United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1997
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 0-25714
THE AEGIS CONSUMER FUNDING GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 22-3008867
- --------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
200 North Cobb Parkway, Suite 428, Marietta, Georgia 30062
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(Address of principal executive offices) (Zip Code)
(770) 281-7000
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(Registrant's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [ ].
As of March 11, 1998, 30,000,000 shares of the issuer's common stock
were outstanding.
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THE AEGIS CONSUMER FUNDING GROUP, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page
PART I. FINANCIAL INFORMATION No.
<S> <C> <C>
Item 1. CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited):
Consolidated Condensed Statements of Financial Condition -
December 31, 1997 and June 30, 1997....................................... 3
Consolidated Condensed Statements of Operations - three and six
months ended December 31, 1997 and 1996................................... 4
Consolidated Condensed Statements of Cash Flows - six
months ended December 31, 1997 and 1996................................... 5
Notes to Consolidated Condensed Financial Statements......................... 6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS................................................................ 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................ N/A
Item 2. Changes in Securities........................................................ 26
Item 3. Defaults upon Senior Securities.............................................. 27
Item 4. Submission of Matters to a Vote of Security Holders.......................... N/A
Item 5. Other information............................................................ 27
Item 6. Exhibits and Reports on Form 8-K............................................. 27
SIGNATURES..................................................................................... 28
EXHIBIT INDEX.................................................................................. 29
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2
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PART I. FINANCIAL INFORMATION:
Item 1. Consolidated Condensed Financial Statements
THE AEGIS CONSUMER FUNDING GROUP, INC.
Consolidated Condensed Statements of Financial Condition
(unaudited)
<TABLE>
<CAPTION>
December 31, June 30,
1997 1997
<S> <C> <C>
Cash and cash equivalents $ 2,797,795 $ 4,492,591
Automobile finance receivables, net 26,627,444 34,654,507
Retained interests in securitized receivables 20,321,644 33,329,946
Other assets, including fixed assets 10,000,277 11,005,696
------------- ---------------
$ 59,747,160 $ 83,482,740
============== ===============
Liabilities and Stockholders' Equity (Deficit)
Warehouse credit facilities $ 19,637,067 $ 17,407,004
Notes payable 33,968,509 36,812,869
Advances on proposed sale of SST 2,950,000 -
Accounts payable and accrued expenses 11,460,451 15,808,781
--------------- ---------------
Total liabilities 68,016,027 70,028,654
--------------- ---------------
Subordinated debentures, net -- 24,031,746
--------------- ---------------
Stockholders' equity (deficit):
Common stock, $.01 par value; 30,000,000
shares authorized; 17,677,217 shares
issued and outstanding 176,772 176,772
Preferred stock, $0.10 par value; 2,000,000 shares
authorized:
Series C, 1,100 shares designated; 920 shares
issued; 106 shares outstanding 11 11
Series D, 21,350 shares designated; 21,107 shares
issued and outstanding 2,110 -
Series E, 2100 shares designated; 2000 shares
issued and outstanding 200 -
Series F, 2100 shares designated; 2000 shares
issued and outstanding 200 -
Paid-in capital 47,449,704 22,303,034
Retained deficit since date of
recapitalization (March 1, 1992) (55,897,864) (33,057,477)
--------------- ---------------
Total stockholders' equity (deficit) (8,268,867) (10,577,660)
--------------- ---------------
$ 59,747,160 $ 83,482,740
================ ================
</TABLE>
3
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<TABLE>
<CAPTION>
THE AEGIS CONSUMER FUNDING GROUP, INC.
Consolidated Condensed Statements of Operations
(unaudited)
Three months ended Six months ended
December 31, December 31,
1997 1996 1997 1996
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenues:
Servicing fee income $ 3,010,327 $ - $ 6,781,374 $ -
Fees and commissions earned 14,411 23,987 46,782 70,542
Gains (losses) from securitization transactions 2,697,576 (577,793) 5,610,941 9,771,326
Write down of retained interests in
securitized receivables (11,461,787) (29,000,000) (11,461,787) (31,000,000)
Interest income 2,323,815 6,961,086 5,379,001 12,175,510
Other income 279,881 60,306 770,763 138,985
--------------- --------------- --------------- ---------------
(3,135,777) (22,532,414) 7,127,074 (8,843,637)
---------------- --------------- --------------- ---------------
Operating expenses:
Salaries and other employee costs 4,051,060 1,908,489 10,042,077 4,439,833
Provision for credit losses 3,862,949 6,043,350 4,975,658 6,579,525
Interest expense 2,477,590 4,214,327 5,844,943 7,227,800
Other expenses 5,730,026 2,806,842 9,083,583 5,099,895
--------------- --------------- --------------- ---------------
16,121,626 14,973,008 29,946,261 23,347,053
--------------- --------------- --------------- ---------------
Net loss before income tax benefit (19,257,403) (37,505,422) (22,819,187) (32,190,690)
Income tax benefit - (10,606,120) - (8,427,030)
--------------- ----------- --------------- ---------------
Net loss $ (19,257,403) $ (26,899,302) $ (22,819,187) $ (23,763,660)
=============== =============== =============== ================
Net loss available to common stockholders $ (19,257,403) $ (26,957,780) $ (22,819,187) $ (23,897,183)
================ =============== ================ ================
Basic and Diluted Earnings Per Share $ (1.09) $ (1.68) $ (1.29) $ (1.50)
================ ================ ================ =================
Weighted Average Number of Shares Used
In the Calculation of Basic and Diluted
Earnings Per Share 17,677,217 16,066,631 17,677,217 15,923,853
=============== =============== =============== ===============
</TABLE>
4
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<TABLE>
<CAPTION>
THE AEGIS CONSUMER FUNDING GROUP, INC.
Consolidated Condensed Statements of Cash Flows
Six months ended December 31, 1997 and 1996
(unaudited)
1997 1996
------------------ ---------------
Cash flows from operating activities:
<S> <C> <C>
Net loss $ (22,819,187) $ (23,763,660)
Adjustments to reconcile net (loss) income to net cash used in
operating activities:
Amortization and depreciation expense 479,446 534,143
Write off of leasehold improvements 453,100 -
Provision for credit losses, net 4,975,658 6,579,525
Unrealized gains on securitization transactions - (12,109,339)
Write down of retained interests in securitized receivables 11,461,787 31,000,000
(Increase) decrease in automobile finance receivables portfolio 4,147,640 (177,992,496)
(Increase) decrease in other assets 864,919 (2,028,142)
Increase (decrease) in accounts payable and accrued expenses (4,348,330) 6,540,387
Decrease in income taxes payable - (9,188,444)
------------------ -----------------
Net cash used in operating activities (4,784,967) (180,428,026)
------------------ ----------------
Cash flows from investing activities:
Distributions from retained interests in securitized receivables 1,546,515 1,735,129
Additional payments to securitized receivable trusts - (3,099,659)
Acquisition of fixed assets (792,047) (2,771,438)
------------------- -----------------
Net cash provided by (used in) investing activities 754,468 (4,135,968)
------------------ ----------------
Cash flows from financing activities:
Proceeds from borrowings under warehouse credit facilities 161,022,588 403,297,298
Repayment of borrowings under warehouse credit facilities (158,792,525) (222,281,263)
Proceeds from subordinated debt - 20,167,467
Proceeds from borrowings under notes payable - (17,186,942)
Repayment of borrowings under notes payable (2,844,360) 5,000,000
Proceeds from advances on proposed sale of SST 2,950,000 -
Purchase of treasury stock - (340,000)
------------------ -----------------
Net cash provided by financing activities 2,335,703 188,656,560
------------------ ----------------
Net (decrease) in cash and cash equivalents (1,694,796) 4,092,566
Cash and cash equivalents, beginning of period 4,492,591 3,090,624
------------------ ----------------
Cash and cash equivalents, end of period $ 2,797,795 $ 7,183,190
================== ================
Supplemental disclosures of cash flow information:
Cash paid during the period:
Interest $ 4,813,627 $ 4,586,897
================== ================
Income taxes $ 50,125 $ 98,300
================== ================
</TABLE>
5
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The interim financial data is unaudited; however, in the opinion of management,
the interim data includes all adjustments necessary for a fair statement of the
results for the interim periods. Results for interim periods are not necessarily
indicative of the results for a full year. The consolidated financial statements
included herein have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission (the "SEC"). Pursuant to
interim accounting disclosure rules and regulations, certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted. The organization and business of the Company, accounting policies
followed by the Company and other information are contained in the notes to the
Company's consolidated financial statements filed as part of the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 1997. This
quarterly report should be read in conjunction with such Annual Report on Form
10-K.
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 128, Earnings Per Share, which is effective for annual and interim financial
statements issued for periods ending after December 15, 1997. SFAS No. 128 was
issued to simplify the Standards for calculating earnings per share ("EPS")
previously found in APB No. 15, Earnings Per Share. SFAS 128 replaces the
presentation of primary EPS with a presentation of basic EPS. The new rules also
require dual presentation of basic and diluted EPS on the face of the statement
of operations for companies with a complex capital structure. For the Company,
basic EPS excludes the dilutive effects of stock options and certain non-vested
Incentive Stock Options. Diluted EPS for the Company will reflect all potential
dilutive securities (similar to fully diluted EPS under Accounting Principles
Board Opinion No. 15).
2. COMPANY OPERATIONS AND LIQUIDITY
As reflected in the accompanying statement of financial condition as of December
31, 1997 and the consolidated condensed statement of operations for the six
months then ended, the Company has suffered substantial losses during such
periods and, accordingly, substantial reductions in stockholders' equity. These
negative financial trends have resulted primarily from (i) material increases in
delinquencies and losses on owned and managed finance contracts acquired since
the Company's inception and, to a lesser extent, (ii) one time charges relating
to the consolidation of the Company's operations and relocation of
administrative functions to Marietta, Georgia.
As a result of increasingly high rejection rates and backlog in risk default
insurance claims processing by the Company's insurance provider, the Company's
expected receipts from retained interests in securitized receivables has been
reduced or delayed. Furthermore, the Company is facing severe liquidity problems
due to the lack of committed operating capital.
6
<PAGE>
In October and November 1997, III Finance Ltd. ("III Finance"), High Risk
Opportunities Fund Ltd. ("HRO") and Greenwich Capital Financial Products, Inc.
converted their subordinated debentures of the Company to preferred stock of the
Company. The conversion of debt to equity reduces the Company's annual debt
service requirements by approximately $3.0 million. Payment of preferred stock
dividends, if any, are subject to the approval of the Board of Directors. See
Note 5.
In November 1997, the Company entered into negotiations to sell the stock of its
servicing subsidiary, Systems & Services Technologies, Inc. ("SST"), for $7.0
million to Adams, Viner & Mosler, Ltd. and III Associates (collectively referred
to as the "Purchasers"), subject to shareholder approval. The Company received
advances on the sale of SST totaling $2.95 million through December 31, 1997. In
connection with the sale, the Company has a repurchase option, expiring on
December 31, 1998, to repurchase SST for $7.0 million plus a 5% premium. See
Note 6.
To further address liquidity problems, the Company is executing its strategic
business plan to (1) reduce operating overheads and expenses through
consolidation of operations, (2) develop and implement new products and fee
based services to enhance operating revenues, and (3) complete the sale of its
interest in SST. Further, the Company is working closely with its funding
source, III Finance, to ensure continued funding for new originations and to
sustain continued operations. See Note 3.
There can be no assurance that the Company's efforts to alleviate its liquidity
problems and restore its operations to profitability will be successful. If the
Company is unsuccessful in its efforts, it may be unable to meet its
obligations, which raises substantial doubt about the Company's ability to
continue as a going concern. If the Company is unable to continue as a going
concern and is forced to liquidate assets to meet its obligations, the Company
may not be able to recover the recorded amounts of such assets. The Company's
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
3. WAREHOUSE AND OTHER CREDIT FACILITIES
Through December 31, 1997, the Company securitized an aggregate amount of $543.3
million in seven securitization transactions under its $1.0 billion purchase
facility. Future securitizations under the purchase facility ($456.7 million as
of December 31, 1997) are subject to customary conditions and are uncommitted.
The purchase facility provides for initial financing through the Company's $75.0
million warehouse line as the finance contracts are acquired and subsequently
sold into the purchase facility.
As of December 31, 1997, the Company was in technical default of net worth
covenants under its $75 million warehouse line and its Retained Yield Line
("RTY") Financing provided by III Finance. On February 26, 1998, the warehouse
line was reduced to $50 million and the Company obtained waivers of such
defaults for all of its facilities with III Finance through March 31, 1998. See
Note 6.
A lease line with III Finance expired December 31, 1997 with approximately
$5.2 million outstanding. The Company is currently negotiating extending the
maturity date of that facility through December 31, 1998.
7
<PAGE>
4. COMMITMENTS AND CONTINGENCIES
The Company is subject to various other legal proceedings and claims that arise
in the ordinary course of business. In the opinion of management of the Company,
the amount of any ultimate liability with respect to these actions will not
materially affect the results of operations, cash flows or financial position of
the Company.
5. CAPITAL STOCK
On October 16, 1997, III Finance and HRO converted $21.3 million of the
Company's 12% convertible subordinated debenture (the "Debenture") into $21.1
million of the Company's 12.75% non-voting Cumulative Convertible Preferred
Stock, Series D ("Series D Preferred Shares"). The Series D Preferred Shares are
redeemable at the holder's option, in which event the Company may pay the
holders in common stock at $1.26 per share or in cash.
On November 10, 1997, the remaining subordinated debt holder, Greenwich Capital
Financial Products, Inc., converted $4.0 million of subordinated debt of the
Company into $4.0 million of Cumulative Preferred Stock of the Company ("Series
E and F Preferred Shares"). The debt was converted into 2,000 shares each of
Series E and F Preferred Shares with a 12.0% dividend and a redemption value of
$4.0 million. The Series E Preferred Shares are redeemable at the holders
option, in which event the Company may pay the holders in common stock at $1.26
per share or in cash and the Series F Preferred Shares are redeemable at the
holder's option into common stock at $2.00 per share or in cash.
See Note 6 with the respect to conversion of Series C Preferred Stock into
common shares. No warrants that were issued and outstanding at December 31, 1997
have been exercised as of February 27, 1998.
6. SUBSEQUENT EVENTS
On January 13, 1998, HRO, with III Offshore Advisors acting as investment
advisor, converted 85 shares of the Company's Series C Preferred Stock into
12,322,783 shares of Common Stock at a conversion price of $0.7968 per share.
According to HRO's Schedule 13-D filing, HRO directly owns 13,135,987 shares of
the Company's common stock and, through HRO's ownership of the 21 remaining
outstanding shares of the Company's Series C Preferred Stock, indirectly owns an
additional 3,047,700 shares of the Company's common stock.
On January 28, 1998, the Company executed a Stock Purchase Agreement for the
sale of the stock of SST. During the period January 1, 1998 through February 27,
1998, the Company has received additional down payments under the Stock Purchase
Agreement of $3.1 million (a total of $6.05 million since entering into
preliminary negotiations for the sale of SST in November 1997). Under the terms
of the Agreement, the Company is restricted from utilizing any net cash flow of
SST from and after the effective date of the Agreement (provided that the sale
Agreement is ratified by stockholders approval) until the repurchase option is
exercised.
As a result of the Company's inability to satisfy The Nasdaq Stock Market's
minimum bid requirement of $1.00 per share, or its alternative test of $4.0
million in net tangible assets and $3.0 million in market value of public float,
the Company's stock was delisted from Nasdaq effective at the close of business
on Friday, February 5, 1998. The Company retains the right to apply to be
relisted on Nasdaq should the Company satisfy Nasdaq's listing requirements.
8
<PAGE>
As of December 31, 1997, the Company was in technical default under its $75
million warehouse line and its RTY Financing provided by III Finance for failing
to meet certain net worth requirements. On February 26, 1998 the warehouse line
was reduced to $50 million and the Company obtained waivers of net worth
covenants for all of its facilities with III Finance through March 31, 1998. In
connection with the waiver, III Finance agreed to allow the Company to incur a
shortfall of what the Company owes III Finance on its monthly pay-downs, not to
exceed $500,000.
7. PRO FORMA INFORMATION
As discussed in Notes 2 and 6, the Company entered into an Agreement for the
sale of the stock of SST. The accompanying pro forma condensed statement of
financial condition and condensed statement of operations gives effect to the
transaction as if it had occurred as of June 30, 1997 and the repurchase option
had expired unexercised It has been assumed that the proceeds from the sale have
been used to reduce liabilities.
Pro Forma Condensed Statement of Financial Condition
December 31, 1997
(in thousands)
<TABLE>
<CAPTION>
As Reported Pro Forma
(Unaudited) (Unaudited)
<S> <C> <C>
Assets $ 59,747 $ 55,044
======== ========
Liabilities 68,016 60,442
Stockholders' equity (deficit) $ (8,269 (5,398)
-------- --------
Total liabilities and stockholders' equity $ 59,747 $ 55,044
========= ========
(deficit)
</TABLE>
<TABLE>
<CAPTION>
Pro Forma Condensed Statement of Operations
Six Months Ended December 31, 1997
(in thousands)
As Reported Pro Forma
(Unaudited) (Unaudited)
<S> <C> <C>
Revenues $ 7,127 $ 439
Expenses 29,946 25,563
----------------- ------------------
Net income(loss) before gain $ (22,819) $ (25,124)
On sale of SST stock
Gain on sale of SST stock - 2,871
----------------- ------------------
Net income (loss) $ (22,819) $ (22,253)
================= ==================
Basic and Diluted Earnings Per Share $ (1.29) $ (1.26)
================- ==================
</TABLE>
Pro forma information related to the period ended December 31, 1996 was not
considered relevant as SST's operations were in the process of being
established.
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Certain statements contained in this Management's Discussion and Analysis of
Financial Condition and Results Of Operations contain "forward-looking
statements" which can be identified by the use of forward-looking terminology
such as "believes," "expects," "may," "will," "should," or "anticipates" or the
negative thereof or other variations thereon or comparable terminology, or by
discussions of strategy. No assurance can be given that future results covered
by the forward-looking statements will be achieved. The Company cautions readers
of this Quarterly Report on Form 10-Q that a number of important factors could
cause the Company's actual results, performance or achievements in fiscal year
ending June 30, 1998 and beyond to differ materially from the results,
performance or achievements expressed in, or implied by, such forward-looking
statements.
The following discussion and analysis of financial condition and results of
operations of the Company relates to the six months and three months ended
December 31, 1997 and 1996 and should be read in conjunction with the Company's
Consolidated Condensed Financial Statements and Notes thereto included elsewhere
in this quarterly report. The unaudited results for the three and six months
ended December 31, 1997 are not necessarily indicative of results to be expected
for the entire fiscal year.
Overview
The Company is a specialty consumer finance company engaged in acquiring,
securitizing and servicing finance contracts originated by dealers in connection
with the sale of late-model used and, to a lesser extent, new cars to consumers
with sub-prime credit. Since commencing the acquisition of finance contracts in
May 1992 through December 31, 1997, the Company has acquired approximately $1.37
billion of finance contracts, of which $1.19 billion have been securitized in
twenty-four offerings of asset-backed securities.
The following table illustrates the Company's finance contract acquisition
volume, total revenue, securitization activity and servicing portfolio during
the past nine fiscal quarters.
<TABLE>
<CAPTION>
For the Quarters Ended
Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec 31,
1995 1996 1996 1996 1996 1997 1997 1997 1997
---- ---- ---- ---- ---- ---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Number of finance contracts
acquired during period...... 8,190 10,569 12,037 15,401 14,584 8,992 8,745 8,724 2,874
Average finance contract balance $12.2 $12.4 $12.4 $12.3 $12.3 $12.6 $12.6 $12.8 $12.7
Aggregate value of finance
contracts acquired during period $100,582 $128,781 $149,612 $190,843 $179,933 $110,580 $110,485 $112,044 $36,417
Gains from securitization
transactions(1)(2).......... $ 7,424 $ 12,759 $ 10,824 $ 10,349 $ (578) $ 5,979 $ 5,797 $ 2,913 $ 2,698
Gains from whole loan sales... $ 64 $ 111 $ 290 - - $ 37 - - -
Net interest (expense) income. $ 1,021 $ 546 $ 993 $ 2,129 $ 2,747 $ 2,894 $ 1,931 $ (312) $ (154)
Revenue(3)(4)................. $ 6,946 4 10,341 $ 11,916 $ 10,675 $(26,747) $ 4,765 $ (5,291) $ 6,886 $(5,613)
Finance contracts securitized
during period............... 85,368 130,138 149,274 173,258 4,870 238,393 148,814 87,316 66,974
Finance contracts sold during
period...................... 1,801 2,752 2,250 - - 15,000 - - -
Servicing portfolio(at period
end)(5).................... 287,481 401,704 500,694 645,551 759,304 783,757 813,055 838,067 874,685(6)
</TABLE>
- ----------
(1) Excludes gains from whole loan sales of finance contracts.
(2) The quarters ended December 31, 1995 through December 31, 1997 are before
write downs of $3.1 million, $1.5 million, $3.5 million, $2.0 million,
$29.0 million, $4.4 million,$13.6 million,$0, and $11.5 million
respectively, taken on prior retained interests in securitized receivables.
(3) Revenue is net of interest expense and includes the write-downs on retained
interests in securitized receivables.
(4) The quarter ended March 31, 1997 has been restated to reflect a $4.4
million write down on retained interests in securitization receivables
resulting from a correction of an error discovered in the Company's
valuation model, relating to such quarter, during the valuation process for
the June 30, 1997 quarter.
(5) Through September 1997, excludes finance contracts in bankruptcy,
authorized for repossession and in repossession and still eligible for
reinstatement.
(6) Includes all finance contracts except those considered inactive, fully
liquidated, having balances less than $1,000 or where default insurance has
been rejected or paid.
10
<PAGE>
Revenues
The Company's primary sources of revenues consist of three components: gains
from securitization transactions, servicing fees and interest income.
Gains or Losses from Securitization Transactions and Write-Downs on Retained
Interest in Securitized Receivables. The Company warehouses the finance
contracts it acquires and periodically sells them to a trust, which in turn
sells asset-backed securities to investors. By securitizing its finance
contracts, the Company is able to lock in the difference ("gross spread")
between the annual rate of interest paid by the consumer ("APR") on the finance
contracts acquired and the interest rate on the asset-backed securities sold
("Certificate Rate"). When the Company securitizes its finance contracts, it may
record a gain or loss from securitization transactions and, if appropriate,
establish an asset referred to as retained interest in securitized receivables.
Gains or losses from securitization transactions are equal to (i) the retained
interest, if any, in the securitized receivables, (ii) the difference between
the net proceeds from the securitization and the cost (including the cost of
Vender's Single Interest Insurance Policy ("VSI Policy") and credit default
premiums ("RDI") to the Company) of the finance contracts sold, and (iii)
reserve funds, if required.
During the six months ended December 31, 1997, the Company did not record any
additions to retained interest in securitized receivables.
The Company reviews on a quarterly basis the retained interest in securitized
receivables. If actual experience differs from the Company's assumptions or to
the extent that market and economic changes occur that adversely impact the
assumptions utilized in determining the retained interest in securitized
receivables, the Company records a charge against earnings (See "Results of
Operations"). Because the Company's current assumptions utilized in evaluating
its retained interest in securitized receivables incorporate (i) market discount
rates, (ii) expected default rates over the life of the securitization trust,
(iii) expected prepayments by the obligors, and (iv) expected recovery rates on
the underlying collateral, and differ from the original assumptions, the Company
sustained large write downs in prior recordings of retained interest in
securitized receivables.
As of December 31, 1997, the market discount rate utilized in determining the
retained interest in securitized receivables was based on the Company's estimate
of the yield required by a third party purchaser of such instrument. The
Company's prepayment assumptions are based primarily on the age of the portfolio
of finance contracts and prior prepayment history. The Company bases its default
assumptions on anticipated losses after considering the performance
characteristics of the Company's finance contract portfolio to date. The
Company's default assumptions are based on estimated repossession rates,
anticipated proceeds from the liquidation of repossessed vehicles, proceeds from
VSI Policy coverage and recoveries from the Company's RDI insurance.
11
<PAGE>
Increasingly high insurance claim rejection rates and a backlog in RDI claims
processing by the Company's insurance provider has resulted in shortfalls to the
trusts which in turn has caused a shortfall in the release to the Company of
retained interests that the Company had anticipated receiving.
Servicing Fee Income. Servicing fees are earned at a contracted rate, based on
the receivable balance outstanding, from the owner of the asset. Subsequent to
securitization, the Company continues to service the securitized finance
contracts, for which it recognizes servicing fees over the life of the
securitization. SST services the finance contracts of the Company, which are
eliminated in consolidation, and certain securitization trusts. Servicing fee
income includes fees earned on subservicing agreements with third party
servicers.
Interest Income. Interest income consists of: (i) interest income earned on
finance contracts, (ii) interest income earned on leases (the Company ceased
funding leases in the quarter ended September 30, 1995), (iii) the accretion of
finance contract acquisition discounts net of related capitalized costs and (iv)
the amortization of capitalized costs net of origination discounts for leases.
Other factors influencing interest income during a given fiscal period include
(a) the annual percentage rate of the finance contracts acquired, (b) the
aggregate principal balance of finance contracts acquired and funded through the
Company's warehouse credit facilities prior to securitization, (c) the length of
time such finance contracts are funded by the warehouse credit facilities prior
to securitization, and (d) defaults on finance contracts owned by the Company.
Finance contract acquisition growth has a significant impact on the amount of
interest income earned by the Company.
The following table provides information for each of the Company's rated
securitizations:
<TABLE>
<CAPTION>
Weighted
Remaining Average Weighted Retained
Balance at Finance Average Interest in
Original Dec. 31, Contract Certificate Current Gross Net Securitized
Securitization Balance 1997 Rate(1) Rate(1) Ratings Spread(1)(2) Spread(1)(3) Receivables (13)
- -------------- ------- ---- ------- ------- ------- ------------ ------------ ----------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Aegis Auto Receivables
Trust,
Series:
1994-A............ $18,539 $1,495 20.28% 7.74% A+ (4) 12.54% 8.70% $380
1994-2............ 23,251 2,965 19.82 8.04 A+ (4) 11.78 8.12 720
1994-3............ 21,000(5) 3,560 19.66 9.46 A+ (4) 10.20 6.46 1,040
1995-1............ 21,000(5) 4,363 20.41 8.60 A+ (4) 11.81 8.46 1,070
1995-2............ 54,000(5) 13,747 19.94 7.16 A+ (4) 12.78 8.98 4,240
1995-3............ 60,000(5) 17,992 20.04 7.09 A+ (4) 12.95 10.12 5,210
1995-4............ 70,000(5) 23,639 19.88 6.65 B- (4) 13.23 10.41 7,480
1996-1............ 92,000(5) 35,647 20.13 8.44(6) (7) 11.69 8.89 -
1996-2............ 105,000(5) 48,278 20.10 8.93(8) (9) 11.17 8.40 -
1996-3............ 110,000(5) 59,015 20.20 8.82(10) (11) 11.40 8.75 -
Aegis Auto
Owners Trust....... 148,347 67,312 20.14 6.53 (12) 13.61 10.87 -
</TABLE>
- ----------
(1) Percentages as of closing date.
(2) Difference between the Weighted Average APR on finance contracts and the
Weighted Average APR on the trust certificates (the "Weighted Average
Certificate Rate").
(3) Difference between Weighted Average APR on finance contracts and the
Weighted Average Certificate Rate, net of servicing and trustee monthly
fees and annualized issuance costs that include underwriting fees and
hedging gains or losses, if any.
(4) Indicates ratings by Duff & Phelps.
(5) Includes prefunded amounts which were transferred to the related trust by
the end of the quarter for 1995-1, 1995-2, 1995-3, 1995-4, 1996-1, 1996-2,
1996-3 and by the first week of the next quarter for 1994-3.
(6) The Weighted Average Certificate Rate is composed of the following: the
Class A certificate rate is 8.39%, the Class B certificate rate is 7.86%
and the Class C certificate rate is 12.14%.
(7) The 1996-1 Securitization has Class A Notes rated CCC by Duff & Phelps and
B by Fitch; Class B Notes rated CCC by Duff & Phelps and CCC by Fitch and
Class C Notes rated CCC by Duff & Phelps and CCC- by Fitch.
(8) The Weighted Average Certificate Rate is composed of the following: the
Class A certificate rate is 8.9%, the Class B certificate rate is 8.4% and
the Class C certificate rate is 11.65%.
(9) The 1996-2 Securitization has Class A notes rated CCC by Duff & Phelps and
CCC+ by Fitch; Class B notes rated CCC by Duff and Phelps and CC+ by Fitch
and Class C notes rated CCC by Duff & Phelps and CC by Fitch.
(10) The weighted average Certificate Rate is composed of the following: the
Class A certificate is 8.8%, the Class B certificate is 8.3% and the Class
C certificate is 11.1%.
(11) The 1996-3 Securitization has Class A notes rated CCC by Duff & Phelps and
B- by Fitch; Class B notes rated CCC by Duff & Phelps and CC+ by Fitch and
Class C notes rated CCC by Duff & Phelps and CC by Fitch.
(12) The Owner Trust Facility has Class A notes rated AAA by Standard &
Poor's and Aaa by Moody's and Class B certificates rated Ba1 by Moody's.
(13) The sum of the retained interest in securitized receivables in the above
table is $20.14 million which excludes approximately $180,000 of retained
interests relating to transactions entered into prior to 1994.
12
<PAGE>
The following table provides information for each of the Company's
securitization under its $1.0 billion purchase facility:
<TABLE>
<CAPTION>
Weighted
Remaining Average Weighted
Balance at Finance Average
Original Dec. 31, Contract Certificate Gross Net
Securitization Balance 1997 Rate(1) Rate(1) Spread (1)(2) Spread(1)(3)
- --------------------- -------- ---- ------- ------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
1997-1............ $238,693 $148,453 20.43% 9.5%(4) 10.93% 8.46%
1997-2............ 37,163 25,505 20.67 9.75(5) 10.92 8.48
1997-3............ 38,475 28,522 20.73 9.53(6) 11.20 8.81
1997-4............ 74,721 57,314 20.40 9.38(7) 11.22 8.62
1997-5............ 48,128 40,719 20.6 9.18(8) 11.39 8.91
1997-6............ 39,189 35,314 20.5 9.32(9) 11.17 8.69
1997-7............ 66,974 64,766 20.4 9.06(10) 11.34 8.55
</TABLE>
- ----------
(1) Percentages as of closing date.
(2) Difference between the Weighted Average APR on finance contracts and the
Weighted Average Certificate Rate.
(3) Difference between Weighted Average APR on finance contracts and the
Weighted Average Certificate Rate, net of servicing and trustee fees.
(4) The weighted average Certificate Rate is composed of the following: the
Class A certificate rate is 7.3% and the Class B Certificate rate is 13.73%
(5) The weighted average Certificate Rate is composed of the following: the
Class A certificate rate is 7.5% and the Class B Certificate rate is 13.9%.
(6) The weighted average Certificate Rate is composed of the following: the
Class A certificate rate is 7.25% and the Class B Certificate rate is
13.8%.
(7) The weighted average Certificate Rate is composed of the following: the
Class A certificate rate is 7.1% and the Class B Certificate Rate is 13.6%.
(8) The weighted average Certificate Rate is composed of the following: the
Class A certificate rate is 6.90% and the Class B Certificate rate is
13.41%.
(9) The weighted average Certificate Rate is composed of the following: the
Class A certificate rate is 7.05% and the Class B Certificate Rate is
13.54%.
(10) The weighted average Certificate is composed solely of the Class A
Certificate except for 1997-7 in which a single Class A Certificate was
issued.
Results of Operations
Six Months Ended December 31, 1997 Compared To Six Months Ended December 31,
1996
Revenues. As described below under "Gains or Losses from Securitization
Transactions," "Write Downs of Retained Interest in Securitized Receivables,"
"Servicing Fee Income" and "Interest Income," revenues increased to $7.1 million
for the six months ended December 31, 1997 from ($8.8) million for the six
months ended December 31, 1996, an increase of $15.9 million.
Gains or Losses from Securitization Transactions. Gains from securitization
transactions were $5.6 million for the six month period ended December 31, 1997
compared with $9.8 million for the six months period ended December 31, 1996.
Write Downs of Retained Interest in Securitized Receivables. The Company
revalues its retained interests in securitized receivables quarterly using
anticipated future experience on the respective underlying securitization
trust's finance contract performance. When the actual experience differs from
the original assumptions utilized in the initial valuation in a detrimental
direction, the Company can incur permanent losses in the carrying value of these
assets. The write down of retained interests in securitized receivables during
the six month period ended December 31, 1997 is a result of the Company's
current assumptions utilized in evaluating its retained interests in securitized
receivables, which incorporate higher discount and expected default rates over
the life of the securitization trust, lower recovery rates on the underlying
collateral and higher prepayment rates than expected, compared to the levels
used in the comparable period a year ago. Write downs of retained interests in
securitized receivables were $11.5 million for the six-month period ended
December 31, 1997 compared with $31.0 million in the prior year.
13
<PAGE>
Servicing Fee Income. Servicing fee income was $6.7 million for the six months
ended December 31, 1997 compared with no servicing fee income for the six months
ended December 31, 1996. This increase is a result of the Company's servicing
subsidiary, SST, operating in the 1997 period; SST was in its developmental
stages in the comparable prior period.
Interest Income. Interest income decreased to $5.4 million for the six months
ended December 31, 1997 from $12.2 million for the six months ended December 31,
1996, a decrease of $6.8 million or 55.7%. The decrease in interest income is
attributed to (i) the lower average amount of loans held for securitization for
the six months ended December 31, 1997 as compared to the same period in 1996,
and (ii) the increase in the number of non performing finance contracts in the
finance contracts portfolio.
In addition, the Company recorded interest income of approximately $412,000 and
$733,000 for the six months ended December 31, 1997 and 1996, respectively, on
the lease portfolio, a decrease of approximately $321,000. The decrease is
attributed to the amortization in the lease portfolio.
Operating Expenses. Operating expenses increased to $29.9 million for the six
months ended December 31, 1997 from $23.3 million for the six months ended
December 31, 1996, an increase of $6.6 million or 28.3%. The increase in
operating expenses was primarily driven by (i) one time charges of $2.4 million
relating to the consolidation of operations and relocation of the Company's
administrative functions to Marietta, Georgia, and (ii) a $5.6 million increase
in Salaries and Employee Costs primarily attributable to the operation of SST
which was in formation during the comparable period in 1996.
Interest Expense. Interest expense decreased to $5.8 million for the six months
ended December 31, 1997 from $7.2 million for the six months ended December 31,
1996, a decrease of $1.4 or 19.4%, as a result of the decreased financing
required to maintain loans held for securitization in the Company's warehouse
facilities due to lower loan origination volumes. The decrease in interest
expense is primarily attributable to the Company's warehouse credit facilities,
which had a lower monthly average outstanding balance and interest rates during
the most recent six-month period.
Salaries and Other Employee Costs. Salaries and other employee costs increased
to $10.0 million for the six months ended December 31, 1997 from $4.4 million
for the six months ended December 31, 1996, an increase of $5.6 million or
127.2%. The increase is attributable primarily to the growth in the employee
base at SST to support its expanding operations.
Provision for Credit Losses. The provision for credit losses decreased to $5.0
million for the six months ended December 31, 1997 from $6.6 for the six months
ended December 31, 1996, a decrease of $1.6 million or 24.2%. The current
provision for credit losses is affected by: (i) the Company's volume of finance
contracts acquired; (ii) the increase in delinquent automobile finance
receivables (as discussed below); and (iii) the change in the Company's
historical loss ratios. These changes also resulted in an increase in the
Company's reserve rate as a percentage of total automobile finance receivables
held on the Company's balance sheet.
14
<PAGE>
All Other Operating Expenses. All other operating expenses increased to $9.1
million for the six months ended December 31, 1997 from $5.1 million for the six
months ended December 31, 1996, an increase of $4.0 million or 78.4 %. The
significant components of the increase in all other operating expenses include
$2.4 million of restructuring charges related to the move of the Company's
administrative offices to Marietta, Georgia and one-time severance and other
employee costs, and a $900,000 write off of capitalized costs related to certain
of the Company's financing arrangements. In addition, the Company's general and
administrative expenses increased to support the Company's expanding loan
servicing processing center (SST).
Taxes on Income. For the six months ended December 31, 1997 and 1996, the
Company recorded no income tax expenses or benefits.
Net (Loss) Income. The Company recognized a net loss of $22.8 million for the
six months ended December 31, 1997. The net loss resulted from several factors
including: (i) a write down of $11.5 million in retained interest in securitized
receivables; (ii) a $2.4 million dollar charge related to the move of the
Company's facilities to Marietta, Georgia, (iii) a $900,000 write off of
capitalized costs related to certain of the Company's financing arrangements and
(iv) operating losses incurred while the Company rebuilds its finance contract
volume.
Three Months Ended December 31, 1997 Compared To Three months ended December 31,
1996
Revenues. As described below under "Gains or Losses from Securitization
Transactions," "Write Downs of Retained Interest in Securitized Receivables,"
"Servicing Fee Income" and "Interest Income," revenues before write downs on
retained interests in securitized receivables increased $1.8 million to $8.3
million for the three month period ended December 31, 1997 compared with the
prior year.
Gains or Losses from Securitization Transactions. Gains from securitization
transactions were $2.7 million for the three month period ended December 31,
1997 compared with a loss of $600,000 for the three month period ended December
31, 1996.
Write Downs of Retained Interest in Securitized Receivables. The Company
revalues its retained interests in securitized receivables quarterly using
estimated future experience on the respective underlying securitization trust's
finance contract performance. When the actual experience differs from the
original assumptions utilized in the initial valuation in a detrimental
direction, the Company can incur permanent losses in the carrying value of these
assets. The write down of retained interests in securitized receivables during
the three month period ended December 31, 1997 is a result of the Company's
current assumptions utilized in evaluating its retained interests in securitized
receivables, which incorporate higher discount and expected default rates over
the life of the securitization trust, lower recovery rates on the underlying
collateral and higher prepayment rates compared to the levels used in the
comparable period a year ago. Write downs of retained interests in securitized
receivables were $11.5 million for the three-month period ended December 31,
1997 compared with $29.0 million in the prior year.
Servicing Fee Income. Servicing fee income increased to $3.0 million for the
three months ended December 31, 1997 from no revenues for the three months ended
December 31, 1996. This increase is a result of the Company's servicing
subsidiary, SST, operating in the 1997 period; SST was in its developmental
stages in the comparable prior period.
Interest Income. Interest income decreased to $2.3 million for the three months
ended December 31,
15
<PAGE>
1997 from $7.0 million for the three months ended December 31, 1996, a decrease
of $4.7 million or 67.1%. The decrease in interest income is attributed to (i)
the lower average amount of loans held for securitization for the three month
period ended December 31, 1997 as compared to the same period in 1996 resulting
in lower interest income, and (ii) the increase in the number of non performing
finance contracts in the finance contracts portfolio.
In addition, the Company recorded interest income of approximately $163,000 and
$220,000 for the three months ended December 31, 1997 and 1996, respectively, on
the lease portfolio, a decrease of approximately $57,000. The decrease is
attributed to the amortization in the lease portfolio.
Operating Expenses. Operating expenses increased to $16.1 million for the three
months ended December 31, 1997 from $15.0 million for the three months ended
December 31, 1996, an increase of $1.1 million or 7.3%. The increase in
operating expenses was primarily driven by one-time charges of $2.4 million
relating to the restructuring of the Company, consolidation of operations and
relocation of the Company's administrative functions to Marietta, Georgia.
Interest Expense. Interest expense decreased to $2.5 million for the three
months ended December 31, 1997 from $4.2 million for the three months ended
December 31, 1996, a decrease of $1.7 million or 40.5%, as a result of the
decreased financing required to maintain loans held for securitization in the
Company's warehouse facilities due to lower loan origination volumes and more
efficient securitization processes. The decrease in interest expense is
primarily attributable to the Company's warehouse credit facilities, which had a
lower monthly average outstanding balance and interest rates during the
three-month period ended December 31, 1997.
Salaries and Other Employee Costs. Salaries and other employee costs increased
to $4.0 million for the three months ended December 31, 1997 from $1.9 million
for the three months ended December 31, 1996, an increase of $2.1 million or
110.5%. The increase is attributable primarily to the growth in the employee
base at SST to support its expanding operations.
Provision for Credit Losses. The provision for credit losses decreased to $3.9
million for the three months ended December 31, 1997 from $6.0 for the three
months ended December 31, 1996, a decrease of $2.1 million or 35.0%. The current
provision for credit losses is affected by: (i) the Company's volume of finance
contracts acquired; (ii) the increase in delinquent automobile finance
receivables; and (iii) the change in the Company's historical loss ratios. These
changes also resulted in an increase in the Company's reserve rate as a
percentage of total automobile finance receivables held on the Company's balance
sheet.
All Other Operating Expenses. All other operating expenses increased to $5.7
million for the three months ended December 31, 1997 from $2.8 million for the
three months ended December 31, 1996, an increase of $2.9 million or 103.6 %.
The significant components of the increase in all other operating expenses
include $2.4 million of restructuring charges related to the move of the
Company's administrative offices to Marietta, Georgia and a $900,000 write off
of capitalized costs related to certain of the Company's financing arrangements.
In addition, the Company's general and administrative expenses increased to
support the Company's expanding loan servicing processing center (SST).
Taxes on Income. For the three months ended December 31, 1997, the Company
recorded no income tax expenses or benefits. The Company recorded a tax benefit
of $10.6 million, net of a $5.1 million valuation adjustment, for the three
months ended December 31, 1996.
16
<PAGE>
Net (Loss) Income. The Company recognized a net loss of $19.3 million for the
three months ended December 31, 1997. The net loss resulted from several factors
including: (i) a write down of $11.5 million in retained interest in securitized
receivables; (ii) a $2.4 million adjustment for costs related to the move of the
Company's facilities to Marietta, Georgia, (iii) a $900,000 write off of
capitalized costs relating to certain of the Company's financing arrangements
and (iv) operating losses incurred while the Company rebuilds its finance
contract volume.
Financial Condition
Automobile Finance Receivables, Net. Automobile finance receivables consist of
finance contracts held for sale, finance contracts held for investment
(including vehicles held in the repossession process) and the Company's lease
portfolio. The Company ceased originating lease contracts in the first quarter
of its 1996 fiscal year.
Automobile finance receivables, net of allowance for credit losses, decreased to
$26.6 million at December 31, 1997 from $34.7 million at June 30, 1997, a
decrease of $8.1 million or 23.3%. Automobile finance contracts decreased to
$26.2 million at December 31, 1997 from $30.4 million at June 30, 1997, a
decrease of $4.2 million or 13.6%. Automobile leases decreased to $8.9 million
at December 31, 1997 from $11.2 million at June 30, 1997, a decrease of $2.3
million or 20.5%. The allowance for credit losses increased to $8.5 million at
December 31, 1997 from $6.9 million at June 30, 1997, an increase of $1.6
million or 23.2%. The increase in reserve for credit losses can be attributed to
management's current view of aged receivables and the likelihood of collection.
Retained Interests in Securitized Receivables. The following table provides
historical data regarding the retained interests in securitized receivables for
the periods shown:
<TABLE>
<CAPTION>
Year Ended Three Months Ended
June 30, September 30, December 31,
1997 1997 1997
---- ---- ----
(dollars in thousands)
<S> <C> <C> <C>
Beginning balance........................ $ 70,243 $ 33,330 $ 32,532
Additions................................ 13,709 - -
Amortization............................. (1,622) (798) (748)
Write downs.............................. (49,000) - (11,462)
----------------- ----------------- ------------------
Ending balance........................... $ 33,330 $ 32,532 $ 20,322
================= ================= ==================
</TABLE>
17
<PAGE>
Delinquency Experience
The following tables reflect the delinquency experience of finance contracts
acquired, including those sold in whole finance contract sales or
securitization, by the Company at the dates shown:
<TABLE>
<CAPTION>
Finance Contract Portfolio
At December 31, At June 30,
1997 1997
---- ----
(dollars in thousands)
<S> <C> <C> <C> <C>
Principal balance
outstanding .................. $874,685(3) $813,055(1)
-------- --------
Number of finance
contracts outstanding.... 86,848(3) 75,847(1)
Delinquent loans
31-59 days................... $87,769 10.0% $71,008 8.7%
60-89 days .................. 33,544 3.8% 21,831 2.7%
90 days and over............. 21,449(4) 2.5% 4,781 0.6%
------ ------ ------ ----
Total....................... 142,762 16.3% 97,620 12.0%
Finance contracts in repossession
or bankruptcy................. 174,720(5) 20.0% 69,485(2) 8.5%
------- ------ ------- ----
Grand Total $317,482 36.3% $167,105 20.5%
======== ====== ======== =====
</TABLE>
__________________________
(1) Excludes contracts for which notice of intent to liquidate has expired and
those having an outstanding balance less than or equal to $500.
(2) Excludes finance contracts in bankruptcy, authorized for repossession and
in repossession and still eligible for reinstatement.
(3) Includes all finance contracts except those considered inactive, fully
liquidated, have balances less than $1,000, or where risk default insurance
has been rejected or paid.
(4) At December 31, 1997, includes delinquent loans in the 90 to 120 days
category (see (5) below).
(5) At December 31, 1997, this amount represents contracts in bankruptcy and
delinquent loans more than 120 days.
Credit Loss and Repossession Experience
An allowance for credit losses is maintained for all finance contracts held for
sale and for all finance contracts held for investment. Management evaluates the
reasonableness of the assumptions employed by reviewing credit loss experience,
delinquencies, repossession trends, the size of the finance contract portfolio
and general economic conditions and trends. If necessary, assumptions are
changed to reflect historical experience to the extent it deviates materially
from that which was assumed.
If a delinquency exists and default is deemed inevitable or the collateral is in
jeopardy, the Company's collections department will initiate appropriate
collection efforts that may include repossession of the financed vehicle.
Bonded, insured outside repossession agencies are used to secure involuntary
repossessions. In most jurisdictions, notice to the borrower of the Company's
intention to sell the repossessed automobile is required, whereupon the borrower
may exercise certain rights to cure his or her default or redeem the automobile.
Following the expiration of the legally required notice period, the repossessed
vehicle is sold at a wholesale auto auction, usually within 150 days of the
repossession. The Company monitors vehicles set for auction, and procures an
appraisal under the VSI Policy prior to sale. Liquidation proceeds are applied
to the borrower's outstanding obligation under the finance contract. Loss
deficiency claims under the VSI Policy and credit default insurance policy are
appropriately filed.
The Company has experienced claim denials under the RDI policies, which it is
contesting. If it is unsuccessful in its efforts, the Company may experience an
adverse financial impact. The Company reports the remaining deficiency as a net
charge-off against the allowance for credit losses for
18
<PAGE>
automobile finance receivables owned by the Company. For finance contracts held
in securitization trusts, charge-offs are accounted for in accordance with the
underlying pooling and servicing agreements.
Through the fiscal year ended June 30, 1996, its finance contract portfolio was
unseasoned. Accordingly, delinquency and charge-off rates in the portfolio may
not have fully reflected the rates that would apply when the average holding
period for finance contracts in the portfolio is longer. In the quarter ended
December 31, 1997, the Company's liquidated and defaulted receivables rate
increased to 33.4% from 22.1% in the fiscal year ended June 30, 1997 and from
13.1% in the fiscal year ended June 30, 1996. Additionally, the Company's net
charge-offs as a percentage of the average principal balance outstanding for the
three months ended December 31, 1997 increased to 23.2% from 12.1% in the fiscal
year ended June 30, 1997 and from 6.6% in the fiscal year ended June 30, 1996.
The increase in default rates from June 30, 1997 to December 31, 1997 can be
attributed to the change in the definition of a defaulted receivable in the
purchase facility to 90 days delinquent from other pooling and servicing
arrangements which define receivables defaulted at either 120 days or 180 days.
The causes for the increase for the Company's net charge-off rate is due to the
(i) increase in defaulted receivables, (ii) deterioration in the Company's
recovery rates from the disposition of repossessed vehicles, and (iii) slower
than expected settlement of credit default insurance claims. Without decreasing
the delinquency and/or charge-off rates in the portfolio, the Company's ability
to obtain credit or securitize its finance contracts would continue to have an
adverse effect on the Company's results of operations and financial condition.
19
<PAGE>
The following table shows the Company's repossession and loss experience for its
managed finance contract portfolio for the periods indicated:
<TABLE>
<CAPTION>
Fiscal Year Ended Six Months
June 30,(*) Ended December 31,
---------------------- ------------------
1996 1997 1997
---------- --------- --------
(dollars in thousands)
<S> <C> <C> <C>
Average principal balance
outstanding(1)...................................... $304,394 $624,341 $719,955
Balance of liquidated and defaulted
receivables(2)...................................... $39,932 $138,008 $120,330
Recoveries (3) and (4)................................ 16,039 46,952 28,275
------ ------ ------
Gross charge-off(5)................................... 23,893 91,056 92,055
Credit default insurance approvals (6)................ 3,849 15,611 8,600
----- ------ -----
Net charge-offs....................................... $20,044 $75,445 $83,455
======= ======= =======
Liquidated and defaulted receivables
as a percentage of average principal
balance outstanding(7)............................. 13.1% 22.1% 33.4%
Gross charge-offs as a percentage of
average principal balance outstanding (7).......... 7.6 14.6 25.6
Net charge-offs as a percentage of average
principal balance outstanding (7).................. 6.6 12.1 23.2
</TABLE>
- ----------
(1) Arithmetic mean of beginning and ending outstanding principal balance,
excluding defaulted receivables, of finance contracts acquired including
those previously sold in securitization transactions.
(2) Defaults recognized in accordance with the terms underlying the specific
pooling and servicing agreements.
(3) Includes proceeds from collateral liquidations, property insurance claims,
rebates, borrowers and other sources.
(4) Includes recoveries on liquidated and defaulted receivables recognized in
prior periods.
(5) Balance of liquidated and defaulted receivables minus recoveries.
(6) Value of credit insurance approvals.
(7) December 31, 1997 percentages are annualized.
(*) The amounts and percentages for the fiscal years ended June 30, 1996 and
1997 have been restated from previously reported information to reflect the
change in definition and timing of defaulted receivables.
The Company has prepared analyses, based on its own credit experience and
available industry data, to identify the relationship between finance contract
delinquency and default rates at the various stages of a finance contract
repayment term. The results of these analyses, which have been incorporated into
the Company's methodology of determining gains and losses from securitization
transactions, suggest that the probability of a finance contract becoming
delinquent or going into default is highest during the "seasoning period" that
occurs between the sixth and the eighteenth month payment period after the
acquisition date.
A greater portion of the Company's finance contract acquisition volume is
expected to fall into the "seasoning period" described above, which may cause a
rise in the overall finance contract portfolio delinquency and default rates,
without regard to underwriting performance. Assuming no changes in any other
factors that may affect delinquency and default rates, the Company believes this
trend should stabilize or reverse when the volume of mature finance contracts
(with lower delinquency and default rates) is sufficient to offset the total
finance contract portfolio delinquency and default rates.
The Company believes delinquencies and losses can be partially mitigated by
introducing stricter credit standards together with improved processes. During
the fiscal year ended June 30, 1997, the Company dedicated approximately $3.0
million of working capital to the development and implementation of its own
servicing company through its wholly owned subsidiary, Systems and Services
Technology, Inc. ("SST"). While SST was developing, the Company contracted for
certain collection functions through a sub-servicing agreement with its third
party servicer, American Lenders Facility, Inc.("ALFI"). Through this
arrangement the Company assumed responsibility for all customer contact with
respect to all existing leases and with respect to finance contracts that were
included in the Company's December 1994 securitization transaction and all
finance contracts acquired thereafter. In addition, the Company assumed
responsibility for liquidation activities on its
20
<PAGE>
entire finance contract portfolio (including securitized finance contracts) at
such time. In January 1997, SST began servicing a portion of the Company's
finance contracts from the time of acquisition. As of March 1997, SST was
awarded the servicing on all of the Company's finance contracts simultaneously
with their acquisition. By the end of May 1997, SST was servicing approximately
76.9% of the Company's managed finance contract portfolio. SST does not perform
any servicing on the Company's lease portfolio. The Company continues to perform
collection functions under its sub-servicing agreement with ALFI on 22.5% of the
remaining finance contracts serviced by ALFI. There can be no assurance that the
performance of the Company's portfolio will be maintained, or that the rate of
future defaults and/or losses will be consistent with prior experience or at
levels that will not adversely affect the Company's profitability. On November
10, 1997, the Company agreed in principle subject to approval by the
stockholders and certain creditors of the Company, to sell up to all of the
outstanding stock of its wholly owned subsidiary, SST. The Company intends to
continue to have SST service its finance contracts. (See "Liquidity and Capital
Resources").
With respect to the Company's owned portfolio, the Company does not record its
provision for credit losses based on a percentage of the Company's finance
contract portfolio outstanding because percentages can be favorably affected by
large balances of recently acquired finance contracts. The Company utilizes
actual dollar levels of delinquencies and charge-offs and analyzes the data on a
"static pool" basis. The Company's goal is to complete the liquidation process
as quickly as possible. The Company has experienced delays in liquidating its
repossessed vehicles caused by events at its servicers and custodians in
providing a perfected title to the Company's liquidating agents. It is currently
working with these parties to improve the title tracking processes. Upon receipt
of the perfected title, the Company's re-marketing group can schedule the
vehicle to be liquidated, typically within five business days. All repossessed
vehicles are sold at wholesale auction. The Company is responsible for the costs
of repossession, transportation and storage.
Liquidity and Capital Resources
The Company's business requires substantial cash to support its operating
activities. The principal cash requirements include (i) amounts necessary to
acquire automobile finance contracts pending disposition, primarily through
securitization, (ii) cash held from time to time in restricted spread accounts
to support securitization and other securitization expenses, and (iii) cash
required to operate its servicing operations. The Company also uses material
amounts of cash for operating expenses and debt service. The Company has
operated on a negative cash flow basis and experienced a $67.5 million loss in
the eighteen-month period ended December 31, 1997. The Company has funded its
negative operating cash flows principally through borrowings from financial
institutions, sales of equity securities and most recently, advances in
connection with the proposed sale of SST, its servicing subsidiary (subject to
stockholder approval). There can be no assurance that the Company will have
access to capital markets in the future or that financing will be available to
satisfy the Company's operating and debt service requirements or to implement
its business plan and to operate on a positive cash flow basis. If these
resources are not available on terms acceptable to the Company, the Company may
have to further curtail operations that may result in a new restructuring plan
or in discontinuing its operations.
The Company's external capital resources primarily consist of its $75.0 million
warehouse credit facility ($50 million effective February 26, 1998) and the
Company's $1.0 billion purchase facility. When the Company securitizes finance
contracts through its purchase facility, it repays a portion of its outstanding
warehouse indebtedness with the proceeds from such securitization, making such
portion available for future borrowing. The terms under the purchase facility
provide the Company
21
<PAGE>
with a periodic securitization strategy. In the six months ended December 31,
1997, the Company completed 3 securitizations totaling $154.3 million under the
terms of the purchase facility. Since establishing the purchase facility in
March 1997, the Company has sold an aggregate amount of $543.3 million and
expects to securitize finance contracts periodically during the year. There can
be no assurances that transactions under the purchase facility will be
successfully completed. The Company also continues to seek additional
arrangements with financial institutions with respect to the disposition of its
portfolio assets through securitization, whole loan sale or other exit
strategies. In addition, the Company, in the past, had been able to borrow
against its retained interests in securitized receivables to provide liquidity.
To further enhance the Company's liquidity, its wholly owned subsidiary, SST,
began its servicing operations. As a servicer of the Company's finance contracts
sold in the securitization process, SST receives its fee for services rendered
to the respective trusts directly from those trusts prior to any other
distributions. As servicer for the finance contracts held for sale and held for
investment, the Company has reduced its overall cost to service these finance
contracts, thus enhancing its liquidity.
The Company executed a Stock Purchase Agreement (the "Agreement"), dated as of
January 28, 1998, for the sale of the outstanding stock of its servicing
subsidiary, SST, for $7.0 million to Adams, Viner & Mosler, Ltd., and III
Associates (collectively referred to as the "Purchasers"), subject to
stockholder approval. The Agreement grants the Company the option to repurchase
SST at any time on or before December 31, 1998, for $7.0 million plus a 5%
premium. Under the terms of the Agreement, the Company is restricted from
utilizing any net cash flow of SST from and after the effective date of the
Agreement (provided that the Agreement is ratified by Company's stockholders)
until the repurchase option is exercised. The Company had received advances on
the sale of SST of $2.95 million as of December 31, 1997. The Company has
subsequently received additional advances totaling $3.1 million through February
27, 1998. It is expected that SST will continue to service the Company's finance
contracts subsequent to the sale. The Company does not expect to record a gain
on this transaction unless and until the consummation of the sale, pursuant to
the terms of the Agreement.
The following table sets forth the major components of the increase (decrease)
in cash and cash equivalents for the periods shown:
<TABLE>
<CAPTION>
Six Months Ended December 31,
1996 1997
------------------- ------------------
<S> <C> <C>
Net cash used in operating activities $ (180,428,026) $ (4,784,967)
Net cash (used in) provided by investing activities (4,135,968) 754,468
Net cash provided by financing activities 188,656,560 2,335,703
------------------- -----------------
Net increase (decrease) in cash and cash equivalents $ 4,092,566 $ (1,694,796)
=================== =================
</TABLE>
Net cash used in operating activities primarily represents cash flows utilized
to support the Company's on-going operations which include (i) the acquisition
of finance contracts (including capitalized acquisition costs), net of cash
proceeds of sales (including through securitization and repayments from
automobile finance receivables), (ii) costs to maintain its production,
marketing, re-marketing and collection activities, and (iii) in the case of the
six months ended December 31, 1997, the costs of relocating the Company's
headquarters from New Jersey to Georgia. The source of cash used to acquire
finance contracts is generated primarily by financing activities under the
Company's
22
<PAGE>
warehouse credit facilities.
The Company's cash flows and results of operations may be affected adversely by
rising interest rates. The Company's warehouse credit facilities are at floating
rates of interest, and increases in rates cannot immediately be passed on to
consumers, whose finance contracts are at fixed rates of interest. In addition,
rising interest rates result in a decrease in the Company's net spreads on
securitization transactions, thereby decreasing future projected cash flows from
retained interests in securitized receivables. Furthermore, the Company's
discount rate utilized in determining its borrowing base may also rise,
decreasing the amount available to borrow. Moreover, interest rates charged by
the Company may be more significantly affected by factors other than prevailing
interest rates, most notably geographic distribution and varying state interest
rate limitations.
In connection with its securitization transactions, the Company enters into
pooling and servicing agreements (the "Agreements") in which its finance
contracts are sold to a trust which, in turn, sells securities to investors. The
terms of the Agreements generally require that the excess servicing cash flows
of the finance contracts be retained in a bank account under the control of the
trustee (the "Reserve Fund") until the Reserve Fund meets predetermined deposit
requirements. Any cash flows in excess of Reserve Fund requirements are released
to the Company on a monthly basis. For the six months ended December 31, 1996
and 1997, the Company received $1.74 million and $1.55 million respectively, in
excess servicing cash flows from Reserve Funds. In the event that the finance
contracts owned by the Trusts fail to meet predetermined delinquency and loss
performance measures, the Agreements require that the Trustee retain excess
servicing cash flows until the Reserve Fund attains pre-set incrementally higher
levels of credit enhancement. The predetermined performance measures are not
always maintained on a consistent monthly basis, thus deferring the release of
the cash flows to the Company from the Reserve Fund of the applicable Trust. In
addition, certain of the Agreements required the Company to deposit additional
cash into the Trust's Reserve Fund if its initial minimum required levels were
not met within a predetermined time frame. For the six months ended December 31,
1996 the Company paid additional cash contributions to certain Reserve Funds of
$3.1 million and none for the period ended December 31, 1997.
The purchase facility includes a commitment from III Finance for the purchase of
$350.0 million of trust certificates. The Certificates are backed by the
Company's finance contracts and are unrated. The $75.0 million warehouse line
($50 million as of February 26, 1998) supports the purchase facility. As of
December 31, 1997, the Company securitized an aggregate amount of $543.3 million
in seven securitization transactions under its $1 billion purchase facility.
Future securitizations under the purchase facility ($456.7 million as of
December 31, 1997) are subject to customary conditions and are uncommitted. The
purchase facility provides for initial financing through the warehouse line as
the finance contracts are acquired and subsequently sold, generally on a monthly
basis, into the purchase facility.
The Company's current $50.0 million warehouse line supporting the purchase
facility, provides the Company with a two year (expiring the sooner of March 13,
1999 or an event of default as defined thereunder) warehouse line bearing
interest at LIBOR plus 3% from the date the loan is made with borrowing limits
of the lesser of $50.0 million or the sum of (A) 100% of the outstanding
principal amount of finance contracts and (B) the lesser of 90% of the
outstanding principal amount of non-conforming finance contracts (which
percentages are reduced to 80% and 70%, respectively, if the Company's
automobile insurer fails to maintain an A.M. Best Company rating of "A" or
better (defined by A.M. Best Company as an "excellent" rating regarding the
insurer's financial strength and ability to meet its obligations to
policyholders)) and $1.0 million plus 92% (declining 1% per month for each month
the receivable is outstanding past 180 days) of the outstanding principal amount
of uninsured automobile finance contracts. Proceeds from borrowings under this
warehouse facility may be used for the purpose of acquiring automobile finance
contracts in accordance with the Company's underwriting guidelines. Proceeds
from borrowings under this warehouse facility may be used for the purpose of
acquiring automobile finance contracts in accordance with the Company's
underwriting guidelines. Concurrent with the closing of the warehouse line in
March 1997, the Company's warehouse credit facility for
23
<PAGE>
originating lease transactions was amended to reduce it from $50 million to the
then outstanding balance and no additional borrowing is allowed under the
facility. In addition, the Company had a $50.0 million warehouse credit facility
with III Finance dedicated to the purchase of HUD Title I Loans which expired in
November 1997.
As of December 31, 1997, the Company was in technical default of net worth
covenants under its $75 million warehouse line and its Retained Yield Line
("RTY") Financing provided by III Finance. On February 26, 1998, the warehouse
line was reduced to $50 million and the Company obtained waivers for such
defaults on all of its facilities with III Finance through March 31, 1998.
The lease line with III Finance expired January 3, 1998. The Company is
currently negotiating extending the term of the lease warehouse facility through
December 31, 1998.
For the fiscal year ended June 30, 1997 and for the six months ended December
31, 1997, the Company securitized approximately $565.3 million and $154.3
million, respectively, of finance contracts and used the net proceeds to pay
down borrowings under its warehouse credit facilities.
On October 16, 1997, the holders of the Debenture converted the Debenture into
non-voting Cumulative Convertible Preferred Stock, Series D ("Series D Preferred
Shares"). The Series D Preferred Shares has a 12.75% dividend and a redemption
value of approximately $21.1 million, and is redeemable at the holders option,
in which event the Company can pay common stock at $1.26 per share (a total of
16,751,412 shares of common stock) or cash.
On November 10, 1997, Greenwich Capital Financial Products, Inc., converted the
Company's $4.0 million subordinated debt into Cumulative Preferred Stock
("Series E and F Preferred Shares"). The debt, with a face value of $4.0 million
and an interest rate of 12% was converted into 2,000 shares each of Series E and
F Preferred Shares with a 12.0% dividend and a redemption value of $4.0 million.
The Series E Preferred Shares are redeemable at the holder's option into common
stock at $1.26 per share or for cash, at the Company's election and the Series F
Preferred Shares are redeemable at the holder's option into common stock at
$2.00 per share or for cash.
24
<PAGE>
Strategic Plan. During the second quarter of its current fiscal year, the
Company began to execute its strategic plan (the "Plan") to address the current
operating losses and liquidity issues. The plan calls for reductions in the
Company's overhead by consolidation of operations from Jersey City, New Jersey
to Marietta, Georgia. Included in Other Expenses in the December 31, 1997
Statement of Operations is a $2.4 million restructuring charge related to the
consolidation of operations to Marietta, Georgia. The $2.4 million includes
approximately $1.4 million of payroll related cost, $369,000 in equipment lease
terminations, $293,000 in cost related to abandonment of the New Jersey
leasehold improvements, $250,000 in establishment of new accounting systems and
procedures and $60,000 in moving costs. The consolidation to Georgia will result
in space reductions of approximately 50,000 square feet in its leased offices in
New Jersey and California. Management is currently negotiating terminations of
these leases with the owners.
In addition to the consolidation to the Georgia office, the Plan also called for
substantial reductions in the work force related to management, production,
California servicing, and field representatives. The following table details the
significant decreases in the Company's work force:
Employees at Employees at
Department September 30, 1997* February 27, 1998*
- ---------- ------------------- ------------------
Management 41 15
Production (Origination) 120 65
California Servicing 180 50
Field Representatives 60 0
--- ---
498 228
=== ===
* Excludes SST employees due to the proposed sale of SST.
Based on management estimates, staffing reductions and downsizing of space
requirements should reduce operating expenses by approximately one-half and
still allow the production facility to operate at a capacity of up to 2,500
loans per month.
The Plan also calls for development and implementation of new products and fee
based services to enhance operating revenues. Fee based services include
subcontracting the Company's origination services to other companies to enhance
operating revenues by utilizing the current excess capacity. There can be no
assurances that the Company will be successful in raising the necessary capital,
alleviate its liquidity problems and restore its operations. If the Company is
unsuccessful in its efforts, it will be unable to meet its obligations and will
not be able to continue as a going concern.
Inflation
While inflation has not had a material impact upon the Company's results of
operations, there can be no assurance that the Company's business will not be
affected by inflation in the future. Increases in the inflation rate generally
result in increased interest rates and can be expected to result in increases in
the Company's operating expenses. As the Company borrows funds at variable rates
and generally acquires finance contracts at an average interest rate of
approximately 20.2%, increased interest rates will increase the borrowing costs
of the Company, and such increased borrowing costs may not be offset by
increases in the interest rates with respect to finance contracts acquired.
25
<PAGE>
Seasonality
The Company's operations are affected to some extent by seasonal fluctuations.
Finance contract acquisitions tend to increase in March through June and
September and October, while finance contract acquisitions are lowest in
December and January. Delinquencies also tend to be higher during certain
holiday periods, particularly at calendar year end.
PART II. OTHER INFORMATION
Item 2. Changes in Securities
(a) - Not Applicable
(b) - (c) On October 16, 1997, III Finance Ltd. and The High Risk Opportunities
Hub Fund Ltd., the holders of $21,333,333 principal amount at maturity of 12%
Exchangeable Subordinated Notes due 2004 of Aegis Auto Finance, Inc. (the
"Notes"), exchanged the Notes for non-voting Class D Convertible Preferred Stock
of the Company (the "Class D Preferred"). The Class D Preferred has a 12.7518%
dividend rate and a redemption value of approximately $21.1 million. On November
12, 1997, Greenwich Capital Financial Products, Inc. ("Greenwich"), the holder
of $4 million of subordinated debt of the Company issued pursuant to a Credit
Agreement dated May 16, 1996 between the Company, as borrower, certain of its
subsidiaries, as guarantors, and Greenwich, as lender, exchanged such debt for
$2 million redemption value of each of the Company's non-voting Class E
Redeemable Preferred Stock and non-voting Class F Redeemable Preferred Stock,
each carrying a dividend rate of 12% (respectively, the "Class E Preferred" and
the "Class F Preferred").
The Certificates of Designations, Preferences and Rights for the Class D
Preferred, the Class E Preferred and the Class F Preferred create classes of
securities which rank prior to the Company's common stock, par value $.01 per
share (the "Common Stock"), as to distributions of assets upon liquidation,
dissolution or winding up of the Company, whether voluntary or involuntary, and
as to dividends.
Each of these transactions was exempt from registration pursuant to either
Section 3 (a) (9) or 4 (1) of the Securities Act of 1933, as amended. Each
holder of a share of Class D Preferred, Class E Preferred or Class F Preferred
is entitled to cause the Company to redeem such stock, in which event the
Company has the option (i) to issue to such redeeming holder Common Stock of the
Company valued at $1.26 per share in the case of the Class D Preferred and Class
E Preferred or $2.00 per share in the case of the Class F Preferred, in each
case having an aggregate value equal to the preferred stock's redemption value,
or (ii) to pay the redeeming holder in cash the current market value of the
Common Stock that would have been issued under clause (i). In addition the
Company has the right, at its option, to redeem the Class D Preferred, the Class
E Preferred and the Class F Preferred for cash equal to such stock's redemption
value, in which it must also issue to the holder warrants to purchase that
number of shares of Common Stock that would have been issued pursuant to clause
(i) of the preceding sentence for an aggregate exercise price equal to the
redemption value of the preferred stock being redeemed. If the Class D
Preferred, Class E Preferred and Class F Preferred were all presented for
redemption by the holders, and the Company elected to issue Common Stock in
respect of such redemptions, the Company would be required to issue
approximately 16.75 million, 1.59 million and 1 million shares of Common Stock,
respectively, representing 48.66%, 9.19% and 5.35% of the Common Stock, giving
effect in each case only to
26
<PAGE>
the redemption of such class of preferred stock. As of the date of issuance of
this report there are 30 million shares of common stock authorized and
outstanding, therefore such redemption can not be accomplished without amending
the certificate of incorporation of the Company.
Item 3. Defaults Upon Senior Securities
As of December 31, 1997, the Company was in technical default under its $75
million warehouse line and its RTY Financing provided by III Finance for failing
to meet certain net worth requirements. On February 26, 1998 the warehouse line
was reduced to $50 million and the Company obtained waivers of such defaults for
all of its facilities with III Finance through March 31, 1998. In connection
with the waiver, the Company can incur a shortfall of what it owes III Finance
on its monthly pay-downs, not to exceed $500,000.
Item 5. Other Information - Management Changes
Effective December 16, 1997, William F. Henle exercised his right under an
employment agreement, not to relocate with the Company to Georgia and resigned
his post as Chief Operating Officer, for good cause as defined under his
employment agreement.
Effective December 31, 1997, Dina L. Penepent resigned her post as the Company's
Chief Financial Officer, citing personal reasons.
Item 6. (a) Exhibits -
<TABLE>
<CAPTION>
Page
Exhibit No. Description No.
- ----------- ----------- ---
<S> <C>
10.105.12.1 Amendment No. 3 to Loan and Security Agreement
dated February 26, 1998 by and between Aegis Consumer Finance, Inc.
and Aegis Auto Finance, Inc. as Borrowers and III Finance, Ltd. as Lender ....................
10.108.1 Stock Purchase Agreement dated as of January 28, 1998 between
The Aegis Consumer Funding Group, Adams, Viner &
Mosler, Ltd. and III Associates...............................................................
27 Financial Data Schedule.......................................................................
</TABLE>
(b) Reports on Form 8-K - On February 11, 1998, the Company filed
a current report on Form 8-K reporting certain information with
regard to the conversion of 85 shares of Series C Preferred Stock
into Shares of Common Stock.
28
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
THE AEGIS CONSUMER FUNDING GROUP, INC.
Date: March 16, 1998 By: /s/Mathew B. Burns
-----------------
Mathew B. Burns
Chief Executive Officer
Signing on behalf of the registrant
and as principal financial and
accounting officer.
29
AMENDMENT NO. 3 TO
LOAN AND SECURITY AGREEMENT
AND WAIVER
THIS AMENDMENT NO. 3 AND WAIVER ("Amendment") is entered into among
AEGIS AUTO FINANCE, INC., a Delaware corporation ("AAF") and III FINANCE LTD., a
Cayman Islands company ("Lender") as of this 26th day of February, 1998.
Reference is hereby made to that certain Loan and Security Agreement
between AAF and the Lender dated as of March 14, 1997, as amended by that
certain Assignment and Amendment Agreement, dated as of April 30, 1997, and that
certain Amendment No. 2, dated as of May 21, 1997 (as the same may be further
amended, restated, supplemented or otherwise modified from time to time, the
"Loan Agreement"). Capitalized terms used herein and not defined herein shall
have the meanings ascribed to such terms in the Loan Agreement. AAF and the
Lender have agreed to amend the Loan Agreement as hereinafter set forth.
SECTION 1. Amendments to the Loan Agreement. The Loan Agreement is,
effective the date hereof and subject to the satisfaction of the conditions
precedent set forth in Section 3 hereof, hereby amended as follows:
1.1 The definition of "Applicable Advance Rate" set forth in Section
1.1 of the Loan Agreement is hereby amended to delete the text thereof in its
entirety and to substitute the following therefor:
"Applicable Advance Rate" shall mean:
(i) with respect to (x) any Nonconforming Receivable (other than
a Nonconforming Insured Receivable) and (y) any Eligible Receivable
which is not a Conforming Uninsured Receivables and is not covered by
an RDI Policy at the applicable time of determination (i.e., because
it has been outstanding for less than 14 days), a percentage equal to
(a) 92% from the date of creation thereof to the last Business Day in
any calendar month occurring no less than five nor more than six
months after such date of creation; (b) during each succeeding
calendar month, an amount equal to the "Applicable Advance Rate"
during the immediately preceding calendar month minus one percent
(1%);
(ii) with respect to any Nonconforming Insured Receivable or
Eligible Receivable which is a Delinquent Receivable, a percentage
equal to ninety percent (90%);
(iii) with respect to any Nonconforming Insured Receivable and
-1-
<PAGE>
any Eligible Receivable which is not a Conforming Uninsured Receivable
and is otherwise not described in clauses (i) or (ii) above, 100%; and
(iv) with respect to any Conforming Uninsured Receivable, a
percentage equal to ninety-nine percent (99%); provided, however, that
from and after the date when the principal amount of Conforming
Uninsured Receivables generated during a particular calendar month
shall have exceeded $15,000,000, (or, if earlier, then from and after
the date in any month when the principal amount of Conforming
Uninsured Receivables generated during a prior calendar month shall
have exceeded $10,000,000 and Lender shall have notified Borrower in
writing of the Lender's determination that the Conforming Uninsured
Receivables generated during the current month shall, by month end,
have exceeded $15,000,000), the Applicable Advance Rate for all
Conforming Uninsured Receivables thereafter generated shall equal
ninety-eight percent (98%), provided, further, however, that (i) if
the Applicable Advance Rate for Conforming Uninsured Receivables has
been reduced to 98% in any month by reason of the Lender's
determination as described in the parenthetical set forth above and
(ii) as of that month end, the total Conforming Uninsured Receivables
generated during such month have remained below $15,000,000, then in
such event, the Applicable Advance Rate for the Conforming Uninsured
Receivables generated during that particular month will be
re-increased to 99%;
provided, however, that if at any time the insurer with which the Borrower
maintains the applicable RDI Policy or VSI Policy referred to in Section 5.8 of
this Agreement is rated by A.M. Best Company ("Best") at a level lower than "A",
then the Applicable Advance Rate with respect to any Nonconforming Insured
Receivables or Eligible Receivables described in clause (ii) above shall be
seventy percent (70%) and the Applicable Advance Rate with respect to any
Nonconforming Insured Receivables or Eligible Receivables described in clause
(iii) above shall be eighty percent (80%).
1.2 Section 1.1 of the Loan Agreement is hereby amended to add the
following definition immediately after the definition of "Collateral":
"Conforming Uninsured Receivable" shall mean a Receivable originated in
accordance with the Underwriting Criteria for the Borrower's "Silver Program" or
the "Buyer's Choice Program" in each case as described on Exhibit E hereto,
regardless of whether or not such Receivables are covered by any risk default
insurance.
1.3 The definition of "Eligible Receivable" is hereby amended to delete
clause
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<PAGE>
(v) in its entirety and to substitute the following therefor:
(v) which, unless otherwise identified to the Lenders as a
Nonconforming Insured Receivable, a Conforming Uninsured Receivable or
a Nonconforming Receivable, satisfies the conditions for coverage
under an RDI Policy and which, except for any Nonconforming Receivable
not constituting a Nonconforming Insured Receivable and except for any
Conforming Uninsured Receivable, is insured under such policy,
provided however, that any otherwise Eligible Receivables which have
been outstanding for less than 14 days since their origination and for
which the Borrower is in the process of obtaining insurance under an
RDI Policy shall be deemed to be Eligible Receivables under this
subclause (v);
1.4 The definition of "Maximum Loan Amount" set forth in Section 1.1 of
the Loan Agreement is hereby amended to delete the dollar number of
"$75,000,000" which appears therein and to substitute therefor the dollar number
of "$50,000,000".
1.5 The definition of "Termination Date" set forth in Section 1.1 of
the Loan Agreement is hereby amended to delete the date "March 13, 1999" and to
substitute therefor the date "July 15, 1999".
1.6 Exhibit E thereof (the Underwriting Criteria) is hereby amended by
deleting such exhibit in its entirety and substituting therefor, the exhibit
which appears as Exhibit A hereto.
1.7 Section 2.1 of the Loan Agreement is hereby amended to delete
therefrom the second sentence in its entirety and to substitute the following
therefor: "The Borrower shall set forth in the Aging Receivable Report,
delivered monthly pursuant to Section 5.1(c), the amount of Receivables which
constitute Eligible Receivables, with separate indications for which such
Receivables constitute Delinquent Receivables, Nonconforming Receivables,
Nonconforming Insured Receivables and Conforming Uninsured Receivables.
1.8 Section 2.2(b) of the Loan Agreement is hereby amended to delete
the phrase "separately indicating the dollar amount of such Receivables
constituting Delinquent Receivables, Nonconforming Receivables (other than
Nonconforming Insured Receivables) and Nonconforming Insured Receivables" which
currently appears therein and to substitute therefor the phrase "separately
indicating the dollar amount of such Receivables constituting Delinquent
Receivables, Nonconforming Receivables (other than Nonconforming Insured
Receivables), Nonconforming Insured Receivables and Conforming Uninsured
Receivables".
1.9 Section 5.1(c) of the Loan Agreement is hereby amended to delete
the
-3-
<PAGE>
parenthetical phrase "(indicating separate balances for Nonconforming
Receivables and Delinquent Receivables)" which currently appears therein and to
substitute therefor the parenthetical phrase "(indicating separate balances for
Nonconforming Receivables, Delinquent Receivables and Conforming Uninsured
Receivables)".
SECTION 2. Waivers.
2.1 Waivers to Loan Agreement. In addition to the foregoing amendments,
the Borrower has asked the Lender to waive the Borrower's noncompliance with
Section 2.5(a)(ii) of the Loan Agreement insofar as such section requires
mandatory prepayments whenever the outstanding Loans exceed the Borrowing Base.
Borrower has also asked the Lender to waive Borrower's non-compliance with
Section 5.14 of the Loan Agreement insofar as such section requires the Parent
to maintain a specified net worth. Lender hereby agrees to grant such waivers,
provided, however, that each such waiver shall only be effective through March
31, 1998, after which date Lender reserves all rights under the Loan Agreement
and the other Financing Documents in respect of any Events of Default which may
then exist as a result of the events described in this paragraph and the first
such waiver shall only be effective to the extent that the required mandatory
prepayments which Borrower has failed to make do not exceed $500,000 in the
aggregate at any one time outstanding.
2.2 Waivers to Loan Agreements. In addition to the foregoing waivers,
Lender hereby agrees that, to the extent the Parent's failure to maintain a
specified net worth constitutes a default or event of default under any other
loan agreements outstanding between Lender and Borrower and/or any of Borrower's
other affiliates, Lender agrees to waive such default or event of default;
provided, however, that each such waiver shall only be effective through March
31, 1998, after which date Lender reserves all rights under the Loan Agreement
and the other Financing Documents in respect of any such failure to maintain
such a specified net worth.
SECTION 3. Conditions Precedent. This Amendment shall become effective
upon receipt by the Lender of each of the following:
(a) Duly executed originals of this Amendment and
(b) Duly executed reaffirmation of guaranty attached hereto as Exhibit
B.
SECTION 4. Covenants, Representations and Warranties of the Borrower.
4.l Upon the effectiveness of this Amendment, AAF hereby reaffirms all
covenants, representations and warranties made by it in the Loan Agreement to
the extent the same are not amended hereby and agrees that all such covenants,
representations and warranties
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shall be deemed to have been re-made as of the effective date of this Amendment.
4.2 AAF hereby represents and warrants that this Amendment constitutes
its legal, valid and binding obligation, enforceable against AAF in accordance
with its terms.
4.3 By its signature hereto, AAF acknowledges and agrees that, if the
Lender or any of its Affiliates agrees to re-commence purchases of any
Certificates in connection with any securitizations of any Receivables, whether
under the Receivables Sale Documents or otherwise, a condition to any such
purchases will be that the aggregate purchase price for Certificates evidencing
a 100% pass-through interest in any trust not exceed the portion of the
Borrowing Base applicable to the Receivables to be sold to such trust plus, to
no greater an extent than payable under the Certificate Purchase Agreement,
accrued interest owed hereunder on such portion of the Borrowing Base.
SECTION 5. Reference to and Effect on the Loan Agreement.
5.l Upon the effectiveness of this Amendment, (i) each reference in the
Loan Agreement to "this Agreement", "hereunder", "hereof", "herein" or words of
like import shall mean and be a reference to the Loan Agreement, as amended
hereby, and each reference to the Loan Agreement in any other document,
instrument or agreement executed and/or delivered in connection with the Loan
Agreement shall mean and be a reference to the Loan Agreement as amended hereby
and (ii) each reference to "Underwriting Criteria" in any of the Loan Agreement
or any other Receivables Sale Document shall mean and be a reference to the
Underwriting Criteria as set forth on Exhibit A hereto.
5.2 Except as specifically amended above, the Loan Agreement and all
other Financing Agreements executed and/or delivered in connection therewith
shall remain in full force and effect and are hereby ratified and confirmed.
5.3 The execution, delivery and effectiveness of this Amendment shall
not operate as a waiver of any right, power or remedy of the Lender under the
Loan Agreement or any other Financing Agreement executed in connection
therewith, nor constitute a waiver of any provision contained therein, except as
specifically set forth herein.
SECTION 6. Execution in Counterparts. This Amendment may be executed in
any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed and delivered shall be deemed to be
an original and all of which taken together shall constitute but one and the
same instrument.
SECTION 7. Governing Law. This Amendment shall be governed by and
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construed in accordance with the laws of the State of New York.
SECTION 8. Headings. Section headings in this Amendment are included
herein for convenience of reference only and shall not constitute a part of this
Amendment for any other purpose.
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IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective officers thereunto duly authorized, as of the date
first above written.
AEGIS AUTO FINANCE, INC.,
By:/s/ Cyril Means
---------------
Name: Cyril Means
Title: Vice President
III FINANCE LTD, as Lender
By:/s/ David Bree
---------------
Name: David Bree
Title:
<PAGE>
EXHIBIT A
NEW UNDERWRITING CRITERIA
[Attached]
<PAGE>
EXHIBIT B
ACKNOWLEDGMENT TO AMENDMENT to
LOAN AND SECURITY AGREEMENT AND WAIVER
The Aegis Consumer Funding Group hereby consents to the agreements of
the Lender and AAF contained in the foregoing Amendment to Loan and Security
Agreement and Waiver, and hereby reaffirms all of its obligations under the
Guaranty executed by it in connection with the Loan Agreement, which Guaranty
shall remain in full force and effect, before and after giving effect to the
amendments described hereinabove, and such Guaranty is hereby ratified and
confirmed.
THE AEGIS CONSUMER FUNDING GROUP, INC.
By______________________________
Name:
Title:
STOCK PURCHASE AGREEMENT
Dated as of January 28, 1998
Between
THE AEGIS CONSUMER FUNDING GROUP INC.,
ADAMS, VINER & MOSLER, LTD.,
and
III ASSOCIATES
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I
DEFINITIONS AND INTERPRETATION
1.1. Definitions.............................................................1
1.2. Interpretation..........................................................7
ARTICLE II
PURCHASE AND SALE OF SHARES; PURCHASE PRICE
2.1. Purchase and Sale of Shares.............................................8
2.2. Purchase Price..........................................................8
2.3. Adjustments.............................................................8
ARTICLE III
CLOSING
3.1. Closing Date............................................................9
3.2. Payment of Purchase Price; Delivery of Shares...........................9
3.3. Buyer's Additional Deliveries...........................................9
3.4. Seller's Deliveries.....................................................9
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SELLER
4.1. Organization and Authority of Seller...................................10
4.2. Organization and Capital Structure of the Company......................11
4.3. Subsidiaries and Investments...........................................12
4.4. Financial Statements...................................................12
4.5. Operations Since Balance Sheet Date....................................12
4.6. Taxes..................................................................14
4.7. Availability of Assets.................................................15
4.8. Governmental Permits...................................................15
4.9. Real Property..........................................................15
4.10. Personal Property.....................................................16
4.11. Intellectual Property; Software.......................................16
4.12. Accounts Receivable...................................................17
4.13. Employee Benefit Plans................................................17
4.14. Employee Relations....................................................18
4.15. Contracts.............................................................18
4.16. No Violation, Litigation or Regulatory Action.........................19
4.17. Environmental Matters.................................................19
4.18. Insurance.............................................................20
4.19. Minute Books..........................................................20
4.20. No Finder.............................................................20
4.21. Disclosure............................................................20
4.22. Proxy Statement. .....................................................20
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF BUYERS
5.1. Organization of Buyers.................................................21
5.2. Authority of Buyers....................................................21
5.3. No Finder..............................................................22
5.4. Investment Representation..............................................22
5.5. Litigation.............................................................22
5.6. Ability to Close.......................................................22
ARTICLE VI
ACTION PRIOR TO THE CLOSING DATE
6.1. Investigation of the Company by Buyers.................................22
6.2. Preserve Accuracy of Representations and Warranties....................23
6.3. Consents of Third Parties; Governmental Approvals......................23
6.4. Operations Prior to the Closing Date...................................24
6.5. Notification by Seller of Certain Matters..............................24
ARTICLE VII
ADDITIONAL AGREEMENTS
7.1. Stockholder Meeting....................................................24
7.2. Preparation of the Proxy Statement.....................................24
7.3. Access to Records after Closing........................................25
7.4. Confidential Nature of Information.....................................25
7.5. No Public Announcement.................................................26
7.6. Expenses...............................................................26
7.7. Further Assurances.....................................................26
7.8. Repurchase Options.....................................................27
7.9. Operating Agreements...................................................28
7.10. Use of Proceeds.......................................................30
7.11. Company Indemnifications; Voting......................................30
7.12. Certain Intercompany Debt.............................................30
ARTICLE VIII
CONDITIONS PRECEDENT TO OBLIGATIONS OF PARTIES
8.1. Conditions to Buyers' Obligations......................................31
8.2. Conditions to Seller's Obligations.....................................32
ARTICLE IX
TAX MATTERS
9.1. Tax Returns............................................................33
9.2. Survival of Obligations................................................33
ARTICLE X
INDEMNIFICATION
10.1. Indemnification by Seller.............................................33
10.2. Indemnification by Buyers.............................................34
10.3. Notice of Claims......................................................35
10.4. Third Person Claims...................................................36
ARTICLE XI
TERMINATION
11.1. Termination...........................................................37
11.2. Notice of Termination.................................................37
11.3. Effect of Termination.................................................37
ARTICLE XII
GENERAL PROVISIONS
12.1. Notices...............................................................37
12.2. Successors and Assigns................................................38
12.3. Entire Agreement; Amendments..........................................39
12.4. Waivers...............................................................39
12.5. Partial Invalidity....................................................39
12.6. Execution in Counterparts.............................................39
12.7. Governing Law.........................................................40
12.8. Submission to Jurisdiction............................................40
<PAGE>
STOCK PURCHASE AGREEMENT
STOCK PURCHASE AGREEMENT, dated as of January 28, 1998 between The
Aegis Consumer Funding Group Inc., a Delaware corporation ("Seller"), Adams,
Viner & Mosler, Ltd., a limited partnership organized under the laws of Illinois
("AVM"), and III Associates, a general partnership organized under the laws of
Nevada ("Associates") (AVM and Associates being sometimes referred to together
as the "Buyers").
PRELIMINARY STATEMENT
Seller is the owner, beneficially and of record, of all of the issued
and outstanding capital stock of Systems & Services Technologies, Inc., a
Delaware corporation (the "Company"). Seller desires to sell to Buyers, and
Buyers desire to purchase from Seller, all of the capital stock of the Company
on the terms and subject to the conditions set forth herein.
Accordingly, in consideration of the mutual agreements hereinafter set
forth, Buyers and Seller agree as follows:
ARTICLE I
DEFINITIONS AND INTERPRETATION
1.1. Definitions. In this Agreement, the following terms have the
meanings specified or referred to in this Section 1.1 and shall be equally
applicable to both the singular and plural forms.
"Affiliate" means, with respect to any Person, any other Person which
directly or indirectly controls, is controlled by or is under common control
with such Person; provided that the Company shall not be deemed an Affiliate of
Seller.
"Agreed Rate" means the prime or corporate base rate published by
Citibank N.A., New York, New York, as that rate may vary from time to time, or
if that rate is no longer published, a comparable rate.
"Associates Shares" has the meaning specified in Section 2.2(b).
<PAGE>
"AVM Shares" has the meaning specified in Section 2.2(b).
"Balance Sheet" has the meaning specified in Section 4.4.
"Balance Sheet Date" means September 30, 1997.
"Buyers" has the meaning specified in the first paragraph of this
Agreement.
"Buyer Ancillary Agreements" means all agreements, instruments and
documents being or to be executed and delivered by either of Buyers under this
Agreement or in connection herewith.
"Buyer Group Member" means Buyers, the Company and any Affiliates of
either Buyers and their respective successors and assigns.
"CERCLA" means the Comprehensive Environmental Response, Compensation
and Liability Act, 42 U.S.C. ss.ss. 9601 et seq., and the regulations
promulgated thereunder.
"Claim Notice" has the meaning specified in Section 10.3.
"Closing" means the closing of the transfer of the Shares from Seller
to Buyer.
"Closing Date" has the meaning specified in Section 3.1.
"Code" means the Internal Revenue Code of 1986, as amended.
"Company" has the meaning specified in the second paragraph of this
Agreement.
"Company Agreements" has the meaning specified in Section 4.16.
"Company Group" means any "affiliated group" (as defined in Section
1504(a) of the Code without regard to the limitations contained in Section
1504(b) of the Code) that, at any time on or before the Closing Date, includes
or has included the Company or any Subsidiary or any predecessor of or successor
to the Company or any Subsidiary (or another such predecessor or successor), or
any other group of corporations that, at any time on or before the Closing Date,
files or has filed Tax Returns on a combined, consolidated or unitary basis with
the Company or any Subsidiary or any predecessor of or successor to the Company
or any Subsidiary (or another such predecessor or successor), except for Seller.
"Company Property" means any real or personal property, plant,
building, facility, structure, underground storage tank, equipment or unit, or
other asset owned, leased or operated by the Company.
"Copyrights" means United States and foreign copyrights, copyrightable
works, and mask work, whether registered or unregistered, and pending
applications to register the same.
"Court Order" means any judgment, order, award or decree of any
foreign, federal, state, local or other court or tribunal and any award in any
arbitration proceeding.
"Encumbrance" means any lien (statutory or other), claim, charge,
security interest, mortgage, deed of trust, pledge, hypothecation, assignment,
conditional sale or other title retention agreement, preference, priority or
other security agreement or preferential arrangement of any kind or nature, and
any easement, encroachment, covenant, restriction, right of way, defect in title
or other encumbrance of any kind.
"Environmental Law" means all Requirements of Laws derived from or
relating to all federal, state and local laws or regulations relating to or
addressing the environment, health or safety, including but not limited to
CERCLA, OSHA and RCRA and any state equivalent thereof.
"ERISA" means the Employee Retirement Income Security Act of 1974 and
the regulations promulgated thereunder.
"ERISA Affiliate" means (i) any corporation which at any time on or
before the Closing Date is or was a member of the same controlled group of
corporations (within the meaning of Section 414(b) of the Code) as the Company;
(ii) any partnership, trade or business (whether or not incorporated) which at
any time
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on or before the Closing Date is or was under common control (within meaning of
section 414(c) of the Code) with the Company; and (iii) any entity which at any
time on or before the Closing Date is or was a member of the same affiliated
service group (within the meaning of Section 414(m) of the Code) as either the
Company, any corporation described in clause (i) or any partnership, trade or
business described in clause (ii) of this paragraph.
"ERISA Benefit Plans" means the Company's Pension Plans and its Welfare
Plans.
"Exchange Act" has the meaning specified in Section 4.23.
"Existing Loan Agreements" means the following agreements: Loan and
Security Agreement dated March 14, 1997 between Aegis Auto Finance, Inc. and III
Finance Ltd., as amended, and Amended and Restated Master Loan Agreement dated
April 30, 1997 among Aegis Auto Finance, Inc., Aegis Consumer Finance, Inc. and
III Finance Ltd., as amended.
"Exercise Price" has the meaning specified in Section 7.8.
"Expenses" means any and all expenses incurred in connection with
investigating, defending or asserting any claim, action, suit or proceeding
incident to any matter indemnified against hereunder (including court filing
fees, court costs, arbitration fees or costs, witness fees, and reasonable fees
and disbursements of legal counsel, investigators, expert witnesses,
consultants, accountants and other professionals).
"Expiration Date has the meaning specified in Section 7.8.
"Governmental Body" means any foreign, federal, state, local or other
governmental authority or regulatory body.
"Governmental Permits" has the meaning specified in Section 4.9.
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"Intellectual Property" means Copyrights, Patent Rights, Trademarks and
Trade Secrets and all agreements, contracts, licenses, sublicenses, assignments
and indemnities which relate or pertain to any of the foregoing.
"IRS" means the Internal Revenue Service.
"Leased Real Property" has the meaning specified in Section 4.10.
"Losses" means any and all losses, costs, obligations, liabilities,
settlement payments, awards, judgments, fines, penalties, damages, expenses,
deficiencies or other charges.
"Material Adverse Effect" means any condition, circumstance, change or
effect (or any development that, insofar as can be reasonably foreseen, would
result in any condition, circumstance, change or effect) that is materially
adverse to the assets, business, financial condition, or results of operations
of the Company or Seller, as applicable.
"Multiemployer Plan" has the meaning specified in Section 3(37) of
ERISA.
"Net Cash Flow" means the Company's net cash flow under generally
accepted accounting principles after allowance for all reasonable and necessary
capital expenditures.
"OSHA" means the Occupational Safety and Health Act, 29 U.S.C. ss.ss.
651 et seq., and the regulations promulgated thereunder.
"Owned Real Property" has the meaning specified in Section 4.10.
"Owned Software" has the meaning specified in Section 4.12(g).
"Patent Rights" means United States and foreign patents, patent
applications, continuations, continuations-in-part, divisions, reissues, patent
disclosures, inventions (whether or not patentable or reduced to practice) and
improvements thereto.
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"Pension Plan" means each "employee pension benefit plan" (as such term
is defined in Section 3(2) of ERISA) maintained by the Company or an ERISA
Affiliate, or with respect to which the Company or an ERISA Affiliate is or will
be required to make any payment, or which provides or will provide benefits to
present or prior employees of the Company or an ERISA Affiliate due to such
employment.
"Permitted Encumbrances" means: (i) liens for taxes and other
governmental charges and assessments arising in the ordinary course of business
which are not yet due and payable, (ii) liens of landlords and liens of
carriers, warehousemen, mechanics and materialmen and other like liens arising
in the ordinary course of business for sums not yet due and payable, (iii) liens
securing the indebtedness represented by the Secured Loans and (iv) liens
securing other existing indebtedness of the Company, including, but not limited
to, the liens and indebtedness set forth and described on Schedule 1.1.
"Person" means any individual, corporation, partnership, joint venture,
limited liability company, association, joint-stock company, trust,
unincorporated organization or Governmental Body.
"Proxy Statement" has the meaning specified in Section 4.23.
"Purchase Price" has the meaning specified in Section 2.2.
"RCRA" means the Resource Conservation and Recovery Act, 42 U.S.C.
ss.ss. 6901 et seq., and the regulations promulgated thereunder.
"Repurchase Options" has the meaning specified in Section 7.8.
"Requirements of Laws" means any foreign, federal, state and local
laws, statutes, regulations, rules, codes or ordinances enacted, adopted, issued
or promulgated by any Govern-
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mental Body (including those pertaining to electrical, building, zoning,
subdivision, land use, environmental and occupational safety and health
requirements) or common law.
"Secured Loans" means the indebtedness of the Company issued under or
pursuant to the Existing Loan Agreements and secured by a lien upon the Shares.
"SEC" means the Securities and Exchange Commission or any successor
agency.
"Seller" has the meaning specified in the first paragraph of this
Agreement.
"Seller Ancillary Agreements" means all agreements, instruments and
documents being or to be executed and delivered by Seller under this Agreement
or in connection herewith.
"Seller Group Member" means Seller and its Affiliates and their
respective successors and assigns.
"Seller Stockholder Meeting" has the meaning specified in Section 7.1.
"Shares" means all of the issued and outstanding shares of capital
stock of the Company.
"Software" means computer software programs and software systems,
including all databases, compilations, tool sets, compilers, higher level or
"proprietary" languages, related documentation and materials, whether in source
code, object code or human readable form.
"Subsidiaries" means any corporation, partnership, limited liability
company, joint venture or other entity in which the Company (a) owns, or at any
relevant time owned, directly or indirectly, 50% or more of the outstanding
voting securities or equity interests or (b) is a general partner.
"Tax" (and, with correlative meaning, "Taxes" and "Taxable") means:
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(i) any federal, state, local or foreign net income, gross
income, gross receipts, windfall profit, severance, property,
production, sales, use, license, excise, franchise, employment,
payroll, withholding, alternative or add-on minimum, ad valorem,
value-added, transfer, stamp, or environmental tax, or any other tax,
custom, duty, governmental fee or other like assessment or charge of
any kind whatsoever, together with any interest or penalty, addition
to tax or additional amount imposed by any governmental authority; and
(ii) any liability of the Company for the payment of amounts with
respect to payments of a type described in clause (i) as a result of
being a member of an affiliated, consolidated, combined or unitary
group, or as a result of any obligation of the Company under any Tax
Sharing Arrangement or Tax indemnity arrangement.
"Tax Return" means any return, report or similar statement required to
be filed with respect to any Tax (including any attached schedules), including,
without limitation, any information return, claim for refund, amended return or
declaration of estimated Tax.
"Tax Sharing Arrangement" means any written or unwritten agreement or
arrangement for the allocation or payment of Tax liabilities or payment for Tax
benefits with respect to a consolidated, combined or unitary Tax Return which
Tax Return includes the Company or any Subsidiary.
"Trademarks" means United States, state and foreign trademarks, service
marks, logos, trade dress and trade names (including all assumed or fictitious
names under which the Company is conducting business or has within the previous
five years conducted business), whether registered or unregistered, and pending
applications to register the foregoing.
"Trade Secrets" means confidential ideas, trade secrets, know-how,
concepts, methods, processes, formulae, reports, data, customer lists, mailing
lists, business plans, or other proprietary information.
"Welfare Plan" means each "employee welfare benefit plan" (as such term
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is defined in Section 3(1) of ERISA) maintained by the Company, or with respect
to which the Company is or will be required to make any payment, or which
provides or will provide benefits to present or prior employees of the Company
due to such employment.
1.2. Interpretation. As used in this Agreement, the word "including"
means without limitation, the word "or" is not exclusive and the words "herein",
"hereof", "hereby", "hereto" and "hereunder" refer to this Agreement as a whole.
Unless the context otherwise requires, references herein: (i) to Articles,
Sections, Exhibits and Schedules mean the Articles and Sections of and the
Exhibits and Schedules attached to this Agreement; (ii) to an agreement,
instrument or other document means such agreement, instrument or other document
as amended, supplemented and modified from time to time to the extent permitted
by the provisions thereof and by this Agreement; and (iii) to a statute means
such statute as amended from time to time and includes any successor legislation
thereto. The Schedules and Exhibits referred to herein shall be construed with
and as an integral part of this Agreement to the same extent as if they were set
forth verbatim herein. Titles to Articles and headings of Sections are inserted
for convenience of reference only and shall not be deemed a part of or to affect
the meaning or interpretation of this Agreement. References herein to the
knowledge of a party or matters or information known to a party mean the actual
knowledge of the officers of such party.
ARTICLE II
PURCHASE AND SALE OF SHARES; PURCHASE PRICE
2.1. Purchase and Sale of Shares. Upon the terms and subject to the
conditions of this Agreement, on the Closing Date, Seller shall sell, transfer,
assign, convey and deliver to Buyers, and Buyers shall purchase from Seller, the
Shares, free and clear of all Encumbrances (except for Permitted Encumbrances).
2.2. Purchase Price. Subject to Section 2.3, (a) the aggregate purchase
price for the Shares (the "Purchase Price") shall be equal to $7,000,000;
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(b) it is understood and agreed that AVM shall purchase and acquire 2/7
of the Shares (the "AVM Shares") for a purchase price of $2,000,000 and
Associates shall purchase and acquire 5/7 of the Shares (the "Associates
Shares") for a purchase price of $5,000,000; and
(c) it is further understood and agreed that prior to the date hereof
AVM has paid $2,000,000 to Seller as a down payment on the Purchase Price,
Associates has paid $2,782,448.08 to Seller as a down payment on the Purchase
Price (such amounts together being referred to herein as the "Original
Downpayments") and, if Associates is reasonably satisfied that the amount
requested is reasonable and proper in the context of the cash requirements of
Seller, Associates shall, after a written request to Associates from Seller and
within five business days of Associates's receipt of such request, make
additional down payments on the Purchase Price prior to the Closing Date.
Accordingly, on the Closing Date the Buyers payment obligation shall be equal to
the Purchase Price minus the sum of all down payments actually made prior to the
Closing Date ("Remaining Purchase Price").
2.3. Adjustments. In the event that the total of the Original
Downpayments plus any additional amounts requested by Seller in accordance with
Section 2.2(c) (the "Requested Downpayments" and together with the Original
Downpayments, the "Total Downpayments") is less than $7,000,000 then: (a) the
Purchase Price shall be equal to the amount of the Total Downpayments; (b) the
total number of Shares to be purchased by Buyers (the "Adjusted Purchased
Shares") shall be determined by multiplying the Shares by a fraction, the
numerator of which is the Total Downpayments and the denominator of which is
$7,000,000; (c) the number of AVM Shares shall equal the Adjusted Purchased
Shares multiplied by a fraction the numerator of which is $2,000,000 and the
denominator of which is the Total Downpayments; (d) the number of Associates
Shares shall equal the Adjusted Purchased Shares multiplied by a fraction, the
numerator of which is the sum of $2,782,448.08 plus the Requested Downpayments
and the denominator of which is the Total Downpayments; and (e) the references
to $7,000,000 in Sections 7.8(c), 10.1(a) and 10.2(a) shall be deemed to refer
to a dollar amount equal to the Total Downpayments.
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ARTICLE III
CLOSING
3.1. Closing Date. The Closing shall take place at 10:00 A.M., local
time, on the third business day following the Seller Stockholder Meeting, or
such later date as may be agreed upon by Buyers and Seller after the conditions
set forth in Section 8.1 and Section 8.2 have been satisfied, at the offices of
Sidley & Austin, 875 Third Avenue, New York, New York 10022 or at such other
place or at such other time as shall be agreed upon by Buyers and Seller. The
time and date on which the Closing is actually held are sometimes referred to
herein as the "Closing Date."
3.2. Payment of Purchase Price; Delivery of Shares. Subject to
fulfillment or waiver of the conditions set forth in Section 8.1, at the Closing
Buyers shall pay Seller the Remaining Purchase Price by wire transfer of
immediately available funds to the account in the United States specified by
Seller in writing to Buyers at least two business days prior to the Closing and,
subject to fulfillment or waiver of the conditions set forth in Section 8.2,
Seller shall deliver (or authorize delivery) to Buyers stock certificates
representing the Shares, accompanied by a duly executed stock power transferring
the AVM Shares to AVM and the Associates Shares to Associates.
3.3. Buyer's Additional Deliveries. Subject to fulfillment or waiver of
the conditions set forth in Section 8.1, at the Closing Buyers shall deliver to
Seller the certificate contemplated by Section 8.2(a), duly executed by the
authorized representative of Buyers.
3.4. Seller's Deliveries. Subject to fulfillment or waiver of the
conditions set forth in Section 8.2, at Closing Seller shall deliver to Buyers
all the following:
(a) Copies of the Certificate of Incorporation of Seller and the
Company certified as of a recent date by the Secretary of State of the State of
Delaware;
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(b) Certificate of the secretary or an assistant secretary of Seller,
dated the Closing Date, in form and substance reasonably satisfactory to Buyers,
as to (i) no amendments to the Certificate of Incorporation of Seller or the
Company since a specified date; (ii) the by-laws of Seller; (iii) the
resolutions of the Board of Directors of Seller and evidence of the stockholders
of Seller authorizing the execution and performance of this Agreement and the
transactions contemplated hereby; and (iv) incumbency and signatures of the
officers of Seller executing this Agreement and any Seller Ancillary Agreement;
and
(c) The certificates contemplated by Sections 8.1(a) and (b), duly
executed by the authorized officer of Seller.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SELLER
As an inducement to Buyer to enter into this Agreement and to
consummate the transactions contemplated hereby, Seller represents and warrants
to Buyers that the following shall be true on the Closing Date:
4.1. Organization and Authority of Seller. (a) Seller is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware. Seller has full corporate power and authority to own or lease
and to operate and use its properties and to carry on its business as now
conducted.
(b) Seller has full corporate power and authority to execute, deliver
and perform this Agreement and all of the Seller Ancillary Agreements. Subject
to approval of the Seller's stockholders, this Agreement has been duly
authorized, executed and delivered by Seller and is the legal, valid and binding
obligation of Seller enforceable in accordance with its terms, and each of the
Seller Ancillary Agreements has been duly authorized by Seller and upon
execution and delivery by Seller will be a legal, valid and binding obligation
of Seller enforceable in accordance with its terms, except as enforceability may
be limited by applicable bankruptcy,
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insolvency, moratorium or other laws affecting the rights of creditors generally
and by general principles of equity.
(c) Except as set forth in Schedule 4.1, neither the execution and
delivery by Seller of this Agreement or any of the Seller Ancillary Agreements
or the consummation by Seller of any of the transactions contemplated hereby or
thereby nor compliance with or fulfillment of the terms, conditions and
provisions hereof or thereof will:
(i) conflict with, result in a breach of the terms, conditions or
provisions of, or constitute a default, an event of default or an
event creating rights of acceleration, termination or cancellation or
a loss of rights under, or result in the creation or imposition of any
Encumbrance upon any of the assets or properties of Seller or the
Company or any Subsidiary, under (1) the Certificate of Incorporation
or By-laws of Seller or the Company or any Subsidiary, (2) any note,
instrument, agreement, mortgage, lease, license, franchise, permit or
other authorization, right, restriction or obligation to which Seller
or the Company or any Subsidiary is a party or any of the respective
assets or properties of Seller or the Company or any Subsidiary is
subject or by which Seller or the Company or any Subsidiary is bound,
(3) any Court Order to which Seller or the Company or any Subsidiary
is a party or any of the respective assets or properties of Seller or
the Company or any Subsidiary is subject or by which Seller or the
Company or any Subsidiary is bound, or (4) any Requirements of Laws
affecting Seller, the Company or any Subsidiary or their respective
assets or properties; provided that no representation or warranty is
made in this clause (i) with respect to any matter concerning Seller
that individually could not reasonably be expected to have a Material
Adverse Effect with respect to Seller; or
(ii) require the approval, consent, authorization or act of, or
the making by Seller or the Company or any Subsidiary of any
declaration, filing or registration with, any Person.
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4.2. Organization and Capital Structure of the Company. (a) The Company
is a corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware. The Company is duly qualified to transact
business as a foreign corporation and is in good standing in each of the
jurisdictions listed in Schedule 4.2, except where the failure to be so
qualified or in good standing could not reasonably be expected to have a
Material Adverse Effect on the Company. No other jurisdiction has demanded,
requested or otherwise indicated that the Company is required so to qualify. The
Company has full corporate power and authority to own or lease and to operate
and use its properties and assets and to carry on its business as now conducted.
(b) The authorized capital stock of the Company consists of 3,000
shares of Common Stock, par value $.01 per share ("Company Common Stock"), of
which 100 shares are issued and outstanding and 2,900 shares are unissued and
not reserved for any purpose. Except for this Agreement, there are no
agreements, arrangements, options, warrants, calls, rights or commitments of any
character relating to the issuance, sale, purchase or redemption of any shares
of capital stock of the Company. No holder of Company Common Stock has any
preemptive, stock purchase or other rights to acquire Company Common Stock. All
of the outstanding shares of the Company Common Stock are validly issued, fully
paid and nonassessable and were not issued in violation of any preemptive or
similar rights. Seller is the record and beneficial owner of 100 shares of
Company Common Stock. All of such shares of Company Common Stock are so owned
free from all Encumbrances of any kind except for Permitted Encumbrances.
(c) True and complete copies of the certificate of incorporation and
all amendments thereto, of the By-laws, as amended to date, and of the stock
ledger of the Company have been delivered to Buyer.
4.3. Subsidiaries and Investments. The Company does not, directly or
indirectly, own, of record or beneficially, any outstanding voting securities or
other equity interests in or control any corporation, limited liability company,
partnership, trust, joint venture or other entity.
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4.4. Financial Statements. Schedule 4.4 contains (i) the unaudited
balance sheet of the Company as of September 30, 1997 ( the "Balance Sheet").
Except as set forth therein, the Balance Sheet has been prepared in conformity
with generally accepted accounting principles consistently applied, and presents
fairly the financial position of the Company as of the date thereon and for the
period covered thereby, subject to normal year-end adjustments and the absence
of footnotes.
4.5. Operations Since Balance Sheet Date. (a) Since the Balance Sheet
Date, there has been:
(i) except for any effect upon the Company of Seller's financial
condition or prospects, no material adverse change in the assets,
business, operations, liabilities, profits or condition of the
Company, and to the knowledge of Seller, no fact or condition exists
which might reasonably be expected to cause such a change in the
future; and
(ii) no damage, destruction or loss, whether or not covered by
insurance, or condemnation or other taking adversely affecting any of
the assets, business, operations or condition of the Company.
(b) Since the Balance Sheet Date, except in the ordinary course of
business and in conformity with past practice and except to the extent that it
has not resulted in and could not reasonably be expected to result in a Material
Adverse Effect with respect to the Company, the Company has not:
(i) sold, leased (as lessor), transferred or otherwise disposed
of (including any transfers from the Company to Seller or any of its
Affiliates), or mortgaged or pledged, or imposed or suffered to be
imposed any Encumbrance (other than a Permitted Encumbrance) on, any
of the assets reflected on the Balance Sheet or any assets acquired by
the Company after the Balance Sheet Date, except for inventory and
minor amounts of personal property sold or otherwise disposed of for
fair value in the ordinary course of business consistent with past
practice;
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(ii) canceled any debts owed to or claims held by the Company
(including the settlement of any claims or litigation) or waived any
other rights held by the Company other than in the ordinary course of
business consistent with past practice;
(iii) paid any claims against the Company (including the
settlement of any claims and litigation against the Company or the
payment or settlement of any obligations or liabilities of the
Company) other than in the ordinary course of business consistent with
past practice;
(iv) created, incurred or assumed, or agreed to create, incur or
assume, any indebtedness for borrowed money or entered into, as
lessee, any capitalized lease obligations (as defined in Statement of
Financial Accounting Standards No. 13);
(v) accelerated or delayed collection of notes or accounts
receivable in advance of or beyond their regular due dates or the
dates when the same would have been collected in the ordinary course
of business consistent with past practice;
(vi) delayed or accelerated payment of any account payable or
other liability of the Company beyond or in advance of its due date or
the date when such liability would have been paid in the ordinary
course of business consistent with past practice;
(vii) acquired any real property or undertaken or committed to
undertake capital expenditures exceeding $250,000 in the aggregate;
(viii) made, or agreed to make, any payment of cash or
distribution of assets to Seller or any of its Affiliates;
(ix) instituted any increase in any compensation payable to any
officer or employee of the Company or in any profit-sharing, bonus,
incentive, deferred compensation, insurance, pension, retirement,
medical, hospital, disability, welfare or other benefits made
available to officers or employees of the Company;
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(x) made any change in the accounting principles and practices
used by the Company from those applied in the preparation of the
Balance Sheets;
(xi) entered into or become committed to enter into any other
material transaction except in the ordinary course of business; or
(xii) prepared or filed any Tax Return inconsistent with past
practice or, on any such Tax Return, taken any position, made any
election, or adopted any method that is inconsistent with positions
taken, elections made or methods used in preparing or filing similar
Tax Returns in prior periods.
4.6. Taxes.
(a) Except where there would be no Material Adverse Effect with respect
to the Company (i) each of the Company and each Company Group has filed all Tax
Returns required to be filed; (ii) all such Tax Returns are complete and
accurate and disclose all Taxes required to be paid by the Company and each
Company Group for the periods covered thereby and all Taxes shown to be due on
such Tax Returns have been timely paid; (iii) all Taxes owed by the Company or
any Company Group have been timely paid; (iv) none of the Company or any member
of any Company Group has waived or been requested to waive any statute of
limitations in respect of Taxes which waiver is currently in effect; (v) to the
knowledge of Seller, there is no action, suit, investigation, audit, claim or
assessment pending or proposed or threatened with respect to Taxes of the
Company or any Company Group and, no basis exists therefor; (vi) all
deficiencies asserted or assessments made as a result of any examination of the
Tax Returns referred to in clause (i) have been paid in full; (vii) all Tax
Sharing Arrangements and Tax indemnity arrangements relating to the Company
(other than this Agreement) shall terminate as of the date hereof and the
Company shall not have any liability thereunder for any Taxes incurred on or
after the date hereof; (viii) there are no liens for Taxes upon the assets of
the Company except liens relating to current Taxes not yet due; (ix) all Taxes
which the Company is required by law to withhold or to collect for payment have
been duly withheld and
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collected, and have been paid or accrued, reserved against and entered on the
books of the Company and (x) the Company has not been a member of any Company
Group other than a Company Group of which Seller is the parent and the Company
has not had any direct or indirect ownership in any corporation, partnership,
joint venture or other entity.
(b) No transaction contemplated by this Agreement is subject to
withholding under Section 1445 of the Code (relating to "FIRPTA").
(c) No payment or other benefit, and no acceleration of the vesting of
any options, payments or other benefits, can reasonably be expected to be, as a
direct or indirect result of the transactions contemplated by this Agreement, an
"excess parachute payment" to a "disqualified individual" as those terms are
defined in Section 280G of the Code and the Treasury Regulations thereunder. No
payment or other benefit, and no acceleration of the vesting of any options,
payments or other benefits, can, as a direct or indirect result of the
transactions contemplated by this Agreement, reasonably be expected to be (or
under Section 280G of the Code and the Treasury Regulations thereunder be
presumed to be) a "parachute payment" to a "disqualified individual" as those
terms are defined in Section 280G of the Code and the Treasury Regulations
thereunder, without regard to whether such payment or acceleration is reasonable
compensation for personal services performed or to be performed in the future.
4.7. Availability of Assets. The assets owned or leased by the Company
constitute all the material assets and properties used in, or necessary for, the
operation of the business of the Company (including all books, records,
computers and computer programs and data processing systems).
4.8. Governmental Permits. To the knowledge of Seller, the Company
owns, holds or possesses all material licenses, franchises, permits, privileges,
immunities, approvals and other authorizations from a Governmental Body which
are necessary to entitle it to own or lease, operate and use its assets and to
carry on and conduct its business substantially as currently conducted (herein
collectively called "Governmental Permits").
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4.9. Real Property. (a) The Company has good and insurable title in fee
simple absolute to all real property owned by the Company (the "Owned Real
Property") and to all buildings, structures and other improvements thereon, in
each case free and clear of all Encumbrances, except for Permitted Encumbrances.
(b) The Company has the right to quiet enjoyment of all real property
owned by third persons of which the Company is lessee (the "Leased Real
Property") for the full term of each such lease (and any renewal option)
relating thereto, and the leasehold or other interest of the Company in such
Leased Real Property is not subject or subordinate to any Encumbrance except for
Permitted Encumbrances.
(c) Neither the whole nor any part of the Owned Real Property or any
real property leased, used or occupied by the Company is subject to any pending
suit for condemnation or other taking by any public authority, and, to the best
knowledge of Seller or the Company, no such condemnation or other taking is
threatened or contemplated.
4.10. Personal Property. (a) The Company has good title to all of its
assets and properties other than Owned Real Property free and clear of all
Encumbrances, except for Permitted Encumbrances.
4.11. Intellectual Property; Software.
(a) The Company either: (i) owns the entire right, title and interest
in and to the Intellectual Property and Software included in its assets and
properties and material to its business and operations, free and clear of any
Encumbrance; or (ii) has the perpetual, royalty-free right to use the same.
(b) (i) The Intellectual Property owned by the Company and material to
its business and operations is valid and enforceable; and (ii) the Company is
not in breach of any agreement affecting the Intellectual Property, and has not
taken any action which would impair or otherwise adversely affect its rights in
the Intellectual Property.
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(c) (i) No material infringement of any Intellectual Property of any
other Person has occurred or results in any way from the operations, activities,
Software or processes used in the Company's business; (ii) no claim of any
infringement of any Intellectual Property of any other Person has been made or
asserted in respect of the operations of the Company's business; (iii) no
written claim of invalidity of any Copyright, Trademark or Patent Right,
Software or Trade Secret has been made; and (iv) no proceedings are pending or,
to the knowledge of Seller, threatened which challenge the validity, ownership
or use of any Intellectual Property.
(d) To the knowledge of Seller, all employees, agents, consultants or
contractors who have contributed to or participated in the creation or
development of any Intellectual Property or Software on behalf of the Company or
any predecessor in interest thereto either: (i) is a party to a "work-for-hire"
agreement under which the Company is deemed to be the original owner/author of
all property rights therein; or (ii) has executed an assignment or an agreement
to assign in favor of the Company (or such predecessor in interest, as
applicable) of all right, title and interest in such material.
4.12. Accounts Receivable. All accounts receivable of the Company have
arisen from bona fide transactions by the Company in the ordinary course of
business. All accounts receivable reflected in the Balance Sheet are good and
collectible in the ordinary course of business at the aggregate recorded amounts
thereof, net of any applicable allowance for doubtful accounts reflected in the
Balance Sheets.
4.13. Employee Benefit Plans.
(a) With respect to each Pension Plan subject to Section 302 of ERISA
other than any Multiemployer Plan, (i) no proceeding has been initiated to
terminate such plan, (ii) there has been no "reportable event" (as such term is
defined in Section 4043(b) of ERISA) other than events for which reporting has
been waived by applicable regulations, (iii) no "accumulated funding deficiency"
(within the meaning of Section 412 of the Code), whether or not waived, has
occurred, (iv) no person has
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failed to make a required installment or any other payment required under
Section 412 of the Code by the applicable due date and (v) neither the Company
nor any ERISA Affiliate has provided or is required to provide security to such
plan under Section 401(a)(29) of the Code due to a plan amendment that results
in an increase in current liability. Each Pension Plan which is intended to
qualify under Section 401(a) of the Code has been determined to be so qualified
by the IRS, and to the knowledge of Seller no circumstance has occurred or
exists which may reasonably be expected to cause such plan to cease being so
qualified.
(b) There is no pending or, to the knowledge of Seller or the Company,
threatened claim in respect of any of the ERISA Benefit Plans other than claims
for benefits in the ordinary course of business. Each of the ERISA Benefit Plans
other than any Multiemployer Plans (i) has been administered in all material
respects in accordance with its terms and (ii) complies in form, and has been
administered in all material respects in accordance, with the requirements of
ERISA and, where applicable, the Code. The Company and each ERISA Affiliate has
complied in all material respects with the health care continuation requirements
of Part 6 of Title I of ERISA. The Company has no obligation under any ERISA
Benefit Plans or otherwise to provide any material health or other welfare
benefits to any prior employees or any other person, except as required by Part
6 of Title I of ERISA. The consummation of the transactions contemplated by this
Agreement will not result in any material increase in the amount of compensation
or benefits or accelerate the vesting or timing of payment of any material
compensation or benefits payable to or in respect of any participant.
4.14. Employee Relations.
The Company has, to the knowledge of Seller, complied with all
applicable laws, rules and regulations which relate to prices, wages, hours,
discrimination in employment and collective bargaining and is not liable for any
arrears of wages or any taxes or penalties for failure to comply with any of the
foregoing. Seller and the Company believe that the Company's relations with the
employees of the Company are satisfactory. The Company is not a party to, and
the Company is not affected by
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or threatened with, any dispute or controversy with a union or with respect to
unionization or collective bargaining involving the employees of the Company.
4.15. Contracts. (a) Except where there would be no Material Adverse
Effect on the Company, the Company is not a party to or bound by:
(i) any guarantee of the obligations of customers, suppliers,
officers, directors, employees, Affiliates or others; or
(ii) any agreement which provides for, or relates to, any
interest rate or foreign currency swap, cap, collar, hedge or
insurance agreements, or options or forwards on such agreements, or
other similar agreements for the purpose of managing the interest rate
and/or foreign exchange risk associated with its financing.
(b) Each of the leases, contracts and other agreements referred to in
Sections 4.10, 4.11, 4.13, and 4.15 (collectively, the "Company Agreements")
constitutes a valid and binding obligation of the parties thereto and is in full
force and effect and except for those Company Agreements which by their terms
will expire prior to the Closing Date or are otherwise terminated prior to the
Closing Date in accordance with the provisions hereof) will continue in full
force and effect after the Closing, in each case without breaching the terms
thereof or resulting in the forfeiture or impairment of any rights thereunder
and without the consent, approval or act of, or the making of any filing with,
any other party. The Company has fulfilled and performed its obligations under
each of the Company Agreements in all material respects, and the Company is not
in, or alleged in writing to be in, breach or default under, nor is there or is
there alleged in writing to be any basis for termination of, any of the Company
Agreements and, to the knowledge of Seller, no other party to any of the Company
Agreements has breached or defaulted thereunder, and no event has occurred and
no condition or state of facts exists which, with the passage of time or the
giving of notice or both, would constitute such a default or breach by the
Company or by any such other party except where such event or condition would
not have a Material Adverse Effect
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on the Company. The Company is not currently renegotiating any of the Company
Agreements or paying liquidated damages in lieu of performance thereunder.
Complete and correct copies of each of the Company Agreements have heretofore
been delivered or made available to Buyer by Seller.
4.16. No Violation, Litigation or Regulatory Action.
Except as disclosed in Schedule 4.16,
(i) to the knowledge of Seller, the assets of the Company and
their uses comply with all applicable Requirements of Laws and Court
Orders, except where such non-compliance would not have a Material
Adverse Effect on the Company;
(ii) to the knowledge of Seller, the Company has complied with
all Requirements of Laws and Court Orders which are applicable to its
assets or business, except where such non-compliance would not have a
Material Adverse Effect on the Company;
(iii) there are no lawsuits, claims, suits, proceedings or
investigations pending or, to the knowledge of Seller or the Company,
threatened against or affecting the Company nor, to the knowledge of
Seller or the Company, is there any basis for any of the same, and
there are no lawsuits, suits or proceedings pending in which Seller is
the plaintiff or claimant; and
(iv) there is no action, suit or proceeding pending or, to the
knowledge of Seller or the Company, threatened which questions the
legality or propriety of the transactions contemplated by this
Agreement.
4.17. Environmental Matters. To the knowledge of Seller,
(i) the operations of the Company comply with all applicable
Environmental Laws, except where non-compliance would not have a
Material Adverse Effect on the Company; and
(ii) the Company has obtained all environmental, health and
safety Governmental Permits necessary for the operat-
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ion of its business, and all such Governmental Permits are in full
force and effect and the Company is in compliance with all terms and
conditions of such permits, except where non-compliance would not have
a Material Adverse Effect on the Company.
4.18. Insurance. The Company has insurance coverage which is customary
with regard to the nature and size of its business with reputable insurance
carriers. Seller shall (and shall cause the Company to) keep or cause such
insurance or comparable insurance to be kept in full force and effect through
the Closing Date. Seller has complied (or has caused the Company to comply) in
all material respects with each of such insurance policies and, to the knowledge
of Seller, has not failed to give any notice or present any claim thereunder in
a due and timely manner.
4.19. Minute Books. True and complete copies of the minute books of the
Company have been delivered to Buyer. Such minute books contain true and
complete records of all meetings and other corporate action taken by the Board
of Directors and stockholders of the Company.
4.20. No Finder. Neither Seller, the Company nor any Person acting on
its behalf has paid or become obligated to pay any fee or commission to any
broker, finder or intermediary for or on account of the transactions
contemplated by this Agreement.
4.21. Disclosure. None of the representations or warranties of Seller
contained herein, and none of the other information or documents furnished to
Buyer or any of its representatives by Seller or the Company or their
representatives pursuant to the terms of this Agreement, is, in the light of the
circumstances under which they are made or furnished, false or misleading in any
material respect or omits to state a fact herein or therein necessary to make
the statements herein or therein not misleading in any material respect.
4.22. Proxy Statement. None of the information to be included in the
proxy statement (the "Proxy Statement") to be prepared for and relating to the
Seller Stockholder Meeting (as defined in Section 7.1) will, at the time of the
mailing of the Proxy Statement, the time of the Seller Stockholder Meeting or on
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the Closing Date, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they are
made, not misleading. The Proxy Statement will comply as to form in all material
respects with the provisions of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"); provided that Buyers' rights with respect to this Section
4.22 shall be limited to the recovery of Loss and Expense incurred by Buyers by
reason of actions by shareholders of Seller based upon allegations that this
Section 4.22 has been breached by Seller.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF BUYERS
As an inducement to Seller to enter into this Agreement and to
consummate the transactions contemplated hereby, Buyers hereby represents and
warrants to Seller and agrees as follows:
5.1. Organization of Buyers. AVM is a limited partnership duly
organized, validly existing and in good standing under the laws of the State of
Illinois and has full partnership power and authority to own or lease and to
operate and use its properties and assets and to carry on its business as now
conducted. Associates is a general partnership organized and validly existing
under the laws of the State of Nevada and has full partnership powers and
authority to own or lease its properties and assets and to carry on its business
as now conducted.
5.2. Authority of Buyers. Each Buyer has full power and authority to
execute, deliver and perform this Agreement and all of the Buyer Ancillary
Agreements. The execution, delivery and performance of this Agreement and the
Buyer Ancillary Agreements by AVM have been duly authorized and approved by
AVM's general partner. The execution, delivery and performance of this Agreement
and the Buyer Ancillary Agreements by Associates have been duly authorized and
approved by Associates' general partner. This Agreement has been duly
authorized, executed and delivered by each Buyer and is the legal, valid and
binding agreement of
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each Buyer enforceable in accordance with its terms, and each of the Buyer
Ancillary Agreements has been duly authorized by each Buyer and upon execution
and delivery by each Buyer will be a legal, valid and binding obligation of each
Buyer enforceable in accordance with its terms.
Neither the execution and delivery of this Agreement or any of the
Buyer Ancillary Agreements or the consummation of any of the transactions
contemplated hereby or thereby nor compliance with or fulfillment of the terms,
conditions and provisions hereof or thereof will:
(i) conflict with, result in a breach of the terms, conditions or
provisions of, or constitute a default, an event of default or an
event creating rights of acceleration, termination or cancellation or
a loss of rights under (1) the Limited Partnership Agreement of AVM or
the Partnership Agreement of Associates, (2) any material note,
instrument, agreement, mortgage, lease, license, franchise, permit or
other authorization, right, restriction or obligation to which either
Buyer is a party or any of its properties is subject or by which
either Buyer is bound, (3) any Court Order to which either Buyer is a
party or by which either of them is bound or (4) any Requirements of
Laws affecting either Buyer; or
(ii) require the approval, consent, authorization or act of, or
the making by either Buyer of any declaration, filing or registration
with, any Person.
5.3. No Finder. Neither AVM, Associates nor any Person acting on their
behalf has paid or become obligated to pay any fee or commission to any broker,
finder or intermediary for or on account of the transactions contemplated by
this Agreement.
5.4. Investment Representation. Buyers understand that the Shares have
not been registered under the Securities Act of 1933 and that the Shares are
being acquired by AVM and Associates, respectively, for their own account for
investment, and not with a view to the sale or distribution of any part thereof
without registration under the Securities Act of 1933 or pursuant to an
applicable exemption therefrom.
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5.5. Litigation. There is no action, suit or proceeding pending, or, to
the knowledge of either Buyer, threatened which questions the legality or
propriety of the transactions contemplated by this Agreement.
5.6. Ability to Close. Each Buyer has sufficient assets to perform its
obligations under this Agreement.
ARTICLE VI
ACTION PRIOR TO THE CLOSING DATE
The respective parties hereto covenant and agree to take the following
actions between the date hereof and the Closing Date:
6.1. Investigation of the Company by Buyers. Seller shall afford and
cause the Company to afford to the officers, employees and authorized
representatives of Buyers (including their independent public accountants and
attorneys) complete access during normal business hours, upon prior reasonable
notice, to the offices, properties, employees, attorneys, accountants and
business and financial records (including computer files, retrieval programs and
similar documentation) of the Company to the extent Buyers shall deem necessary
or desirable and shall furnish, and shall cause the Company to furnish, to
Buyers or their authorized representatives such additional information
concerning the assets, business and the operations of the Company as shall be
reasonably requested. Buyers agree that such investigation shall be conducted in
such a manner as not to interfere unreasonably with the operations of the
Company. If during an investigation made by Buyers or their representatives
hereunder they discover facts which contradict any of the representations and
warranties of Seller hereunder, Buyers shall promptly notify Seller of such
facts. No investigation made by Buyers or their representatives hereunder or
notice to Seller pursuant to the preceding sentence shall affect the
representations and warranties of Seller hereunder or the rights of Buyer in
respect of any breach thereof.
6.2. Preserve Accuracy of Representations and Warranties. Each of the
parties hereto shall refrain from taking any
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action which would render any representation or warranty of such party contained
in Article IV or V of this Agreement inaccurate as of the Closing Date. Each
party shall promptly notify the other of any action, suit or proceeding that
shall be instituted or threatened against such party to restrain, prohibit or
otherwise challenge the legality of any transaction contemplated by this
Agreement. Seller shall promptly notify Buyers of (i) any lawsuit, claim,
proceeding or investigation that is threatened, brought, asserted or commenced
against the Company and (ii) any other event or matter which becomes known to
Seller and would cause any other representation or warranty contained in Article
IV to be untrue in any material respect.
6.3. Consents of Third Parties; Governmental Approvals. (a) Seller will
(and will cause the Company to) act diligently and reasonably to secure, before
the Closing Date, the consent, approval or waiver, in form and substance
reasonably satisfactory to Buyers, from any party to the Existing Loan
Agreements, any other agreement to which the Seller is a party or by which it is
bound or any Company Agreement required to be obtained to permit the
consummation of the transactions contemplated by this Agreement or to otherwise
satisfy the conditions set forth in Section 8.1(e); provided that (i) neither
Seller, the Company nor Buyers shall have any obligation to offer or pay any
consideration in order to obtain any such consents or approvals; and (ii)
neither Seller nor the Company shall make any agreement or understanding
affecting the assets or business of the Company as a condition for obtaining any
such consents or waivers except with the prior written consent of Buyers. During
the period prior to the Closing Date, Buyers shall act diligently and reasonably
to cooperate with Seller and the Company to obtain the consents, approvals and
waivers contemplated by this Section 6.3(a).
(b) During the period prior to the Closing Date, Seller and Buyers
shall (and Seller shall cause the Company to) act diligently and reasonably, and
shall cooperate with each other, in making any required filing or notification
and in securing any consents and approvals of any Governmental Body required to
be obtained by them in order to permit the consummation of the transactions
contemplated by this Agreement, or to otherwise satisfy the conditions set forth
in Section
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8.1(d); provided that neither Seller nor the Company shall make any agreement or
understanding affecting the assets or business of the Company as a condition for
obtaining any such consents or approvals except with the prior written consent
of Buyer.
6.4. Operations Prior to the Closing Date. The parties agree that for
the period from the date hereof through the earlier of the Expiration Date, the
Repurchase Closing Date and any date on which this Agreement is terminated
pursuant to Section 11.1, the number of directors comprising the whole Board of
Directors of the Company shall be three, who shall be Clifford Viner, Warren
Mosler and Matthew Burns. During such period, the Shares shall not be voted to
expand or contract the size of such Board, remove Mr. Mosler, Mr. Viner or Mr.
Burns from the board or elect anyone to replace any of them without the prior
written consent of all of the parties.
6.5. Notification by Seller of Certain Matters. During the period prior
to the Closing Date, Seller will promptly advise Buyers in writing of (i) any
Material Adverse Change in the Company or the condition of its assets,
properties or business, (ii) any notice or other communication from any third
Person alleging that the consent of such third Person is or may be required in
connection with the transactions contemplated by this Agreement, and (iii) any
material default under any Company Agreement or event which, with notice or
lapse of time or both, would become such a default on or prior to the Closing
Date and of which Seller or the Company has knowledge.
ARTICLE VII
ADDITIONAL AGREEMENTS
7.1. Stockholder Meeting. Seller shall call a meeting of its
stockholders (the "Seller Stockholder Meeting") for the purpose, among others,
of voting for the transactions contemplated hereby. Seller shall use its best
efforts to hold the Seller Stockholder Meeting on or prior to March 31, 1998.
Seller shall, through its Board of Directors, recommend to its stockholders
approval of such transactions and shall not withdraw such recommendation;
provided, however, that such Board of Directors shall not be required to make,
and shall be entitled to
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withdraw, such recommendation if such Board of Directors concludes in good faith
on the basis of the written advice of its outside counsel that the making of, or
the failure to withdraw, such recommendation would violate the fiduciary
obligations of such Board of Directors under applicable law.
7.2. Preparation of the Proxy Statement. The Seller shall promptly
prepare and file with the SEC the Proxy Statement. The Seller shall use its best
efforts to satisfy the comments of the SEC with regard to the Proxy Statement in
order that the Proxy Statement may be mailed to Seller's stockholders in
accordance with the Exchange Act and the rules and regulations thereunder.
7.3. Access to Records after Closing. (a) For a period of six years
after the Closing Date, Seller and its representatives shall have reasonable
access to all of the books and records of the Company to the extent that such
access may reasonably be required by Seller in connection with matters relating
to or affected by the operations of the Company prior to the Closing Date or the
exercise of the Repurchase Options. Such access shall be afforded by Buyers upon
receipt of reasonable advance notice and during normal business hours. Seller
shall be solely responsible for any costs or expenses incurred by it pursuant to
this Section 7.3(a). If Buyers shall desire to dispose of any of such books and
records prior to the expiration of such six-year period, Buyers shall, prior to
such disposition, give Seller a reasonable opportunity, at Seller's expense, to
segregate and remove such books and records as Seller may select.
(b) For a period of six years after the Closing Date, Buyers and their
representatives shall have reasonable access to all of the books and records
relating to the Company which Seller or any of its Affiliates may retain after
the Closing Date. Such access shall be afforded by Seller and its Affiliates
upon receipt of reasonable advance notice and during normal business hours.
Buyers shall be solely responsible for any costs and expenses incurred by it
pursuant to this Section 7.3(b). If Seller or any of its Affiliates shall desire
to dispose of any of such books and records prior to the expiration of such
six-year period, Seller shall, prior to such disposition, give Buyers a
reasonable opportunity, at Buyers' expense, to segregate and remove such books
and records as Buyers may select.
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(c) In the event that the Repurchase Option is exercised, after the
Repurchase Closing Date (as defined below) the term Seller in this Section 7.3
shall mean AVM and Associates and the term Buyers shall mean the party
exercising the Repurchase Option.
7.4. Confidential Nature of Information. Each party agrees that it will
treat in confidence all documents, materials and other information which it
shall have obtained regarding the other party during the course of the
negotiations leading to the consummation of the transactions contemplated hereby
(whether obtained before or after the date of this Agreement), the investigation
provided for herein and the preparation of this Agreement and other related
documents, and, in the event the transactions contemplated hereby shall not be
consummated, each party will return to the other party all copies of nonpublic
documents and materials which have been furnished in connection therewith. Such
documents, materials and information shall not be communicated to any third
Person (other than, in the case of Buyers, to its counsel, accountants,
financial advisors or lenders, and in the case of Seller, to its counsel,
accountants or financial advisors). No Person shall use any confidential
information in any manner whatsoever except solely for the purpose of evaluating
the proposed purchase and sale of the Shares or the negotiation or enforcement
of this Agreement or any agreement contemplated hereby; provided that after the
Closing Buyers and the Company may use or disclose any confidential information
to the extent reasonable and necessary in the operation of the Company and its
business. The obligation of each party to treat such documents, materials and
other information in confidence shall not apply to any information which (i) is
or becomes lawfully available to such party from a source other than the
furnishing party, (ii) is or becomes available to the public other than as a
result of disclosure by such party or its agents, (iii) is required to be
disclosed under applicable law or judicial process, but only to the extent it
must be disclosed,(iv) such party reasonably deems necessary to disclose in
order to obtain any of the consents or approvals contemplated hereby or (v) all
parties agree may be disclosed.
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7.5. No Public Announcement. Neither Buyers nor Seller shall (nor shall
Seller permit the Company to), without the approval of the other, make any press
release or other public announcement concerning the transactions contemplated by
this Agreement, except as and to the extent that any such party shall be so
obligated by law or the rules of any stock exchange or quotation system, in
which case the other party shall be advised and the parties shall use their best
efforts to cause a mutually agreeable release or announcement to be issued;
provided that the foregoing shall not preclude communications or disclosures
necessary to implement the provisions of this Agreement or to comply with the
accounting and SEC disclosure obligations.
7.6. Expenses. Each party hereto will pay all costs and expenses
incident to its negotiation and preparation of this Agreement and to its
performance and compliance with all agreements and conditions contained herein
on its part to be performed or complied with, including the fees, expenses and
disbursements of its counsel, accountants and investment bankers. All costs and
expenses, if any, incurred by the Company in connection with this Agreement and
the transactions contemplated hereby shall be borne by the Company.
7.7. Further Assurances. From time to time following the Closing,
Seller shall execute and deliver, or cause to be executed and delivered, to the
Company such other bills of sale, deeds, endorsements, assignments and other
instruments of conveyance and transfer as Buyers or the Company may reasonably
request or as may be otherwise necessary to more effectively convey and transfer
to, and vest in, the Company, and put the Company in possession of, any part of
the assets or properties of the Company not in its possession on the Closing
Date.
7.8. Repurchase Options. Each of the Buyers hereby grants to the Seller
an option (the "Repurchase Options") to repurchase all, but not less than all,
of the Shares. The Repurchase Options shall having the following further terms
and conditions:
(a) the Repurchase Options shall be deemed to be granted on and as of
the Closing Date upon, and subject to, the actual closing of the transactions
called for by this Agreement;
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(b) the Repurchase Options shall expire on December 31, 1998 (the
"Expiration Date");
(c) the exercise price of the Repurchase Options shall be an aggregate
of $7,000,000 plus an accretion thereon at the rate of 5% per annum from the
Closing Date to and including the date on which such repurchase is consummated
in accordance with clauses (d) and (e) below (the "Exercise Price"), reduced by
the amount of any payments actually made by Seller to either of Buyers pursuant
to Section 10.1 of this Agreement prior to the Repurchase Closing Date, provided
that, in no event, shall the Exercise Price be less than $1;
(d) Seller may exercise the Repurchase Options (but only simultaneously
and for all of the Shares) by written notice of such exercise which is actually
delivered to each of the Buyers prior to the Expiration Date, which notice shall
specify a closing date (the "Repurchase Closing Date") for such repurchase
(which shall be no less than ten business days nor more than thirty business
days after such delivery);
(e) on the Repurchase Closing Date (i) AVM shall duly transfer all of
its right, title and interest in and to the AVM Shares to Seller in exchange for
the payment to AVM of its proportional share of the Exercise Price which shall
be wire transferred in immediately available funds by Seller to an account
designated by AVM to Seller at least one business day prior to the Repurchase
Closing Date and (ii) Associates shall duly transfer all of its right, title and
interest in and to the Associates Shares to Seller in exchange for the payment
to Associates of its proportionate share of the Exercise Price which shall be
wire transferred in immediately available funds by Seller to an account
designated by Associates to Seller at least one business day prior to the
Repurchase Closing Date;
(f) the sale to Seller by AVM and Associates of the Shares upon
exercise of the Repurchase Options shall be
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without any express or implied representation and warranty by AVM and Associates
with respect to any matter relating to the Company or its business, assets and
liabilities or otherwise, except that upon such sale AVM and Associates shall be
deemed to have represented and warranted to Seller that each of them severally,
have complied with Section 7.9 of this Agreement; and
(g) Seller may assign the Repurchase Options to a Seller Group Member
or one or more other assignees, acting as one, upon written notice delivered to
Buyers prior to the Expiration Date, in which event such assignee shall have the
same rights under the Repurchase Options as Seller but, except in the case of an
assignment to a Seller Group Member, shall not be entitled to further assign
such Repurchase Options.
7.9. Operating Agreements. From and after the date hereof and to the
earlier of the Repurchase Closing Date or February 12, 1999:
(a) AVM and Associates each severally agree to cause the Company:
(i) to operate only in the ordinary course of business consistent
with past practices;
(ii) not to declare or pay any dividends or distribute any assets
or make any loans;
(iii) not to borrow any money, permit the assets of the Company
to become subject to any liens or encumbrances (other than Permitted
Encumbrances), enter into any capital leases or material operating
leases or otherwise incur any material obligation or liability outside
the ordinary course of business consistent with past practices;
(iv) not to offer products or services which are competitive with
products and services offered by Seller or its Affiliates on the
Closing Date;
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(v) to apply the Company's Net Cash Flow, on a quarterly basis,
to the payment of the outstanding principal balance on the Secured
Loans;
(vi) except in accordance with Section 7.4, not to reveal or
disseminate any trade secrets or other confidential information
pertaining to the Company;
(vii) not to merge into or consolidate with any Person or sell
all or substantially all of its assets to any Person;
(viii) to provide Seller with monthly reports on the Company's
financial condition, results of operations, cash flow and other
financial information reasonably requested by Seller;
(ix) not to pay any amounts to either of Buyers or to their
respective Affiliates except as provided in clause (v) above; and
(x) not to terminate the employment by the Company of John
Chappell as its President except for "cause" as such term is defined
in the Employment Agreement between the Company and Mr. Chappell dated
September 18, 1996.
(b) Each of AVM and Associates severally agrees that it will not
hypothecate, pledge or in any way encumber the Shares (other than for Permitted
Encumbrances) and will not, except as provided in Section 7.8, sell or otherwise
transfer or dispose of any Shares or any portion thereof or any interest
therein; provided that AVM and Associates may grant to III Finance Ltd. and/or
one or more investment funds managed by III Offshore Advisors an option to
purchase the Shares so long as such option is subordinate to the Repurchase
Options and cannot be exercised on or prior to the Expiration Date (unless the
Repurchase Option has been exercised, in which case such option cannot be
exercised on or prior to the applicable Repurchase Closing Date).
(c) Each of AVM and Associates severally agrees that it shall, in its
capacity as a stockholder of the Company, fully cooperate with Seller to enable
Seller to exercise the Repurchase Options
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in Seller's sole and absolute discretion and shall not take any action, directly
or indirectly, in such capacity, to prevent Seller from exercising such
discretion or consummating the exercise of the Repurchase Options; provided that
nothing in this clause (c) or elsewhere in this Agreement shall be deemed to bar
any investment fund (including but not limited to III Finance Ltd.) advised or
managed by Associates, III Offshore Advisors or their Affiliates (or bar
Associates, AVM, or III Offshore Advisors as agent of any such fund) from
exercising any right or taking or refraining from taking any action as
stockholder, lender or otherwise pursuant to the Existing Loan Agreements
(including, without limitation, the foreclosure of any lien on or security
interest in the Shares or the right to accelerate any loan or loans outstanding
under any such Existing Loan Agreement or the exercise of any other right which
may arise upon the occurrence or continuance of an event of default thereunder)
or otherwise or subject either of Buyers to any liability to Seller or its
stockholders in the event of the exercise of any such right or taking or
refraining from taking any such action.
(d) Seller shall retain the Company, and the Company shall accept its
retention, to service all loans and receivables purchased or originated by
Seller and its Affiliates and sold to investment funds advised or managed by
Associates, III Offshore Advisors or their Affiliates on current terms and
conditions (including fees and other compensation). Seller and its Affiliates
agree not to pay any servicer for loans purchased or originated by Seller and
its Affiliates and sold to any Person other than such funds more than the
servicing fee payable by Seller to the Company for comparable services;
provided, however, that in the event Seller sells loans to a third party, the
acquirer of such loans must agree to the Company performing loan servicing of
such loans.
7.10. Use of Proceeds. The Purchase Price shall be utilized by Seller
as working capital for general corporate purposes.
7.11. Company Indemnifications; Voting. Buyers agree that (a) they
shall not permit or cause the Company to take any action to reduce the scope or
nature of indemnification provided on the date hereof by the Company to
directors, officers and
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employees of the Company, (b) they shall cause the Company to maintain any
insurance in force on the date hereof which provides such indemnification and
(c) at the Seller Stockholder Meeting they will vote any shares of Common Stock
of Seller for which either of them have the power to vote (by proxy or
otherwise) for the transactions provided for herein.
7.12. Certain Intercompany Debt. The parties agree and acknowledge
that, on the date hereof, the Company owes to Seller inter-company indebtedness
of $150,000 and no more (the "Intercompany Debt"). From and after the date
hereof and prior to the Closing Date, the Company shall repay to Seller in full,
without interest, the Intercompany Debt, provided that (a) such repayment shall
be made only from, and to the extent that the Company has at the end of each of
its fiscal quarters prior to the Closing Date, net income (as shown on its
regularly prepared quarterly financial statements) determined in accordance with
generally accepted accounting principles consistently applied and after
deduction of the payments required by Section 7.9(a)(v); (b) the Company shall
not be liable for or be obligated to pay to Seller any amounts in excess of the
Intercompany Debt; and (c) Seller shall continue to provide, at its sole cost,
the insurance and employee benefits provided to the Company and its employees at
any time during the six months prior to the date of this Agreement. If the
transactions provided for in ARTICLE II of this Agreement are consummated, on
the Closing Date all Intercompany Debt not paid by the Company on or prior to
the Closing Date shall be discharged and forgiven by Seller on the Closing Date
so that on the Closing Date no amounts shall be due and payable by the Company
to Seller in respect of any intercompany indebtedness or charges, provided that
if the Repurchase Option is exercised in accordance with Section 7.8, the unpaid
Intercompany Debt (plus any amounts expended by Seller in compliance with clause
(c) above) shall be payable by the Company in full. No amounts shall be due and
payable to Seller or its Affiliates by the Company in respect of any Tax Sharing
Arrangement or Tax indemnity arrangement which exists or may have existed
involving the Company or any Company Group unless and until the Repurchase
Option is exercised in accordance with Section 7.8.
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ARTICLE VIII
CONDITIONS PRECEDENT TO OBLIGATIONS OF PARTIES
8.1. Conditions to Buyers' Obligations. The obligation of Buyers to
close the purchase the Shares pursuant to this Agreement shall be subject to the
satisfaction (or waiver by Buyers), on or prior to the Closing Date, of the
following conditions:
(a) There shall have been no material breach by Seller in the
performance of any of its covenants and agreements herein; each of the
representations and warranties of Seller contained or referred to herein shall
be true and correct in all material respects on the Closing Date as though made
on the Closing Date, except for changes therein specifically permitted by this
Agreement or resulting from any transaction expressly consented to in writing by
Buyers or any transaction permitted by Section 6.4; and there shall have been
delivered to Buyers a certificate to such effect, dated the Closing Date, signed
on behalf of Seller by the President or any Vice President of Seller, in
addition to the other deliveries specified in Section 3.4.
(b) The holders of at least a majority of the outstanding Common Stock
of Seller shall have voted in favor of the transactions provided for herein at
the Seller Stockholder Meeting.
(c) No action, suit, investigation or proceeding shall have been
instituted or threatened to restrain or prohibit or otherwise challenge the
legality or validity of the transactions contemplated hereby.
(d) The parties shall have received all approvals and actions of or by
all Governmental Bodies which are necessary to consummate the transactions
contemplated hereby, which are either specified in Schedule 4.1 or otherwise
required to be obtained prior to the Closing by applicable Requirements of Laws
or which are necessary to prevent a material adverse change in the assets,
business, operations, liabilities, profits or condition (financial or otherwise)
of the Company.
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(e) Each of the lenders who are parties to the Existing Loan Agreements
shall have consented to, in writing, the transactions provided for herein.
(f) Seller and each of its Affiliates shall pay off and settle all
obligations of Seller to the Company or to any Affiliate of the Company.
8.2. Conditions to Seller's Obligations. The obligations of Seller to
sell the Shares pursuant to this Agreement shall be subject to the satisfaction
(or waiver by Seller), on or prior to the Closing Date, of the following
conditions:
(a) There shall have been no material breach by Buyers in the
performance of any of their covenants and agreements herein; each of the
representations and warranties of Buyers contained or referred to in this
Agreement shall be true and correct in all material respects on the Closing Date
as though made on the Closing Date, except for changes therein specifically
permitted by this Agreement or resulting from any transaction expressly
consented to in writing by Seller or any transaction contemplated by this
Agreement; and there shall have been delivered to Seller a certificate to such
effect, dated the Closing Date and signed on behalf of each of Buyers by their
respective authorized representatives, in addition to the other deliveries
specified in Section 3.3.
(b) No action, suit or proceeding by any Governmental Body shall have
been instituted or threatened to restrain, prohibit or otherwise challenge the
legality or validity of the transactions contemplated hereby.
(c) Each of the lenders who are parties to the Existing Loan Agreements
shall have consented to, in writing, the transactions provided for herein.
(d) The holders of at least a majority of the outstanding Common Stock
of Seller shall have voted in favor of the transactions provided for herein at
the Seller Stockholder Meeting.
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(e) The parties shall have received all approvals and actions of or by
all Governmental Bodies necessary to consummate the transactions contemplated
hereby, which are required to be obtained prior to the Closing by applicable
Requirements of Laws.
ARTICLE IX
TAX MATTERS
9.1. Tax Returns. Seller shall file or cause to be filed when due
(taking into account all extensions properly obtained) all Tax Returns that are
required to be filed by or with respect to the Company for taxable years or
periods ending before the Closing Date and Seller shall remit (or cause to be
remitted) any Taxes due in respect of such Tax Returns, and Buyers shall file or
cause to be filed when due all Tax Returns that are required to be filed by or
with respect to the Company for taxable years or periods ending on or after the
Closing Date and Buyers shall remit (or cause to be remitted) any Taxes due in
respect of such Tax Returns.
9.2. Survival of Obligations. Notwithstanding anything to the contrary
in this Agreement, and notwithstanding Article X of this Agreement, the
obligations of the parties set forth in this Article IX shall be unconditional
and absolute and shall remain in effect until the expiration of all applicable
statutes of limitation; provided that Buyers and Seller agree to enter into
negotiations in good faith to amend appropriately the provisions of this Article
IX in the event of the exercise of the Repurchase Options.
ARTICLE X
INDEMNIFICATION
10.1. Indemnification by Seller. (a) Seller agrees to indemnify and
hold harmless each Buyer Group Member from and against any and all Losses and
Expenses incurred by such Buyer Group Member in connection with or arising from:
(i) any breach by Seller of any of its covenants in this
Agreement or in any Seller Ancillary Agreement;
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(ii) any failure of Seller to perform any of its obligations in
this Agreement or in any Seller Ancillary Agreement; or
(iii) any breach of any warranty or the inaccuracy of any
representation of Seller contained or referred to in this Agreement or
any certificate delivered by or on behalf of Seller pursuant hereto;
provided that without limitation of Seller's indemnification
obligations under clause (i) or (ii) of this subsection (a), Seller
shall be required to indemnify and hold harmless under clause (iii) of
this subsection (a) with respect to Loss and Expense incurred by Buyer
Group Members as a result of inaccuracies only if such Loss and
Expense exceeds $200,000 in the aggregate, but if in excess of such
amount, then for the entire amount of such Loss and Expense without
deduction; and provided further that Sellers' total liability under
this Section 10.1 shall not exceed an aggregate of $7,000,000.
(b) The indemnification provided for in this Section 10.1 shall
terminate on the earlier of the Repurchase Closing Date or the first anniversary
of the Closing Date (and no claims shall be made by any Buyer Group Member under
this Section 10.1 thereafter), except that the indemnification by Seller shall
continue as to:
(i) the representations and warranties set forth in Sections 4.2
(b), 4.6, 4.9 and 4.10 and the covenants of Seller set forth in
Sections 7.4, 7.5, 7.6, and 7.10, as to all of which no time
limitation shall apply; and
(ii) any Loss or Expense of which any Buyer Group Member has
notified Seller in accordance with the requirements of Section 10.3 on
or prior to the date such indemnification would otherwise terminate in
accordance with this Section 10.1, as to which the obligation of
Seller shall continue until the liability of Seller shall have been
determined pursuant to this Article X, and Seller shall have
reimbursed all Buyer Group Members for the full amount of such Loss
and Expense in accordance with this Article X.
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10.2. Indemnification by Buyers. (a) Buyers severally agree to
indemnify and hold harmless each Seller Group Member from and against any and
all Loss and Expense incurred by such Seller Group Member in connection with or
arising from:
(i) any breach by Buyers of any of their respective covenants or
agreements in this Agreement or in any Buyer Ancillary Agreement;
(ii) any failure by either Buyer to perform any of their
respective obligations in this Agreement or in any Buyer Ancillary
Agreement; or
(iii) any breach of any warranty or the inaccuracy of any
representation of Buyers contained or referred to in this Agreement or
in any certificate delivered by or on behalf of Buyers pursuant
hereto;
provided that, without limitation of Buyers' indemnification
obligations under clauses (i) and (ii) of this subsection (a), Buyers
shall be required to indemnify and hold harmless under clause (iii) of
this subsection (a) with respect to Loss and Expense incurred by
Seller Group Members only if such Loss and Expense exceeds $200,000 in
the aggregate, but if in excess of such amount, then for the entire
amount of such Loss and Expense without deduction and provided further
that Buyers' total liability under this Section 10.2 shall not exceed
an aggregate of $7,000,000.
(b) The indemnification provided for in this Section 10.2 shall
terminate on the earlier of the Repurchase Closing Date or the first anniversary
of the Closing Date (and no claims shall be made by Seller under this Section
10.2 thereafter), except that the indemnification by Buyers shall continue as
to:
(i) the covenants of Buyers set forth in Sections 7.4, 7.5, 7.6,
7.8 and 7.9, as to all of which no time limitation shall apply; and
(ii) any Loss or Expense of which Seller has notified Buyers in
accordance with the requirements of Section 10.3 on or prior to the
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date such indemnification would otherwise terminate in accordance with
this Section 10.2, as to which the obligation of Buyers shall continue
until the liability of Buyers shall have been determined pursuant to
this Article X, and Buyers shall have reimbursed all Seller Group
Members for the full amount of such Loss and Expense in accordance
with this Article X.
10.3. Notice of Claims. (a) Any Buyer Group Member or Seller Group
Member (the "Indemnified Party") seeking indemnification hereunder shall give to
the party obligated to provide indemnification to such Indemnified Party (the
"Indemnitor") a notice (a "Claim Notice") describing in reasonable detail the
facts giving rise to any claim for indemnification hereunder and shall include
in such Claim Notice (if then known) the amount or the method of computation of
the amount of such claim, and a reference to the provision of this Agreement or
any other agreement, document or instrument executed hereunder or in connection
herewith upon which such claim is based; provided, that (i) a Claim Notice in
respect of any action at law or suit in equity by or against a third Person as
to which indemnification will be sought shall be given promptly after the action
or suit is commenced; and (ii) failure to give such notice shall not relieve the
Indemnitor of its obligations hereunder except to the extent it shall have been
materially prejudiced by such failure.
(b) In calculating any Loss or Expense there shall be deducted (i) any
insurance recovery in respect thereof (and no right of subrogation shall accrue
hereunder to any insurer, and (ii) the amount of any tax benefit to the
Indemnified Party (or any of its Affiliates) with respect to such Loss or
Expense (after giving effect to the tax effect of receipt of the indemnification
payments).
(c) After the giving of any Claim Notice pursuant hereto, the amount of
indemnification to which an Indemnified Party shall be entitled under this
Article X shall be determined: (i) by the written agreement between the
Indemnified Party and the Indemnitor; (ii) by a final judgment or decree of any
court of competent jurisdiction; or (iii) by any other means to which the
Indemnified Party and the Indemnitor shall agree. The judgment or decree of a
court shall be deemed final when the time for appeal, if any, shall have expired
and no appeal shall have been taken or when all appeals taken shall have
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been finally determined. The Indemnified Party shall have the burden of proof in
establishing the amount of Loss and Expense suffered by it.
(d) Any indemnification payment hereunder with respect to any Loss or
Expense shall be an amount which is sufficient to compensate the indemnified
party for the amount of such Loss or Expense, after taking into account all
increases in federal, state, local, foreign or other Taxes payable by the
indemnified party as a result of the receipt of such payment (by reason of such
payment being included in income, resulting in a reduction of tax basis, or
otherwise increasing such Taxes payable by the indemnified party at any time).
10.4. Third Person Claims. The Indemnitor shall have the right to
conduct and control, through counsel of its choosing, the defense, compromise or
settlement of any such third Person claim, action or suit against such
Indemnified Party as to which indemnification will be sought by any Indemnified
Party from any Indemnitor hereunder if the Indemnitor has acknowledged and
agreed in writing that, if the same is adversely determined, the Indemnitor has
an obligation to provide indemnification to the Indemnified Party in respect
thereof, and in any such case the Indemnified Party shall cooperate in
connection therewith and shall furnish such records, information and testimony
and attend such conferences, discovery proceedings, hearings, trials and appeals
as may be reasonably requested by the Indemnitor in connection therewith;
provided that the Indemnified Party may participate, through counsel chosen by
it and at its own expense, in the defense of any such claim, action or suit as
to which the Indemnitor has so elected to conduct and control the defense
thereof. Notwithstanding the foregoing, the Indemnified Party shall have the
right to pay, settle or compromise any such claim, action or suit, provided that
in such event the Indemnified Party shall waive any right to indemnity therefor
hereunder unless the Indemnified Party shall have sought the consent of the
Indemnitor to such payment, settlement or compromise and such consent was
unreasonably withheld, in which event no claim for indemnity therefor hereunder
shall be waived.
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<PAGE>
ARTICLE XI
TERMINATION
11.1. Termination. Anything contained in this Agreement to the contrary
notwithstanding, this Agreement may be terminated at any time prior to the
Closing Date:
(a) by the mutual consent of Buyers and Seller;
(b) by Buyers or Seller if the Closing shall not have occurred on or
before September 30, 1998 (or such later date as may be mutually agreed to by
Buyers and Seller);
(c) by Buyers in the event of any material breach by Seller of any of
Seller's agreements, representations or warranties contained herein and the
failure of Seller to cure such breach within seven days after receipt of notice
from Buyer requesting such breach to be cured; or
(d) by Seller in the event of any material breach by Buyers of any of
Buyers' agreements, representations or warranties contained herein and the
failure of Buyers to cure such breach within seven days after receipt of notice
from Seller requesting such breach to be cured.
11.2. Notice of Termination. Any party desiring to terminate this
Agreement pursuant to Section 11.1 shall give notice of such termination to the
other parties to this Agreement.
11.3. Effect of Termination. In the event that this Agreement shall be
terminated pursuant to this Article XI, all further obligations of the parties
under this Agreement (other than Sections 7.4, 7.6 and 12.8 and Article X) shall
be terminated without further liability of any party to the others, provided
that (a) Seller shall immediately upon termination return to Buyers all down
payments made on the Purchase Price hereunder (without interest for the period
ending on the termination date but with 5% interest per annum thereafter); (b)
if such termination occurs and, for any reason, the stockholders of the Seller
have not duly approved the transactions provided for herein in accordance with
applicable Delaware law, upon the written demand of the Buyers, the Seller shall
execute and
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<PAGE>
deliver to Buyers an irrevocable proxy, in form and substance satisfactory to
Buyers, authorizing Buyers to vote all of the outstanding voting stock of the
Company owned, directly or indirectly, by the Seller or its Affiliates on any
matter coming before the stockholders of the Company for a vote, such proxy to
terminate upon the payment in full by Seller of the amounts referred to in
clause (a) of this Section 11.3; and (c) nothing herein shall relieve any party
from liability for its willful breach of this Agreement.
ARTICLE XII
GENERAL PROVISIONS
12.1. Notices. All notices or other communications required or
permitted hereunder shall be in writing and shall be deemed given or delivered
(i) when delivered personally, (ii) if transmitted by facsimile when
confirmation of transmission is received, or (iii) if sent by registered or
certified mail, return receipt requested, or by private courier when received;
and shall be addressed as follows:
If to Buyers, to:
Adams, Viner & Mosler, Ltd.
III Associates
250 Australian Avenue South
West Palm Beach, Florida 33401
Facsimile No.: (561) 655-6871
Attention: Warren Mosler
with a copy to:
Sidley & Austin
One First National Plaza
Chicago, Illinois 60603
Facsimile No.: (312) 853-7036
Attention: William D. Kerr
If to Seller, to:
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<PAGE>
The Aegis Consumer Funding Group Inc.
200 North Cobb Parkway
Suite 428
Marietta, Georgia 30062
Facsimile No.: 770-281-7102
Attention: Matthew Burns
with a copy to:
Kramer, Levin, Naftalis & Frankel
919 Third Avenue
New York, New York 10022
Facsimile No.: (212) 715-8000
Attention: Peter S. Kolevzon, Esq.
or to such other address as such party may indicate by a notice delivered to the
other party hereto.
12.2. Successors and Assigns. (a) Except as set forth in Section
7.8(g), the rights of any party under this Agreement shall not be assignable by
such party without the written consent of the other parties.
(b) This Agreement shall be binding upon and inure to the benefit of
the parties hereto and their successors and permitted assigns. The successors
and permitted assigns hereunder shall include without limitation, in the case of
Buyers, any permitted assignee as well as the successors in interest to such
permitted assignee (whether by merger, liquidation (including successive mergers
or liquidations) or otherwise). Nothing in this Agreement, expressed or implied,
is intended or shall be construed to confer upon any Person other than the
parties and successors and assigns permitted by this Section 12.3 any right,
remedy or claim under or by reason of this Agreement.
12.3. Entire Agreement; Amendments. This Agreement and the Exhibits and
Schedules referred to herein and the documents delivered pursuant hereto contain
the entire understanding of the parties hereto with regard to the subject matter
contained herein or therein, and supersede all prior agreements, under-
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<PAGE>
standings or letters of intent between or among any of the parties hereto. This
Agreement shall not be amended, modified or supplemented except by a written
instrument signed by an authorized representative of each of the parties hereto.
12.4. Waivers. Any term or provision of this Agreement may be waived,
or the time for its performance may be extended, by the party or parties
entitled to the benefit thereof. Any such waiver shall be validly and
sufficiently given for the purposes of this Agreement if, as to any party, it is
in writing signed by an authorized representative of such party. The failure of
any party hereto to enforce at any time any provision of this Agreement shall
not be construed to be a waiver of such provision, nor in any way to affect the
validity of this Agreement or any part hereof or the right of any party
thereafter to enforce each and every such provision. No waiver of any breach of
this Agreement shall be held to constitute a waiver of any other or subsequent
breach.
12.5. Partial Invalidity. Wherever possible, each provision hereof shall be
interpreted in such manner as to be effective and valid under applicable law,
but in case any one or more of the provisions contained herein shall, for any
reason, be held to be invalid, illegal or unenforceable in any respect, such
provision shall be ineffective to the extent, but only to the extent, of such
invalidity, illegality or unenforceability without invalidating the remainder of
such provision or provisions or any other provisions hereof, unless such a
construction would be unreasonable.
12.6. Execution in Counterparts. This Agreement may be executed in two
or more counterparts, each of which shall be considered an original instrument,
but all of which shall be considered one and the same agreement, and shall
become binding when one or more counterparts have been signed by each of the
parties hereto and delivered to each of Seller and Buyers.
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<PAGE>
12.7. Governing Law. This Agreement shall be governed by and construed
in accordance with the internal laws (as opposed to the conflicts of law
provisions) of the State of New York.
12.8. Submission to Jurisdiction. Seller and Buyers hereby irrevocably
submit in any suit, action or proceeding arising out of or related to this
Agreement or any of the transactions contemplated hereby to the non-exclusive
jurisdiction of the United States District Court for the Southern District of
New York and the jurisdiction of any court of the State of New York located in
New York City and waive any and all objections to jurisdiction that they may
have and any claim or objection that any such court is an inconvenient forum.
Each party consents to service of process upon it with respect to any
such action or proceeding by registered mail, return receipt requested, and by
any other means permitted by applicable laws and rules.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed the day and year first above written.
ADAMS, VINER & MOSLER, LTD.
By: AVM Associates,
general partner
By /s/Warren B. Mosler
-------------------
Name: Warren B. Mosler
Title: General Partner
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<PAGE>
III ASSOCIATES
By: Cheyenne, Inc.,
general partner
By /s/Robert H. Fasulo
-------------------
Name: Robert H. Fasulo
Title: Secretary/Treasurer
THE AEGIS CONSUMER FUNDING GROUP INC.
By /s/Matthew B. Burns
-------------------
Name: Matthew B. Burns
Title: Chief Executive Officer
-50-
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