Name of Offeree:_______________ Memorandum No.______________
CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM
BLC FINANCIAL SERVICES, INC.
9% Convertible Subordinated Notes Due 2003
This Private Placement Memorandum (the "Memorandum") relates
to the sale by BLC Financial Services, Inc., a Delaware corporation (the
"Company"), of up to $5,000,000 principal amount of 9% Convertible Subordinated
Notes Due February 1, 2003 (the "Notes"), in the form attached hereto as Exhibit
A (the "Offering"). Holders of the Notes (the "Holder(s)" will have certain
rights and obligations pursuant to a Holders' Agreement among such Holders and
the Company. See "Description of Capital Stock - The Holders' Agreement."
Interest on the Notes will accrue from the date of issuance
of such Notes (the "Issue Date") and will be payable quarterly beginning on
April 15, 1999.
The Notes will be convertible at the option of the Holder,
unless previously converted, redeemed or repurchased, in whole or in part, at
any time and from time to time, on 30 days' prior written notice by the Holder
to the Company, into shares of Common Stock, $.01 par value, of the Company (the
"Common Stock") following the last issuance of the Notes until the close of
business on the Business Day immediately preceding the maturity date, at a
conversion price per share (the "Conversion Price") equal to the greater of (i)
$3.50 or (ii) 130% of the average of the Market Price per share for the five
Business Days immediately preceding the date the subscription for such Notes is
accepted by the Company (the "Conversion Ratio"), subject to adjustment in
certain events. The Conversion Price with respect to any Notes will be
determined by the Company as of the Business Day immediately preceding the date
the subscription for such Notes is accepted by the Company. Notes with different
Conversion Prices will be issued in different series. Accrued and unpaid
interest on the Notes converted to the date of conversion will be paid at
conversion. See "Description of the Notes - Optional Conversion." The last
reported sale price, on January 29, 1999, of the Common Stock, which is listed
on the American Stock Exchange under the symbol BCL, was $2.50 per share.
The Notes will be redeemable at the option of the Company,
unless previously converted, redeemed or repurchased, in whole or in part, at
any time and from time to time, on 60 days' prior written notice by the Company
to the Holders, if for five or more days in any 20-Trading Days period (whether
or not consecutive) the Market Price per share of Common Stock is greater than
the Conversion Price, at a redemption price equal to 105% of the principal
amount of the Notes to be redeemed plus all accrued and unpaid interest thereon
to the date of redemption, provided that such notice of redemption shall be
delivered no later than 10 days after the expiration of such 20-day Trading
1
Period. In addition, the Notes will be redeemable at the option of the Company,
unless previously converted, redeemed or repurchased, in whole or in part, at
any time and from time to time, on 60 days' prior written notice, from the
proceeds of one or more Public Equity Offerings, at a redemption price equal to
105% of the principal amount of the Notes being redeemed plus all accrued and
unpaid interest thereon to the date of redemption. Upon delivery of any notice
of redemption by the Company, a Holder may elect to convert the Notes to be
redeemed at the Conversion Ratio. If less than all of the Notes are to be
redeemed, the Notes will be chosen for redemption by the Company on a pro rata
basis or by lot or by a method that complies with applicable legal requirements.
See "Description of the Notes - Optional Redemption."
The Notes are unsecured and are not entitled to the benefit of
any sinking fund. The Notes will be subordinate to all Senior Indebtedness (as
defined) of the Company and will rank pari passu with all unsubordinated trade
and other indebtedness of the Company. On December 31, 1998, approximately
$22,229,526.06 of Senior Indebtedness, secured by substantially all of the
assets of the Company, and $8,328,000.00 (giving effect to the sale of the Notes
offered hereby) of unsecured pari passu indebtedness, was outstanding. See "Risk
Factors - Subordination" and "Description of the Notes."
The Notes offered hereby are being sold by the Company to
investors who meet the suitability standards set forth in this Memorandum. See
"Suitability Standards." There is no public market for the Notes and no public
market is expected to develop following the Offering. The Company does not
intend to apply for listing of the Notes on any securities exchange or for
inclusion of the Notes on any automated quotation system.
INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH
DEGREE OF RISK AND IS SUITABLE ONLY FOR PERSONS WHO ARE FINANCIALLY ABLE TO HOLD
THE SECURITIES FOR AN INDEFINITE PERIOD OF TIME AND TO BEAR THE LOSS OF THEIR
ENTIRE INVESTMENT. SEE "RISK FACTORS."
THE NOTES AND THE COMMON STOCK ISSUABLE UPON THEIR CONVERSION
OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), OR APPLICABLE STATE SECURITIES LAWS, NOR HAS THE
UNITED STATES SECURITIES AND EXCHANGE COMMISSION OR ANY STATE REGULATORY
AUTHORITY PASSED UPON THE ACCURACY OR ADEQUACY OF THIS MEMORANDUM OR ENDORSED
THE MERITS OF THE OFFERING MADE HEREBY. ANY REPRESENTATION TO THE CONTRARY IS
UNLAWFUL. THE SECURITIES ARE OFFERED PURSUANT TO EXEMPTIONS PROVIDED BY SECTION
4(2) OF THE SECURITIES ACT, REGULATION D THEREUNDER, CERTAIN STATE SECURITIES
LAWS AND CERTAIN RULES AND REGULATIONS PROMULGATED PURSUANT THERETO. THE
SECURITIES MAY NOT BE TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR
AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY AND ITS COUNSEL THAT SUCH
REGISTRATION IS NOT REQUIRED.
BLC FINANCIAL SERVICES, INC.
000 Xxxxxxx Xxxxxx
Xxx Xxxx, Xxx Xxxx 00000
(000) 000-0000
February 1, 1999
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THIS MEMORANDUM IS CONFIDENTIAL AND PROPRIETARY AND IS
SUBMITTED TO A LIMITED NUMBER OF "ACCREDITED INVESTORS" (AS DEFINED IN
REGULATIONS PROMULGATED UNDER THE SECURITIES ACT) SOLELY FOR USE IN CONNECTION
WITH THE CONSIDERATION OF THE PURCHASE OF THE SECURITIES OFFERED HEREBY IN A
PRIVATE OFFERING WITH THE EXPRESS UNDERSTANDING THAT, WITHOUT THE PRIOR WRITTEN
PERMISSION OF THE COMPANY, SUCH PERSONS WILL NOT RELEASE THIS DOCUMENT OR
DISCUSS THE INFORMATION CONTAINED HEREIN OR MAKE REPRODUCTIONS OF OR USE THIS
MEMORANDUM FOR ANY PURPOSE OTHER THAN EVALUATING A POTENTIAL INVESTMENT IN THE
SECURITIES. EACH PURCHASER OF THE SECURITIES OFFERED HEREBY MUST ACQUIRE THE
SECURITIES FOR ITS OWN ACCOUNT.
IN MAKING AN INVESTMENT DECISION, INVESTORS MUST RELY ON THEIR
OWN EXAMINATION OF THE COMPANY AND THE TERMS OF THE OFFERING, INCLUDING THE
MERITS AND RISKS INVOLVED. THIS MEMORANDUM DOES NOT PURPORT TO BE ALL-INCLUSIVE
OR TO CONTAIN ALL OF THE INFORMATION THAT A PROSPECTIVE INVESTOR MAY DESIRE IN
EVALUATING THE COMPANY. ALL OF THE INFORMATION PROVIDED HEREIN CONCERNING THE
COMPANY HAS BEEN FURNISHED BY THE COMPANY. THIS INFORMATION SHOULD NOT BE RELIED
UPON AS ANY REPRESENTATION WITH RESPECT TO FUTURE RESULTS TO BE OBTAINED BY THE
COMPANY OR THE VALUE OF THE SECURITIES OF THE COMPANY. PROSPECTIVE INVESTORS ARE
NOT TO CONSTRUE THIS MEMORANDUM OR ITS CONTENTS AS LEGAL, BUSINESS OR TAX
ADVICE. EACH PROSPECTIVE INVESTOR SHOULD CONSULT ITS OWN ADVISORS REGARDING
LEGAL, BUSINESS AND TAX MATTERS RELATED TO THIS OFFERING.
THE OBLIGATIONS OF THE PARTIES WITH RESPECT TO THE
TRANSACTIONS CONTEMPLATED HEREIN ARE SET FORTH IN AND WILL BE GOVERNED BY
CERTAIN DOCUMENTS DESCRIBED HEREIN. ALL OF THE STATEMENTS AND INFORMATION
CONTAINED HEREIN ARE QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO SUCH DOCUMENTS.
NEITHER THE DELIVERY OF THIS MEMORANDUM, NOR ANY SALE MADE PURSUANT HERETO,
SHALL IMPLY THAT INFORMATION CONTAINED HEREIN IS CORRECT AT ANY TIME SUBSEQUENT
TO THE DATE SET FORTH ON THE COVER.
THIS MEMORANDUM DOES NOT CONSTITUTE AN OFFER OF SECURITIES TO
ANY PERSON UNLESS THE NAME OF SUCH PERSON AND AN IDENTIFICATION NUMBER APPEAR ON
THE FRONT COVER HEREOF. DELIVERY OF THIS MEMORANDUM TO ANYONE OTHER THAN THE
PERSON WHOSE NAME APPEARS ON THE FRONT COVER IS UNAUTHORIZED AND ANY
REPRODUCTION OR CIRCULATION OF THIS MEMORANDUM, IN WHOLE OR IN PART, WITHOUT THE
PRIOR WRITTEN CONSENT OF THE COMPANY, IS PROHIBITED.
NO OFFERING LITERATURE OR ADVERTISING IN ANY FORM WHATSOEVER
SHALL BE EMPLOYED IN THE OFFERING EXCEPT FOR THIS MEMORANDUM. NO DEALER,
SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO
MAKE ANY REPRESENTATION ON BEHALF OF THE COMPANY RELATING TO THIS OFFERING OTHER
THAN AS SET FORTH IN THIS MEMORANDUM.
3
THIS OFFERING IS MADE SUBJECT TO PRIOR SALES, AND TO
WITHDRAWAL, CANCELLATION OR MODIFICATION BY THE COMPANY WITHOUT NOTICE. THE
COMPANY MAY REJECT ANY SUBSCRIPTION, IN WHOLE OR IN PART.
NEITHER THE DELIVERY OF THIS MEMORANDUM NOR ANY OFFERS OR
SALES MADE HEREUNDER, SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE MATTERS DISCUSSED HEREIN SINCE THE DATE HEREOF.
THE METHOD OF DELIVERY OF THE DOCUMENTS TO BE DELIVERED TO THE
COMPANY, AND THE PAYMENT OF THE PURCHASE PRICE TO THE COMPANY WILL BE AT THE
ELECTION AND RISK OF THE OFFEREE. IF SENT BY MAIL, IT IS RECOMMENDED THAT SUCH
DOCUMENTS AND SUCH PAYMENTS BE SENT BY REGISTERED MAIL, PROPERLY INSURED, WITH
RETURN RECEIPT REQUESTED, AND THAT A SUFFICIENT NUMBER OF DAYS BE ALLOWED TO
ENSURE DELIVERY TO THE COMPANY AND CLEARANCE OF PAYMENT PRIOR TO 5:00 P.M., NEW
YORK CITY TIME, ON THE DATE DESIGNATED FOR PAYMENT.
NOTICE TO NEW HAMPSHIRE RESIDENTS
NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN
APPLICATION FOR A LICENSE HAS BEEN FILED UNDER CHAPTER 421-B OF THE NEW
HAMPSHIRE REVISED STATUTES WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A
SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW
HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE THAT ANY DOCUMENT
FILED UNDER RSA 421-B IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER ANY SUCH
FACT NOR THE FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A SECURITY OR
A TRANSACTION MEANS THAT THE SECRETARY OF STATE HAS PASSED IN ANY WAY UPON THE
MERITS OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON,
SECURITY OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TO ANY
PROSPECTIVE PURCHASER, CUSTOMER OR CLIENT ANY REPRESENTATION INCONSISTENT WITH
THE PROVISIONS OF THIS PARAGRAPH.
4
AVAILABLE INFORMATION
The Company is subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information with
the Commission. The reports, proxy statements and other information filed by the
Company with the Commission in accordance with the Exchange Act may be
inspected, without charge, at the Public Reference Section of the Commission
located at 000 Xxxxx Xxxxxx, X.X., Xxxxxxxxxx, X.X. 00000, and at the Regional
Offices of the Commission located at Seven World Trade Center, 13th Floor, New
York, New York 10048 and Citicorp Center, 000 Xxxx Xxxxxxx Xxxxxx, Xxxxx 0000,
Xxxxxxx, Xxxxxxxx 00000-0000. Copies of all or any portion of the material may
be obtained from the Public Reference Section of the Commission upon payment of
the prescribed fees.
The Company will furnish the Holders with annual reports
containing, among other information, audited financial statements certified by
an independent public accounting firm and quarterly reports containing unaudited
financial information for the first three quarters of each fiscal year. The
Company will also furnish such Holders with such other reports as it may
determine or as may be required by law. The Commission maintains a web site that
contains reports, proxy and information statements and other information
regarding reporting companies under the Exchange Act, including the Company, at
xxxx://xxx.xxx.xxx.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 1998 and Quarterly Report on Form 10-Q for the fiscal quarter
ended September 30, 1998, copies of which have been furnished herewith and have
been filed with the Commission (File No. 1-8185), are hereby incorporated by
reference in this Memorandum.
All documents filed by the Company pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act after the date of this Memorandum and
prior to the termination of the Offer contemplated hereby shall be deemed to be
incorporated by reference in this Memorandum and to be a part hereof from the
date of filing of such documents. Any statement contained in a document
incorporated by reference or deemed to be incorporated by reference herein shall
be deemed to be modified or superseded for all purposes of this Memorandum to
the extent that a statement contained herein or in any subsequently filed
document which also is incorporated or deemed to be incorporated by reference
herein modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Memorandum.
The Company will provide without charge to each person to whom
a copy of this Memorandum has been delivered, including any beneficial owner, on
the written or oral request of such person, a copy of any and all of the
documents referred to above which have been or may be incorporated in this
Memorandum by reference, other than exhibits to such documents, unless such
exhibits are specifically incorporated by reference therein. Requests for such
copies should be directed to the Corporate Secretary of BLC Financial Services,
Inc. at its principal executive offices, which are located at 000 Xxxxxxx
Xxxxxx, Xxx Xxxx, Xxx Xxxx 00000 (telephone number (000) 000-0000).
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TABLE OF CONTENTS
Page
SUMMARY............................................................... 7
RISK FACTORS.......................................................... 13
USE OF PROCEEDS....................................................... 17
DIVIDEND POLICY....................................................... 17
CAPITALIZATION........................................................ 18
SELECTED FINANCIAL INFORMATION........................................ 20
THE COMPANY........................................................... 21
CERTAIN TRANSACTIONS.................................................. 21
DESCRIPTION OF THE NOTES.............................................. 21
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS............................. 29
DESCRIPTION OF THE COMPANY'S CAPITAL STOCK............................ 34
TERMS OF THE OFFERING................................................. 37
INVESTOR SUITABILITY REQUIREMENTS..................................... 38
6
SUMMARY
The following summary information is qualified in its entirety
by, and should be read in conjunction with, the more detailed information and
consolidated financial statements (including the notes thereto) appearing
elsewhere in this Memorandum or incorporated herein by reference.
This Private Placement Memorandum (this "Memorandum") and
documents incorporated herein by reference contain statements that constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. When included in this Memorandum or in documents
incorporated herein by reference, the words "expects," "intends," "anticipates,"
"estimates" and analogous expressions are intended to identify such
forward-looking statements. Such statements, which include statements contained
in "Risk Factors," inherently are subject to a variety of risks and
uncertainties that could cause actual results to differ materially from those
projected. Such risks and uncertainties include, among others, general economic
and business conditions, competition, regulatory initiatives and compliance with
governmental regulations and various other matters, many of which are beyond the
Company's control. These forward-looking statements speak only as of the date of
the document containing such statements. The Company expressly disclaims any
obligation or undertaking to release publicly any updates or revisions to any
forward-looking statement contained herein or in any document incorporated
herein by reference to reflect any change in the Company's expectations with
regard thereto or any change in events, conditions or circumstances on which any
statement is based.
The Company
BLC Financial Services, Inc., a Delaware corporation (the
"Company"), is engaged, through its wholly owned subsidiary Business Loan
Center, Inc., a Delaware corporation ("Business Loan Center"), primarily in the
business of originating and servicing loans to small businesses under the
Guaranteed Loan Program (the "Guaranteed Loan Program" or the "SBA 7(a)
Program") sponsored by the United States Small Business Administration (the
"SBA").
The Company conducts its operations primarily through Business
Loan Center and the following wholly owned subsidiaries: BLC Financial Network,
a Virginia corporation; BLC Financial Network of Florida, Inc., a Florida
corporation; and BLC Financial Network of Mid-America, Inc., a Kansas
corporation.
7
The Offering
Securities Offered: The Company is offering up to $5,000,000
principal amount of 9% Convertible Subordinated Notes
Due February 1, 2003 (the "Notes") in the form attached
as Exhibit A (the "Offering"). Issuer: BLC Financial
Services, Inc.
Maturity Date: February 1, 2003 (the "Maturity Date").
Terms of the Offering:
The Company will sell the Notes on its own behalf to
Holders (the "Holders") who will have certain rights
and obligations pursuant to a Holder's Agreement
(defined below). All persons desiring to subscribe for
the Notes must (i) meet the standards set forth under
the caption "Suitability Standards" in this Memorandum,
(ii) complete and execute the Subscription Agreement
and the Holders' Agreement attached hereto as Exhibit B
and Exhibit C, respectively (iii) deliver such
documents to the Company and (iv) deliver to the
Company, a check payable to the order of the Company,
in an amount equal to the principal amount of the Notes
purchased by such person. The Company will not use the
proceeds of any sale of Notes until delivery of such
Notes by the Company. The Company will deliver Notes
within three days not including saturdays, sundays or
any day on which banks located in the state of New York
are authorized or obligated to close ("Business Days")
of the deliveries described above, provided that the
Company, in its sole discretion, has accepted the
subscription for such Notes, and the date of such
delivery will be the "Issue Date" with respect to such
Notes. The Offering will terminate on March 31, 1999,
unless extended by the Company. There is no minimum
subscription required in connection with the Offering,
and the Company will evaluate, and at its sole
election, accept, subscriptions for Notes as they are
received in accordance with this Memorandum. See "Terms
of the Offering.
Interest on the Notes: Interest on the Notes will accrue from
the date of issuance of such notes (the "Issue Date")
at a rate of 9% per annum and will be payable quarterly
beginning on April 15, 1999.
8
Optional Conversion: The Notes will be convertible at the option
of the Holder, unless previously converted, redeemed or
repurchased, in whole or in part, at any time and from
time to time, on 30 days' prior written notice by the
Holder to the Company, following the last issuance of
the Notes until the close of business on the Business
Day immediately preceding the Maturity Date, at a
conversion price per share (the Conversion Price")
equal to the greater of (i) $3.50 or (ii) 130% of the
average of the Market Price per share for the five
Business Days immediately preceding the date the
subscription for such Notes is accepted by the Company
(the "Conversion Ratio"). Accrued and unpaid interest
on the Notes converted to the date of conversion will
be paid at conversion. The Conversion Price with
respect to any Notes will be determined by the Company
as of the Business Day immediately preceding the date
the subscription for such Notes is accepted by the
Company. Notes with different Conversion Prices will be
issued in different series. See "Description of the
Notes - Optional Conversion."
The last reported sale price, on January 29, 1999, of
the Common Stock, which is traded on the American Stock
Exchange (the "American Stock Exchange") under the
symbol BCL, was $2.50 per share. The Conversion Ratio
will be subject to adjustment upon the occurrence of
certain events affecting the Common Stock.
Optional Redemption: The Notes will be redeemable at the option
of the Company, unless previously converted, redeemed
or repurchased, in whole or in part, at any time and
from time to time, or 60 days' prior writtennotice by
the Company to the Holders, if for five or more days in
any 20-Trading Day (as hereinafter defined) period
(whether or not consecutive) the Market Price (as
hereinafter defined) per share of Common Stock is
greater than the Conversion Price applicable to such
Notes, at a redemption price equal to 105% of the
principal amount of the Notes to be redeemed plus all
accrued and unpaid interest thereon to the date of
9
redemption, provided that such notice of redemption
shall be delivered no later than 10 days after the
expiration of such 20-day Trading Period. In addition,
the Notes will be redeemable at the option of the
Company, unless previously converted, redeemed or
repurchased, in whole or in part, at any time and from
time to time, on 60 days' prior written notice by the
Company to the Holders, from the proceeds of one or
more Public Equity Offerings (as hereinafter defined),
at a redemption price equal to 105% of the principal
amount of the Notes being redeemed plus all accrued and
unpaid interest thereon to the date of redemption.
Upon delivery of any notice of redemption by the
Company, a Holder may elect to convert the Notes to be
redeemed at the Conversion Ratio.
If less than all of the Notes are to be redeemed, the
Notes will be chosen for redemption by the Company on a
pro rata basis or by lot or by a method that complies
with applicable legal requirements. See "Description of
the Notes - Optional Redemption."
Ranking of the Notes: The Notes will be unsecured and are not
entitled to the benefit of any sinking fund. The Notes
will be subordinate to all Senior Indebtedness (as
hereinafter defined) of the Company and will rank pari
passu with all unsubordinated trade and other
indebtedness. On December 31, 1998, approximately
$22,229,526.06 of Senior Indebtedness, secured by
substantially all of the assets of the Company, and
$8,328,000.00 (giving effect to the sale of the Notes
hereby) of unsecured pari passu indebtedness was
outstanding. See "Description of the Notes - Ranking."
Restrictive Covenants: The Notes will contain covenants that limit,
subject to certain exceptions, the ability of the
Company to (i) conduct affiliate transactions or (ii)
cancel any claim or debt, except for adequate
consideration or in the ordinary course of its
business. See "Description of the Notes - Covenants."
10
Description of Common
Stock: The Company's total authorized capital
stock consists of 37,000,000 shares of Common Stock, of
which 19,918,449 shares were issued and outstanding at
September 30, 1998, and 2,000,000 shares of preferred
stock, $.10 par value, of which none have been issued.
Holders'Agreement: Each purchaser of Notes (each, an
"Investor") will be required to enter into a holders'
agreement (the "Holders' Agreement") among the Company
and such purchasers. The Holders' Agreement will (i)
give the Company a right of first refusal with respect
to any sales of the Notes by Investors and (ii) provide
certain "piggyback" registration rights to the Holders
of the shares of Common Stock issuable upon the
conversion of the Notes. See "Description of the
Company's Capital Stock - Holders' Agreement."
Restrictions on
Transferability: Neither the Notes nor the shares of
Common Stock issuable upon their conversion have been
or (except as otherwise provided in the Holders'
Agreement) will be registered under the Securities Act
of 1933, as amended (the "Securities Act") or the
securities laws of any state. Neither the Notes nor the
shares of Common Stock issuable upon their conversion
may be sold, offered for sale, transferred, pledged,
hypothecated or otherwise disposed of except in
compliance with the Securities Act and other applicable
securities laws. Accordingly, each Investor must be
prepared to bear the economic risk of his or her
investment for an indefinite period of time.
Investors may be permitted to transfer Notes and the
shares of Common Stock issuable upon conversion of the
Notes in compliance with the resale provisions of Rule
144 under the Securities Act. In general, under Rule
144 as currently in effect, a person (or persons whose
shares are aggregated), including an affiliate, who has
beneficially owned restricted shares for at least one
year is entitled to sell, within any three-month period
commencing 90 days after the date of this Memorandum, a
number of shares that does not exceed the greater of
(i) 1% of the then outstanding shares of Common Stock
or (ii) the average weekly trading volume in the Stock
11
during the four calendar weeks preceding such sale,
subject to the filing of a Form 144 with respect to
such sale and certain other limitations and
restrictions. In addition, a person who is not deemed
to have been an affiliate of the Company at any time
during the 90 days preceding a sale and who has
beneficially owned the shares proposed to be sold for
at least two years, is entitled to sell such shares
under Rule 144(k) without regard to the requirements
described above. The amount of time which an Investor
has held a Note may be used to satisfy any "holding
period" requirements of Rule 144 upon a transfer of the
shares of Comon stock underlying such Note. See
"Description of the Notes -- Restrictions on
Transferability."
Use of Proceeds: The gross proceeds to be received by the
Company from the Offering are anticipated to aggregate
approximately $5,000,000, assuming the maximum
principal amount of Notes are sold by the Company. See
"Terms of the Offering." The Company intends to use
such proceeds (less the expenses of the Offering) to
repay certain unsecured indebtedness, for working
capital, capital expenditures and general corporate
purposes.
Risk Factors: Investment in the securities offered hereby
involves a high degree of risk and is suitable only for
persons who are financially able to hold the securities
for an indefinite period of time and to bear the loss
of their entire investment. For a discussion of certain
risk factors affecting the Company and any investment
therein, see "Risk Factors."
RISK FACTORS
INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK,
INCLUDING, BUT NOT NECESSARILY LIMITED TO, THE RISK FACTORS DESCRIBED BELOW. AN
INVESTMENT IN THE SECURITIES IS NOT SUITABLE FOR PERSONS WHO CANNOT AFFORD A
TOTAL LOSS OF THEIR INVESTMENT. EACH PROSPECTIVE INVESTOR SHOULD CAREFULLY
CONSIDER THE FOLLOWING RISK FACTORS INHERENT IN AND AFFECTING THE BUSINESS OF
THE COMPANY AND THIS OFFERING, IN ADDITION TO THE OTHER INFORMATION IN THIS
MEMORANDUM, BEFORE MAKING AN INVESTMENT DECISION.
Future Capital Needs; Uncertainty of Additional Financing
The Company is dependent on, and intends to use a significant
12
portion of, the proceeds of this Offering to continue to expand. The Company's
ability to execute its growth strategy to expand depends to a significant degree
on its ability to obtain additional long-term debt and equity capital. There can
be no assurance that additional financing will be available to the Company on
acceptable terms, or at all. The Company's ability to repay indebtedness,
including the Notes, at maturity may depend on refinancing, which could be
adversely affected if it does not have access to the capital markets for the
sale of additional long-term debt or equity securities through private
placements or public offerings on terms acceptable to it. Factors which could
affect the Company's access to the capital markets, or the cost of such capital,
include changes in interest rates, general economic conditions, and the
perception in the capital markets of its business, results of operations,
leverage, financial condition and business prospects. Moreover, any additional
equity financing may be dilutive to the Company's shareholders, and the terms of
any additional debt financing could require it to comply with certain financial
or other restrictive covenants that may limit its activities. See "Use of
Proceeds."
Holding Company Structure; Subordination
The Notes will be general unsecured obligations of the
Company. The Notes will not be guaranteed by the Company's subsidiaries and will
not be secured by any assets of such subsidiaries. Because the Company conducts
its operations through its operating subsidiaries, the Company's ability to
service its debt obligations, including its ability to pay the principal and
interest on the Notes, and its ability to pay dividends on the Common Stock
(including shares of Common Stock issuable upon conversion of Notes), is
strictly dependent upon the earnings and cash flows of its subsidiaries and the
ability of these subsidiaries to make funds available to the Company for such
purpose (whether in the form of intercompany loans, dividends or otherwise). See
"- Debt Restrictions."
As a consequence of the Company's holding company structure,
the Notes will effectively rank junior in right of payment to the prior payment
in full of all obligations and liabilities of the Company's subsidiaries.
Therefore, the claims of creditors of the Company's subsidiaries will, in
respect of the assets of such subsidiaries, have priority over claims of the
Company's creditors (including the Holders), even though the obligations to
creditors of the Company's subsidiaries do not constitute Senior Indebtedness.
The Notes will not restrict or limit the ability of the Company's subsidiaries
to incur, assume or guarantee any indebtedness. Moreover, the Notes will not
restrict or limit the ability of the Company or any of its subsidiaries from
creating liens and security interests or otherwise encumbering its properties
and assets, or from making payments and distributions on account of its equity
securities.
The Notes will be subordinated in right of payment to all
existing and future Senior Indebtedness of the Company and will rank pari passu
with all existing and future unsubordinated trade and other indebtedness of the
Company. On December 31, 1998, approximately $22,229,526.06 of Senior
Indebtedness, secured by substantially all of the assets of the Company, and
$8,328,000.00 (giving effect to the sale of the Notes offered hereby) of
unsecured pari passu indebtedness of the Company was outstanding. The Notes will
not prohibit the Company or any of its subsidiaries from incurring additional
indebtedness. Moreover, the Notes will provide that in the event of the
insolvency, bankruptcy, liquidation, reorganization or other winding up of the
Company, the Senior Indebtedness of the Company must be paid in full before
holders of the Notes may be paid. See "Description of the Notes Ranking."
13
Debt Restrictions
The Company, as a holding company which conducts operations
through its operating subsidiaries, is strictly dependent on the earnings and
cash flow to these subsidiaries to service the Company's debt obligations
(including the Notes) and expenses and to pay dividends, if any, on its Common
Stock. The terms of the Company's revolving credit facilities with Transamerica
Business Credit Corporation prohibit the Company's subsidiaries from making
funds available to the Company for the payment of dividends on the shares of
Common Stock issuable upon conversion of the Notes and prohibits the Company
from paying dividends on such shares of Common Stock.
The Company and its subsidiaries are currently subject to
financial and operating covenants under the Company's revolving credit
facilities with Transamerica Business Credit Corporation.
Managing Growth
The Company is currently undergoing a period of growth and
expansion, which is expected to place a significant strain on its personnel and
resources. The Company's growth has resulted in an increase in the level of
responsibility for both existing and new management personnel. The Company has
sought to manage its current and anticipated growth through the recruitment of
additional management personnel and the implementation of internal systems and
controls. However, failure to manage growth effectively could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Dependence on Key Personnel; Need for Additional Personnel
The Company depends to a significant extent on the efforts and
abilities of its key executive officers, including the Company's Chief Executive
Officer, Xxxxxx X. Xxxxxxxxxxxx. The Company's growth and future success will
depend in large part on its ability to attract, motivate and retain highly
qualified personnel. There can be no assurance that the Company will be able to
retain its current management and other employees, or recruit new qualified
personnel, to support its existing and planned operations. The loss of key or
the inability to hire or retain additional qualified personnel, could have a
material adverse effect on its business, financial condition and results of
operations.
Competition
The commercial lending business is highly competitive and the
Company competes with many banks and other non-bank lending institutions, most
of which are substantially larger, and have greater financial resources and name
recognition. There are currently 14 licensed non-bank lenders, including The
Money Store Investment Corp., AT&T Small Business Lending Corporation and GE
Capital Small Business Lending Finance Company, which compete within the
Guaranteed Loan Program lending market. Additionally, certain banks and non-bank
lending institutions which participate in the Guaranteed Loan Program have been
designated as "Preferred" or "Certified Lenders" under the Guaranteed Loan
14
Program which may give them a competitive advantage. There can be no assurance
that the Company will be able to compete successfully in the future or that
competition will not have a material adverse effect on the Company's business,
financial condition and results of operations.
Government Regulation
The level of SBA funding for the Guaranteed Loan Program is
subject to the federal budgeting process for each fiscal year ending September
30 (each a "Federal Fiscal Year"). Accordingly, the availability of funds for
SBA guarantees could increase or decrease each year. The federal budget for
Federal Fiscal Year 1998 appropriated funds to permit approximately $9.2 billion
under the Guaranteed Loan Program in which Business Loan Center participates as
compared to $9.5 billion, $7.7 billion and $7.8 billion of actual usage of funds
for the Federal Fiscal Years ended 1997, 1996 and 1995, respectively. There can
be no assurance that the federal budget will continue to appropriate such
amounts in future Fiscal Years or that such failure will not have a material
adverse effect on the Company's business, financial condition and results of
operations.
The qualification of a Small Business Lending Company, such as
Business Loan Center, to participate in the Guaranteed Loan Program is subject
to termination by the SBA based on objective criteria, at its election, on ten
days' notice. Such termination by the SBA would have a material adverse impact
on the Company's business, financial condition and results of operations.
SBA approval of loans is dependent in part, upon the SBA's
determination that Business Loan Center's facilities and personnel can
adequately support the servicing of the loan. Accordingly, based upon the
experience of its personnel and the present staffing of Business Loan Center in
its regional offices, Business Loan Center reasonably believes that it can
satisfy this criteria in the areas in which it is currently operating. However,
the failure to satisfy the SBA criteria could have a material adverse impact on
the Company's business, financial condition and results of operations.
As a Small Business Lending Company, Business Loan Center's
operations are subject to extensive local, state and federal regulations
including, but not limited to, the following federal statutes and regulations
promulgated thereunder: the Small Business Act, the Small Business Investment
Act of 1958, as amended, Title 1 of the Consumer Credit Protection Act of 1968,
as amended (including certain provisions thereof commonly known as the
Truth-in-Lending Act), the Equal Credit Opportunity Act of 1974, as amended, the
Fair Credit Reporting Act of 1970, as amended, Title IV of the Higher Education
Act of 1965, as amended, the Fair Debt Collection Practices Act, as amended, and
the Real Estate Settlement Procedures Act. In addition, Business Loan Center is
subject to state laws and regulations with respect to the amount of interest and
other charges which lenders can collect on loans (e.g., usury laws). At present,
Business Loan Center believes it is in material compliance with all such rules
and regulations. However, a failure to comply with all such rules and
regulations could have a material adverse impact on the Company's business,
financial condition and results of operations.
Control by Shareholder, Affiliates and Existing Management
Xxxxxx X. Xxxxxxxxxxxx, the President and Chief Executive
15
Officer of the Company, and certain other affiliates of the Company, may
participate in the Offering. Prior to completion of this Offering, Xx.
Xxxxxxxxxxxx owns 26.67% of the outstanding shares of Common Stock on a
fully-diluted basis, without giving effect to conversion of the Notes. In
addition, officers and directors of the Company own 33.26% of the shares of
Common Stock on a fully diluted basis, without giving effect to conversion of
the Notes.
Xx. Xxxxxxxxxxxx, together with such affiliates, officers and
directors, acting in concert, would be able to significantly influence the
disposition of any matter submitted to a vote of the Board of Directors. There
can be no assurance that the interests of Xx. Xxxxxxxxxxxx or such officers and
directors will be the same as the interests of the Investors as debtholders or
shareholders.
No Public Market for Notes; Illiquidity of Investment
There is no public market for the Notes and none is expected
to develop in the foreseeable future. In addition, the potential issuance of the
Notes in different series (reflecting different Conversion Prices) could further
limit the size of the market for Notes in a particular series. Neither the Notes
nor the shares of Common Stock issuable upon conversion of the Notes have been
or will be (except pursuant to the Holders Agreement) registered under the
Securities Act or applicable state securities laws. Consequently, the Notes and
the Common Stock may not be resold unless they are registered under the
Securities Act and applicable state securities laws, or unless exemptions from
such registration requirements are available. As a result, an investor may be
unable to liquidate an investment in the Notes and should be prepared to bear
the economic risk of holding the Notes and Common Stock for an indefinite period
of time. In addition, a purchaser of the Notes should be able to withstand a
total loss of such purchaser's investment.
Absence of Dividends
The Company has never declared or paid any cash dividends on
its shares of capital stock and does not anticipate paying any such dividends in
the foreseeable future. See "Dividend Policy" and "Description of the Company's
Securities."
USE OF PROCEEDS
The gross proceeds to the Company from the Offering are
estimated to aggregate approximately $5,000,000, assuming the maximum principal
amount of Notes are sold by the Company. The Company intends to use such
proceeds (less the expenses of the Offering) for working capital, capital
expenditures and general corporate purposes.
DIVIDEND POLICY
The payment of dividends on the Common Stock is within the
discretion of the Company's Board of Directors. The Board of Directors has not
previously declared or paid any cash dividends. The Board of Directors currently
intends to retain any future earnings to fund growth and, therefore, does not
anticipate paying cash dividends on the Common Stock in the foreseeable future.
16
Any future decisions with respect to dividends will depend on future earnings,
operations, capital requirements and resources, restrictions in financing
arrangements, and other business and financial considerations.
17
CAPITALIZATION
The following table sets forth as of June 30, 1998 (i) the
actual capitalization of the Company and (ii) the as adjusted capitalization
giving effect to the issuance of $5,000,000 principal amount of the Notes
offered hereby.
At June 30, 1998
-----------------------------
Actual As Adjusted
---------- ---------------
All Debt excluding Subordinated Debt $ 35,684,000 $ 35,684,000
Subordinated debt 3,328,000 8,328,000
Shareholders' equity:
Common stock 197,000 197,000
Additional Paid in capital 10,840,000 10,840,000
Retained Earnings 2,762,000 2,762,000
Unrealized gain on residual interests 470,000 470,000
------------ -----------
(net of income taxes of $341,000
at June 30, 1998)
Total Shareholder's equity 14,269,000 14,269,000
------------ -------------
$ 53,281,000 $ 58,281,000
============ =============
18
BLC FINANCIAL SERVICES, INC. AND SUBSIDIARIES
Consolidated Condensed Balance Sheet
The following sets forth as of June 30, 1998 (i) the actual
consolidated condensed balance sheet of the Company and (ii) as adjusted to give
effect to the issuance of $5,000,000 principal amount of Notes offered hereby.
At June 30, 1998
-------------------------
Actual As Adjusted
--------------- -----------------
Loans receivable - net $22,040,000 $ 22,040,000
Loans held for sale 7,160,000 7,160,000
Cash 1,730,000 6,730,000
Restricted cash 1,768,000 1,768,000
Accounts receivable - loans sold 8,252,000 8,252,000
Accounts and other receivables 1,006,000 1,006,000
Prepaid expenses 302,000 302,000
Leasehold improvements, furniture and equipment,
net of accumulated depreciation of $342,000 in
1998; $211,000 in 1997 742,000 742,000
Servicing assets 3,270,000 3,270,000
Residual interests 5,057,000 5,057,000
Deferred income taxes 991,000 991,000
Security deposits 131,000 131,000
Deferred financing costs, net of accumulated amor-
tization of $415,000 in 1998; $47,000 in 1997 832,000 832,000
-------------- -------------
$ 53,281,000 $ 58,281,000
============== =============
LIABILITIES
Notes payable $ 32,541,000 $ 32,541,000
Accrued expenses 1,163,000 1,163,000
Due to participants 264,000 264,000
Allowance for estimated future losses on loans
sold 466,000 466,000
Due to affiliates
Debentures 3,328,000 8,828,000
Debt 46,000 46,000
Customer deposits 1,204,000 1,204,000
-------------- -------------
Total liabilities 39,012,000 44,012,000
============== =============
Commitments and contingencies (Note 8)
SHAREHOLDERS' EQUITY Preferred stock, $.10 par value:
Authorized - 2,000,000 shares, issued and
outstanding - none
Common stock, $.01 par value:
Authorized - 35,000,000 shares, issued and
outstanding - 19,778,449 in 1998 and
17,341,243 in 1997 197,000 197,000
Additional paid-in capital 10,840,000 10,840,000
Retained earnings 2,762,000 2,762,000
Unrealized gain on residual interests (net of
income taxes of $341,000 in 1998; $10,000 in 1997) 470,000 470,000
----------- -------------
Total shareholders' equity 14,269,000 14,269,000
----------- -------------
$53,281,000 $58,281,000
============ =============
19
SELECTED FINANCIAL INFORMATION
The following selected financial information should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and the notes thereto
included in the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1998 (the "Annual Report") which is incorporated herein by reference
and a copy of which is furnished herewith.
Year Ended June 30,
------------------------------
1998 1997 1996(1) 1995(2) 1994
---- ---- ---- ---- ----
Summary of Operations:
Total revenues $15,729,000 $7,168,000 $4,997,000 $2,536,000 $1,571,000
Income before
extraordinary item 3,226,000 1,702,000 533,000 142,000 150,000
Extraordinary item - 245,000 91,000 - 25,000
Net Income 3,226,000 1,947,000 644,000 142,000 175,000
Income per share
before extraordinary item .18 .10 .04 .01 .02
Income per share
from extraordinary item - .01 .01 - -
Net income per share .18 .11 .05 .01 .02
As of June 30:
Total assets $53,281,000 $20,086,000 $10,983,000 $10,535,000 $6,691,000
Total liabilities 39,012,000 12,896,000 5,657,000 7,274,000 4,277,000
Shareholders' equity 14,269,000 7,190,000 4,601,000 2,608,000 2,414,000
Shareholders' equity
per share .72 .41 .27 .23 .21
---------------
1. Restated. See notes to "Consolidated Financial Statements" included in the
Annual Report
20
THE COMPANY
BLC Financial Services, Inc., a Delaware corporation (the
"Company"), is engaged, through its wholly owned subsidiary Business Loan
Center, Inc., a Delaware corporation ("Business Loan Center"), primarily in the
business of originating and servicing loans to small businesses under the
Guaranteed Loan Program (the "Guaranteed Loan Program" or the "SBA 7(a)
Program") sponsored by the United States Small Business Administration (the
"SBA").
The Company conducts its operations primarily through Business
Loan Center and the following wholly owned subsidiaries: BLC Financial Network,
a Virginia corporation; BLC Financial Network of Florida, Inc., a Florida
corporation; and BLC Financial Network of Mid-America, Inc., a Kansas
corporation.
CERTAIN TRANSACTIONS
Holders' Agreement
Each Investor will be required to enter into the Holders'
Agreement. The Holders' Agreement will (i) give the Company a right of first
refusal with respect to any sales of the Notes and (ii) provide certain
"piggyback" registration rights with respect to shares of the Common Stock
issuable upon conversion of the Notes. See "Description of the Company's Capital
Stock - Holders' Agreement."
Participation in Offering
Xx. Xxxxxxxxxxxx, the President and Chief Executive Officer
of the Company, and certain affiliates of the Company, may participate in the
Offering. See "Risk Factors - Control by Shareholder, Affiliates and Existing
Management."
Payment of Unsecured Indebtedness
The Company may use some of the proceeds of the Offering to
repay certain unsecured indebtedness of the Company held by affiliates of the
Company.
DESCRIPTION OF THE NOTES
The following is a summary of certain terms of the Notes and
does not purport to be complete. Reference should be made to all provisions of
the Notes, including the definitions therein of certain terms.
Certain Definitions
"Market Disruption Event" means any event that results in a
material suspension or limitation of trading of the shares of Common Stock on
the AMEX, or if the shares of Common Stock are traded on The Nasdaq Small Market
Capitalization System, on such system.
21
"Business Day" means any day, excluding Saturdays, Sundays and
any day on which banks located in the state of New York are authorized or
obligated to close.
"Indebtedness" means, with respect to any person, (i) any
obligation of, or any obligation guaranteed by, such person for the repayment of
borrowed money, whether or not evidenced by bonds, debentures, notes or other
written instruments, (ii) all obligations of the person with respect to interest
rate hedging arrangements to hedge interest rates relating to Indebtedness of
such person, (iii) any deferred payment obligation of, or any such obligation
guaranteed by, such person for the payment of the purchase price of property or
assets evidenced by a note or similar instrument and (iv) any obligation of, or
any such obligation guaranteed by, such person for the payment of rent or other
amounts under a lease of property or assets which obligation is required to be
classified and accounted for as a capitalized lease on the balance sheet of such
person under generally accepted accounting principles.
"Market Price" means, on any date of determination, the
closing bid price of a share of Common Stock on such day as reported on the
AMEX, or if the shares of Common Stock are listed on The Nasdaq Small Market
Capitalization System, the closing price per share of Common Stock on such day
as reported by such system.
"Maturity Date" means February 1, 2003.
"Public Equity Offering" means an underwritten primary public
offering of the Common Stock pursuant to an effective registration statement
under the Securities Act.
"Trading Day" means any day on which purchases and sales of
securities listed on the AMEX are reported thereon, or if the shares of Common
Stock are traded on The Nasdaq Small Market Capitalization System, are reported
on such system, and, in either case, on which no Market Disruption Event has
occurred.
"Senior Indebtedness" means (i) the principal of, premium, if
any, and interest on, rent under and any other Indebtedness of the Company to
any bank or institutional lender plus interest and expenses with respect to such
Senior Indebtedness and (ii) refinancings, deferrals, refundings, replacements,
extensions and renewals of or amendments, modifications or supplements to the
Senior Indebtedness or other obligations referred to in the foregoing clause.
General
The Notes will be unsecured obligations of the Company, will
mature on the Maturity Date and will be limited to an aggregate principal amount
of $5,000,000. The Notes will be issued in denominations of $1,000. Subject to
compliance with applicable securities laws and the Holders' Agreement, the Notes
are exchangeable and transfers thereof will require the prior written consent of
the Company.
The Notes will accrue interest at a rate of 9% per annum from
the date of issuance (the "Issue Date"), and unpaid interest will be payable
quarterly in arrears on January 15, April 15, July 15 and October 15 of each
22
year beginning on April 15, 1999. Interest will be paid to the person in whose
name the Note is registered at the close of business on the January 1, April 1,
July 1 or October 1, as the case may be, immediately preceding each relevant
interest payment date. Interest will be computed on the basis of a 360-day year
comprising twelve 30-day months.
At the Maturity Date, to the extent not previously converted,
repurchased or redeemed, all of the Notes will automatically be redeemed by the
Company at a redemption price equal to 100% of the principal amount of the Notes
plus all accrued and unpaid interest thereon to the date of redemption.
Principal of, premium, if any, and interest on the Notes will
be payable (i) at the office or agency of the Company maintained for such
purpose, (ii) at the option of either the Company or a Holder by check mailed to
Holders of the Notes at its respective address set forth in the register of
Holders (or at such other address designated by such Holder in writing) or (iii)
at such Holder's option, by wire transfer to an account designated by such
holder in writing. Until otherwise designated by the Company, the Company's
office or agency maintained for such purpose will be the principal executive
office of the Company, located at 000 Xxxxxxx Xxxxxx, Xxx Xxxx, Xxx Xxxx 00000.
Ranking
The Notes will be unsecured and will not be entitled to the
benefit of any sinking fund. The Notes will be subordinate to all Senior
Indebtedness of the Company and will rank pari passu with all unsubordinated
trade and other indebtedness. On December 31, 1998, approximately $22,229,526.06
of Senior Indebtedness, secured by substantially all of the assets of the
Company, and $8,328,000.00 of (giving effect to the sale of the Notes offered
hereby) pari passu indebtedness was outstanding. See "Risk Factors."
Optional Conversion
The Notes will be convertible at the option of the Holder,
unless previously converted, redeemed or repurchased, in whole or in part, at
any time and from time to time, on 30 days' prior written notice, into shares of
Common Stock, $.01 par value, of the Company (the "Common Stock"), following the
last issuance of the Notes until the close of business on the Business Day
immediately preceding the Maturity Date, unless previously converted, redeemed
or repurchased, at a conversion price per share (the "Conversion Price") equal
to the greater of (i) $3.50 or (ii) 130% of the average of the Market Price per
share for the five Business Days immediately preceding the date the subscription
for such Notes is accepted by the Company (the "Conversion Ratio"). Accrued and
unpaid interest on the Notes converted to the date of conversion will be paid at
conversion. The Conversion Price with respect to any Notes will be determined by
the Company as of the Business Day immediately preceding the date the
subscription for such Notes is accepted by the Company. Notes with different
Conversion Prices will be issued in different series.
The foregoing Conversion Ratio is subject to adjustment as
described below under "- Adjustment to Conversion Ratio upon Certain Events."
Except as described below, no adjustment will be made on conversion of any Notes
for interest accrued thereon.
23
In order to exercise the right of conversion attaching to the
Notes, the Holder must (i) deliver to the Company a written notification of the
Holder's intent to convert (the "Notice of Conversion") all or a specified
portion of the Notes held by such Holder, at least 30 days prior to the
conversion date specified in the Notice of Conversion (the "Conversion Date")
and (ii) deliver the Note at the specified office of the Company, accompanied by
a duly signed and completed Notice of Conversion on such Conversion Date. A
Holder delivering a Note for conversion will not be required to pay any taxes or
duties payable in respect of the issuance or delivery of Common Stock on
conversion, but will be required to pay any tax or duty which may be payable in
respect of any transfer involved in the issue or delivery of the Common Stock in
a name other than that of the Holder of the Note. Certificates representing
shares of Common Stock will not be issued or delivered unless all taxes and
duties, if any, payable by the Holder have been paid.
Optional Redemption
The Notes will be redeemable at the option of the Company
unless previously converted, redeemed or repurchased, on written notice as
described below, in whole or in part, at any time and from time to time, if for
five or more days in any 20-Trading Day period (whether or not consecutive) the
Market Price per share of Common Stock is greater than the Conversion Price
applicable to such Notes, at a redemption price equal to 105% of the principal
amount of the Notes to be redeemed plus all accrued and unpaid interest thereon
to the date of redemption, provided that such notice of redemption shall be
delivered no later than 10 days after the expiration of such 20-day Trading
Period. In addition, the Notes will be redeemable at the option of the Company
unless previously converted, redeemed or repurchased, on written notice as
described below, in whole or in part, at any time and from time to time, from
the proceeds of one or more Public Equity Offerings, at a redemption price equal
to 105% of the principal amount of the Notes being redeemed plus all accrued and
unpaid interest thereon to the date of redemption. Upon delivery of any notice
of redemption by the Company, a Holder may elect, in the manner specified below,
to convert the Notes to be redeemed at the Conversion Ratio.
If less than all of the Notes are to be redeemed, the Notes
will be chosen for redemption by the Company on a pro rata basis or by lot or by
a method that complies with applicable legal requirements.
In order to exercise the right of redemption attaching to the
Notes, the Company must deliver to each Holder a written notification of the
Company's intent to redeem (the "Notice of Redemption") all or a specified
portion of the Notes held by such Holder, at least 60 days prior to the
redemption date (the "Redemption Date") specified in the Notice of Redemption.
Such Notice of Redemption shall specify (i) the Redemption Date on which the
Holder must deliver the Notes to be redeemed at the specified office of the
Company, (ii) the principal amount of Notes of such Holder to be redeemed and
(iii) the redemption price to be paid by the Company in respect of such Notes.
For a period of 30 days after delivery by the Company of a
Notice of Redemption, the Holder shall retain its right of conversion (at the
Conversion Ratio) attaching to the Notes specified in the Notice of Redemption
to be redeemed. In order to exercise such right of conversion, the Holder must
(i) deliver a Notice of Conversion with respect to all or a portion of the Notes
24
to be redeemed at least 30 days prior to the Redemption Date specifying a
Conversion Date no later than the Redemption Date and (ii) deliver the Note at
the specified office of the Company, accompanied by a duly signed and completed
Notice of Conversion on such Conversion Date.
If less than all the Notes are to be redeemed at any time,
selection of Notes for redemption will be made by the Company on a pro rata
basis or by lot or by such method as the Company shall deem fair and
appropriate, provided that no Notes of $1,000 or less will be redeemed in part.
Each Notice of Redemption will be mailed by first class mall at least 30 but not
more than 60 days before the specified Redemption Date to each Holder of Notes.
If any Note is to be redeemed in part only, the Notice of Redemption that
relates to such Note will state the portion of the principal amount thereof to
be redeemed. A new Note in principal amount equal to the unredeemed portion
thereof will be issued in the name of the holder thereof upon cancellation of
the original Note. On and after the Redemption Date, interest will cease to
accrue on Notes or portions thereof called for redemption.
Adjustment to Conversion Ratio upon Certain Events
The Conversion Ratio is subject to adjustment (under formula
set forth in the Notes) in the event the Company should at any time, or from
time to time after the date of issuance of the Notes, fix a record date for the
effectuation of a split or subdivision of the outstanding shares of the Common
Stock or the determination of holders of the Common Stock entitled to receive a
dividend or other distribution payable in additional shares of the Common Stock
or other securities or rights convertible into, or entitling the holder thereof
to receive directly or indirectly additional shares of the Common Stock
(hereinafter referred to as the "Common Stock Equivalents") without payment of
any consideration by such holder for the additional shares of the Common Stock
(or the Common Stock Equivalents issuable upon conversion or exercise thereof)
then, as of such record date (or the date of such dividend distribution, split
or subdivision if no record date is fixed), the Conversion Ratio shall be
appropriately decreased so that the number of shares of the Common Stock
issuable upon conversion of this Note shall be increased in proportion to such
increase of outstanding shares.
If the number of shares of the Common Stock outstanding at any
time after the date hereof is decreased by a combination of the outstanding
shares of the Common Stock, then, following the record date of such combination,
the Conversion Ratio shall be appropriately increased so that the number of
shares of the Common Stock issuable on conversion hereof shall be decreased in
proportion to such decrease in outstanding shares.
In the case of (i) any reclassification or change of the
Common Stock or (ii) a consolidation, merger or combination involving the
Company or a sale or conveyance to another corporation of the property and
assets of the Company as an entirety or substantially as an entirety, in each
case as a result of which holders of Common Stock shall be entitled to receive
stock, other securities, other property or assets (including cash) with respect
to or in exchange for such Common Stock, the holders of the Notes then
outstanding will be entitled thereafter to convert such Notes into the kind and
amount of shares of stock, other securities or other property or assets of such
reorganized, consolidated or merged Company which they would have owned or been
entitled to receive upon such reclassification, change, consolidation, merger,
25
combination, sale or conveyance had such Notes been converted into Common Stock
immediately prior to such reclassification, change, consolidation, merger,
combination, sale or conveyance (assuming, in a case in which the Company's
stockholders may exercise rights of election, that a holder of Notes would not
have exercised any rights of election as to the stock, other securities or other
property or assets receivable in connection therewith and would have received
per share the kind and amount received per share by a plurality of non-electing
shares).
In the event of a taxable distribution to holders of Common
Stock (or other transaction) that results in any adjustment of the Conversion
Ratio, the holders of Notes may, in certain circumstances, be deemed to have
received a distribution subject to United States income tax as a dividend; in
certain other circumstances, the absence of such an adjustment may result in a
taxable dividend to the holders of Common Stock. See "Certain Federal Income Tax
Considerations."
No adjustment in the Conversion Ratio will be required unless
such adjustment would require a change of at least 1% of the Conversion Ratio
then in effect; provided that any adjustment that would otherwise be required to
be made shall be carried forward and taken into account in any subsequent
adjustment. Except as stated above, the Conversion Ratio will not be adjusted
for the issuance of Common Stock or any securities convertible into or
exchangeable for Common Stock or carrying the right to purchase any of the
foregoing.
Covenants
The Notes will provide, among other things, that the Company
will not, except with the prior written consent of holders of Notes holding a
majority of the aggregate principal amount thereof:
(1) Conduct any transaction with any affiliate, or with any
shareholder of the Company or any affiliate of such shareholder, other than on
an arms-length basis and except as otherwise specifically permitted pursuant to
the Note; or
(2) Cancel any claim or debt in excess of $500,000, except for
adequate consideration, as determined in the sole discretion of the Board of
Directors of the Company, or in the ordinary course of its business.
Merger and Sale of Assets, Etc.
The Company may not consolidate with or merge with or into any
other person or sell, assign, convey, transfer, lease or otherwise dispose of
all or substantially all of its properties and assets to any persons or group of
affiliated persons unless at the time and after giving effect thereto (i) either
(a) the Company shall be the continuing corporation, or (b) the person or entity
(if other than the Company) formed by such consolidation or merger, or to which
such sale, assignment, transfer, lease, conveyance or disposition shall have
been made (the "Surviving Entity") is a corporation duly organized and validly
existing under the laws of the United States of America, any state thereof or
the District of Columbia and shall, in either case, expressly assume all
obligations of the Company under the Notes and the Notes shall remain in full
force and effect; (ii) immediately prior to such transaction and immediately
after giving effect to such transaction on a pro forma basis, no Default or
26
Event of Default shall have occurred and be continuing; and (iii) giving effect
to such transaction on a pro forma basis, the consolidated net worth of the
Company (or the Surviving Entity) is at least equal to the consolidated net
worth of the Company immediately before such transaction.
Upon any consolidation or merger or any transfer of all or
substantially all of the assets of the Company, the successor corporation formed
by such consolidation or into which the Company is merged or to which such
transfer is made shall succeed to, and be substituted for, and may exercise
every right and power of, the Company under the Notes with the same effect as if
such successor corporation had been named as the Company therein.
In the event of any transaction (other than a lease) described
in and complying with the conditions listed in the immediately preceding
paragraphs in which the Company is not the continuing corporation, the Company
would be discharged from all obligations and covenants under the Notes.
Events of Default and Remedies
An Event of Default is defined in the Notes as one of the
following events occurring: (1) the Company defaults in the payment of interest
on any Note when the same becomes due and payable and the default continues for
a period of 10 days; (2) the Company defaults in the payment of the principal or
premium, if any, of any Note when the same becomes due and payable at maturity,
upon redemption or otherwise; (3) the Company fails to comply with any of its
other agreements or covenants in, or provisions of, the Notes, and the default
continues for the period and after the notice specified below; or any
representation or warranty made in any document executed and delivered in
connection with the Notes was false in any material respect on the date as of
which made or deemed made and the default continues for the period and after the
notice specified below; (4) a default occurs under any mortgage, indenture,
instrument or agreement under which there may be issued or by which there may be
secured or evidenced any indebtedness of the Company, whether such indebtedness
now exists or shall be created hereafter, if the holder or holders of at least
$1,000,000 in principal amount of such indebtedness cause such $1,000,000 (or
more) in principal amount of indebtedness to become due and payable prior to its
stated maturity; (5) a final judgment or final judgments for the payment of
money are entered by a court or courts of competent jurisdiction against the
Company and such judgment or judgments remain undischarged for a period (during
which execution shall not be effectively stayed) of 60 days, provided that the
aggregate of all such judgments that are not covered by insurance under which
the Company is a beneficiary exceeds $1,000,000; (6) the Company pursuant to or
within the meaning of any bankruptcy law: (a) commences a voluntary case; (b)
consents to the entry of an order for relief against it in an involuntary case;
(c) consents to the appointment of a custodian of it or for all or substantially
all of its property; (d) makes a general assignment for the benefit of its
creditors; or (e) admits in writing its inability generally to pay its debts as
the same become due; (7) a court of competent jurisdiction enters an order or
decree under any bankruptcy law that: (a) is for relief against the Company in
an involuntary case; (b) appoints a custodian of the Company or for all or
substantially all of the property of the Company; or (c) orders the liquidation
of any of the Company and the order or decree remains unstayed and in effect for
60 days; or (8) a court of competent jurisdiction enters a final judgment
holding any of the documents delivered in connection with the Notes to be
invalid or unenforceable and such judgment remains unstayed and is in effect for
a period of 60 consecutive days; or if the Company shall assert, in any pleading
27
filed in such a court, that any of the documents delivered in connection with
the Notes are invalid or unenforceable.
If an Event of Default (other than an Event of Default
specified in clause (6) or (7) above with respect to the Company) occurs and is
continuing, then and in every such case, the respective holders of at least a
majority in principal amount of the then outstanding Notes, by notice to the
Company, may declare the unpaid principal of, premium, if any, and any accrued
interest on all the Notes to be due and payable. Upon such declaration, the
principal, premium, if any, and interest shall be due and payable immediately.
If an Event of Default specified in clause (6) or (7) above occurs with respect
to the Company, such an amount shall ipso facto become and be immediately due
and payable without any declaration or other act on the part of any Holder.
The Holders of a majority in aggregate principal amount of the
Notes then outstanding may, on behalf of the Holders of all the Notes, waive any
past Default or Event of Default and its consequences, except Default in the
payment of principal, of premium, if any, or interest on the Notes (other than
the nonpayment of principal, of premium, if any, and interest on the Notes that
has become due solely by virtue of an acceleration that has been duly rescinded
as provided above) or in respect of a covenant or provision of the Notes that
cannot be modified or amended without the consent of all Holders.
Amendment, Supplement and Waiver
No provision of the Notes may be amended or waived unless the
Company shall have obtained the written agreement of Holders of a majority of
the aggregate principal amount of the Notes then outstanding.
Restrictions on Transferability
Neither the Notes nor the shares of Common Stock issuable upon
their conversion have been, or (except as otherwise provided in the Holders'
Agreement) will be registered under the Securities Act or the securities laws of
any state. Neither the Notes nor the shares of Common Stock issuable upon their
conversion may be sold, offered for sale, transferred, pledged, hypothecated or
otherwise disposed of except in compliance with the Securities Act and other
applicable securities laws. Accordingly, each Investor must be prepared to bear
the economic risk of his or her investment for an indefinite period of time.
Investors may be permitted to transfer Notes and the shares of
Common Stock issuable upon conversion of the Notes in compliance with the resale
provisions of Rule 144 under the Securities Act. In general, under Rule 144 as
currently in effect, a person (or persons whose shares are aggregated),
including an affiliate, who has beneficially owned restricted shares for at
least one year is entitled to sell, within any three-month period commencing 90
days after the date of this Memorandum, a number of shares that does not exceed
the greater of (i) 1% of the then outstanding shares of Common Stock or (ii) the
average weekly trading volume in the Stock during the four calendar weeks
preceding such sale, subject to the filing of a Form 144 with respect to such
sale and certain other limitations and restrictions. In addition, a person who
is not deemed to have been an affiliate of the Company at any time during the 90
days preceding a sale and who has beneficially owned the shares proposed to be
sold for at least two years, is entitled to sell such shares under Rule 144(k)
28
without regard to the requirements described above. The amount of time which
such Investor has held a Note may be used to satisfy any "holding period"
requirements of Rule 144 upon a transfer of the shares of Common Stock
underlying such Note.
Governing Law
The Notes will be governed by, and construed in accordance
with the laws of the State of New York without giving effect to applicable
principles of conflicts of law.
Transfer and Exchange
A Holder may transfer or exchange Notes in accordance with the
terms of the Notes and the Holders' Agreement. The Company may require a Holder,
among other things, to furnish appropriate endorsements and transfer documents,
including appropriate evidence that such transfer is permitted under applicable
securities laws, and the Company may require a Holder to pay any taxes and fees
required by law. The Company is not required to transfer or exchange any Note
selected for redemption or repurchase or for which a Notice of Conversion has
been tendered.
The registered Holder of a Note will be treated as the owner
of it for all purposes.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of certain of the principal United
States federal income tax consequences of the purchase, ownership and
disposition of the Notes to a holder that is (i) a citizen or resident of the
United States, (ii) a corporation created or organized under the laws of the
United States or any state thereof or the District of Columbia, (iii) an estate,
the income of which is subject to United States federal income taxation
regardless of source, or (iv) a trust with respect to which a court within the
United States is able to exercise primary supervision over its administration
and one or more United States fiduciaries have the authority to control all of
its substantial decisions (a "U.S. Holder"). This summary does not address the
United States federal income tax consequences to persons other than U.S. Holders
who purchase Notes upon their initial issuance.
This summary is based on the Internal Revenue Code of 1986, as
amended (the "Code"), Treasury regulations promulgated or proposed thereunder
and administrative rulings and judicial decisions, in each case now in effect,
all of which are subject to change, possibly on a retroactive basis. This
summary does not address the tax consequences applicable to investors that may
be subject to special tax rules such as banks, thrifts, real estate investment
trusts, regulated investment companies, insurance companies, dealers in
securities or currencies, tax-exempt investors or persons that will hold the
Notes as a position in a "straddle," as part of a "synthetic security" or
"hedge," "conversion transaction" or other integrated investment or as other
than a capital asset as defined in section 1221 of the Code. This summary also
does not address the tax consequences to persons that have a functional currency
other than the U.S. dollar or the tax consequences to shareholders, partners or
beneficiaries of a holder of Notes. Further, it does not include any description
of any alternative minimum tax consequences or the tax laws of any state or
local government or of any foreign government that may be applicable to the
Notes.
29
PROSPECTIVE INVESTORS ARE ADVISED TO CONSULT WITH THEIR OWN
TAX ADVISORS IN LIGHT OF THEIR OWN PARTICULAR CIRCUMSTANCES AS TO THE FEDERAL
TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF NOTES, AS WELL AS
THE EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS.
Stated Interest
The stated interest on a Note will be taxable to a U.S. Holder
as ordinary interest income either at the time it accrues or is received
depending upon such U.S. Holder's method of accounting for federal income tax
purposes.
Tax Basis
A U.S. Xxxxxx's initial tax basis in a Note will be equal to
the purchase price paid by such U.S. Holder for such Note.
Sale or Redemption
Unless a nonrecognition provision applies, the sale, exchange,
redemption (including pursuant to an offer by the Company) or other disposition
of a Note will be a taxable event to a U.S. Holder of a Note for federal income
tax purposes. In such event, a U.S. Holder will recognize gain or loss equal to
the difference between (i) the amount of cash plus the fair market value of any
property received upon such sale, exchange, redemption or other taxable
disposition (other than in respect of accrued and unpaid interest thereon) and
(ii) the U.S. holder's adjusted tax basis therein (other than any tax basis
attributable to accrued and unpaid interest). Subject to the discussion below
under the caption "Market Discount," such gain or loss should be capital gain or
loss and will be short-term or long-term capital gain or loss depending on
whether the Note had been held by the U.S. Holder for more than one year at the
time of such sale, exchange, redemption or other disposition.
Conversion of Note into Common Stock
No gain or loss will be recognized for federal income tax
purposes on conversion of Notes solely into shares of Common Stock, except with
respect to any cash received in lieu of a fractional share or, in the case of
both cash and accrual basis taxpayers, any accrued interest not previously
included in income. To the extent the conversion is not treated as resulting in
the payment of interest, the tax basis for the shares of Common Stock received
upon conversion will be equal to the tax basis of the Notes converted into
Common Stock, and the holding period of such shares of Common Stock will include
the holding period of the Notes so converted. Any accrued market discount not
previously included in income as of the date of the conversion of the Notes and
not recognized upon the conversion (e.g., as a result of the receipt of cash in
lieu of a fractional interest in a Note) should carry over to the Common Stock
received on conversion and be treated as ordinary income upon the subsequent
disposition of such Common Stock.
30
Adjustment of Conversion Price
Section 305 of the Code treats as a distribution taxable as a
dividend (to the extent of the issuing corporation's current or accumulated
earnings and profits) certain actual or constructive distributions of stock with
respect to stock or convertible securities. Under Treasury regulations, an
adjustment in the conversion price, or the failure to make such an adjustment,
may, under certain circumstances be treated as a constructive dividend to the
holder of a Note. Generally, a U.S. Xxxxxx's tax basis in a Note will be
increased by the amount of any such constructive dividend.
Market Discount
Gain recognized on the disposition (including a redemption) by
a subsequent purchaser of a Note that has accrued market discount will be
treated as ordinary income, and not capital gain, to the extent of the accrued
market discount, provided that the amount of market discount exceeds a
statutorily defined de minimis amount. "Market discount" is defined as the
excess, if any, of (i) the stated redemption price at maturity over (ii) the tax
basis of the debt obligation in the hands of the holder immediately after its
acquisition.
Under the de minimis exception, there is no market discount if
the excess of the stated redemption price at maturity of the obligation over the
holder's tax basis in the obligation is less than 0.25% of the stated redemption
price at maturity multiplied by the number of complete years after the
acquisition date to the Note's date of maturity. Unless a holder elects
otherwise, the accrued market discount would be the amount calculated by
multiplying the market discount by a fraction, the numerator of which is the
number of days the obligation has been held by a holder and the denominator of
which is the number of days after the holder's acquisition of the obligation up
to and including its maturity date.
If a U.S. Holder of a Note acquired at market discount
disposes of such Note in any transaction other than a sale, exchange or
involuntary conversion, even though otherwise non-taxable (e.g., a gift), such
U.S. Holder will be deemed to have realized an amount equal to the fair market
value of the Note and would be required to recognize as ordinary income any
accrued market discount to the extent of the deemed gain. A U.S. Holder of a
Note acquired at a market discount also may be required to defer the deduction
of all or a portion of the interest on any indebtedness incurred or maintained
to carry the Note until it is disposed of in a taxable transaction.
A U.S. Holder of a Note acquired at market discount may elect
to include the market discount in income as it accrues. This election would
apply to all market discount obligations acquired by the electing U.S. Holder on
or after the first day of the first taxable year to which the election applies.
The election may be revoked only with the consent of the U.S. Internal Revenue
Service (the "Service"). If a U.S. Holder of a Note so elects to include market
discount in income currently, the above-discussed rules with respect to ordinary
income recognition resulting from sales and certain other disposition
transactions and to deferral of interest deductions would not apply.
31
Bond Premium
If a U.S. Holder purchases a Note at a cost that is in excess
of the amount payable on maturity (which will be determined by reference to an
earlier call date if the call price would reduce the amount of the premium)
(such excess being the "bond premium"), a U.S. Holder may elect under Section
171 of the Code to amortize such bond premium on a constant yield basis over the
period from the acquisition date to the maturity date of such Note (or, in
certain circumstances, until an earlier call date) and offset the qualified
stated interest allocable to an accrual period and included in income in respect
of the Note by the amount of amortizable bond premium allocable to such accrual
period. A U.S. Holder who elects to amortize bond premium must reduce its
adjusted basis in the Note by the amount of such allowable amortization. An
election to amortize bond premium would apply to all amortizable bond premium on
all taxable bonds held at or acquired after the beginning of the U.S. Xxxxxx's
taxable year as to which the election is made, and may be revoked only with the
consent of the Service. No amortization is allowed for any premium attributable
to the conversion feature of a Note.
If an election to amortize bond premium is not made, a U.S.
Holder must include the full amount of each interest payment in income in
accordance with its regular method of accounting and will generally receive a
tax benefit from the bond premium only upon computing its gain or loss upon the
sale or other disposition or payment of the principal amount of the Note.
Back-Up Withholding
A U.S. Holder of Notes or Common Stock may be subject to
"back-up withholding" at a rate of 31% with respect to certain "reportable
payments," including interest payments, dividend payments and, under certain
circumstances, principal payments on the Notes or proceeds from the disposition
of Common Stock. These back-up withholding rules apply if the U.S. Holder, among
other things, (i) fails to furnish a social security number or other taxpayer
identification number ("TIN") certified under penalties of perjury within a
reasonable time after the request therefor, (ii) furnishes an incorrect TIN,
(iii) fails to report properly interest or dividends, or (iv) under certain
circumstances, fails to provide a certified statement, signed under penalties of
perjury, that the TIN furnished is the correct number and that such holder is
not subject to back-up withholding. A U.S. Holder who does not provide the
Company with its correct TIN also may be subject to penalties imposed by the
Service. Any amount withheld from a payment to a U.S. Holder under the back-up
withholding rules is creditable against the U.S. Holder's federal income tax
liability, provided the required information is furnished to the Service.
Back-up withholding will not apply, however, with respect to payments made to
certain holders, including corporations and tax-exempt organizations, provided
their exemption from back-up withholding is properly established.
The Company will report to the U.S. Holders of Notes and
Common Stock and to the Service the amount of any "reportable payments" for each
calendar year and the amount of tax withheld, if any, with respect to such
payments.
THE PRECEDING DISCUSSION OF CERTAIN UNITED STATES FEDERAL
INCOME TAX CONSEQUENCES IS FOR GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE.
ACCORDINGLY, EACH INVESTOR SHOULD CONSULT ITS OWN TAX ADVISER AS TO PARTICULAR
TAX CONSEQUENCES TO IT OF PURCHASING, HOLDING AND DISPOSING OF THE NOTES AND THE
COMMON STOCK OF THE COMPANY, INCLUDING THE APPLICABILITY AND EFFECT OF ANY
32
STATE, LOCAL OR FOREIGN TAX LAWS, AND OF ANY PROPOSED CHANGES IN APPLICABLE
LAWS.
33
DESCRIPTION OF THE COMPANY'S CAPITAL STOCK
General
The Company's total authorized capital stock consists of
37,000,000 shares of Common Stock, $.01 par value, of which 19,918,449 shares
were issued and outstanding at September 30, 1998, and 2,000,000 shares of
preferred stock, par value $10 per share, of which none have been issued. The
Company has authorized the issuance of 1,400,000 shares of Common Stock upon the
conversion of the Notes.
Common Stock
Subject to the prior rights of the holders of preferred stock,
holders of Common Stock are entitled to share ratably in dividends, if, as and
when declared by the Company's Board of Directors out of funds legally available
therefor. In the event of liquidation or distribution of the assets of the
Company, holders of Common Stock are entitled to share ratably in such assets
remaining after payment of liabilities and payment of preferences to the
holders, if any, of preferred stock. See "Dividend Policy." Holders of Common
Stock are entitled to cast one vote for each share of Common Stock held of
record on all matters presented to stockholders. Holders of shares of Common
Stock are entitled to cumulative voting. Common stockholders have no conversion,
preemptive or other subscription rights, and there are no redemptive or sinking
fund provisions with respect to such stock. The outstanding shares of Common
Stock of the Company are, and upon issuance the share offered through this
prospectus will be, validly issued, fully paid and nonassessable.
Preferred Stock
The Amended and Restated Certificate of Incorporation
expressly authorizes the Board of Directors of the Company (the "Board") to
issue up to two million (2,000,000) shares of Preferred Stock from time to time
in one or more series and for such consideration as the Board may determine and,
subject to certain restrictions, with such designations, preferences and rights,
and such qualifications, limitations or restrictions, as the Board may determine
with respect thereto by duly adopted resolution or resolutions. The issuance of
Preferred Stock may delay, defer or prevent a change in control of the Company
without further action by the stockholders and may adversely affect the voting
and other rights of holders of Common Stock. To date, no shares of Preferred
Stock have been issued.
Holders' Agreement
Each Investor will be required to enter into the Holders'
Agreement. As described below, the Holders' Agreement will (i) give the Company
a right of first refusal with respect to any sales of the Notes and (ii) provide
certain "piggyback" registration rights with respect to the shares of Common
Stock issuable upon conversion of the Notes.
Right of First Refusal
No Investor may transfer any Note (other than to a Permitted
34
Transferee) except as described below. "Permitted Transferee" means, with
respect to a person, (a) the spouse or child of such person, (b) such person's
heirs, executors or legal representatives, (c) trustees of an inter vivos trust
or testamentary trust for the benefit of such person or persons identified in
clause (a) of this definition, or (d) another person controlled by such person
or by any person identified in clauses (a) through (c) of this definition.
If any Investor (the "Offering Holder") desires to transfer
all or any part of its Notes to a third party, such Investor shall give a sale
notice ("Sale Notice") to the Company at least 20 days prior to such proposed
transfer. Such Sale Notice shall include (i) the name of the proposed
transferee, (ii) the aggregate principal amount of Notes desired to be
transferred (the "Offered Notes"), (iii) the sale price for such Notes and all
other material terms and conditions of the offer and (iv) the Investor's
irrevocable offer to sell such shares to the Company. The Company shall have the
right to purchase all or a portion of the Offered Notes on the terms set forth
in the Sale Notice. The Company shall give written notice to the Offering Holder
of whether it desires to purchase the Offered Notes on the terms set forth in
the Sale Notice within 20 days after delivery of the Sale Notice to the Company.
If Offered Notes are elected to be purchased in accordance
with the above provisions of this Section 4, the Company shall pay the purchase
price, against delivery of the certificate or certificates representing the
Offered Notes being purchased, properly endorsed for transfer, in the manner and
within 20 days after the date of the Sale Notice.
If the Company declines to purchase the Offered Notes, then
and only then may the Offering Holder transfer the Offered Notes to a third
party (which shall be the proposed transferee named in the Sale Notice), subject
to compliance with all applicable state and federal securities laws, at any time
within 60 days from the date the Sale Notice was given, but only to such third
party at a price and on other terms no more favorable to such third party than
the price and the other terms specified in the Sale Notice.
Registration Rights
If at any time the Company proposes to file a registration
statement under the Securities Act ("Registration Statement") with respect to
the Common Stock (other than Registration Statements filed in connection with
mergers, acquisitions, stock option or other employee benefit plans, exchange
offers or offerings of securities solely to the Company's existing
shareholders), the Company shall give written notice at each such time to each
Investor of its intention at least 20 Business Days before the anticipated
filing date specifying the date of the anticipated filing. Upon the written
request of any such Investor together with a notice of conversion, with respect
to Notes held by such Investor, as applicable, given not less than 10 days
before the anticipated filing date (stating the amount of shares of Common Stock
(including shares to be issued upon conversion of Notes) to be disposed of by
such Investor), the Company shall include the shares of Common Stock intended to
be disposed of in a Registration Statement under the Securities Act so as to
35
permit the disposition by such Investors of the shares of Common Stock so
registered; provided that the managing underwriter or underwriters (if any) in
connection with the offering contemplated by such Registration Statement shall
have advised the Company that the inclusion of the shares of Common Stock
proposed to be disposed of by such Investors pursuant to such Registration
Statement will not adversely affect the offering price per share or otherwise
adversely affect the success of such offering.
Notwithstanding anything to the contrary, if the Registration
Statement for which the Company gives notice is for an underwritten offering and
the managing underwriters determine in good faith that the total amount of
shares of Common Stock proposed to be included in such offering is such as to
adversely affect the offering price per share or otherwise adversely affect the
success of such offering, then (without reducing the amount of shares of Common
Stock to be included in such Registration Statement for the account of the
Company or any holder of Common Stock exercising "demand" registration rights)
the amount of shares of Common Stock to be included in such Registration
Statement for the account of the Investors shall be (i) reduced (pro rata among
the Investors (to the extent they each shall have requested, in accordance with
the foregoing, inclusion in such offering) on the basis of the relative number
of shares of Common Stock so requested by them to be included) to the extent
necessary to reduce the total amount of Common Stock of the Company to be
included in such offering to the amount recommended by such managing underwriter
or (ii) excluded in their entirety if so recommended by such managing
underwriter.
All customary, reasonable and necessary expenses in connection
with the preparation of any registration statement and related prospectus with
respect to which the Investors have been granted registration rights pursuant to
the Holders Agreement, including, without limitation, (i) any accounting fees
incurred by the Company (including, without limitation, the expenses of any
audit and/or "comfort" letter) and filing fees (including, without limitation,
expenses associated with filings required to be made with the Securities and
Exchange Commission), (ii) "blue sky" fees and expenses, (iii) printing,
engraving and duplicating expenses of the Company, (iv) transfer agent and
listing fees and (v) the reasonable fees and expenses of not more than one firm
of counsel representing all Investors shall be borne by the Company.
Notwithstanding the foregoing, in no event shall the Company bear any
underwriting discounts, commissions or fees attributable to the sale of shares
of Common Stock held by the Investors.
36
TERMS OF THE OFFERING
General
The Company is hereby offering for sale up to $5,000,000
principal amount of the Company 9% Convertible Subordinated Notes due 2003. The
Company will sell the Notes on its own behalf. The Offering will terminate on
March 31, 1999, unless extended by the Company. The Company reserves the right
to reject any subscription for any reason or for no reason. Subscriptions will
be accepted by the Company only from investors determined by the Company, in its
sole discretion, to be suitable investors (see "Investor Suitability
Requirements").
There is no minimum subscription required in connection with
the Offering.
Subscription Procedures and Payments
Persons who desire to subscribe for Notes should send to the
Company at 000 Xxxxxxx Xxxxxx, Xxx Xxxx, Xxx Xxxx 00000, Attention: Xxxxxx X.
Xxxxxxxxxxxx, the following documents:
(a) two executed copies of the Subscription Agreement;
(b) one executed copy of the Holders' Agreement; and
(c) a check in the principal amount of Notes
subscribed for, payable to the order of the Company.
The Company will deliver the Notes within three business days of the deliveries
described above, provided that the Company, in its sole discretion, has accepted
the subscription for the Notes, and the date of such delivery will be the "Issue
Date" with respect to such Notes.
Depositing of Funds
All payments made relating to subscriptions shall be deposited
as soon as practicable and held by the Company until the earlier to occur of (i)
the acceptance of such subscriptions by the Company or (ii) the termination of
the Offering.
Funds deposited may be withdrawn until the acceptance of such
subscriptions by the Company. Following a termination of the Offering, or the
rejection of a subscription by the Company in its sole discretion, all such
funds will be returned to the investors without interest. The Company will
evaluate, and at its sole election, accept, subscriptions for Notes as they are
received in accordance with this Memorandum. Upon the acceptance of a
subscription by the Company, all of the funds pertaining to that subscription
will be paid to the Company.
Restrictions on Transfer
There is no public market for the Notes and none is expected
to develop in the foreseeable future. Neither the Notes nor the Common Stock
37
(except pursuant to the Holder's Agreement) will be registered under the
Securities Act or applicable state securities laws. Consequently, the Notes and
the Common Stock may not be resold unless they are registered under the
Securities Act and applicable state securities laws, or unless exemptions from
such registration requirements are available. In addition, Investors should note
that all transfers will be subject to the approval of the Board of Directors of
the Company pursuant to the Stockholders' Agreement, which approval may be
withheld in the sole discretion of the Board of Directors. See "Risk Factors -
No Public Market the Notes; Illiquidity of Investment."
INVESTOR SUITABILITY REQUIREMENTS
General
Investment in the Notes involves significant risk and is
suitable only for persons of adequate financial means who have no need for
liquidity with respect to this investment and who can bear the economic risk of
a complete loss of their investment. The Offering made hereby relies on
exemptions from the registration requirements of the Securities Act and
applicable state securities laws and regulations.
The suitability standards discussed below represent minimum
suitability standards for prospective investors. The satisfaction of such
standards by a prospective investor does not necessarily mean that the Notes are
a suitable investment for such prospective investor. Prospective investors are
encouraged to consult their personal financial advisors to determine whether an
investment in the Notes is appropriate. The Company may reject subscriptions, in
whole or in part, in its sole discretion.
The Company will require each investor to represent in writing
that, among other things, by reason of the investor's business or financial
experience or that of the investor's professional advisor, the investor is
capable of evaluating the merits and risks of an investment in the Notes and of
protecting its own interests in connection with the transaction; the investor is
acquiring the Notes for its own account, for investment only and not with a view
toward the resale or distribution thereof, the investor is aware that the Notes
have not been registered under the Securities Act or any state securities laws
and that transfer thereof is restricted by the Securities Act, applicable state
securities laws and the stock purchase agreement to be entered into in
connection with the purchase of the Notes; the investor is aware of the stock
purchase agreement; the investor is aware of the absence of a market for the
Notes; and such investor meets the suitability requirements set forth below.
Suitability
Subscriptions will be accepted only from investors that
qualify as "accredited investors", as defined in Rule 501(a) of Regulation D
under the Securities Act. Each accredited investor must demonstrate the basis
for such qualification. To be an accredited investor, an investor must fall
within any of the following categories at the time of the sale of Notes to that
investor:
(1) a bank as defined in Section 3(a)(2) of the
38
Securities Act, or a savings and loan association or
other institution as defined in Section 3(a)(5)(A) of
the Securities Act, whether acting in its individual
or fiduciary capacity; a broker or dealer registered
pursuant to Section 15 of the Securities Exchange Act
of 1934; an insurance company as defined in Section
2(13) of the Securities Act; an investment company
registered under the Investment Company Act of 1940
or a business development company as defined in
Section 2(a)(48) of that Act; a Small Business
Investment Company licensed by the United States
Small Business Administration under Section 301(c) or
(d) of the Small Business Investment Act of 1953; a
plan established and maintained by a state, its
political subdivisions, or any agency or
instrumentality of a state or its political
subdivisions, for the benefit of its employees, if
such plan has total assets in excess of $5 million;
an employee benefit plan within the meaning of the
Employee Retirement Income Security Act of 1974, if
the investment decision is made by a plan fiduciary,
as defined in Section 3(21) of that Act, which is
either a bank, savings and loan association,
insurance company, or registered investment adviser,
or if the employee benefit plan has total assets in
excess of $5 million or, if a self-directed plan,
with the investment decisions made solely by persons
that are accredited investors;
(2) a private business development company as defined
in Section 202(a)(22) of the Investment Advisers Act
of 1940;
(3) an organization described in Section 501(c)(3) of the
Internal Revenue Code of 1986, as amended, or a
corporation, Massachusetts or similar business trust,
or partnership, not formed for the specific purpose
of acquiring shares of Common Stock, with total
assets in excess of $5,000,000;
(4) a director or executive officer of the Company;
(5) a natural person whose net worth, individually or
together with that person's spouse, currently exceeds
$1,000,000;
(6) a natural person who had an individual income (not
including such person's spouse's income) in excess of
$200,000 in 1997 and 1998, or joint income with such
person's spouse in excess of $300,000 in each of
those years, and who reasonably expects to reach the
same income level in 1999;
(7) a trust with total assets in excess of $5,000,000 not
formed for the specific purpose of acquiring shares
of Common Stock, whose purchase is directed by a
person having such knowledge and experience in
financial and business matters that he or she is
capable of evaluating the merits and risks entailed
in the purchase of shares of Common Stock; or
(8) an entity in which all of the equity owners are
Accredited Investors.
39
Each investor may be required to make certain representations
in a Subscription Agreement (Exhibit B hereto) in order to assist the Company in
determining whether or not the investor is an Accredited Investor. In addition,
the Company may require investors to supply additional information with respect
to the suitability of the investment for such investor. No Subscription
Agreement will be accepted by the Company unless the Company believes that the
investor is an Accredited Investor. The Company reserves the right to reject any
subscription in whole or in part, in each case in the sole discretion of the
Company.
