1996 resulted from loans originated
prior to the implementation of our new credit scoring system. A risk
analysis using the latest generation of this system characterized
the paper purchased for the portfolio in the second half of 1996 to
be of higher quality than prior period purchases.
Management is convinced that the charge-offs and additions to
reserves taken in the fourth quarter were both prudent and necessary
to enhance our long-term performance. These actions reflect
management's con-
stant focus on analyzing credits in the portfolio and maintaining
the strength of the Company's balance sheet. First Merchants
continues to take the necessary steps to continue to improve credit
quality and minimize the factors that contributed to our fourth
quarter's performance falling short of expectations.
For 1996, we reported a strong increase in revenues, a year over
year increase in net earnings, and strong trends in earnings per
share. Management is moving ahead with a business plan for our auto
finance group to: emphasize the middle to upper-end of the non-prime
credit quality spectrum; broaden the "hub and spoke" strategy for
our dealer service centers; reduce operating expenses; and continue
to focus resources on diversifying our loan origination channels.
<PAGE> 7
Our history of achieving exceptional portfolio growth continued in
1996. Receivables retained on our balance sheet provide interest
income, while contracts sold through securitizations generate
servicing fees and cash flow from the excess portfolio spreads.
These revenues complement our competitive funding costs and
operating efficiencies to expand profitability.
First Merchants purchased $130.5 million in finance contracts during
the fourth quarter, a 30 percent increase over the $100.1 million
purchased in the comparable quarter of the prior year. For all of
1996, the Company purchased $525.8 million in finance contracts, up
significantly from the $257.9 million purchased in 1995. The
Company's increased annual originations were attained through
expansion and diversification of its sales efforts and greater
geographic coverage.
[Bar Chart]
INSTALLMENT CONTRACTS PURCHASED
(in million dollars)
1996 525.8
1995 257.9
1994 91.4
During the past year First Merchants expanded its financing base
through a strong receivables-backed securitization program comprised
of $272.1 million in privately-placed and $262.3 million in
publicly-financed debt. The Company expects to continue its
securitization program as a key part of its 1997 funding strategy.
During 1996, our average cost of funds declined by 110 basis points,
due to more favorable pricing on our $205 million bank line of
credit and attractive securitization interest rates. Our entry into
the securitization market just one year ago was favorably received
in the investor community. We were the first non-prime auto finance
company to issue floating-rate and fixed-rate notes within the same
transaction. We also
successfully exported our name and financing capability abroad
through the sale of $40 million of notes in the European market.
Our strong capital base, improved infrastructure, successful
securitization program, portfolio credit quality, and increased bank
line of credit have enabled us to expand our auto receivable
portfolio to more than $600 million in just over five years. We
believe First Merchants is an attractive investment opportunity for
current and prospective stockholders.
<PAGE> 8
[Photo]
OUR STRATEGY CHANGES THE PARADIGM
First Merchants' future success rests on three key initiatives begun
during 1996: strategic repositioning of our offices; establishing
new distribution channels; and emphasizing credit scoring and risk
management. Because of these calculated actions, the Company is
poised to capitalize upon current marketplace trends.
STRATEGIC REPOSITIONING
During 1996, we began to focus on improving internal efficiency,
implementing a "hub and spoke" strategy to consolidate 26 dealer
service centers in order to accelerate our progress toward becoming
a low cost provider and maintain our competitive edge. This strategy
was well received by our dealers, who have come to respect First
Merchants' commitment to quality, professionalism and fiscal
conservatism. This approach has helped us to continue expanding
nationally, while improving service and operating efficiencies.
<PAGE> 9
[Photo]
AND STANDS OUT IN THE MARKETPLACE
ESTABLISHING NEW DISTRIBUTION CHANNELS
Capitalizing on the internal improvements made during 1996, we
focused our energy on diversifying our loan origination sources
through new distribution channels such as financial institutions and
used car mega-stores. We now operate nationally, covering 80 percent
of the 50 largest metropolitan markets. Our regional office
presence, combined with the national sales force, has created a
valuable franchise for First Merchants.
In 1996, First Merchants launched its first cooperative arrangement
with a financial institution, Magna Bank of St. Louis, allowing
Magna to present itself as a full-service automobile lender to its
dealers while referring non-prime business to the Company. We also
affiliated with two national used car mega-stores, Car Max and
AutoNation USA, to purchase higher quality secondary paper. We
expect to develop further such affiliations.
<PAGE> 10
Last year, we divided our sales force into three groups to diversify
First Merchants' business development efforts. Our Retail Relations
Group, the "spokes" in our "hub and spoke" strategy, focuses on
developing and maintaining business from franchised automobile
dealers. Our Strategic Relations Group works with the used car
mega-stores and multi-state mega dealers. Our Financial Institutions
Group, comprised of experienced bankers, calls on financial
institutions to sell the Company's private label, non-prime auto
finance program to complement banks' existing prime auto finance
programs.
FIRST MERCHANTS USE OF
RISK-BASED PRICING, CREDIT
SCORING AND RISK MANAGEMENT
PHILOSOPHY PUTS THE COMPANY
AT THE FOREFRONT OF
INNOVATION IN THE INDUSTRY.
THE FMAC DISTINCTION
First Merchants use of risk-based pricing, credit scoring and risk
management puts the Company at the forefront of innovation in the
industry. In addition to our emphasis on credit risk management, the
Company is configuring leading-edge technology to create a new loan
origination and processing platform that will become operational in
the second quarter of 1997.
The Company constantly trains and certifies its credit underwriting
staff. Emphasis is also placed on developing techniques to refine
our approach to risk management to obtain a quicker analysis of
credit quality, to enhance price realizations, to identify
portfolio trends and project static pool losses. We manage risk
profitably by applying conservative underwriting criteria,
setting interest rates and discounts appropriate to the risk, and by
aggressively servicing delinquent accounts.
First Merchants demonstrated its commitment to becoming a low cost
provider by improving our efficiency ratio (operating expenses, net
of special charges, as a percentage of total revenues) to 38.1
percent for 1996 from 41.2 percent for 1995. We achieved this
despite the increased costs associated with developing credit
scoring and risk management tools, and the upgrade of information
and servicing systems.
The marketplace is undergoing change as certain competitors
encounter financial difficulties and lose momentum. We feel that
this is part of the maturation process of our industry which
will create more opportunities for sophisticated and competitive
long-term players like First Merchants.
<PAGE> 11
[Photo]
WE REMAIN AHEAD OF THE CURVE BY DIVERSIFYING
OUR FINANCIAL PRODUCT OFFERINGS,
DEVELOPING STRATEGIC ALLIANCES AND
DISTRIBUTION CHANNELS, AND APPLYING
LEADING-EDGE TECHNOLOGY
<PAGE> 12
SHAPING THE FUTURE
The Company is advancing several initiatives to position itself as a
diversified financial services company with brand identity, poised
to meet the needs of our target customer, the non-prime borrower. We
intend to provide financial products that meet the needs of the
non-prime borrower and are consistent with our credit and risk
management standards. Ultimately, our goal is to provide a one-stop
shop for this market.
FIRST MERCHANTS' SUCCESS
RESULTS FROM THE COMPANY'S
VISION, VALUES, OPERATING
PHILOSOPHY AND STRATEGY.
As previously reported, First Merchants' Financial Institutions
Program employs a team with banking experience to call upon and
develop relationships with banks. We are one of few in the industry
with the reputation and professional capability to develop such
relationships. We are in the forefront of this effort and are
excited by the opportunities.
Late last year, we took our first steps toward diversification. We
started the testing of various consumer loan products. We have also
hired an experienced management team to establish a home equity
lending business which we expect to become operational in the second
half of 1997.
First Merchants' success results from the Company's vision, values,
operating philosophy and strategy. We continue to build on our
vision to become a world class diversified financial services
company. Our financial goal is to continue to strengthen our balance
sheet and increase earnings to maximize value for our stockholders
over the long term.
Sincerely,
MITCHELL C. KAHN
President and Chief Executive Officer
<PAGE> 13
FINANCIAL STATEMENTS
<TABLE>
<S> <C>
12 Selected Financial Data
13 Management's Discussion and
Analysis of Financial Condition and
Results of Operations
21 Independent Auditors' Report
22 Consolidated Balance Sheets
24 Consolidated Statements of Earnings
25 Consolidated Statements of Changes
in Stockholders' Equity
26 Consolidated Statements of
Cash Flows
28 Notes to Consolidated Financial
Statements
</TABLE>
<PAGE> 14
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31 1996 1995 1994 1993 1992
Dollars in thousands, except per share data
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATING DATA
Interest income - finance receivables $ 70,870 38,210 15,324 6,354 1,960
Gain on sale of finance receivables 22,925 -- -- -- --
Other income 6,857 1,338 699 401 78
Total revenues 100,652 39,548 16,023 6,755 2,038
- --------------------------------------------------------------------------------------------------------
Interest expense 21,822 10,754 4,034 1,378 443
Provision for credit losses 21,860 1,700 -- -- --
Operating expenses 39,724 16,290 7,490 3,813 1,268
Total expenses 83,406 28,744 11,524 5,191 1,711
- --------------------------------------------------------------------------------------------------------
Earnings before income taxes and
extraordinary item 17,246 10,804 4,499 1,564 327
Income taxes 6,726 4,103 1,710 626 --
Net earnings before extraordinary item 10,520 6,701 2,789 938 327
- --------------------------------------------------------------------------------------------------------
Extraordinary item -- -- (1,168) -- --
Net earnings 10,520 6,701 1,621 938 327
Warrant accretion -- -- (127) (18) --
Net earnings available to stockholders $ 10,520 6,701 1,494 920 327
- --------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding 6,742 4,980 3,297 2,922 1,921
- --------------------------------------------------------------------------------------------------------
Per share data:
Net earnings before extraordinary item $ 1.56 1.35 0.85 0.32 0.17
Net earnings 1.56 1.35 0.49 0.32 0.17
Net earnings available to stockholders $ 1.56 1.35 0.45 0.31 0.17
- --------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
Net finance receivables $ 244,362 251,908 94,090 33,563 11,418
Finance receivables held for sale, net 42,758 32,265 -- -- --
Total assets 339,606 282,274 92,108 33,781 12,820
Senior revolving credit facility 33,300 104,000 61,975 22,225 7,440
Notes payable - securitized pools 133,709 70,378 -- -- --
Subordinated reset notes, net 63,760 13,896 -- -- --
Total stockholders' equity $ 94,737 84,279 25,703 7,507 4,017
Outstanding common shares 6,531 6,526 4,142 2,471 1,971
Book value per common share $ 14.51 12.91 6.21 3.04 2.04
- --------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following analysis of the financial condition and results of operations of
First Merchants Acceptance Corporation and its wholly owned subsidiaries (the
"Company") should be read in conjunction with the Company's Consolidated
Financial Statements and Notes thereto and the other financial data included
elsewhere in this annual report. 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 Financial Statements, the Notes thereto and the
financial data included elsewhere in this annual report.
GENERAL
The Company is a specialty consumer finance company primarily engaged in
financing the purchase of automobiles through the acquisition of
dealer-originated retail installment contracts collateralized by the underlying
automobiles. The Company has experienced significant annual growth in the
serviced finance receivable portfolio since it commenced operations in June,
1991. The Company derives all of its revenues from its finance receivable
portfolio and from the gains and fees associated with the securitization, sale
and servicing of finance receivables. At December 31, 1996, the Company
operated 25 dealer service centers servicing automobile dealers located in 37
states.
RESULTS OF OPERATIONS
The following table sets forth certain financial data:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
YEARS ENDED DECEMBER 31 1996 1995 1994
Dollars in thousands
<S> <C> <C> <C>
Average net finance receivables - owned (1) $346,904 171,737 62,898
Average net finance receivables - serviced (1) 474,362 171,737 62,898
Average indebtedness (2) 272,939 118,173 43,481
- -----------------------------------------------------------------------------
Income from finance receivable portfolio 72,905 39,548 16,023
Interest expense 21,822 10,754 4,034
Net interest income $51,083 28,794 11,989
- -----------------------------------------------------------------------------
Gross portfolio yield (3) 21.0 % 23.0 % 25.5 %
Average cost of borrowed funds (2) 8.0 9.1 9.3
Net interest spread (4) 13.0 % 13.9 % 16.2 %
- -----------------------------------------------------------------------------
Net portfolio yield (3) 14.7 % 16.8 % 19.1 %
- -----------------------------------------------------------------------------
</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 represent the total contractual payments due
under finance contracts less the related unearned finance charges on those
receivables. 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 the borrowings outstanding under the senior
revolving credit facility, notes payable-securitized pools and subordinated
reset notes. The average indebtedness is based on daily balances. Average cost
of borrowed funds represents interest expense as a percentage of average
indebtedness.
(3) Gross portfolio yield represents income from finance receivable portfolio
as a percentage of average net finance receivables-owned. Net portfolio yield
represents net interest income as a percentage of average net finance
receivables-owned.
(4) Net interest spread represents the gross portfolio yield less the average
cost of borrowed funds.
<PAGE> 16
Management's Discussion and Analysis
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
REVENUES
The Company purchased 45,488 finance contracts having an aggregate initial
principal amount of $525.8 million in 1996, representing increases of 79.5% and
103.8%, respectively, from the 25,336 finance contracts having an aggregate
initial principal amount of $257.9 million purchased in 1995.
Interest and other income from finance receivables-owned increased $33.4
million, or 84.3%, to $72.9 million in 1996 from $39.5 million in 1995. The
growth in income from the finance receivable portfolio resulted from an
increase in the number and average size of finance contracts purchased by
dealer service centers as well as an increase in the number of states served
and the size of the Company's sales force.
Average net finance receivables-owned increased $175.2 million, or 102.0% to
$346.9 million in 1996 from $171.7 million
in 1995. Income from the owned finance receivable portfolio as a percentage of
average net finance receivables-owned ("gross portfolio yield") decreased to
21.0% in 1996 from 23.0% in 1995. 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 receivables 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 receivables. However, the increases
in the Company's total revenues attributable to increases in the volume of
finance contracts purchased, securitization and sales of finance receivables,
and related servicing activities are expected to offset decreases in interest
income attributable to decreases in the Company's portfolio yield and interest
income from finance receivables.
In 1996, the Company recognized $22.9 million in gains on sales of finance
receivables to special purpose financing trusts (the "Trusts") and the issuance
to investors of $389.4 million of automobile receivable-backed notes and
certificates by the Trusts. The gains represent the difference between the
sales proceeds, net transaction costs, and the Company's carrying value of the
finance receivables sold, plus excess servicing rights. Excess servicing rights
represent the present value of 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 sold and certain other fees.
Because the Company may choose to structure future issuances of automobile
receivable-backed securitizations in a manner which will result in the
recognition of gains on the sale of receivables in some securitizations 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 finance receivables were sold in 1995. See "Liquidity and Capital
Resources."
Servicing fee income represents the Company's base servicing fee on the finance
receivables sold to Trusts as well as accretion of the excess servicing
receivable. Servicing fee income was $4.8 million in 1996. No servicing fee
income was recorded in 1995.
EXPENSES
Interest expense increased $11.0 million, or 102.9%, to $21.8 million in 1996
from $10.8 million in 1995. The increase in interest expense resulted primarily
from an increase in borrowings under the senior revolving credit facility, (the
"Senior Revolving Credit Facility"), of notes payable-securitized pools and the
subordinated reset notes. Such increased borrowings were used to fund the
growth of the Company's serviced finance receivable portfolio. Average
indebtedness, including borrowings under the Senior Revolving Credit Facility,
notes payable-securitized pools and subordinated reset notes increased $154.7
million, or 131.0%, to $272.9 million in 1996, from $118.2 million in 1995.
Interest expense, including the amortization of fees, as a percentage of
average indebtedness ("average cost of borrowed funds") was 8.0% in 1996,
compared to 9.1% in 1995. See "Liquidity and Capital Resources."
For 1996, the provision for credit losses increased $20.2 million to $21.9
million from $1.7 million charged against earnings in 1995. 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. The discount is nonrefundable to the
dealer. The discount is allocated to the allowance for credit losses. Prior to
1995, a portion of the discount was amortized into interest income. Beginning
in 1995, the remaining unamortized contract acquisition discounts were used to
absorb credit losses. For 1996 and 1995, discounts as a percentage of the
principal amount financed were 3.6% and 6.2%, respectively.
<PAGE> 17
Management's Discussion and Analysis
Non-refundable discounts collected from dealers are supplemented by the
provision for credit losses and, are used to absorb future credit losses. The
increased charge-offs combined with the declining discounts were the primary
factors in determining the increase in the provision for credit losses. See
"Credit Loss Experience."
Operating expenses increased $23.4 million, or 143.9%, to $39.7 million in 1996
from $16.3 million in 1995. Operating expenses in 1996 include charges of $1.4
million for severance, lease termination and other costs associated with
consolidating certain dealer service centers, expanding the geographic coverage
of the Company's sales force and other expense reduction efforts to improve
operating efficiencies. Although operating expenses increased during 1996, the
Company's finance receivable 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 to 8.4% in 1996 from 9.5%
in 1995.
Employee compensation and related costs, such as group insurance and payroll
taxes, represented 59.3% and 63.0% of total operating expenses in 1996 and
1995, respectively. Employee compensation expense increased $13.2 million, or
129.4%, to $23.5 million in the year 1996 from $10.3 million in 1995. Both
employee compensation and total operating expenses increased as a result of
expanding operations and growth in the serviced finance receivable portfolio.
INCOME TAXES
Income taxes were recorded at an effective rate of 39.0% and 38.0% in 1996 and
1995, respectively.
NET EARNINGS
Net earnings increased $3.8 million, or 57.0%, to $10.5 million in the year
1996 from $6.7 million in 1995. 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 THE 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, increases 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 finance receivables-owned increased $23.5
million, or 146.8%, to $39.5 million in 1995, from $16.0 million in 1994. The
growth in income from the finance receivable portfolio resulted from an increase
in the number of finance contracts purchased by dealer service centers in
operation at December 31, 1994, as well as the purchase of finance contracts by
dealer service centers opened after December 31, 1994.
Average net finance receivables-owned increased $108.8 million, or 173.0%, to
$171.7 million in 1995 from $62.9 million in 1994. The gross portfolio yield
decreased to 23.0% in 1995, from 25.5% in 1994. The decrease in the gross
portfolio yield was primarily attributable to a combination of a greater
concentration of finance receivables 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%, to $10.8 million in 1995
from $4.0 million in 1994. The increase in interest expense resulted from an
increase in borrowings under the Senior Revolving Credit Facility, proceeds
from the issuance of indebtedness which includes notes payable-securitized
pools and subordinated reset notes. Average cost of borrowed funds increased
$74.7 million, or 171.8%, to $118.2 million in 1995 from $43.5 million in 1994.
Average cost of borrowed funds was 9.1% in 1995, compared to 9.3% in 1994.
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 reference 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%.
<PAGE> 18
Management's Discussion and Analysis
For 1995, a provision for credit losses of $1.7 million was charged against
earnings. No provision was recorded in 1994. For 1995 and 1994, discounts as a
percentage of the principal amount financed were 6.2% and 8.0%, respectively.
Non-refundable discounts collected from dealers are supplemented by the
provision for credit losses and are used to absorb future credit losses.
Operating expense increased $8.8 million, or 117.5%, to $16.3 million in 1995
from $7.5 million in 1994. Although operating expenses increased during 1995,
the Company's finance receivable 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 to 9.5% in
1995 from 11.9% in 1994.
Employee compensation and related costs, such as group insurance and payroll
taxes, represented 63.0% and 66.0% of total operating expenses in 1995 and
1994, respectively. Employee compensation expense increased $5.4 million, or
107.7%, to $10.3 million in 1995, from $4.9 million in 1994. Both employee
compensation and total operating expenses increased due to expanding operations
and growth in the serviced finance receivable portfolio.
INCOME TAXES
Income taxes were recorded at an effective rate of 38.0% for both 1995 and
1994.
NET EARNINGS
Net earnings before extraordinary item increased $3.9 million, or 140.3%, to
$6.7 million in 1995 from $2.8 million in 1994. The increase in net earnings
before extraordinary item is directly attributable to the growth in the finance
receivable 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 subordinated credit facility (the
"Subordinated Credit Facility").
Net earnings increased $5.1 million, or 313.4% to $6.7 million in 1995 from
$1.6 million in 1994. The difference between net earnings and net earnings
available to stockholders was attributable to warrant accretion during 1994.
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 receivable
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 receivable portfolio and general economic
conditions and trends. Consistent with common industry practice and to better
correlate with the Company's credit loss experience and collection patterns, an
account is charged-off at the earliest of the time the account's collateral is
repossessed, the account is 121 or more days past due or the account is
otherwise deemed to be uncollectible. Prior to December 1996, an account was
charged off at the earliest of repossession, 91 or more days past due or the
account was otherwise deemed to be uncollectible. At December 31, 1996,
$2,165,791 of accounts were greater than 90 but less than 121 days delinquent;
this amount principally represents finance receivables that have been reduced
to their estimated net realizable value.
The allowance for credit losses is initially established through contract
acquisition discounts. A provision for credit losses is charged against
earnings in addition to the contract acquisition discounts credited to the
allowance for credit losses.
During the fourth quarter of 1996, the Company noted various delinquency and
other trends indicating that charge-offs would likely increase in the short
term and made additions to its allowance for credit losses. In the latter part
of 1996, the Company introduced a new credit scoring and risk management system
and strengthened collection procedures. A thorough risk analysis performed
using the Company's latest generation credit scoring system indicates that the
receivables purchased for the portfolio in the second half of 1996 are of
higher quality than those previously purchased. However, management believes
that the charge-off rate in the first half of 1997 will be higher than the
levels experienced in the corresponding 1996 periods due to normal portfolio
seasoning.
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 collateral repossessed for net
finance receivables-owned.
<PAGE> 19
Management's Discussion and Analysis
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
YEARS ENDED DECEMBER 31 1996 1995 1994
Dollars in thousands
<S> <C> <C> <C>
Average net finance receivables - serviced $474,362 171,737 62,898
Net charge-offs - serviced 32,307 8,969 2,820
Net charge-offs as a percentage of average
net finance receivables - serviced 6.8% 5.2% 4.5%
- -----------------------------------------------------------------------------
AS OF DECEMBER 31
Net finance receivables - owned $244,362 251,908 94,090
Allowance for credit losses - owned 17,182 14,301 4,489
Allowance for credit losses as a percentage
of net finance receivables - owned 7.0% 5.7% 4.8%
- -----------------------------------------------------------------------------
</TABLE>
Net finance receivables held for sale totaled $42.8 million and $32.3 million,
net of contract acquisition discounts of $1.1 million and $0.4 million at
December 31, 1996 and 1995, respectively. Net finance receivables held for sale
are not included above as they are recorded at the lower of aggregate cost or
market value.
At December 31, 1996, the excess servicing receivable is reported net of a
$34.0 million allowance for estimated credit losses on finance receivables sold
to the Trusts. There was no excess servicing receivable at December 31, 1995.
DELINQUENCY EXPERIENCE
A payment is considered past due if the borrower fails to make a satisfactory
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 one to two days after such due date. The
following table summarizes the Company's delinquency experience for accounts
with payments 61 days or more past due on both a number and dollar basis for its
serviced finance receivable portfolio as of December 31, 1996 and 1995. The
delinquency experience data exclude contracts where the collateral has
been repossessed.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
AS OF DECEMBER 31 1996 1995
Dollars in thousands
- ----------------------------------------------------------------------------------------------
Number of Number
Dollars contracts Dollars contracts
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net finance receivables - serviced (1) $641,199 63,605 $284,173 31,082
Accounts past due 61 days or more (2), (3) $13,560 1,810 $2,021 251
Accounts with payments 61 days or more
past due as a percentage of net finance receivables
and number of contracts - serviced 2.1% 2.8% 0.7% 0.8%
- ----------------------------------------------------------------------------------------------
</TABLE>
(1) Includes finance receivables held for sale, net.
(2) Customers in this category have missed three or more consecutive monthly
payments.
(3) At December 31, 1996, includes $2.1 million of finance receivables (596
contracts), which principally represent finance receivables that have been
reduced to their estimated net realizable value.
<PAGE> 20
Management's Discussion and Analysis
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 misses more than three
consecutive monthly payments. Collection strategies, including the timing of
repossessions, were modified during 1996 to maximize the receipt of cash from
delinquent customers rather than from the sale of collateral. When collateral
is repossessed for finance receivables owned, 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 charge-off.
Charge-offs related to repossessions for finance receivables serviced but not
owned, are recorded when the Company repossesses and disposes of the
collateral. Repossessed collateral related to the serviced finance receivable
portfolio included 762 and 505 automobiles at December 31, 1996 and 1995,
respectively. At December 31, 1996 the 762 automobiles have been held as
repossessed collateral for an average of 24 days.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has funded its operations, the dealer service
center openings and the serviced finance receivable portfolio growth through
the following: funds provided from principal and interest payments received
under finance contracts, borrowings under the Senior Revolving Credit Facility,
proceeds from the issuance of subordinated debt, securitization of finance
receivables and the sale of shares of common stock and cash flows from other
operating activities.
Net cash provided by (used in) operating activities was $2.6 million,($24.3)
million, and $2.0 million in 1996, 1995, and 1994, respectively. The net cash
flows provided by operating activities primarily resulted from annual increases
in net earnings, purchases of finance receivables held for sale and proceeds
from finance receivables sold.
Net cash used in investing activities was $42.4 million, $152.8 million and
$55.1 million in 1996, 1995 and 1994, respectively. These cash flows were
primarily attributable to the growth in the owned finance receivable portfolio
however, during 1996 a significant portion of finance contracts were purchased
for resale.
Net cash flows provided by financing activities are primarily used to support
serviced finance receivable portfolio growth. Financing activities for 1996,
1995 and 1994 were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
YEARS ENDED PROVIDED BY DECEMBER 31 1996 1995 1994
Dollars in thousands
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Proceeds from issuance of notes payable -
securitized pools, net $124,989 74,216 --
Proceeds from issuance of common stock, net -- 51,588 14,910
Proceeds from issuance of subordinated
debt, net 49,380 13,800 4,500
Repayment of notes payable - securitized pools (62,729) (4,748) --
Repayment of subordinated debt -- -- (6,500)
Net (decrease) increase in borrowings under senior
revolving credit facility (70,700) 42,025 39,750
Other, net (61) 170 182
Net cash flows from financing activities $40,879 177,051 52,842
- --------------------------------------------------------------------------------
</TABLE>
18
<PAGE> 21
Management's Discussion and Analysis
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 certain finance receivables of the Company.
The Company has options 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
expired on November 1, 1996 and bore interest at the reference prime rate.
Also, the Company is a party to an interest rate protection agreement for an
aggregate notional amount of $15.0 million, which limits the exposure to
increases in borrowing costs.
The Company completed six automobile receivable-backed securitization
transactions in 1996 and 1995. Principal and interest on the underlying notes
and certificates are payable monthly from collections and recoveries on the
pools of finance receivables. Financial Security Assurance Inc. ("FSA") issued
financial guaranty insurance policies for the benefit of the note and
certificate holders. Net proceeds from the sale and securitization of finance
receivables were used to repay indebtedness under the Senior Revolving Credit
Facility. A summary of these transactions is as follows.
<TABLE>
<Caption
- -----------------------------------------------------------------------------------------------------------------------------
ISSUER NAME
Gain recognized on
Amount Investor Accounting sale of finance
Date (in millions) rate treatment receivables (in millions)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
First Merchants Auto Receivable November 17, 1995 $75.1 6.20% Borrowing $ NA
Corp. (a wholly owned subsidiary)
First Merchants Grantor Trust March 12, 1996 55.8 5.90% Sale of Receivables 3.0
1996-1
First Merchants Auto Trust May 21, 1996 85.0 LIBOR +.17% Borrowing NA
1996-A 40.9 6.70%
First Merchants Grantor Trust June 26, 1996 90.4 6.85% Sale of Receivables 5.1
1996-2
First Merchants Auto Trust September 26, 1996 82.3 LIBOR +.12% Sale of Receivables 6.8
1996-B 30.5 6.80%
4.7 7.00%
First Merchants Auto Trust December 18, 1996 101.0 LIBOR +.11% Sale of Receivables 8.0
1996-C 37.9 6.15%
5.8 6.35%
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
In an effort to reduce the Company's exposure to the potential increases in
interest rates on the notes and certificates issued by First Merchants Auto
Trust 1996-A and First Merchants Auto Trust 1996-B; the Company has entered
into two interest rate swap agreements. The first swap agreement was entered
into on May 21, 1996 for an initial notional amount of $85.0 million, whereby
the Company pays a fixed rate of 5.98% and receives a variable one-month LIBOR.
The notional amount declines, as specified in the agreement, at each month-end
during the term of the agreement which expires in May 1998. The Company entered
into a second swap agreement on September 26, 1996, with an initial notional
amount of $82.3 million 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 through March, 1999. At
December 31, 1996, the notional amount for the two swap agreements was $52.7
million, and $72.8 million, respectively, and the one month LIBOR was 5.50%.
On November 1, 1996, the Company received approximately $49.4 million from the
issuance of Subordinated Reset Notes, (the "1996 Subordinated Reset Notes")
after deducting the underwriting discount and offering expenses. The proceeds
were used to repay borrowings under the Senior Revolving Credit Facility.
Interest on the 1996 Subordinated Reset Notes is payable quarterly commencing
December 15, 1996 at an
19
<PAGE> 22
Management's Discussion and Analysis
interest rate of 9.50%, until December 15, 2001. The interest rate will
reset, at the Company's option, on December 15, 2001 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 period prior to maturity on December 15, 2006. Holders of the 1996
Subordinated Reset Notes have the option to redeem ll or any portion of the
notes on December 15, 2001, or any subsequent interest reset date.
In August, 1996, the Company's Board of Directors authorized the repurchase of
up to 500,000 shares of the Company's common stock. The shares may be bought on
the open market from time to time or through private negotiated transactions.
The amount of shares repurchased will depend on various factors including the
price of the stock and market conditions. A total of 10,000 shares were
purchased in 1996 at an aggregate price of $187,500.
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 purchases of finance contracts and, prior to such use, net
proceeds were used to reduce borrowing under the Senior Revolving Credit
Facility.
In February 1995, the Company received approximately $13.5 million from the
issuance of Subordinated Reset Notes (the "1995 Subordinated Reset Notes")
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 Subordinated Reset Notes is payable quarterly, 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 period prior to maturity on March 15, 2005. Holders of
the notes have the option to redeem all or any portion of the notes on March
15, 2000 or any subsequent interest reset date.
The Senior Revolving Credit Facility and the indentures relating to the 1996
and 1995 Subordinated Reset Notes, contain several financial and other
covenants, including interest coverage requirements, leverage tests, a maximum
dividend restriction and minimum net worth requirements. The indentures
relating to the Company's securitizations contain several delinquency, credit
loss, customer loan extension and other limitations. At December 31, 1996, the
dollar amount of contracts liquidated and certain other ratios exceeded the
portfolio performance tests contained in the servicing agreements for two of
the Company's securitization trusts. As a result, FSA and the Company have
agreed that the Company will maintain additional cash reserves with the trustee
until the tests are met. At December 31, 1996, the dollar amount of customer
loan extensions granted exceeded the limitations contained in the servicing
agreements for four of the Company's securitization trusts. On March 15, 1997,
FSA granted a waiver with respect to such extensions. On March 15, 1997, the
Company also received a waiver with respect to certain covenants of the Senior
Revolving Credit facility pertaining to its securitizations.
The Company intends to continue increasing its serviced finance receivable
portfolio. In order to meet its 1997 funding needs, the Company will require
additional capital resources to supplement its expected cash flows from
operations, the principal payments on finance receivables and the anticipated
borrowings under its Senior Revolving Credit Facility. The Company is expecting
to complete additional securitizations of finance receivables in 1997, and is
exploring other sources of liquidity 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 increased interest rates.
Because the Company borrows 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. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishment 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
<PAGE> 23
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.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
This annual report, including the Letter to Stockholders, contains certain
forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities and Exchange Act of 1934, as amended. The Company intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995, and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe future initiatives, strategies and expectations of the Company, are
generally identifiable by use of the words "believe," "expect," "anticipate,"
"estimate," or similar expressions. The Company's ability to predict results or
the actual effect of future plans or strategies is inherently uncertain. Factors
which could have a material adverse affect on the operations and future
prospects of the Company and its subsidiaries include, but are not limited to,
changes in: interest rates, general economic conditions, monetary and fiscal
policies of the U.S. Government, the quality or composition of the serviced
finance receivable portfolio, demand for loan products, competition, demand for
financial services in the states served by the Company and accounting
principles, policies and guidelines. These risks and uncertainties should be
considered in evaluating forward-looking statements and undue reliance should
not be placed on such statements. Further information concerning the Company and
its business, including additional factors that could materially affect the
Company's financial results, is included in Company's filings with the
Securities and Exchange Commission.
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS,
FIRST MERCHANTS ACCEPTANCE CORPORATION
We have audited the consolidated balance sheets of First Merchants Acceptance
Corporation and subsidiaries (the "Company") as of December 31, 1996 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, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the accompanying financial statements present fairly, in all
material respects, the financial position of First Merchants Acceptance
Corporation and subsidiaries as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted
accounting principles
Deloitte & Touche LLP
Chicago, Illinois
February 4, 1997 (March 15, 1997 as to the last paragraph of Note 7)
<PAGE> 24
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
AS OF DECEMBER 31 1996 1995
Dollars in thousands except par values
- -----------------------------------------------------------------------
<S> <C> <C>
ASSETS
Net finance receivables $ 244,362 251,908
Allowance for credit losses (17,182) (14,301)
Net receivables 227,180 237,607
- -----------------------------------------------------------------------
Finance receivables held for sale, net 42,758 32,265
Excess servicing receivable 22,349 --
Cash 1,177 112
Restricted cash 29,947 6,808
Repossessed collateral 2,867 2,305
Property and equipment, net 4,620 1,624
Prepaid expenses 3,105 473
Other assets 5,603 1,080
Total assets $ 339,606 282,274
- -----------------------------------------------------------------------
(continues)
</TABLE>
22
<PAGE> 25
Consolidated Balance Sheets
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
AS OF DECEMBER 31 1996 1995
Amounts in thousands except par values
- -----------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES
Borrowings under senior revolving credit facility $ 33,300 104,000
Notes payable - securitized pools 133,709 70,378
Accounts payable and accrued expenses 11,656 5,765
Interest payable 1,217 471
Dealer reserves 194 553
Income taxes 158 723
Deferred income taxes 875 2,209
- -----------------------------------------------------------------------------------
181,109 184,099
Subordinated reset notes, net 63,760 13,896
Total liabilities 244,869 197,995
- -----------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred stock - $100 par value, 500 shares authorized,
no shares issued and outstanding -- --
- -----------------------------------------------------------------------------------
Common stock - $.01 par value:
Non-voting, 300 shares authorized,
no shares issued and outstanding -- --
Voting - 20,000 shares authorized, 6,531 and 6,526
shares issued and outstanding on December 31, 1996,
and 1995, respectively 65 65
Additional paid-in-capital 75,040 75,102
Retained earnings 19,632 9,112
Total stockholders' equity 94,737 84,279
Total liabilities and stockholders' equity $ 339,606 282,274
- -----------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE> 26
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31 1996 1995 1994
Dollars in thousands except per share data
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Interest income - finance receivables $70,870 38,210 15,324
Other portfolio income 2,035 1,338 699
Gain on sale of finance receivables 22,925 -- --
Servicing fees and other income 4,822 -- --
Total revenues 100,652 39,548 16,023
- --------------------------------------------------------------------------------------
EXPENSES
Interest expense 21,822 10,754 4,034
Provision for credit losses 21,860 1,700 --
Operating expenses:
Employee compensation and related costs 23,542 10,263 4,940
Other operating expenses 16,182 6,027 2,550
Total expenses 83,406 28,744 11,524
Earnings before income taxes and extraordinary item 17,246 10,804 4,499
Income taxes 6,726 4,103 1,710
Net earnings before extraordinary item 10,520 6,701 2,789
Extraordinary item from early extinguishment of debt,
net of income taxes -- -- (1,168)
Net earnings 10,520 6,701 1,621
Warrant accretion -- -- (127)
Net earnings available to stockholders 10,520 6,701 1,494
- --------------------------------------------------------------------------------------
PER SHARE DATA
Net earnings before extraordinary item 1.56 1.35 0.85
Extraordinary item -- -- (0.36)
Net earnings 1.56 1.35 0.49
Warrant accretion -- -- (0.04)
Net earnings available to stockholders 1.56 1.35 0.45
Weighted average number of common and common
equivalent shares outstanding 6,742 4,980 3,297
- --------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE> 27
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Amounts in thousands
- -----------------------------------------------------------------------------------------------------------------------------------
Unearned
compensation Notes
Additional attributable receivable Total
Common paid-in Treasury to stock from Retained stockholders'
stock capital stock options stockholders earnings equity
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 $25 7,063 -- (277) (221) 917 7,507
Issuance of 1,530 shares of common
stock for cash 15 14,895 -- -- -- -- 14,910
Exercise common stock warrants for 140
warrant shares and transfer 124 common
warrant shares to additional paid-in capital 1 1,510 -- -- -- -- 1,511
Repayment of notes receivable
from stockholders -- -- -- -- 183 -- 183
Amortization of unearned compensation -- -- -- 98 -- -- 98
Warrant accretion -- -- -- -- -- (127) (127)
Net earnings -- -- -- -- -- 1,621 1,621
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 41 23,468 -- (179) (38) 2,411 25,703
Purchase of employee stock
options for cash -- (25) -- -- -- -- (25)
Repayment of notes receivable
from stockholders -- -- -- -- 38 -- 38
Issuance of 2,250 shares of common
stock for cash 23 51,565 -- -- -- -- 51,588
Exercise 124 warrant shares for
common shares 1 (1) -- -- -- -- --
Issuance of 10 shares of common
stock under 1994 Employee
Stock Purchase Plan -- 95 -- -- -- -- 95
Amortization of unearned compensation -- -- -- 179 -- -- 179
Net earnings -- -- -- -- -- 6,701 6,701
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 65 75,102 -- -- -- 9,112 84,279
Purchase of employee stock options
for cash -- (24) -- -- -- -- (24)
Purchase of 10 shares of common stock -- -- (187) -- -- -- (187)
Issuance of 10 shares of common
stock under 1994 Employee
Stock Purchase Plan -- (38) 187 -- -- -- 149
Net earnings -- -- -- -- -- 10,520 10,520
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 $65 75,040 -- -- -- 19,632 94,737
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE> 28
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31 1996 1995 1994
Dollars in thousands
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Interest income received - finance receivables $68,588 34,399 13,048
Servicing fees received 6,665 -- --
Ancillary and other operating receipts 2,087 1,382 688
Purchases of finance receivables, held for sale, net (393,930) (32,265) --
Proceeds from sale of finance receivables, held for sale, net 384,851 -- --
Payments for operating expenses (37,214) (15,344) (7,349)
Payments for interest and borrowing fees (19,841) (10,071) (4,218)
Income taxes paid (8,624) (2,418) (125)
Net cash flows from operating activities 2,582 (24,317) 2,044
- ------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of finance receivables, net (126,227) (204,899) (85,295)
Principal payments and recoveries received on finance
receivables, net 116,337 60,074 30,715
Purchases of property and equipment (3,883) (1,124) (499)
Increase in restricted cash (23,139) (6,808) --
Increase in prepaid and other assets (5,484) -- --
Net cash flows from investing activities (42,396) (152,757) (55,079)
- ------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of notes payable - securitized pools, net 124,989 74,216 --
Proceeds from issuance of common stock, net -- 51,588 14,910
Proceeds from issuance of subordinated debt, net 49,380 13,800 4,500
Repayment of notes payable - securitized pools (62,729) (4,748) --
Repayment of subordinated notes -- -- (6,500)
Net increase (decrease) in borrowings under
senior revolving credit facility (70,700) 42,025 39,750
Other, net (61) 170 182
Net cash flows from financing activities 40,879 177,051 52,842
Net increase (decrease) in cash 1,065 (23) (193)
Cash balance beginning of year 112 135 328
Cash balance end of year $1,177 112 135
- ------------------------------------------------------------------------------------------------
</TABLE>
(continues)
26
<PAGE> 29
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31 1996 1995 1994
Dollars in thousands
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
RECONCILIATION OF NET EARNINGS TO NET
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 10,520 6,701 1,621
Extraordinary item, net of income taxes -- -- 1,168
Amortization of contract acquisition costs and discounts, net 1,763 723 (527)
Provision for credit losses 21,860 1,700 --
Depreciation 918 358 141
Provision for deferred income taxes (1,334) 908 883
Amortization of debt issuance costs and other 1,235 824 343
Increase in accrued interest income and other revenue (2,181) (4,534) (1,749)
Increase in prepaid and other assets 111 (633) (424)
Increase in finance receivables held for sale, net (10,493) (32,265) --
Increase in excess servicing receivable attributable
to gain on sale of finance receivables (21,510) -- --
Increase in accounts payable and accrued expenses 1,512 855 575
Increase in interest payable 746 323 13
Increase (decrease) in income taxes payable (565) 723 --
Net cash flows from operating activities $ 2,582 (24,317) 2,044
- ------------------------------------------------------------------------------------------------
SUPPLEMENTAL SCHEDULE OF SIGNIFICANT
NONCASH FINANCING ACTIVITIES
Common stock warrants exercised for warrant shares and
transfer common stock warrants to additional paid-in capital $ -- 1 1,511
- ------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE 1 -- BUSINESS DESCRIPTION
First Merchants Acceptance Corporation, including its wholly owned subsidiaries
(the "Company") is a specialty consumer finance company engaged in financing
the purchase of auto-mobiles through the acquisition of dealer-originated
retail installment contracts ("finance contracts") collateralized by the
underlying automobiles. The Company was incorporated on March 22, 1991 in
Delaware and commenced operations on June 1, 1991.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION The consolidated financial statements include accounts of First
Merchants Acceptance Corporation and its wholly owned subsidiaries. All
significant intercompany accounts have been eliminated in consolidation.
RECLASSIFICATIONS
Certain amounts in the prior year's financial statements have been reclassified
to conform with current financial statement presentation.
REVENUE RECOGNITION
Finance receivables consist of both precomputed and simple interest finance
contracts, which require payment of a fixed monthly amount over a specific
term. For precomputed finance receivables, 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 operating income, which includes customer late charges and extension
fees, is recognized when collected.
DEFERRED CONTRACT ACQUISITION COSTS
The Company defers costs directly associated with the acquisition of finance
receivables and amortizes such costs using the interest method as a reduction
of interest income over the term of the finance receivables.
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 discount is allocated to the
allowance for credit losses. Prior to 1996, that portion of the contract
acquisition discount necessary to absorb estimated credit losses was allocated
to the allowance for credit losses. Any remaining contract acquisition discount
was amortized to interest income using the interest method over the term of the
finance contracts.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is initially established through non-refundable
contract acquisition discount. In addition, a provision for credit losses is
charged against earnings to maintain the allowance for credit losses at a level
management believes adequate to absorb potential losses in the finance
receivable 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 receivable portfolio, and general economic
conditions and trends.
Consistent with common industry practice, an account is charged off at the
earliest of the time the account's collateral is repossessed, the account is
121 or more days past due or the account is otherwise deemed to be
uncollectible. Prior to December 1996, an account was charged off at the
earliest
28
<PAGE> 31
of repossession, 91 or more days past due or the account was otherwise deemed
to be uncollectible. At December 31, 1996, $2,165,791 of accounts were greater
than 90 but less than 121 days delinquent; this amount principally represents
finance receivables that have been reduced to their estimated net realizable
value.
FINANCE RECEIVABLES HELD FOR SALE
Finance receivables designated for sale and securitization during the first
quarter of 1997 and 1996 are classified as held for sale as of December 31,
1996 and 1995, respectively. Finance receivables held for sale, net are carried
at the lower of aggregate cost or market value. Market value is determined by
current investor yield requirements.
EXCESS SERVICING RECEIVABLE
The Company sells finance receivables to certain special purpose financing
trusts (the "Trusts"), and the Trusts issue automobile receivables-backed
securities to investors. A gain on sale of finance receivables is recognized by
the Company on the settlement date of such transactions.
The gain on sale of finance receivables represents the difference between the
sales proceeds, net of transaction costs, and the Company's net carrying value
of the finance receivables sold, plus excess servicing income. The excess
servicing receivable is the present value of the net cash flows measured by the
excess of 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.
The difference between the estimated net cash flows and the corresponding
present value represents unearned income, which is amortized to excess serving
income at the discount rate used to determine such present value. Excess
servicing receivable is reduced as such cash flows are collected.
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 finance receivables. The carrying value of
excess servicing receivable is reviewed quarterly by the company on a
disaggregated basis by Trust. If future credit losses and prepayment rates
exceed the Company's original estimates, excess servicing receivable will be
adjusted through a charge to operations. Favorable credit loss and prepayment
experience compared to the Company's original estimates would result in
additional income.
RESTRICTED CASH
The Company is required to establish and maintain cash reserve and collection
accounts with a trustee with respect to the securitized pools of finance
receivables. These amounts are reported as restricted cash on the Company's
consolidated balance sheets. A deposit is initially made in the form of cash
and is supplemented by a portion of the servicing spread collected on the
securitized receivables. The amounts set aside may be used to supplement
certain shortfalls, if any, in payments to investors. These amounts are subject
to an increase up to maximum subordination amounts as specified in the
securitization indenture. Cash amounts on deposit are invested as permitted by
the trust agreement. To the extent amounts on deposit exceed specified levels,
distributions may be made to the Company and, at the termination of the
transaction, any remaining amounts on deposit are distributed to the Company.
REPOSSESSED COLLATERAL
The Company commences repossession procedures against the underlying collateral
when it determines the collection efforts are likely to be unsuccessful.
Repossession generally occurs before a borrower misses more than three
consecutive monthly payments. Collection strategies, including the timing of
repossessions, were modified during 1996 to maximize the receipt of cash from
delinquent customers rather than from the sale of collateral. When collateral
is repossessed for finance receivables owned, the net amount due under the
finance receivable is reduced to the estimated fair value of the collateral,
less the cost of disposition, and the reduction is recorded as a charge-off.
Charge-offs related to repossessions for finance receivables serviced but not
owned, are recorded when the Company repossesses and disposes of the
collateral.
DEALER RESERVES
Dealer reserves consist of (1) amounts withheld from funds paid to dealers to
purchase certain finance contracts, commonly referred to as deferred
certificates; such amounts are refundable to the dealer when the finance
receivables are fully paid and (2) a portion of the finance charges on certain
finance receivables which is payable to the dealer pursuant to agreements and
may be retained by the Company in the event of a default under the finance
contract or early repayment.
29
<PAGE> 32
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 RISK MANAGEMENT AGREEMENTS
The Company enters into interest rate risk management 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.
STOCK BASED COMPENSATION
Compensation costs associated with the Company's stock option and employee
stock purchase plans are recognized based upon the intrinsic value of such
benefits. Under the intrinsic value-based method, compensation cost is the
excess, if any, of the quoted market price of the stock at grant date or other
measurement date over the amount an employee must pay to acquire the stock.
USE 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.
NOTE 3 -- FINANCE RECEIVABLES
Finance contracts generally have terms of 18 to 60 months. Net finance
receivable balances consisted of the following:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
AS OF DECEMBER 31 1996 1995
- ----------------------------------------------------------------
<S> <C> <C>
Dollars in thousands
Precomputed interest
receivables, net $200,406 222,931
Simple interest receivables 43,956 28,977
Net finance receivables $244,362 251,908
- ----------------------------------------------------------------
</TABLE>
Precomputed interest receivables are shown net of unearned finance charges of
$64,761,905 and $89,318,743 at December 31, 1996 and 1995 respectively. Net
finance receivables at December 31, 1996, include $25,805,786 of finance
receivables restricted to provide credit enhancement as required under the
terms of the Company's sales and securitizations of finance receivables.
The Company's experience has shown that a portion of the payments on finance
receivables will be received prior to contractual due dates. Therefore, the
table below is not a forecast of future cash collections. At December 31, 1996
contractual payments, including principal and interest, due under finance
contracts are scheduled to be received as follows:
<TABLE>
<CAPTION>
----------------------------------------
YEAR ENDED DECEMBER 31
Dollars in thousands
----------------------------------------
<S> <C>
1997 $98,960
1998 81,378
1999 72,681
2000 53,005
2001 20,170
Total contractual payments due $326,194
----------------------------------------
</TABLE>
30
<PAGE> 33
The borrowers under the finance contracts are not concentrated in any specific
geographic region. At December 31, 1996, two regional dealer service centers
accounted for more than 10% of the serviced finance receivable 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 condition for a particular geographic region.
Activity in the allowance for credit losses and contract acquisition discount
for the years ended December 31, 1996, 1995 and 1994 were as follows:
<TABLE>
<S> <C> <C> <C>
-------------------------------------------------------------------
ALLOWANCE FOR CREDIT LOSSES 1996 1995 1994
Dollars in thousands
Balance - beginning of year $14,301 4,489 1,553
Discounts allocated to the
allowance for credit losses 7,566 15,724 5,756
Provision for credit losses 21,860 1,700 --
Charge-offs, net (26,545) (7,612) (2,820)
Balance - end of year $17,182 14,301 4,489
-------------------------------------------------------------------
CONTRACT ACQUISITION DISCOUNT
Balance - beginning of year $-- 1,401 888
Discounts in excess of amount allocated
to allowance for credit losses -- -- 1,574
Amortization to interest income -- (13) (935)
Charge-offs -- (1,356) --
Other -- (32) (126)
Balance - end of year $-- -- 1,401
-------------------------------------------------------------------
</TABLE>
Beginning in 1995, the entire contract acquisition discount has been allocated
to the allowance for credit losses and the remaining discounts were no longer
being amortized to interest income. The components of net charge-offs for 1996,
1995 and 1994 are stated in the table below:
<TABLE>
<CAPTION>
------------------------------------------------------------------
SUMMARY OF NET CHARGE-OFFS 1996 1995 1994
Dollars in thousands
------------------------------------------------------------------
<S> <C> <C> <C>
Charge-offs - allowance for credit losses $29,109 8,205 2,982
Recoveries - allowance for credit losses (2,564) (593) (162)
Charge-offs, net 26,545 7,612 2,820
Charge-offs - contract acquisition discount -- 1,356 --
Total net charge-offs $26,545 8,968 2,820
------------------------------------------------------------------
</TABLE>
31
<PAGE> 34
NOTE 4 -- EXCESS SERVICING RECEIVABLE
Excess servicing receivable represents the Company's subordinated interest in
the First Merchants Grantor Trust 1996-1 (the "Trust 1996-1"), First Merchants
Grantor Trust 1996-2 (the "Trust 1996-2"), First Merchants Auto Trust 1996-B
(the "Trust 1996-B") and First Merchants Auto Trust 1996-C (the "Trust 1996-C")
together known as the "Trusts". At December 31, 1996, excess servicing
receivable consisted of the following:
<TABLE>
<CAPTION>
- -----------------------------------------------------------
AS OF DECEMBER 31 1996
Dollars in thousands
- -----------------------------------------------------------
<S> <C>
Estimated future net cash flows before estimated
credit losses $ 64,647
Allowance for estimated credit losses (33,966)
Estimated future net cash flows 30,681
Unearned income (8,332)
Balance - end of year $ 22,349
- ------------------------------------------------------------
</TABLE>
There was no excess servicing receivable at December 31, 1995.
NOTE 5 -- PROPERTY AND EQUIPMENT
Depreciation and amortization of property and equipment were $918,214, $358,253
and $141,402 for 1996, 1995 and 1994 respectively. Property and equipment
consisted of the following as of December 31, 1996 and 1995:
<TABLE>
<CAPTION>
--------------------------------------------------------------
AS OF DECEMBER 31 1996 1995
Dollars in thousands
--------------------------------------------------------------
<S> <C> <C>
Computer equipment $ 3,354 1,224
Furniture and other equipment 2,502 952
Leasehold improvements 219 16
Total cost 6,075 2,192
Accumulated depreciation and amortization (1,455) (568)
Total $ 4,620 1,624
--------------------------------------------------------------
</TABLE>
<PAGE> 35
NOTE 6 -- SENIOR REVOLVING CREDIT FACILITY
As of December 31, 1996, the Company had a $205.0 million Senior Revolving
Credit Facility with a group of nine banks. Borrowings under the Senior
Revolving Credit Facility are secured by certain finance receivables 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 expired on November 1,
1996, and bore interest at the reference prime rate. The Senior Revolving
Credit Facility expires June 30, 1997. The Senior Revolving Credit Facility
requires the Company to maintain specified financial ratios and to comply with
other covenants.
Interest rate and borrowing information as of and for the years ended December
31, 1996, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------
AS OF DECEMBER 31 1996 1995 1994
Dollars in thousands
--------------------------------------------------------------------
<S> <C> <C> <C>
Borrowings $33,300 104,000 61,975
Weighted average contractual interest rate 7.23% 7.39% 8.73%
--------------------------------------------------------------------
YEARS ENDED DECEMBER 31
Interest expense $10,156 8,572 3,692
Highest month - end borrowings 196,675 149,575 61,975
Average outstanding borrowings 128,986 97,340 41,312
--------------------------------------------------------------------
Weighted average interest rates:
Contractual 7.40% 8.24% 8.00%
Effective 7.87% 8.81% 8.94%
--------------------------------------------------------------------
</TABLE>
<PAGE> 36
NOTE 7 -- SECURITIZATION OF FINANCE RECEIVABLE ACTIVITIES
NOTES PAYABLE-SECURITIZED POOLS
On May 21, 1996, the Company completed a $125.9 million debt financing
consisting of automobile receivable-backed notes, Series 1996-A. Of these
notes, $85.0 million have a floating interest rate of 0.17% over the one-month
LIBOR and the remaining $40.9 million have a fixed interest rate of 6.70%. The
Series 1996-A notes were issued by First Merchants Auto Trust 1996-A, a trust
formed specifically for purposes of the securitization structure.
On November 17, 1995, the Company completed a $75.1 million debt financing
consisting of 6.20% automobile receivable-backed notes, Series 1995-A. The
Series 1995-A notes were issued by First Merchants Auto Receivable Corporation,
a wholly-owned special purpose subsidiary of First Merchants Acceptance
Corporation.
Principal and interest on the notes are payable monthly from collections and
recoveries on the pools of finance receivables. Interest expense including the
amortization of debt issuance costs, was $9,016,467 and $672,748 for 1996 and
1995, respectively.
SALE AND SECURITIZATION OF FINANCE RECEIVABLES On March 12, 1996, the Company
completed a sale of finance receivables to Trust 1996-1 and the issuance
of $55.8 million of automobile receivable-backed certificates of Trust 1996-1.
The Company retained a subordinated interest in Trust 1996-1. The certificates
have a pass through interest rate of 5.90%.
On June 26, 1996, the Company completed a sale of finance receivables to Trust
1996-2 and the issuance of $90.4 million of automobile receivable-backed
certificates of Trust 1996-2. The Company retained a subordinated interest in
Trust 1996-2. The certificates have a pass through interest rate of 6.85%.
On September 26, 1996, the Company completed a sale of finance receivables to
Trust 1996-B, and the issuance of $117.5 million of automobile
receivable-backed certificates and notes, Series 1996-B. Of these certificates
and notes, $82.3 million have a floating interest rate of 0.12% over one-month
LIBOR, $30.5 million have a fixed interest rate of 6.80% and the remaining $4.7
million have a fixed interest rate of 7.00%.
On December 18, 1996, the Company completed a sale of finance receivables to
Trust 1996-C, and the issuance of $144.7 million of automobile
receivable-backed certificates and notes, Series 1996-C. Of these certificates
and notes, $101.0 million have a floating interest rate of 0.11% over one-month
LIBOR, $37.9 million have a fixed interest rate of 6.15% and the remaining $5.8
million have a fixed interest rate of 6.35%. The Company delivered $125.7
million in finance contracts acquired from its dealer network. The remaining
$19.0 million were delivered in January, 1997.
The Company recognized gains on the sales of finance receivables totaling $22.9
million in 1996. The gains 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 income.
SECURITIZATION ACTIVITIES
In conjunction with its securitization transaction activities, the Company is
required to establish and maintain cash reserve and collection accounts with
a trustee. A deposit is initially made in the form of cash and is supplemented
with a portion of the servicing spread collected on the securitized receivables.
The amounts set aside may be used to supplement certain shortfalls, if any, in
payments to investors. Also, the Company is required to provide additional
credit enhancement by granting a security interest in certain other finance
receivables. The indentures relating to the Company's securitizations contain
several delinquency, credit loss, customer loan extension and other
limitations.At December 31, 1996, the dollar amount of contracts liquidated and
certain other ratios exceeded the portfolio performance tests contained in the
servicing agreements for two of the Company's securitization trusts. As a
result, Financial Security Assurance Inc. ("FSA") and the Company have agreed
that the Company will maintain additional cash reserves with the trustee until
the tests are met. FSA issued a financial guaranty insurance policy for the
benefit of the certificate and note holders. The proceeds the Company received
from these securitization transactions were used to repay borrowings under the
Senior Revolving Credit Facility.
At December 31, 1996, the dollar amount of customer loan extensions granted
exceeded the limitations contained in the servicing agreements for four of the
Company's securitization trusts. On March 15, 1997, FSA granted a waiver with
respect to such extensions. On March 15, 1997, the Company also received a
waiver with respect to certain covenants of the Senior Revolving Credit facility
pertaining to its securitizations.
<PAGE> 37
NOTE 8 -- SUBORDINATED DEBT
SUBORDINATED RESET NOTES
On November 1, 1996, the Company issued $51.8 million of Subordinated Reset
Notes, (the "1996 Subordinated Reset Notes") in an underwritten public
offering. Interest on the 1996 Subordinated Reset Notes is payable quarterly at
an interest rate of 9.50%, until December 15, 2001. The interest rate will
reset at the Company's option on December 15, 2001 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 period prior to maturity on December 15, 2006. Holders of the 1996
Subordinated Reset Notes have the option to redeem all or any portion of the
notes on December 15, 2001 or any subsequent interest reset date. Proceeds from
the issuance of the 1996 Subordinated Reset Notes were used to repay borrowings
under the Senior Revolving Credit Facility. Interest expense was $899,542
including amortization of underwriting discount and issuance costs in 1996.
As of December 31, 1996 the $51,750,000 outstanding principal balance of the
1996 Subordinated Reset Notes is reported net of the unamortized underwriting
discount of $2,001,000.
On February 14, 1995, the Company received $13,530,000 from the sale of
$14,375,000 of subordinated reset notes (the "1995 Subordinated Reset 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 Subordinated
Reset Notes is payable quarterly, 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 period prior to maturity on March
15, 2005. Holders of the notes have the option to redeem all or any portion of
the notes on March 15, 2000 or any subsequent interest reset date. Interest
expense was $1,750,250 and $1,509,290 including amortization of underwriting
discount and issuance costs in 1996 and 1995, respectively.
As of December 31, 1996 the $14,375,000 outstanding principal balance of the
1995 Subordinated Reset Notes is reported net of the unamortized underwriting
discount of $364,167.
The indentures relating to the 1996 and 1995 Subordinated Reset Notes require
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, 1996.
SUBORDINATED CREDIT FACILITY
On October 29, 1993, the Company entered into a Subordinated Credit Facility
for $6.5 million with Bank of America Illinois ("BA Illinois"), 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 a common stock offering, 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 $341,902 in 1994.
<PAGE> 38
NOTE 9 -- INTEREST RATE RISK MANAGEMENT AGREEMENTS
INTEREST RATE PROTECTION AGREEMENTS
The Company is a party to an interest rate protection agreement with a notional
amount of $15.0 million which limits the Company's exposure to increases in its
borrowing costs relating to LIBOR. This agreement expires in January 1998 and
provides protection against increases in the 90-day LIBOR rate, as determined
on each quarterly anniversary date, above 6.50%. If the 90-day LIBOR equals or
exceeds 8.50% on any such quarterly anniversary date, the cap rate resets to
8.50% per annum for each quarter. The interest protection agreement required
the Company to make payments totaling $517,713 which are being treated as an
adjustment to interest expense over the term of the agreement.
The Company was party to a second interest rate protection agreement which
expired in January 1996. This agreement provided protection on a notional
amount of $15.0 million against increases in the reference prime rate above
7.75% per annum and required the Company to make payments if the reference
prime rate dropped below 6.00% per annum. This interest rate protection
agreement involved no cost to the Company.
INTEREST RATE SWAPS
In conjunction with the issuance of automobile receivable-backed notes Series
1996-A, 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
through May 1998. At December 31, 1996, the notional amount was $52.7 million
and one-month LIBOR was 5.50%.
In conjunction with the issuance of automobile receivable-backed notes Series
1996-C the Company entered into an interest rate swap agreement on September
26, 1996, with an initial notional amount of $82.3 million, 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
through March 1999. At December 31, 1996, the notional amount was $72.8 million
and one-month LIBOR was 5.50%.
These interest rate risk management 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.
NOTE 10 -- 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 future purchases of finance contracts; prior to such use, net
proceeds were used to reduce the outstanding 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. No further warrants
are outstanding.
During the second half of 1994, the Company completed an initial public
offering of 1,530,000 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. 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.
<PAGE> 39
COMMON STOCK WARRANTS
As of December 31, 1996 the 1993 Warrants which were originally scheduled to
expire on October 29, 1998 have been exercised without exchange of future
consideration. Upon completion of the Company's 1994 Common Stock Offering, the
put provision of the 1993 Warrants expired resulting in thecarrying value of
such warrants being transferred to additional paid in capital. Warrants
representing 123,616 and 140,472 warrant shares were exercised during the years
ended December 31, 1995, and 1994, respectively. No warrants were exercised or
outstanding as of December 31, 1996.
COMMON STOCK OPTIONS
On July 27, 1994, the Company adopted the First Merchants Acceptance Corporation
1994 Equity Incentive Plan, and (as subsequently amended 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 750,000 shares of Common Stock may be delivered pursuant to awards
under the Equity Incentive Plan. At December 31, 1996, 258,000 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, and in 1995
options to acquire a total of 17,500 common shares were granted to the
Company's six non-employee directors at exercise prices ranging from $11.00 to
$12.25 per share. No options were granted under the Directors Plan in 1996.
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 of 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").
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. No additional grants were made
and the Incentive Stock Option Plan was terminated effective September 23,
1994. Options to acquire 36,936 shares and 26,872 shares of common stock at
$4.40 per share were granted in 1993 and 1994, respectively. As of December 31,
1996, options to acquire 49,873 shares 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 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, 1996, options to acquire 20,541 shares
were earned and outstanding. These options vest at various times and expire
five years from the applicable vesting date.
During June 1996, the Company and the President and Chief Executive Officer
entered into a stock option agreement, that provides for grants of options for
300,000 shares of common stock on a schedule consisting of 100,000 shares on
each of June 1, 1996, December 31, 1996 and December 31, 1997. The options
contained in each grant become vested and exercisable at a rate of 20,000,
30,000 and 50,000 shares on the first, second and third December 31 following
the grant date, respectively. As of December 31, 1996, the first two grants of
100,000 shares each became effective at an exercise price of $21.875 per share
for the June 1, 1996 grant and $19.25 per share for the December 31, 1996 grant.
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.
<PAGE> 40
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 $178,767 and $97,512 in 1995 and 1994,
respectively. No such expense was recorded in 1996.
STOCK OPTION ACTIVITY
As summarized above, the Company maintains equity-based incentive plans under
which various types of stock awards are granted to officers, directors and key
employees of the Company. Stock option activity under these plans was as
follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
Number Weighted average Number Weighted average Number Weighted average
of shares option price of shares option price of shares option price
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, beginning of year 311,017 $6.28 254,502 $2.92 183,000 $0.92
Granted 423,400 20.01 77,750 18.57 71,502 8.02
Exercised or repurchased (6,595) 1.09 (2,470) 4.40 -- --
Cancelled (34,862) 18.25 (18,765) 11.80 -- --
Options outstanding, end of year 692,960 14.11 311,017 6.28 254,502 2.92
Options exercisable 239,957 4.74 185,716 1.38 31,111 3.02
Options available for future grant 534,500 275,500 345,000
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996 OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ---------------------------------------------------------------------------------------------------------------------------------
Weighted average
Number remaining Average Number Weighted average
outstanding contractual life exercise price exercisable exercise price
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.4 to $4.04 190,937 4.99 $1.18 179,608 $0.98
$5.18 to $12.25 44,023 6.05 10.28 25,699 9.69
$18.75 to $24.25 458,000 9.50 19.88 34,650 20.57
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
These plans are "non-compensatory" under APB No. 25, and accordingly, no charge
to earnings has been recorded. On a pro forma basis, if the fair value of
options granted in 1996 and 1995 had been charged to earnings, net earnings as
reported would have been reduced by $640,476 and $96,682 respectively. Net
earnings per common share as reported for 1996 and 1995 would have been reduced
by $0.09 and $0.02, respectively.
The fair value of each option granted is estimated on the date of grant using a
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995: expected volatility of 50.2%,
risk-free interest rate of 6.1% and 5.9% and expected lives of 6.7 and
5.6years, respectively.
<PAGE> 41
NOTE 11 -- EMPLOYEE BENEFIT PLANS
The Company sponsors a discretionary contribution savings plan (the "Plan")
covering substantially all employees, under 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 to match a portion of each participant's
contribution. Company contributions vest over six years from the contribution
date. Contribution expense was $98,835 and $26,064, in 1996 and 1995,
respectively.
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, eligible
employees were given the opportunity to purchase common stock at a discount of
not more than 15% based upon the fair market value at the beginning of the
enrollment period or date of purchase, whichever is less. The plan is
non-compensatory under APB No. 25, and, accordingly, no charge to earnings has
been recorded for the amount of the discount to fair market value. On a pro
forma basis, if the discount has been charged to earnings, net earnings would
have been reduced by $29,018 and $71,074 for 1996 and 1995, respectively. Net
earnings per common share as reported for 1996 would not have been effected and
net earnings per common share as reported for 1995 would have been reduced by
$0.01. 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
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. Employees of the Company had purchased 10,000 and 10,097
shares of common stock under the Stock Purchase Plan in 1996 and 1995,
respectively.
NOTE 12 -- 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. Management believes that the resolution of
this matter will not have a material impact on the financial position of the
Company, however, the ultimate outcome cannot be determined.
<PAGE> 42
NOTE 13 -- INCOME TAXES
The components of the income tax provision for the year ended December 31, 1996,
1995 and 1994 were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
Dollars in thousands 1996 1995 1994
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 7,203 2,681 709
State 857 514 118
Total current 8,060 3,195 827
- -------------------------------------------------------------------------------------------
Deferred:
Federal (1,167) 816 754
State (167) 92 129
Total deferred (1,334) 908 883
Total $ 6,726 4,103 1,710
- --------------------------------------------------------------------------------------------
</TABLE>
The income tax provision differs from the provision computed at the Federal
statutory tax rate as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Dollars in thousands 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income tax at Federal statutory rate $6,036 35.0% $3,673 34.0% $1,529 34.0%
State income tax, net of federal tax benefit 690 4.0% 430 4.0% 181 4.0%
Total income tax provision $6,726 39.0% $4,103 38.0% $1,710 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, 1996 and 1995 the components of the Company's deferred income
taxes were as follows:
<TABLE>
<CAPTION>
--------------------------------------------
Dollars in thousands 1996 1995
--------------------------------------------
<S> <C> <C>
Deferred tax assets:
Accrued restructuring charges $406 --
Accrued compensation 120 116
Total deferred tax assets 526 116
Deferred tax liabilities:
Contract acquisition discounts 733 1,792
Accumulated depreciation 194 107
Other 474 426
Total deferred tax liabilities 1,401 2,325
Net deferred tax liability $875 2,209
</TABLE>
<PAGE> 43
NOTE 14 -- COMMITMENTS AND CONTINGENT LIABILITIES
The Company leases its corporate office and 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. Charges to expense
with respect to all operating leases totaled $1,588,223, $775,758 and $447,510,
in 1996, 1995 and 1994, respectively. At December 31, 1996, future minimum
lease payments for noncancelable operating leases were as follows:
<TABLE>
<CAPTION>
-------------------------------------
YEAR ENDING DECEMBER 31
Dollars in thousands
--------------------------------------
<S> <C>
1997 $2,029
1998 2,012
1999 1,626
2000 1,256
2001 870
2002 and beyond 2,211
-------------------------------------
Total minimum future rentals $10,004
-------------------------------------
</TABLE>
Included in these commitments are leases for dealer service centers that have
been closed; such leases will not be renewed. It is generally expected that
leases for currently operating offices will expire and that some will be
renewed or replaced with leases for other locations.
DATA PROCESSING AGREEMENT
The Company has entered into contracts to receive data processing services
expiring in September 1998 and May 2002.
At December 31, 1996, future minimum payments pertaining to these agreements
were as follows:
<TABLE>
<CAPTION>
-------------------------------------
YEAR ENDING DECEMBER 31
Dollars in thousands
--------------------------------------
<S> <C>
1997 $2,580
1998 2,415
1999 2,280
2000 2,280
2001 2,280
2002 950
-------------------------------------
Total minimum future rentals $12,785
-------------------------------------
</TABLE>
<PAGE> 44
NOTE 15 -- RESTRUCTURING CHARGES
In 1996, the Company recorded expenses of $1.4 million for severance, lease
termination and other costs associated with consolidating certain dealer
service centers, expanding the geographic coverage of the Company's sales force
and other expense reduction efforts to improve operating efficiencies. Such
expenses were included in "Other operating expenses."
NOTE 16 -- IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishment 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 adoption
of SFAS 125 is not expected to have a material effect on the Company's
financial position or results of operations.
NOTE 17 -- 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 and are subjective in nature, 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.
CASH AND RESTRICTED CASH
The carrying amount of cash and restricted cash approximates fair value because
of its maturity characteristics and 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 loans would be made to
borrowers with similar credit ratings and the same remaining maturities.
EXCESS SERVICING RECEIVABLE
The carrying amount of excess servicing receivable approximates fair value
because the rate at which the future cash flows were discounted, remained
consistent during 1996.
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.
NOTES PAYABLE-SECURITIZED POOLS AND
SUBORDINATED RESET NOTES, NET
The fair value of the Company's notes payable-securitized pools and
subordinated reset notes, net is estimated based on the quoted market price of
similar issues.
INTEREST RATE RISK MANAGEMENT AGREEMENTS
The fair value of interest rate risk management agreements is estimated using
quoted market prices. The estimated fair value of interest rate risk management
agreements as of December 31, 1996 and 1995 was $(346,571) and $8,980,
respectively.
<PAGE> 45
A summary of the fair values of financial assets and liabilities at December
31, 1996 and 1995 follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
AS OF DECEMBER 31 1996 1995
Dollars in thousands
- ------------------------------------------------------------------------------------------------------------
Carrying Carrying
amount Fair value amount Fair value
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash $1,177 1,177 112 112
Restricted cash 29,947 29,947 6,808 6,808
Excess servicing receivable 22,349 22,349 -- --
Finance receivables held for sale 42,758 44,020 32,265 32,735
Net finance receivables 244,362 251,252 251,908 252,560
Less: allowance for credit losses (17,182) (17,182) (14,301) (14,301)
Net receivables 227,180 234,070 237,607 238,259
- ------------------------------------------------------------------------------------------------------------
FINANCIAL LIABILITIES
Borrowings under senior revolving credit facility $33,300 33,300 104,000 104,000
Notes payable - securitized pools, net 133,709 133,809 70,378 70,609
Subordinated reset notes , net 63,760 65,014 13,896 14,981
- ------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 46
NOTE 18 -- QUARTERLY RESULTS (UNAUDITED)
The following table sets forth certain unaudited operating results for each of
the eight quarters ended December 31, 1996. 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.
Dollars in thousands, except per share data
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
First Second Third Fourth Year
Quarter Quarter Quarter Quarter Ended
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996
Interest income from finance receivables and other
portfolio income $ 17,777 19,241 18,390 17,497 72,905
Gain on sale of finance receivables 3,006 5,087 6,795 8,037 22,925
Provision for credit losses 3,500 4,200 4,300 9,860 21,860
Operating expenses 7,807 10,043 11,122 10,752 39,724
Earnings before income taxes 4,954 5,230 5,406 1,656 17,246
Net earnings 3,022 3,190 3,298 1,010 10,520
Earnings per share $ 0.45 0.47 0.49 0.15 $1.56
- ---------------------------------------------------------------------------------------------------------------------
Stock price range of common stock: (1)
High $ 22.13 26.38 20.25 22.75 26.38
Low 16.00 19.50 14.38 16.38 14.38
Weighted average number of common and
common equivalent shares outstanding 6,733 6,780 6,727 6,736 6,742
- --------------------------------------------------------------------------------------------------------------------
1995
Interest income from finance receivables
and other portfolio income $ 6,428 8,538 10,593 13,989 $ 39,548
Provision for credit losses -- 125 525 1,050 1,700
Operating expenses 2,761 3,626 4,273 5,630 16,290
Earnings before income taxes 1,884 2,202 2,703 4,015 10,804
Net earnings 1,168 1,365 1,677 2,491 6,701
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 4,453 4,470 4,489 6,496 4,980
- --------------------------------------------------------------------------------------------------------------------
</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
NASDAQ. These quotations represent prices between dealers and do not include
retail markups, markdowns, or commissions, and do not necessarily represent
actual transactions. The common stock is currently owned by approximately 3,700
stockholders. The Company's common stock trades on the NASDAQ National Market
under the symbol "FMAC".
<PAGE> 47
Directors and Officers
DIRECTORS
THOMAS A. HIATT
General Partner
Middlewest Management Company
MITCHELL C. KAHN
President & Chief Executive Officer
First Merchants Acceptance Corporation
WILLIAM N. PLAMONDON
Consultant
MARCY H. SHOCKEY
General Partner
Middlewest Management Company
RICHARD J. UHL
President
Chicago Holdings, Inc.
SOLOMON A. WEISGAL
President
Solomon A. Weisgal, Ltd.
STOWE W. WYANT
Consultant
CORPORATE OFFICERS
MITCHELL C. KAHN
President & Chief Executive Officer
JOHN R. GRIGGS
Executive Vice President and
Chief Operating Officer--
Dealer Financial Services Division
NORMAN SMAGLEY
Senior Vice President &
Chief Financial Officer
ALAN J. APPELMAN
Senior Vice President
CRAIG A. ADAMS
Vice President
THOMAS R. EHMANN
Vice President
MARK FLOYD
Vice President
BRIAN W. HAUSMANN
Vice President
ALLEN D. RICE
Vice President
PAUL M. VAN EYL
Vice President
RICHARD P. VOGELMAN
Vice President & Secretary
KAREN J. EPPS
Controller
BRIAN P. HAKE
Treasurer
<PAGE> 48
CORPORATE INFORMATION
CORPORATE OFFICES
First Merchants Acceptance Corporation
570 Lake Cook Road, Suite 126
Deerfield, Illinois 60015
(847) 948-9300
TRANSFER AGENT & REGISTRAR
Harris Trust and Savings Bank
Shareholder Services
311 West Monroe Street, 11th Floor
Chicago, Illinois 60603
STOCK TRANSFER MATTERS/ CHANGE OF ADDRESS
First Merchants Acceptance Corporation investors seeking information on stock
transfers, change of address and lost stock certificates should contact
Harris Trust and Savings Bank at the address indicated above.
STOCK LISTING
First Merchants Acceptance Corporation's Common Stock trades on The NASDAQ
Market, under the ticker symbol FMAC.
STOCKHOLDER MEETING
The Annual Meeting of Stockholders will be held on Thursday, May 15, 1997 at
10:00 A.M. Those unable to attend are urged to exercise their right to vote by
returning the proxy sent to them in the mail.
INDEPENDENT AUDITORS
Deloitte & Touche LLP
180 North Stetson Avenue
Chicago, Illinois 60601
SECURITIES COUNSEL
Sonnenschein Nath & Rosenthal
8000 Sears Tower
Chicago, Illinois 60606
INVESTOR RELATIONS
Stockholders, analysts and other members of the investment community seeking
further information or a copy of the Corporation's Annual Report may contact:
NORMAN SMAGLEY
Senior Vice President &
Chief Financial Officer
First Merchants Acceptance Corporation
570 Lake Cook Road, Suite 126
Deerfield, Illinois 60015
Phone (847) 948-9300
Fax (847) 948-9303
FORM 10-K
First Merchants Acceptance Corporation files an Annual Report on Form 10-K
with the U.S. Securities and Exchange Commission. A copy of this report may
be obtained without charge by contacting Norman Smagley at the address
indicated above.
<PAGE> 49
FMAC - THE WINNING TEAM
[Photo]
<PAGE> 50
FIRST MERCHANTS ACCEPTANCE CORPORATION
570 LAKE COOK ROAD, SUITE 126
DEERFIELD, ILLINOIS 60015
[LOGO]
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
NAME OF SUBSIDIARIES STATE OF INCORPORATION
-------------------- ----------------------
First Merchants Automobile
Receivable Corporation Delaware
First Merchants Automobile Receivable
Corporation II Delaware
First Merchants Acceptance
Corporation of New York New York
First Merchants Acceptance
Corporation of Illinois Illinois
First Merchants Acceptance
Corporation of Nevada Nevada
First Merchants Residential
Credit Corporation Delaware
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-84316 of First Merchants Acceptance Corporation on Form S-8 for the First
Merchants Acceptance Corporation 1994 Employee Stock Purchase Plan, and in
Registration Statement No. 33-93332 of First Merchants Acceptance Corporation on
Form S-8 for the First Merchants Acceptance Corporation 1994 Equity Incentive
Plan and the First Merchants Acceptance Corporation 1994 Non-Employee Directors
Stock Option Plan, of our report dated February 4, 1997 (March 15, 1997 as to
the last paragraph of Note 7), included in and incorporated by reference in this
Annual Report on Form 10-K of First Merchants Acceptance Corporation for the
year ended December 31, 1996.
Chicago, Illinois
March 27, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The information included in this Financial Data Schedule shall not be deemed to
be filed with the Securities and Exchange Commission and is qualified in its
entirety by reference to the financial and other information included elsewhere
in this Annual Prospectus on Form 10-K
</LEGEND>
<CIK> 0000926296
<NAME> FIRST MERCHANTS ACCEPTANCE CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,177
<SECURITIES> 0
<RECEIVABLES> 244,362
<ALLOWANCES> (17,182)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 6,075
<DEPRECIATION> (1,455)
<TOTAL-ASSETS> 339,606
<CURRENT-LIABILITIES> 0
<BONDS> 63,760
0
0
<COMMON> 65
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 339,606
<SALES> 0
<TOTAL-REVENUES> 100,652
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 39,724
<LOSS-PROVISION> 21,860
<INTEREST-EXPENSE> 21,822
<INCOME-PRETAX> 17,246
<INCOME-TAX> 6,726
<INCOME-CONTINUING> 10,520
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,520
<EPS-PRIMARY> 1.56
<EPS-DILUTED> 1.56
</TABLE>
