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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 9, 1999
Registration No. 333-90909
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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AMENDMENT NO. 1 TO
FORM SB-2
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
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AUSTIN FUNDING.COM CORPORATION
(Name of small business issuer in its charter)
Nevada 6162 74-2923677
(State or other jurisdiction (Primary Standard Classification (I.R.S.
of incorporation) Code Number) Employer Identification No.)
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823 Congress Avenue, Suite 515
Austin, Texas 78701
(512) 481-8000
(Address and telephone number of Registrant's principal executive offices)
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GLENN A. LAPOINTE
PRESIDENT
AUSTIN FUNDING.COM CORPORATION
823 Congress Avenue, Suite 515
Austin, Texas 78701
(512) 481-8000
(Name, address and telephone number of agent for service)
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Please send copies of all communications to:
JACK A. SELMAN
SELMAN MUNSON & LERNER, P.C.
111 CONGRESS AVENUE, SUITE 1000
AUSTIN, TEXAS 78701
(512) 505-5955
FAX (512) 505-5956
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APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS OF SECURITIES TO BE AMOUNT TO BE PROPOSED OFFERING PRICE PROPOSED MAXIMUM AMOUNT OF
REGISTERED REGISTERED PER UNIT AGGREGATE OFFERING PRICE REGISTRATION FEE
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8% Secured Subordinated Debentures......... $ 10,000,000 $ 1,000 $ 10,000,000 $3,330
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TOTAL...................................... $ 10,000,000 $3,330
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The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended or until the Registration Statement shall
become effective on such date as the Commission, acting pursuant to said Section
8(a), may determine.
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CROSS REFERENCE SHEET
PURSUANT TO REGULATION S-B
FORM SB-2 ITEM NUMBER AND CAPTION LOCATION IN PROSPECTUS BY CAPTION
- --------------------------------- ---------------------------------
1. Front of Registration Statement
and Outside Front Cover Page of
Prospectus........................................ Front Cover Page of Registration Statement
and Front Cover Page of the Prospectus
2. Inside Front and Outside Back
Cover Pages of the Prospectus..................... Inside Front and Outside Back Cover Pages
3. Summary Information and Risk Factors.............. Prospectus Summary; Risk Factors; Selected
Financial Data; Risk of Delayed Offering
4. Use of Proceeds................................... Use of Proceeds
5. Determination of Offering Price................... Debenture Pricing; Marketing and Underwriting
Arrangements; Risk Factors
6. Dilution.......................................... Not Applicable
7. Selling Security Holders.......................... Not Applicable
8. Plan of Distribution.............................. Front Cover Page; Marketing and Underwriting
Arrangements; Plan of Distribution
9. Legal Proceedings................................. Legal Proceedings
10. Directors, Executive Officers,
Promoters and Control Persons................ Management
11. Security Ownership of Certain
Beneficial Owners and Management............. Security Ownership of Certain Beneficial
Owners and Management; Management
12. Description of Securities......................... Description of Securities
13. Interest of Named Experts and Counsel............. Not Applicable
14. Disclosure of Commission
Position on Indemnification for
Securities Act Liabilities................... Indemnification
15. Organization within Last Five Years............... Certain Relationships and Related Transactions;
Business of the Company
16. Description of Business........................... Prospectus Summary; Risk Factors; Use of
Proceeds; Business of the Company;
Capitalization; Selected Financial Data;
Management's Discussion and Analysis of
Results of Operations and Financial
Condition; Management; Financial Statements
17. Management's Discussion and Analysis.............. Management's Discussion and Analysis or Plan
of Operation
18. Description of Property........................... Description of Property
19. Certain Relationships and
Related Transactions......................... Certain Relationships and Related Transactions
20. Market for Common Equity and
Related Stockholder Matters.................. Risk Factors; Description of Securities; Market
for Company Securities and Related
Stockholder Matters
21. Executive Compensation............................ Executive Compensation
22. Financial Statements.............................. Financial Statements
23. Changes in and Disagreements
with Accountants on Accounting
and Financial Disclosure.......................... Not Applicable
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[LOGO]
AUSTIN FUNDING.COM CORPORATION
$10,000,000 8% SECURED SUBORDINATED DEBENTURES DUE 2015
We are offering up to $10,000,000 of our 8% Secured Subordinated
Debentures due 2015 at par to be distributed by Choice Investments, Inc. on a
best efforts basis. Prior to this offering, there has been no public market for
the debentures. It is anticipated that the debentures will be traded in the
over-the-counter market and listed on the "yellow sheets" published by the
National Quotation Bureau, LLC.
For information on how to subscribe, call the sales center at (512)
302-6060 and ask for a sales representative. Sale of debentures will only be
made in connection with this Prospectus.
FOR A DISCUSSION OF MATERIAL RISKS RELATING TO THIS OFFERING, SEE "RISK
FACTORS" ON PAGE 4.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
PRICE TO UNDERWRITING DISCOUNTS
PUBLIC AND COMMISSIONS PROCEEDS TO COMPANY
Per Subordinated Debenture ........ $ 5,000 $ 366 $ 4,634
Total Minimum Offering ............ $ 3,000,000 $ 383,330 $ 2,616,670
Total Maximum Offering ............ $10,000,000 $ 733,330 $ 9,266,670
We have engaged Choice Investments, Inc. as marketing agent to consult,
advise and assist in the distribution of the debentures, on a best efforts
bases. We and Choice Investments, Inc. must sell a minimum amount of $3,000,000
of the debentures if any are to be sold. Choice is required to use only its best
efforts to sell the maximum amount of $10,000,000 the debentures offered.
Subscription funds will be placed in an escrow account with Compass Bank, and
will earn interest from the date of receipt until completion or termination of
the offering. Once the minimum amount of $3,000,000 of the debentures are sold,
we intend to close on that minimum amount and continue to sell the remainder of
the debentures until the expiration of this offering. The Company reserves the
right to withdraw this offer and close the offering prior to February 11, 2000,
upon the sale of the minimum amount of the debentures. If $3,000,000 of
debentures have not been sold by the termination of this offering, all funds
received from subscribers will be promptly refunded, with interest. In the event
of an oversubscription, the debentures will be allocated pro rata among the
subscribers in the offering based on the amount of their respective
subscriptions. No person, together with associates of or persons acting in
concert with such person, may purchase more than $1,000,000 of the debentures
offered in the offering. The minimum purchase is $5,000 but may be sold in
increments of $1,000 after that minimum purchase. The purchase limitations
described herein are subject to increase or decrease at the sole discretion of
the Company.
CHOICE INVESTMENTS, INC.
DECEMBER ___, 1999
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NO DEALER, SALES PERSON OR ANY OTHER PERSON IS AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THIS OFFERING AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN GIVEN OR
MADE BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL, OR THE SOLICITATION OF ANY OFFER TO BUY, ANY OF THE SECURITIES
OFFERED HEREBY TO ANY PERSON TO WHOM, OR IN ANY JURISDICTION IN WHICH SUCH OFFER
OR SOLICITATION IS NOT AUTHORIZED OR IS UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL CREATE ANY IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF
THIS PROSPECTUS.
TABLE OF CONTENTS
PAGE
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Prospectus Summary................................................................................................1
Risk Factors......................................................................................................5
Use of Proceeds..................................................................................................10
Business of the Company..........................................................................................11
Management Discussion and Analysis of Results of Operations
and Financial Condition .........................................................................................21
Management.......................................................................................................28
Description of Securities....................................................................................... 36
Market for Company Securities and Related Stockholder Matters....................................................56
Executive Compensation...........................................................................................58
Plan of Distribution.............................................................................................61
Legal Matters....................................................................................................66
Experts..........................................................................................................66
How to Get More Information......................................................................................67
Index to Financial Statements ...................................................................................68
UNTIL _________________, ALL DEALERS EFFECTING TRANSACTIONS IN THE
REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS AS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR SOLD ALLOTMENTS OR SUBSCRIPTIONS.
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PROSPECTUS SUMMARY
THE COMPANY
We are the parent company for AFC Mortgage Corporation ("AFC"). Through
our subsidiary, we are a licensed mortgage lender active in acquiring, holding
and ultimately selling first liens secured by residential real estate. These
mortgages are acquired individually at a discount from their ultimate secondary
market pooled values. We operate exclusively on a wholesale basis through a
network of approved correspondent brokers that bring loans to us for
consideration. Using debt secured by the mortgages in order to pool these loans,
we sell the mortgages directly to various private and institutional investors at
a price greater than our acquisition cost. Primarily, we receive income from
sources in connection with our sub-prime mortgage lending activities. We charge
certain non-refundable mortgage application fees to potential borrowers and,
upon closing a loan, receive additional fees payable by the borrower or
investor, which fees are based upon a percentage of the loan and/or the interest
rates charged.
Our subsidiary, AFC, is a Texas corporation, which has been in the
mortgage business since its incorporation in 1997. In an effort to reorganize
AFC into a holding company form of ownership, we were organized and recently
acquired AFC. Prior to acquiring AFC, we were a wholly-owned subsidiary of
Innovation International, Inc. On June 7, 1999, as a result of a declared stock
distribution by Innovation International, we became separate from and no longer
a subsidiary of Innovation International. We entered into a Reorganization Plan
and Agreement dated May 26, 1999 and its subsequent amendment dated June 12,
1999 with the shareholders of AFC, pursuant to which AFC became our wholly-owned
subsidiary, and the AFC shareholders became our shareholders. Pursuant to the
Reorganization Plan we distributed 1,600,000 shares of our stock to the
shareholders of Innovation International in the ratio of one of our shares for
each 25 shares of Innovation International, thereby spinning us off from
Innovation International. We then issued 19,733,333 shares of our common stock
to the shareholders of AFC in the same proportion as the shareholder's then
current holdings in AFC, in exchange for 100% of the stock in AFC owned by them,
thereby making AFC our wholly-owned subsidiary.
Our executive offices are located at 823 Congress Avenue, Suite 515,
Austin, Texas 78701, and our telephone number is (512) 481-8000.
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THE OFFERING
Debentures ..................... Up to $10,000,000 in aggregate principal
amount of 8% secured subordinated debentures
due 2015. Debentures will only be issued in
a minimum amount of $5,000.
Maturity date.................... December 31, 2015.
Interest and interest............ The debentures accrue interest at an annual
rate of 8%. Interest is payment dates
payable monthly on the first day of the
month. All principal and interest is due and
payable in full on December 31, 2015.
Redemption....................... We may redeem the debentures at our option,
in whole or in part, at any time after
December 31, 2001.
Redemption prices are equal to the principal
amount plus accrued and unpaid interest to
the date of redemption. See the discussion
under the caption entitled "Description of
Debentures-Redemption of Subordinated
Debentures."
Security......................... Our obligation to pay the principal of and
interest on the debentures will be secured
by a pledge of one or more non-callable
United States Government or Government
Agency Zero Coupon s in the aggregate face
amount of the debentures sold in the
offering due on or about December 31, 2015
(the "Zero Coupon Bonds") owned by us and
pledged to the Trustee as security for the
debentures.
Subordination.................... The debentures are junior in right of
repayment to all of our existing and future
senior indebtedness. The debentures are also
effectively subordinate in right of payment
to all of our subsidiaries' indebtedness and
other liabilities, including AFC. At
September 30, 1999, we and our subsidiary
had outstanding approximately $6.6 million
of senior indebtedness.
This number includes trade and other
payables outstanding. It does not include
intercompany liabilities and liabilities
that are not required to be reflected on a
balance sheet by generally accepted
accounting principles. See the discussion
under the caption entitled "Description of
the Debentures-Subordination."
Trustee.......................... Norwest Bank Minnesota, N.A.
Market maker..................... The debentures are not listed on any
securities exchange or included for
quotation on any quotation system, and no
established trading market exists. Choice
Investments, Inc. will assist the Company in
finding market makers and making a market in
the debentures but is under no obligation to
do so, and such market making, if commenced,
may be terminated at any time.
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Use of Proceeds.................. We intend to use the net proceeds of this
offering to fund the expansion of lending
activities; acquire financial service
businesses; repay outstanding indebtedness;
and for working capital and general
corporate purposes. Approximately $3.3
million of the gross proceeds of the
offering will be used to purchase the Zero
Coupon Bonds being used as security in the
debenture assuming the sale of all
$10,0000,000 of debentures. See "Use of
Proceeds."
Risk Factors..................... The debentures offered hereby are
speculative and involve a high degree of
risk and should not be purchased by
investors who cannot afford the loss of
their entire investment. See "Risk Factors."
Please remember that these securities:
o are not bank accounts or deposit accounts;
o are not federally insured by the FDIC;
o are not insured by any other state or federal agency; and
o are secured only by the Zero Coupon Bonds, as provided in the pledge
agreement.
FORWARD-LOOKING STATEMENTS
This Prospectus includes forward-looking statements within the meaning
of Section 21E of the Securities Exchange Act of 1934 (the "Act"). These
statements are based on management's beliefs and assumptions and on information
currently available to management. Forward-looking statements include statements
in which words such as "expect," "anticipate," "intend," "plan," "believe,"
"estimate," "consider" or similar expressions are used.
Forward-looking statements are not guarantees of future performance.
They involve risks, uncertainties and assumptions. Our future results and
stockholder values may differ materially from those expressed in these
forward-looking statements. Many of the factors that will determine these
results and values are beyond our ability to control or predict. In addition, we
do not have any intention or obligation to update forward-looking statements
after the effectiveness of this Prospectus even when new information, future
events or other circumstances have made them incorrect or misleading. For these
statements, we claim the protection of the safe harbor for forward-looking
statements contained in Section 21E of the Act.
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SELECTED FINANCIAL DATA
This selected financial data should be read in conjunction
with and are qualified by reference to our financial statements and
the related notes hereto included elsewhere in this Prospectus. See
"Management's Discussion and Analysis of Results of Operations and
Financial Condition."
At or For the Six Months At or For the Years
Ended September 30, Ended March 31,
(unaudited)
1999 1998 1999 1998
------------ ------------ ------------ ------------
SELECTED INCOME STATEMENT DATA: (Dollars in thousands, excluding per share data)
Income:
Gain on sales of loans (gross profit) ............ $ 560 $ 1,064 $ 1,116 $ 592
Other income ..................................... 13 6 42 10
------------ ------------ ------------ ------------
Total income ............................ 573 1,070 1,158 602
Expenses:
Salaries and benefits ............................. 363 659 866 261
General and administrative ........................ 363 260 416 142
Occupancy ......................................... 40 30 42 13
Other ............................................. 62 34 74 49
------------ ------------ ------------ ------------
Total expenses ........................... 828 983 1,398 465
------------ ------------ ------------ ------------
Gain on sale of property .......................... -- -- -- 47
Income tax expense (benefit) ...................... -- -- (45) 47
Net income (loss) ..................................... (255) 87 (195) 137
============ ============ ============ ============
Per share data:
Pro forma net income (loss) per share(1)(2) ....... (0.01) 43.71 (97.46) 235.63
Pro forma weighted average shares outstanding(1)
OPERATING DATA:
Production volume ................................. $ 8,423 $ 16,505 $ 20,548 $ 10,346
Average principal balance per loan,
wholesale and retail (in whole unaudited dollars) ... $ 111,439 $ 999,312 $ 106,740 $ 98,380
SELECTED BALANCE SHEET DATA:
Cash and equivalents ............................. $ 152 $ 141 $ 4 $ 116
Mortgage loans held for sale (inventory) ......... 7,567 4,096 1,853 1,288
Property, plant and equipment .................... 34 32 34 15
Receivables ...................................... 1,016 54 90 1,661
Investment in limited partnership ................ 745 -- 485 --
Other assets ..................................... -- 3 6 2
------------ ------------ ------------ ------------
Total assets ............................ $ 9,514 $ 4,326 $ 2,472 $ 3,082
============ ============ ============ ============
Warehouse notes payable .......................... 6,499 4,064 1,823 2,790
Accounts payable and other accrued expenses ...... 149 111 199 126
Long term debt ................................... -- -- 17 --
Deferred taxes ................................... -- -- -- 3
------------ ------------ ------------ ------------
Total liabilities ...................... $ 6,648 $ 4,175 $ 2,039 $ 2,919
============ ============ ============ ============
Shareholders equity .............................. $ 2,866 $ 151 $ 433 $ 163
============ ============ ============ ============
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(1) Gives effect to the formation of the Company as a holding company for AFC
through the exchange and the issuance of shares related thereto.
(2) Pro Forma net income per share has been computed by dividing pro forma net
income by the pro forma weighted average number of common shares and share
equivalents outstanding.
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RISK FACTORS
Your investment in the debentures involves a high degree of risk. You
should carefully consider, together with the other information contained in this
prospectus, the following factors in evaluating us and our business before
purchasing the debentures.
RISKS ASSOCIATED WITH THE COMPANY
Because we have a limited operating history, we may not be able to
successfully manage our business or achieve profitability. We were originally
organized in April 1997 and have a limited operating history. Our operations are
subject to all of the risks inherent in the establishment of a young business
enterprise. The likelihood of our success must be considered in light of the
problems, expenses, complications and delays frequently encountered in
connection with the development of a new business and the competitive
environment in which we operate. We may not be able to operate profitably in the
future. Our financial objectives must therefore be considered very speculative.
Accordingly, our limited operating history prohibits an effective evaluation of
our potential success. Our viability and continued operations depend upon future
profitability, the ability to generate cash flow from uncertainties related to
the mortgage industry, and other business opportunities.
The proceeds from this offering may not satisfy our needs for the next
twelve months; therefore, we may need additional financing. We may require
additional working capital or other funds for the expansion of our operations.
Management is considering the sale of additional securities, such as
subordinated debentures like the ones offered herein and preferred stock to
increase our working capital. We may not be successful in obtaining additional
financing or such financing may not be available upon acceptable terms to us.
See "Management's Discussion and Analysis of Results of Operations and Financial
Conditions-Liquidity and Capital Resources."
A conflict of interest of one of our directors or officers may benefit
him or his company at our expense. Our directors and officers are or may become,
in their individual capacities, officers, directors, controlling shareholders
and/or partners of other entities engaged in a variety of businesses. Thus,
there exist potential conflicts of interest including, among other things, time,
effort and corporate opportunity involved in participation with other business
entities. See "Management-Certain Relationships and Related Transactions."
Volatile interest rates may affect our ability to originate loans.
Prevailing market interest rates, which impact borrower decisions to obtain new
loans or to refinance existing loans, affect our ability to originate mortgage
loans. When interest rates decrease, the economic advantages of refinancing
mortgage loans increase. However, when interest rates decrease, increases in the
rate of prepayments of mortgage loans may reduce the period during which we earn
servicing income from loan servicing activities. We believe that these effects
should be offset by increased loan origination and a related increase in the
size of our servicing portfolio. Furthermore, as a result of our strategy of
maintaining continuing customer
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relationships, we historically have been able to recapture a substantial amount
of refinanced loans and home purchase mortgages from prior customers.
If we fail to assemble a strong management team, we may not be able to
operate successfully. Our ability to operate successfully depends to a
substantial degree upon its management and consultants. The assembly of a strong
management team is critical to the success of the business.
The keyman life insurance policy we hold on our chief executive officer
may not be enough to cover his loss. While we have obtained keyman insurance on
our Chief Executive Officer in the sum of $1,000,000, the insurance may not be
enough in the event of the loss of such officer. The loss of the Chief Executive
Officer would have an adverse affect on us.
Increased competition in the mortgage industry may adversely affect our
business. We may face direct competition from other mortgage companies in the
area, and it is possible that additional competitors will enter the same markets
in which we currently operate. The competitors may offer lower interest rates
than the rates we offer and, in some instances, may have products superior to
those of ours. See "Business of the Company-Competition."
Losses from material inaccuracies in the representations and warranties
provided by us in association with the sale of a loan or servicing rights could
adversely affect our business and results of operations. When a mortgage loan
originator (retail or wholesale) sells a mortgage loan to its investors, it
makes certain representations and warranties as to the compliance by the
originator with applicable underwriting guidelines. A loan originator or the
purchaser of loan servicing rights generally becomes obligated to the investor
with respect to the accuracy of those representations and warranties, and if
those representations and warranties are incorrect, the investor may require the
servicer or the lender who originated the loan to repurchase the mortgage loan.
Consequently, any loss resulting from a material inaccuracy in the
representations and warranties would fall on the servicer as the originating
seller/servicer of the loan. We will attempt to limit our exposure to repurchase
risks (i) through quality control requirements imposed on the origination staff,
and (ii) by negotiating appropriate representations and warranties and
indemnification from entities from which we acquire mortgage loans. In addition,
with respect to mortgage loans originated by us, we will be required in the
ordinary course of business to make representations and warranties to the
purchasers of servicing rights and investors and insurers of such loans. Losses
resulting from a material inaccuracy in those representations and warranties
would fall on us. From time to time, we could be obligated to repurchase loans
as a result of the breach of such representations and warranties. A breach or
breaches of representations and warranties could have a material adverse affect
upon our financial condition.
Existing officers and directors control us, including the election of
our directors and appointment of our officers. Our officers and directors
currently own approximately 78% of our outstanding Common Stock. Accordingly,
our Board of Directors and the officers will
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exercise control over us, including control over the election of directors and
the appointment of our officers.
Competition for wholesale brokers is very high, which could lead to
higher costs and adversely affect our business and results of operations. We may
depend on independent mortgage brokers, and to a lesser extent, on correspondent
lenders, for the origination and purchase of our mortgage loans. These
independent mortgage brokers deal with multiple lenders for each prospective
borrower. We compete with these lenders for the independent brokers' business on
the basis of price, service, loan fees, costs and other factors. Our competitors
also seek to establish relationships with such brokers, who are not obligated by
contract or otherwise to do business with us.
Periodic declines in property values may reduce our loan originations.
Our business may be adversely affected by periods of economic slowdown or
recession, which may be accompanied by declining property values. Any material
decline in property values reduces the ability of borrowers to use equity in the
property to support any borrowings and increases the loan-to-value ratios of
mortgage loans previously made, thereby weakening collateral coverage and
increasing the possibility of a loss in the event of default.
Because there has been no prior public market for our securities, we
may experience market volatility and have difficulty establishing an active
trading market. Prior to this registration, there has been no public market for
our securities. Although we intend that the debentures will be traded in the
over-the-counter market and listed on the "yellow sheets" published by the
National Quotation Bureau, LLC., there can be no assurance that our securities
will be so listed or published or, if they are, that we will be able to maintain
such listing and/or publication. There also can be no assurance that an active
trading market will develop after listing and publication or that, if developed,
it will be sustained. Recent history relating to the market prices of newly
public companies indicates that there may be significant volatility in the
market for such securities because of factors unrelated, as well as related, to
such company's operating performance. It is unlikely that an active trading
market will develop for the debentures.
The Year 2000 computer problem may have a significant effect on our
ability to originate loans and conduct our business. We do not anticipate any
problems with Year 2000 Compliance. We have been in contact with our accountant,
bankers and loan purchasers and have been assured that all are in Year 2000
Compliance. However, if these entities are not in compliance, we may experience
limited business interruptions. Should noncompliance be an issue, we may need to
change our accountant, banking relationship, title companies or transfer agent.
RISKS ASSOCIATED WITH THE DEBENTURES
The debentures are subordinate to other debts we owe and investors will
not be entitled to payment until all senior indebtedness is satisfied. The
debentures are subordinated to all of
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our "senior indebtedness." As of September 30, 1999, we had approximately $6.6
million of senior indebtedness. The indenture does not limit our ability to
incur additional indebtedness, including senior indebtedness, or additional
indebtedness by AFC or our other subsidiaries.
The debentures are only our obligations and are not obligations of our
subsidiary, AFC. Because we are a holding company, our rights and the rights of
our creditors, including the holders of the debentures, to participate in any
distribution of the assets of AFC (either as a shareholder or as a creditor),
upon a liquidation, reorganization or insolvency of AFC (and the consequent
right of the holders of the debentures to participate in those assets) is
subject to the claims of the creditors of AFC, our claims would be subject to
any prior security interest in the assets of AFC and any indebtedness of AFC
senior to that of our interest. As of September 30, 1999, AFC had approximately
$6.6 million of liabilities (almost all of which was the senior indebtedness
described above) and stockholders' equity of approximately $2.9 million.
The source of payments to holders of our securities is limited to
dividends paid by our subsidiary. As previously discussed, there is a risk that
our subsidiary, AFC, will be unable to pay sufficient dividends to us. Our
ability to pay interest on the debentures will significantly depend on AFC's
ability to pay dividends to us in amounts sufficient to service our obligations.
Our obligations include making payments on our outstanding mortgage loan
facilities.
We may also become obligated to make other payments on securities that
we issue in the future that are pari passu or have a preference over the
debentures with respect to the payment of principal, interest or dividends. Our
obligations include making payments on outstanding other borrowings-aggregating
approximately $6.6 million in principal amount at September 30, 1999.
Due to the discount of the Zero Coupon Bonds on purchase, the
debentures may not be fully secured. The Zero Coupon Bonds are discounted on
purchase. Therefore, proceeds from the Zero Coupons Bonds may not be sufficient
to fund all principal and interest owing with respect to the debentures if we
default and the Zero Coupon Bonds are sold prior to its maturity.
Our securities are not insured. The debentures are not insured by the
Bank Insurance Fund or the Savings Association Insurance Fund of the FDIC or by
any other governmental agency.
We may issue additional securities in the future. There is generally no
restriction on our ability to issue securities which are pari passu or have a
preference over the debentures. Likewise, there is also no restriction on the
ability of AFC to issue additional capital stock or incur additional
indebtedness, or in our ability to guarantee indebtedness of AFC or a third
party. At September 30, 1999, we had 21,333,333 shares of our common stock and
1,500,000 shares of our preferred stock issued and outstanding. We have 58.5
million shares of common stock and 18.5 million shares of preferred stock,
authorized and available for issuance from time to time in the discretion of our
board of directors. In addition, at September 30, 1999,
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AFC had 56,587 shares of common stock, and 1.0 million shares of preferred stock
authorized and available for issuance from time to time in the discretion of its
board of directors.
We do not anticipate that we will seek shareholder approval in
connection with any future issuances of our stock unless we are required by law
or the rules of any stock exchange on which our securities are listed. In
addition, our Articles of Incorporation also provide our board of directors with
the authority without first obtaining shareholder approval to issue up to
18,500,000 shares of preferred stock, and to fix the relative rights and
preferences of the preferred stock. There are no limitations on our ability to
incur additional debt or issue additional notes or debentures.
There has been no prior market for the debentures and we do not expect
an active trading market to develop, which may limit the debentures' resale. The
debentures have no prior market. We expect that the debentures will be traded in
the over-the-counter market and listed on the "yellow sheets" published by the
National Quotation Bureau, LLC. It is unlikely that an active trading market
will develop for the debentures.
Although it has no obligation to do so, Choice Investments, Inc. will
assist the Company in finding market makers and in making a market in the
debentures as long as the volume of trading and other market-making
considerations justify such an undertaking. However, a public market having
depth, liquidity and orderliness depends on the presence in the marketplace of a
sufficient number of buyers and sellers at any given time; neither we nor market
makers have control over such a marketplace. In the event that Choice or any
other entity does not make a market in the debentures, holders of those
securities would be limited to selling them in privately negotiated
transactions. If an active trading market does develop for either of those
securities, there can be no assurance that such a trading market will continue.
If a trading market does not develop, or is not maintained, holders of
debentures may experience difficulty in reselling them or may be unable to sell
them at all. Additionally, since the prices of securities generally fluctuate,
there can be no assurance that purchasers of those securities will be able to
sell those securities at or above the purchase price paid for them.
Holders of our senior indebtedness have priority over the payment to
holders of the debentures. The debentures are subordinated to all of our current
or future senior indebtedness or liabilities which are not expressly by their
terms made subordinate or equal in right of payment to the debentures. The
debentures may also be subordinated to obligations of AFC. As of September 30,
1999, we had $6.6 million of senior indebtedness.
The indenture relating to the debentures does not limit our ability to
incur additional indebtedness, including senior indebtedness, or additional
indebtedness by AFC or our other subsidiaries.
The indenture provides for limited covenants which do not protect the
holders of debentures or impact our obligations under these securities. The
covenants in the indenture are limited and do not protect holders of debentures
in the event of a material adverse change
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in our financial condition or results of operations. In addition, payment of
principal of and interest on the debentures can only be accelerated if we:
o fail to pay principal on the debentures at maturity or upon
redemption,
o fail to pay interest on any of the debentures and such failure
continues for a 30-day period,
o breach any of the provisions of the indenture and such breach
continues for a 60-day period after receipt of notice, or
o reorganize or become bankrupt or insolvent in certain events.
The indenture does not require us to:
o adhere to any financial ratios or specified levels of
liquidity, or
o repurchase, redeem or modify the terms of the debentures upon
a change in control or other events involving us that may
adversely affect the creditworthiness of the debentures.
Therefore, neither the covenants nor the other provisions of the
indenture should be a significant factor in evaluating our obligations under the
debentures.
Our underwriter has participated in a limited number of initial public
offerings. This is one of the first public offerings in which Choice
Investments, Inc. has participated. Prospective purchasers of the debentures
offered hereby should consider the limited experience of Choice Investments,
Inc. in evaluating this offering.
USE OF PROCEEDS
The primary purposes of this offering are to obtain additional working
capital for the purpose of funding lending activities, to provide funds for
Austin Funding.com Corporation (the "Company") to acquire related financial
services businesses and to repay outstanding indebtedness of AFC. The funds
raised from the offering will be used to purchase the Zero Coupon Bonds which
will be the security for the debentures and pay Choice Investment, Inc.'s
("Choice") commissions and the expenses of the offering. It is estimated that
the Zero Coupon Bonds will cost the Company approximately $3.3 million of the
proceeds of this offering assuming the sale of all $10,000,000 of debentures.
The net proceeds from the sale of the debentures in a maximum offering of
$10,000,000 (after purchase of the Zero Coupon Bonds) are estimated at $6.0
million. The net proceeds from the sale of the debentures in a minimum offering
of $3,000,000 (after purchase of the Zero Coupon Bonds for approximately
$990,000) are estimated at $1.6 million.
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The Zero Coupon Bonds will be purchased at the time that the offering
is closed, whether it occurs in two stages or one. It is anticipated that the
Company will close on the minimum amount of $3,000,000 of debentures when it is
sold and will continue with the offering until the maximum amount of $10,000,000
is sold or the offering expires. At each such closing, the Company will purchase
from Choice Zero Coupon Bonds with a principal amount consistent with the amount
of the debentures sold at that closing. Choice will be paid a reasonable
commission for the Zero Coupon Bonds which will be in addition to the
commissions, fees and expenses to be paid to Choice hereunder for the sale of
the debentures. In any event, not more than ten percent of the net proceeds of
this offering, not including underwriting compensation, will be paid to National
Association of Securities Dealers, Inc. ("NASD") members, affiliated persons of
such members, or members of the immediate family of such persons pursuant to
NASD Conduct Rule 2710(c) (8).
The net proceeds of the offering will be first used toward the
acquisition of one or more financial service organizations. In the event of a
minimum offering, it is anticipated that all of the net proceeds will be used
for such acquisition. If the Company closes a maximum offering, approximately
$3.3 million of the net proceeds will be used for an initial acquisition. The
Company has been exploring since mid 1999 the purchase of one or more banks,
mortgage operations and related financial service businesses. The Company has
engaged consultants and counsel to assist in such proposed transactions. The
Company has had negotiations with the owners of three banks over the last
several months and is currently doing due diligence on one bank with which the
Company has a contract. Although the proposed deal is very tentative, the
Company has entered into a Agreement of Sale and Purchase with certain
shareholders of Greater Texas Savings Bank, FSB (the "Bank") pursuant to which
the Company proposes to purchase approximately 59% of the shares and conduct a
tender offer for all of the remaining shares of that Bank (the "Acquisition").
The purchase price for all of the shares of the Bank will be approximately $3.1
million. The Bank is a federal savings bank based in Falfurrias, Texas and as of
June 30, 1999 reported total assets of $44.7 million, total deposits of $42.6
million and total equity capital of $2.1 million. The Acquisition is very
tentative because the Company has not had an opportunity to conduct any review
or due diligence of the Bank or its operations. The obligation of the Company to
purchase the shares is subject to the Company conducting such due diligence on
the Bank. The Company may, in its sole judgement and absolute discretion,
terminate the Agreement for any or no reason within ninety days from the receipt
of all the due diligence information requested by the Company. Furthermore, the
sellers of the 59% of the shares of the Bank are not on the board of directors
of the Bank and have limited rights to direct the Bank to provide financial,
regulatory or legal information to the Company and there is no assurance that
the Company will receive the due diligence materials it will need. In addition,
the acquisition of the Bank will be subject to the required federal and state
regulatory approvals for the change of control of the Bank. There can be no
assurance that the condition of the Bank will be acceptable to the Company, that
the Company will not terminate the Acquisition for some other reason, that the
Company will obtain control of the Board of Directors of the Bank, that the
required regulatory approvals will be obtained, or that the Acquisition will be
closed and the Company will own the Bank. Regardless of whether the Bank is
ultimately purchased, the Company intends to use the net proceeds to acquire a
financial services organization.
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In the event the Offering results in the sale of more than the minimum
of $3,000,000 of debentures, the Company intends to lend a portion of the net
proceeds retained by it to AFC for AFC to repay part of its residential
warehouse credit facilities. The warehouse credit facility is a $10.0 million
line of credit with lenders of which $6.5 million was outstanding as of
September 30, 1999. The warehouse credit facilities are used to hold mortgage
loans originated or purchased by AFC and are secured by the mortgage loans held
for sale. The interest rate on the warehouse credit facilities is at Chase Bank
of Texas prime rate plus 2.0% on non-agency mortgage loans held for sale. The
loan to AFC to repay a part of the warehouse credit facility could be as much as
50% of the net proceeds remaining after an Acquisition as contemplated above.
The remainder of the proceeds will be the additional working capital of
the Company and will be invested on an interim basis in short- and
intermediate-term securities. These funds would be available for general
corporate purposes that may include expansion of operations through acquisitions
of other mortgage businesses, financial service organizations and
diversification into other related and unrelated businesses, or for investment
purposes. In addition, the funds may be used to infuse additional capital to AFC
when and if appropriate. Except as described herein, none of the of the proceeds
of the offering are intended to be directed to a NASD member, affiliated person
or related person.
While the foregoing represents the Company's present intention with
respect to the use of the offering proceeds, capital requirements or business
opportunities, none of which are currently anticipated, could cause management
to elect to use proceeds for other general corporate purposes and for other
purposes not contemplated at this time. Notwithstanding the foregoing, the
Company reserves the right to use the proceeds in any manner authorized by law.
BUSINESS OF THE COMPANY
The Company through its subsidiary is a licensed mortgage lender active
in acquiring, holding and ultimately selling residential mortgages
("Mortgages"). Mortgages are acquired individually at a discount from their
ultimate secondary market pooled values. The Company operates exclusively on a
wholesale basis through a network of approved correspondent brokers that bring
loans to the Company for consideration. Using debt secured by the Mortgages in
order to pool these loans, the Mortgages are sold directly to various private
and institutional investors at a price greater than the Company's acquisition
cost. Primarily, the Company receives income from sources in connection with its
sub-prime mortgage lending activities. The Company charges certain
non-refundable mortgage application fees to potential borrowers and, upon
closing a loan, receives additional fees payable by the borrower or investor,
which fees are based upon a percentage of the loan and/or the interest rates
charged.
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TRADITIONAL UNITED STATES MORTGAGE MARKET
The Mortgage Bankers Association estimates the United States mortgage
market to total over $4.3 trillion in terms of loans outstanding and projects
mortgage originations to be $1.2 trillion in 1999.
The mortgage industry is divided broadly into four major segments
today:
o mortgage origination -- sourcing, verification and
documentation of mortgage loans, typically done by mortgage
brokers and single-source lenders;
o mortgage funding -- underwriting, funding and selling closed
loans to mortgage loan purchasers;
o securitization -- aggregating loans for sale into the
secondary market; and
o servicing -- ongoing billing, collection and
foreclosure/collateral management.
Over the past two decades, the mortgage industry has evolved
dramatically. Until the late 1970's, the mortgage market was primarily a captive
banking market where retail banks and savings and loan institutions originated
loans through their branches, underwrote and closed loans internally, funded
loans from their own customer deposits and then serviced the loans themselves.
This internal chain of production was broken by the emergence of the pure
mortgage bank that could buy mortgages from mortgage brokers and sell to
government sponsored mortgage investors, such as FNMA and FHLMC and the
development of a large, liquid secondary funding and trading market for mortgage
debt. This efficient new market for mortgage funding made it viable for the
first time to uncouple from the large retail banks both the front-end functions
of mortgage origination and mortgage funding and the back-end function of
servicing.
A significant transformation of the mortgage origination, banking and
servicing businesses into specialized functions conducted primarily by
independent companies has also occurred during the last two decades. This
transformation has created both a large, concentrated and efficient secondary
mortgage market and a large, fragmented and inefficient mortgage origination and
banking market. There are over 20,000 mortgage brokerage operations in the
United States, according to the National Association of Mortgage Brokers.
CURRENT MARKET ENVIRONMENT
Financing plays an integral part in real estate sales and is
generally handled in one of three ways. One way is conventional financing where
the borrower obtains a loan from a financial institution, such as a bank,
savings and loan or mortgage company. Conventional lending's stringent criteria
create loans which conform to FNMA guidelines. The primary focus of this type of
lending is the creation of loans that may be readily sold to FNMA. The second
possibility is when the seller provides financing on the sale of a property.
This seller financed method is a financial agreement between the buyer and the
seller whereby the parties
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agree to the sale of the real estate predicated on the seller "taking back" a
real estate secured note as part of the purchase price. The third method of real
estate financing is non-conforming, or "sub-prime" mortgage lending. Sub-prime
lending takes a more common sense approach to underwriting and makes allowances
for unusual circumstances that do not conform to FNMA underwriting criteria.
In recent years, the sub-prime lending market has grown as the
institutional appetite for high yielding asset backed investments has increased.
These non-conforming mortgages have commanded a greater presence in the market.
The amount and types of alternative loan products in the future will depend
largely upon several factors. These include interest rates, allowable lending
criteria, regional market conditions and money available at any given time in
the conventional financing marketplace. Generally, as interest rates rise,
alternative financing becomes more prevalent because fewer buyers meet the debt
ratios required by conventional lenders. Even with low interest rates,
conventional lending criteria often eliminate potential borrowers with unusual
circumstances (self-employed, recently moved, career change, etc.). According to
the U.S. Department of Housing and Urban Development ("HUD") reports, it is
estimated that over $210 billion in sub-prime single-family mortgage loans were
originated in 1998.
BUSINESS STRATEGY
The Company has developed a specific strategy for the future. The
strategy addresses several key needs.
o Management believes that by assuming a role as educator in the
marketplace, the Company will generate extensive credibility
as well as assist its broker network in generating new
business. This will be accomplished by presenting seminars to
real estate professionals on deal structuring and effective
use of sub-prime mortgage products in the marketplace. Joe
Shaffer and Glenn LaPointe of the Company have conducted
dozens of seminars for mortgage brokers across Texas in the
past. In calendar 1997 they conducted two such seminars in
Austin, in 1998 they put on seminars in El Paso, Dallas, and
McAllen, and in 1999 they have had such seminars in Corpus
Christi, Austin and Las Vegas, Nevada. In addition to creating
goodwill in the industry, these seminars give employees of the
Company direct contact with brokers who will be the source of
loan referrals. Management intends to build on those previous
successes to expand the Company's correspondent broker base.
o The Company will aggressively seek out and recruit those
individuals who demonstrate capability in sourcing and closing
loan purchases. The Company will emphasize quality over
quantity, only dealing with successful correspondents. One of
the most difficult tasks facing management is that of
determining which sources of product (loans) are profitable
and which are not. A cost/benefit analysis will be performed
in which the Company will evaluate
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individuals by reviewing ratios of the percentage of closings
to loan submissions, the dollar volume of revenues to loan
submissions and several intangible factors including teamwork
with the employees of the Company. Those brokers or sources of
transactions that are not profitable will be eliminated. In
other words, management intends to occasionally "fire"
customers that are not viable.
Those brokers with a demonstrated ability to package and provide
quality product will be frequently contacted and encouraged to do business with
the Company.
In order to have greater control over loan packaging and still maintain
adequate production, the Company intends to market to quasi-retail sources of
loans, such as realtors, title companies and real estate professionals other
than mortgage brokers.
MARKETING
The sub-prime mortgage market place is structured as an imitation of
the conforming market place with regard to marketing techniques. The traditional
approach of sending representatives with no underwriting experience or decision
making authority into mortgage brokers' offices can create an environment of
mistrust and resentment. The Company's approach is to have in-house marketing
representatives with complete underwriting knowledge and discretionary authority
over pricing and purchase transactions. This should give mortgage brokers and
their clients a dependable, responsive resource for which they will ultimately
be willing to pay higher fees and interest rates.
The Company's marketing efforts are currently focused on existing
mortgage brokers. These brokers are contacted and encouraged to do business with
the Company in several ways. Faxes promoting the Company's loan programs are
sent weekly to the Company's database of over 8,000 mortgage brokers nationwide.
In addition, the Company has sponsored a number of local seminars on home equity
lending, participated in various tradeshows, and been active in several industry
organizations to help create a market presence.
In addition, the Company has produced a number of regional seminars
specifically educating brokers on the use of the Company's loan products. These
seminars are free to the broker and held in exclusive private clubs in various
cities. These have historically brought a large attendance as well as attention
to the Company.
Starting in the third quarter of 1999, a similar campaign will be
conducted with realtors. The plan was to have them encourage their mortgage
brokers to send loans to the Company or to submit the clients directly to the
Company.
Because of events in the asset backed markets in the last quarter of
1998, the types of loan products available in the marketplace have become
restricted. Many brokers developed their businesses over the past several years
by "bottom feeding" as lower and lower quality
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products became available. Because of quality concerns surrounding these lower
quality mortgage products, management is developing avenues to bypass brokers
and package files directly, thus ensuring the quality and contents of loan
files.
For the fiscal year ended March 31, 1999, the Company expended
approximately $33,000 for sales and marketing activities. In 1999 the Company is
seeking to expand its marketing activities to consistently include nationwide
advertising of its sub-prime effort, and expects to invest more than $80,000 in
marketing and advertising costs.
The Company will focus heavily on providing education as a means to
achieve further market penetration. The Company believes quality of service is a
priority over growth if the Company is to remain a viable enterprise in the long
run. The Company may consider creating strategic alliances with larger
competitors/investors with which the Company may "piggy-back" warehousing, bulk
sales and securitizations.
The Company also may pursue the securitization of the mortgages it
purchases and broker/dealers to sell the Company's securities offerings. This
will allow the Company to control its future to a greater degree than some of
its competition.
PRICING
The Company originates or purchases individual loans at a desired
interest rate of approximately 11.5% or more, which is typically in excess of
the sub-prime loan secondary market rate. The Company then sells these loans to
various investors in pools of $1 million or more at or below the secondary
market rate (for instance, 9.5%) resulting in a gain for the Company.
Historically, the market has paid a 5-10% differential between the sales price
of loans the Company has pooled versus the acquisition price of individual loans
acquired by the Company. This gain is expected to provide the primary source of
profits for the Company. There will likely be changes in the Company's cost of
funds as various factors affect interest rates, including monetary policies of
the Federal Reserve Board, national and international economic conditions and
housing demand, to name a few. The Company will adjust its desired yield range
in order to maintain profitability and competitiveness over time.
The Company invests in loans at prices less than their pooled secondary
market value. The acquisition price varies in any given transaction depending
upon the loan's characteristics and the Company's yield requirements at the time
of purchase. Yield requirements are established in light of capital costs,
market conditions, the characteristics of particular classes or types of loans
and the risk of default by the payor on any given loan. The risk of default can
be affected by changes in general or local economic conditions, neighborhood
values, the value of the specific real estate collateral and by changes in
zoning, land use, and environmental laws.
The Company establishes the yield requirements for its loans by
assuming that all payments on the Mortgages will be paid as scheduled. However,
to the extent that loans are
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paid off earlier than anticipated (e.g., within 12 months of purchase), the
Company may be responsible for partial or full repayment of any premium received
from the investor, thereby reducing the Company's profits. For example, if the
Company sells a loan to an investor in which a premium is paid on the loan and
the loan is prepaid in full within six months after the date of purchase,
typically the Company will be responsible for repayment of one-half of the
premium received by the Company on that loan.
The second method of generating revenues for the Company is to sell
loans into a securitization conduit and receive income in the form of the
interest arbitrage between the loan coupon and the conduit's cost of funds.
While this approach generates substantially greater profits, the Company
receives these profits over time as the loans perform. This creates a greater
potential for recourse and a restriction of immediate cash flow. Diligent
underwriting and the more than doubled profit potential would offset these
risks.
The following table consolidates the approximate loan production and
fee income for the Company during the periods indicated.
Twelve Months Ended
September 30, September 30,
1999 1998
------------- -------------
Total dollars funded $ 18,170,951 $ 16,401,231
Number of Loans 189 174
Gross fee revenue $ 18,301,014 $ 16,505,329
LOAN PROCESSING AND UNDERWRITING
The Company's loan application and approval process generally is
conducted over the telephone with applications usually received from mortgage
bankers, mortgage brokers and consumers at the Company's centralized processing
facility in Austin, Texas. After receiving an application, the information is
entered into the Company's system and processing begins. The information
provided in loan applications is first verified by, among other things, the
following:
o written confirmations of the applicant's income and, if
necessary, bank deposits,
o a formal credit bureau report on the applicant from a credit
reporting agency,
o a title report,
o a real estate appraisal, if necessary, and
o evidence of flood insurance, if necessary.
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Loan applications are then reviewed to determine whether or not they
satisfy the Company's underwriting criteria, including loan-to-value ratios,
occupancy status, borrower income qualifications, employment stability,
purchaser requirements and necessary insurance and property appraisal
requirements.
The Company has developed its credit index profile ("CIP") as a
statistical credit based tool to predict likely future performance of a
borrower. Its CIP is similar to other CIP's in the mortgage banking industry,
but since the Company is holding most of its loans for a period of time before
it sells them, the Company underwrites them as though it is the end purchaser. A
significant component of the CIP system is the credit evaluation score
methodology developed by Fair Isaacs Company ("FICO"), a consulting firm
specializing in creating default predictive models using a number of variable
components. A FICO score is calculated by a system of scorecards. FICO uses
actual credit data on millions of consumers, and applies complex mathematical
methods to perform extensive research into credit patterns that attempt to
forecast consumer credit performance. The principal components of the FICO
predictive model include a consumer's credit payment history, outstanding debt,
availability and pursuit of new credit and types of credit in use. Through this
scorecard process, FICO identifies distinctive credit patterns, which correspond
to a likelihood that consumers will make their future loan payments. The score
is based on all the credit-related data in the credit report. The other major
components of the CIP include debt-to-income analysis, employment stability,
self employment criteria, residence stability and whether the applicants use the
premises as their primary residence. By using both scoring models together, all
applicants are considered on the basis of their ability to repay the loan
obligation while allowing the Company to price the loan based on the extent of
the evaluated risk.
The Company's underwriters review the applicant's credit history, based
on the information contained in the application and reports available from
credit reporting bureaus and the Company's CIP score, to determine whether the
applicant meets the Company's underwriting guidelines. Based on the
underwriter's approval authority level, certain exceptions to the guidelines may
be made when there are compensating factors subject to approval from a more
senior designated authority. The underwriter's decision is communicated to the
broker, banker or consumer depending on the source of the loan and, if approved,
the proposed loan terms are explained.
FUNDING SOURCES
The Company needs substantial cash flow to facilitate the funding and
closing of the originated and purchased loans. These funds are provided on a
short-term basis by financial institutions that specialize in providing lines of
credit known as warehouse lines.
The amount of the warehouse line provided by a lender is based on the
Company's net worth. Typically, the warehouse lender applies a leverage factor
of fifteen to twenty. As of the date of this filing, the Company has several
warehouse agreements in place which provide warehouse lines with funding
capabilities in the aggregate of $10 million. The warehouse
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agreements have various financial and operational covenants with which the
company must comply. In addition, the warehouse agreements are personally
guaranteed by one or more of the existing stockholders. The Company submits the
mortgage loan to the warehouse bank for funding along with the investor
commitment to purchase the loan. The warehouse bank receives a per loan fee from
the Company plus interest at two percent over the financial institution's prime
rate on the unpaid principal balance of the loan for the time the loan is in the
warehouse.
In the future, the Company will seek to eliminate the personal
guarantees of certain stockholders of the Company from the warehouse agreements.
In accordance with industry practice, the warehouse lines are renewable by the
lenders annually.
LOAN SALES
The Company originates and purchases all of its mortgage loans with the
intent to sell the mortgage loans, without retaining any interest therein, and
the related servicing rights into the secondary market. The mortgage loans are
sold without recourse primarily to institutional investors, national banks and
mortgage lenders. As part of the sale, the Company provides representations and
warranties which are customary to the industry and cover such things as
compliance with program standards, laws and regulations as well as the accuracy
of the information. In the event of a breach of these representations and
warranties, the Company may be required to repurchase these mortgage loans
and/or may be liable for certain damages. Normally, any repurchased mortgage
loan can be corrected and resold back to the original investor. Since 1997 when
the Company began its business, the Company has had to repurchase only two
mortgage loans.
The Company holds the originated or purchased mortgage loan for sale
from the time that the mortgage loan application is submitted by the borrower
until the time the mortgage loan is sold to an investor. During that time, the
interest rate on the mortgage loan might be higher or lower than the market rate
at which price the Company can sell the mortgage loan to an investor. Therefore,
a market gain or loss results on the mortgage loan.
COMPETITION
The Company faces intense competition in the business of sub-prime
mortgage loans. The Company's competitors in the industry include consumer
finance companies, mortgage banking companies, savings banks, commercial banks,
credit unions, thrift institutions, credit card issuers, insurance companies,
FHLMC and other entities engaged in mortgage lending. The largest direct
competitors are mortgage banking entities specifically formed to engage in
sub-prime lending. Many of these competitors are substantially larger and have
considerably greater financial, technical and marketing resources than the
Company. In addition, many financial services organizations that are much larger
than the Company have formed national loan origination networks or purchased
home equity lenders. While competition is a factor, these larger entities also
create public awareness and acceptance of these loan products.
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Competition among industry participants can take many forms, including
convenience in obtaining a loan, customer service, marketing and distribution
channels, amount and term of the loan, loan origination fees and interest rates.
To the extent any of these competitors significantly expand their activities in
the Company's market, the business of the Company could be materially adversely
affected. Fluctuations in interest rates and general economic conditions may
also affect the Company and its competition. During periods of rising rates,
competitors that have locked in lower rates to potential borrowers may have a
competitive advantage.
Starting in late 1998, several of the Company's competitors either
became bankrupt or withdrew from the market due to a collapse in liquidity in
asset backed markets. These companies included Southern Pacific Funding
Corporation, First Plus Financial, Inc. and Pacific Investments Corporation. A
number of these companies were engaging in loan practices which paid little
regard to the likelihood of collateral recovery, in the event of default, and
even to the likelihood of loan repayment by borrowers. In addition, many
companies were using gain on sale accounting techniques which booked long term
interest gains which were never achieved in most cases. The Company does not
engage in either of these practices.
SEASONALITY
The mortgage loan origination business is generally subject to seasonal
trends. These trends reflect the general pattern of sale and resale of homes.
Loan origination typically peaks during the spring and summer seasons, and
declines to lower levels from mid-November through January. The mortgage
servicing business is generally not subject to seasonal trends.
REGULATION
The Company's operations are subject to extensive regulation,
supervision and licensing by federal, state and local governmental authorities
and are subject to various laws and judicial and administrative decisions
imposing requirements and restrictions on part or all of its operations. The
Company's consumer lending activities are subject to the Federal
Truth-in-Lending Act and Regulation Z (including the Home Ownership and Equity
Protection Act of 1994), the Federal Equal Credit Opportunity Act, as amended,
and Regulation B, the Fair Credit Reporting Act of 1970, as amended, the Federal
Real Estate Settlement Procedures Act and Regulation X, the Home Mortgage
Disclosure Act, the Federal Debt Collection Practices Act and the National
Housing Act of 1934, as well as other federal and state statutes and regulations
affecting the Company's activities.
The Company is also subject to the rules and regulations of, and
examinations by, state and federal regulatory authorities with respect to
originating and processing loans. These rules and regulations, among other
things, impose licensing obligations on the Company; establish eligibility
criteria for mortgage loans; prohibit discrimination; govern inspections and
appraisals of properties and credit reports on loan applicants; regulate
assessment, collection,
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foreclosure and claims handling, investment and interest payments on escrow
balances and payment features; mandate certain disclosures and notices to
borrowers; and, in some cases, fix maximum interest rates, fees and mortgage
loan amounts. Failure to comply with these requirements can lead to loss of
approved status, certain rights of rescission for mortgage loans, class action
lawsuits and administrative enforcement action.
In Spring 1999, the Texas Legislature approved Senate Bill 1074 which
provides for licensing of residential mortgage brokers. The Texas Savings and
Loan Department will be the licensing and regulatory agency. A mortgage broker
or a mortgage broker's loan officer must meet continuing education requirements
in order to maintain that license. The law took effect on September 1, 1999, but
an individual brokering mortgage loans is not required to be licensed until
January 1, 2000. Mortgage bankers and their employees are exempt from this
mortgage broker licensing legislation. A mortgage banker is defined as any
individual or entity who is a HUD approved mortgagee with direct endorsement
underwriting authority or an approved seller or servicer for either FNMA or
FHLMC or an approved issuer for GNMA. The Company has recently become a HUD
approved mortgagee and is therefore exempt from any licensing requirements under
the new law.
There can be no assurance that the Company will maintain compliance
with these requirements in the future or receive other necessary approvals
without additional expenses, or that more restrictive local, state or federal
laws, rules and regulations will not be adopted or that existing laws and
regulations will not be interpreted in a more restrictive manner, which would
make compliance more difficult and more expensive for the Company.
EMPLOYEES
At September 30, 1999, the Company employed approximately 16 persons,
substantially all of whom were full-time employees. All of these are employed at
the Company's Austin, Texas headquarters. None of the Company's employees are
represented by a union. The Company considers its relations with its employees
to be good.
DESCRIPTION OF PROPERTY
All of the operations of the Company are conducted from office space
leased from a non-affiliated landlord. The following table sets forth
information concerning the facility:
Location Tenant Approx. Size Lease Expiration Monthly Rent
- --------------- ------------ ---------------- ------------
823 Congress Avenue, Suite 515 3,293 square feet February 28, 2001 $3,842 to April 30, 2000
Austin, Texas 78701 then $4,391
The lease provides for rent escalations tied to increases in operating
expenses or fluctuations in the consumer price index. The Company's management
believes this office space is satisfactory for all of its needs for the
foreseeable future and that the property is adequately covered by insurance.
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LEGAL PROCEEDINGS
On June 14, 1999, the Company, holder of a defaulted $160,000 real
estate lien note and beneficiary of a deed of trust to Lot 9, Ridge Haven
Estates, in Rockwall County, Texas, securing payment of the note, posted through
its Substitute Trustee a notice of foreclosure on Lot 9. On June 30, 1999, an
action was filed in the 382nd Judicial District Court of Rockwall County, Texas,
by Vernon Oland Hogue, Jr., and Judy Hogue, as Plaintiffs, against Richard
Franks, Laurie I. Davis, LaSalle Anders, SAFECO Land Title of Collin County,
SAFECO Land Title of Plano, the Company and IMC Mortgage Company, as Defendants.
The complaint alleges, among other things, that the Company has no interest in
Lot 9 due to a gap in the chain of title and may not proceed with a scheduled
Substitute Trustee's sale. The Plaintiffs sought, and received, a temporary
injunction that restrains the Substitute Trustee sale on the property. The
Plaintiffs seek a permanent injunction restraining foreclosure, ask the Court to
void the Company's liens and deed of trust on Lot 9, request a declaration that
the Plaintiffs have a first lien against Lot 9 in the amount of $55,000, and
seek an unspecified amount of damages for fraud, costs, attorney's fees and such
other relief as the Court may grant. The parties to the action are conducting
discovery and no trial date has been set. The Company believes that it has
meritorious defenses to this lawsuit and that resolution of this matter will not
have a material adverse effect on the business or financial condition of the
Company.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
The following discussion should be read in conjunction with the
Consolidated Financial Statements and the other financial data included
elsewhere in this Prospectus. The statements which are not historical facts
contained in this section are forward-looking statements that involve risks and
uncertainties, including those described under "Risk Factors." The Company's
actual results may differ materially from the results discussed in the
forward-looking statements.
FINANCIAL CONDITION
o September 30, 1999, Compared to March 31, 1999: Total assets
increased by $7.0 million or 285% from March 31, 1999, to
September 30, 1999. This increase is accounted for by two main
factors. Loan production increased during this period
resulting in increased inventory of loans of $5.7 million.
Additionally, $1.4 million of cash and other assets were
contributed to the Company in exchange for capital stock.
o March 31, 1999, Compared to March 31, 1998: The Company's
total assets at March 31, 1999, were $2.5 million, a decrease
of $610,000, or 20%, as compared to March 31, 1998. This
decrease was primarily the result of a decrease of $1.0
million in accounts receivable and inventory due to decreases
in loan production
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netted with a $485,000 contributed investment in a limited
partnership exchange for Preferred Stock.
o Retained earnings decreased by $215,000 from $137,000 at March
31, 1998, to a loss of $78,000 at March 31, 1999. The decrease
was due primarily to a net loss for the year caused by reduced
loan production with tighter spreads.
RESULTS OF OPERATIONS
Comparison of Operating Results for the Six Months Ended September 30,
1999, and September 30, 1998. Sales decreased from $16.8 million for the six
months ended September 30, 1999 to $8.8 million for the six months ended
September 30, 1999. This percentage decrease of approximately 48% is the result
of decreased liquidity from the investors who purchase the loans underwritten by
the Company.
Gross profit as a percentage of cost of goods sold remained virtually
unchanged over the comparison period from 6.35% for the six months ended
September 30, 1998 to 6.36% for the six months ended September 30, 1999. This
profit percentage demonstrates a consistent cost of sales independent of volume.
Selling and administrative expense decreased $155,000 over the
comparison period. The largest expense, salaries and wages decreased
proportionately by 45% for the six months ended September 30, 1998 to the six
months ended September 30, 1999. The most significant increase came in
professional fees stemming from the legal and accounting fees incurred in
bringing the Company public.
As a result of the foregoing, net income decreased from $87,414 for the
six months ended September 30, 1998 to a loss of $255,412 for the six months
ended September 30, 1999.
Comparison of Operating Results for Fiscal Years Ended March 31, 1999
and March 31, 1998. Sales increased from $10.3 million for the year ended March
31, 1998 to $20.5 million for the year ended March 31, 1999. This percentage
increase of approximately 99% is primarily the result of an increase in loans
acquired coupled with the recognition that the year ended March 31, 1998 was the
first year of operation of the Company.
Selling and administrative expenses increased from $465,000 for the
year ended March 31, 1998, to $1.4 million for the year ended March 31, 1999.
The across the board increase in selling and administrative expenses between
years is, again, reflective of the fact that March 31, 1998, was the first year
of operation of the Company.
As loan production increased, additional employees were hired, and,
correspondingly, other selling and administrative expenses increased.
Net income decreased from $137,000 for the year ended March 31, 1998,
to a loss of $195,000 for the year ended March 31, 1999.
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Liquidity and Capital Resources. The Company's cash and cash
equivalents were $152,060 as of September 30, 1999, compared to $4,245 as of
March 31, 1999. This increase in cash and cash equivalents was due primarily
from capital raised from the issuance of preferred stock. During the three
months ending September 30, 1999, the Company obtained access to cash totaling
$1,433,533 from the issuance of its preferred stock. In addition, the Company
also realized cash totaling $4.5 million during the quarter from sales of loans.
Cash flow from operating activities decreased from cash flow generation of
$115,000 for the year ended March 31, 1998, to cash flow used of $111,000 for
the year ended March 31, 1999.
Capital expenditures for the year ended March 31, 1999, were
approximately $29,000 principally in computer technology and to a lesser extent
for the expansion of sales organization facilities. The Company believes it will
continue to make investments in computer technology in the near future to
upgrade and maintain its product and service offerings. The Company believes
that such investments could aggregate $50,000 to $100,000 over the next two
years, but has no specific plans at present for such expenditures.
The Company may consider acquisitions of other mortgage and financial
service businesses as part of implementing its strategies.
See "Use of Proceeds."
Cash flow requirements depend on the level and timing of the Company's
activities in loan originations in relation to the timing of the sale of such
loans. In addition, the Company requires cash flow for the payment of operating
expenses, interest expense and capital expenditures. Currently, the Company's
primary sources of funding are borrowings under warehouse lines of credit,
proceeds from the sale of loans in the secondary market and internally generated
funds.
Historically, the Company has funded its growth, in large part, from
its access to lines of credit and its operating activities. The Company has been
additionally capitalized by the stockholders of AFC purchasing securities of
AFC. See "Management-Certain Relationships and Related Transactions." There can
be no assurance that the Company will be able to employ the additional capital
and credit resources to fund transactions that result in a profit to the
Company. The success of the Company's mortgage origination business depends upon
the availability of mortgage funding at reasonable rates. Although there has
been no limitation on the availability of mortgage funding in the last few
years, there can be no assurance that mortgages at attractive rates will
continue to be available.
The Company also plans, in the long-term, to engage in the business of
servicing mortgage loans. In order to engage in this business, the Company will
be required to retain the servicing rights on the loans which it originates.
Such retention will result in a reduction in the revenue available to the
Company upon the sale of such mortgage loans. In such event, the Company will be
required to employ capital to finance the retention of servicing rights. Such
capital principally would be expended to pay the costs associated with loan
origination, such as
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loan officer compensation and related overhead expenses. However, the retention
of servicing rights also creates an asset on the Company's balance sheet.
The Company will be required to obtain additional capital to achieve
its long-term objectives. The Company has no commitments to obtain such capital,
and there can be no assurance that such capital will be available to the Company
in the future or, if available, will be on terms acceptable to the Company.
The Company expects that its existing capital and its credit
facilities, as well as cash flow expected to be generated from operations, will
satisfy the Company's cash requirements for at least the next 12 months, and
principally will be applied to originate loans. However, management believes
that the Company will require additional credit over the next three years in
order to expand its loan origination capabilities and loan servicing business.
The Company is presently in discussions with various lenders for additional
lines of credit. If such additional credit is not available to the Company, the
Company could be required to reduce the scope of its operations, which could
adversely affect the Company's results of operation.
The Company ended its fiscal year at March 31, 1999, with $4,000 in
cash and cash equivalents, compared to $115,000 for fiscal year ended March 31,
1998. The Company has generated cash (to cover its operating losses) through the
sale of its capital stock.
Disclosure About Market Risk. The Company's business will be adversely
affected by periods of economic slowdown or recession, which may be accompanied
by decreased demand for consumer credit and declining real estate values. Any
material decline in real estate values results in increased loan-to-value ratios
thereby weakening collateral coverage and increasing the possibility of a loss
in the event of default. To the extent that prospective borrowers do not meet
the Company's underwriting criteria, the volume of loans originated by the
Company could decline. A decline in loan origination volumes could have a
material adverse effect on the Company's business, prospects, financial
condition and results of operations. Changes in the level of consumer
confidence, real estate values, prevailing interest rates and investment returns
expected by the financial community could make mortgage loans of the types
originated by the Company less attractive to borrowers or investors because,
among other things, the actual rates of delinquencies and foreclosures on such
loans could be higher under adverse economic conditions than those currently
experienced in the mortgage lending industry in general.
In addition, the Company could experience losses on its inventory of
loans due to changes in economic or financial conditions, including changes in
interest rates, that may be beyond the Company's control.
Interest rate movements may significantly impact the Company's volume
of closed loans. As such, interest rate movements represent a major component of
market risk to the Company. In a higher interest rate environment, consumer
demand for mortgage loans, particularly refinancing of existing mortgages,
declines. Interest rate movements affect the
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interest income earned on loans held for sale, interest expense on the warehouse
lines payable, the value of mortgage loans held for sale and ultimately the gain
on sale of mortgage loans. In addition, in an increasing interest rate
environment, the Company's mortgage loan brokerage volume is adversely affected.
The Company currently does not engage in any hedging activities.
Therefore, a rise in interest rates may adversely affect the earnings of the
Company.
The Company currently does not maintain a trading portfolio. As a
result, the Company is not exposed to market risk as it relates to trading
activities. The majority of the Company's portfolio is held for sale that
requires the Company to perform market valuations of its pipeline, its mortgage
portfolio held for sale and related forward sale commitments in order to
properly record the portfolio and the pipeline at the lower of cost or market.
Therefore, the Company monitors the interest rates of its loan portfolio as
compared to prevailing interest rates in the market.
The Company typically does not pre-sell the mortgages it originates
when the Company establishes the borrower's interest rate and therefore has
interest rate exposure on such loans. The Company's future operating results are
more sensitive to interest rate movements than a mortgage lender who pre-sells
the mortgage loans it originates.
Industry Trends. The growth in volume that the mortgage industry has
seen over the past few years has resulted from a general downward trend in
interest rates. The Company believes that mortgage volume may tend to decrease
on a relative basis in higher interest environments, but higher interest rates
generally result in smaller mortgage companies leaving the market resulting in
potentially larger market shares for continuing mortgage bankers. The Company
believes that it will be able to realize the opportunities in such an
environment, but there can be no assurance that it will be able to do so.
The Company also believes that the industry will continue to offer
broader and more diversified product offerings and that technology will play an
increasing part in real estate transactions, including expanded use of Internet
capabilities. The Company has begun preliminary work to make the necessary
investments in these technologies. Management believes that the Company should
fully automate its accounting and loan underwriting functions and then establish
a website which facilitates electronic commerce between the Company and its
customers, investors and brokers. The Company may need to raise additional
capital to complete these necessary investments in technology.
Although the Company is expanding its business on a national basis, the
Company's business base is concentrated principally in the State of Texas and to
a lesser degree in the States of California and Colorado. As a result, the
Company's business may be subject to the effects of economic conditions and real
estate markets specific to such locales.
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Inflation And Seasonality. The Company believes the effect on
inflation, other than its potential effect on market interest rates, has been
insignificant. Seasonal fluctuations in mortgage originations generally do not
have a material effect on the financial condition or results of operations of
the Company.
Accounting Developments. In June 1996, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS No. 125"). SFAS No. 125, among other
things, provides accounting and reporting standards for transfers and servicing
of financial assets and extinguishments of liabilities. SFAS No. 125 requires
that after a transfer of financial assets, an entity recognize the financial and
servicing assets it controls and the liabilities it has incurred, derecognizes
financial assets when control has been surrendered, and derecognizes liabilities
when extinguished. SFAS No. 125 also requires that liabilities and derivatives
incurred or obtained by transferors as part of a transfer of financial assets be
initially measured at fair value. SFAS No. 125 is effective for transfers and
servicing of financial assets and extinguishment of liabilities occurring after
December 31, 1996, and is to be applied prospectively. The Company expects that
the impact of SFAS No. 125 on the results of operations, financial condition, or
liquidity will be immaterial.
On June 15, 1998, the FASB issued SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133 is effective for all
fiscal quarters of all fiscal years beginning after June 15, 1999. SFAS No. 133
requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction. The Company is in the process of evaluating the impact of
SFAS No. 133 on its financial statements.
In October 1998, the FASB issued SFAS No. 134, Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise. SFAS No. 134 amends SFAS No. 65,
Accounting for Certain Mortgage Backed Securities, to require that after an
entity engaged in mortgage banking activities has securitized mortgage loans
that are held for sale, it must classify the resulting retained mortgage-backed
securities or other retained interests based on its ability and intent to sell
or hold those investments. This statement is effective for the first fiscal
quarter beginning after December 15, 1998, with earlier application encouraged.
At this time, the Company does not anticipate any impact from the adoption of
this standard.
Year 2000. As with all financial related businesses, the Company's
operations depend almost entirely on computer systems. Many currently installed
computer systems and software products only accept two digits to identify the
year in any date. Thus, the year 2000 will appear as "00", which the system
might consider to be the year 1900 rather than the year 2000. This could result
in system failures, delays or miscalculations. Computer systems and
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software that have not been developed or enhanced recently may need to be
upgraded or replaced to comply with Year 2000 requirements.
The Company believes that each of its software systems on a stand-alone
basis is currently Year 2000 compliant. Testing of the Company's software for
compliance has been completed and was found to be Year 2000 compliant. The
Company also uses multiple software systems and products developed by third
party vendors, including systems and products used in operations and finance,
and systems that operate the office of the Company. The Company is currently in
the process of requesting compliance certificates from these vendors to certify
their Year 2000 readiness. The Company has requested and received compliance
certificates or other assurances from these vendors to certify their Year 2000
readiness.
The operations of many of the Company's customers, investors and
suppliers may be affected by Year 2000 complications. The failure of the
Company's customers, investors or suppliers to ensure that their systems are
Year 2000 compliant could have an adverse effect on the Company's customers,
investors and suppliers, resulting in decreased Internet usage or the Company's
inability to obtain necessary data communication and telecommunication capacity,
which in turn could have an adverse effect on the Company's business, results of
operations and financial condition.
The potential worst case scenario includes:
o slowdown in the communications for some applications due to a
general failure of the Internet;
o corruption of data in the Company's internal information
systems;
o delays in the Company's processing capabilities that depend on
third-party systems;
o financial losses associated with delays in closing loans; and
o failure of infrastructure services provided by third parties,
including public utilities and Internet service providers.
The Company has not incurred significant costs to date complying with
Year 2000 requirements and does not believe that it will incur significant costs
for such purposes in the foreseeable future. Because the Company's loan business
is highly diversified with regard to individual borrowers and types of business
and its primary market area is not significantly dependent on one employer or
industry, the Company does not expect any significant or prolonged difficulties
that could affect net earning or cash flow. However, if the Company discovers
any Year 2000 errors or defects in the Company's internal systems, it could
incur
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substantial costs in making repairs. The resulting disruption of the Company's
operations could seriously damage the Company's business.
MANAGEMENT
The Board of Directors of the Company currently consists of seven
members. The current members of the Board of Directors and the executive
officers of the Company are:
Director Term
Name Position(s) Held with the Company Age(1) Since Expires
- ---- --------------------------------- ------ -------- -------
Glenn A. LaPointe Chairman, President, Chief Executive 36 1999 2002
Officer and Director
Terry G. Hartnett Director 56 1999 2000
Bradley J. Farley(2) Director 36 1999 2002
Glenn G. Farley(2) Director 42 1999 2002
Shannon D. Stewart Vice President and Director 34 1999 2001
Karen R. Heller Vice President and Director 38 1999 2000
Jennifer Ann V. Bullock Vice President and Director 28 1999 2000
- ----------
(1) At September 30, 1999.
(2) Messrs. Bradley J. Farley and Glenn G. Farley are brothers.
The following is a brief description of the business experience of
the directors and executive officers of the Company:
GLENN A. LAPOINTE has been Chief Executive Officer and President of
the Company since its inception in 1997. From September 1985 to May 1987, Mr.
LaPointe was employed as a trader's assistant in institutional equities with the
securities brokerage firm of Smith, Barney, Harris Upham & Company in Tampa,
Florida. From June 1987 to June 1988 he was a broker for Kimmins Securities,
Inc., a subsidiary of a publicly held NYSE listed company located in Tampa,
Florida. His duties included syndicating equity capital for over $15,000,000 of
multi-family units in Florida and directing a rights offering of $11,000,000 of
subordinated debentures for the parent company. From 1988 to September 1992, Mr.
LaPointe was Sole Director of Financial Resource Group, a marketing and
consulting company that assisted accountants and CPAs in expanding their client
base. From October, 1992 to April, 1994, Mr. LaPointe served as Executive Vice
President of Marketing for Capital South Mortgage Investments, Inc., an Austin,
Texas based mortgage lending and investment company. His duties included
generating new business and new sources of funding, effectively negotiating loan
acquisitions both directly with borrowers as well as with brokers as
intermediaries, structuring the creation of mortgages so as to create viable
loan programs for the buyers and
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sellers of real estate, packaging mortgage acquisitions so that they may be
successfully presented to investors, evaluating the validity and accuracy of
appraisals on the underlying property, ordering and evaluating title policies
and meeting conditions of those policies to insure clear first lien positions,
evaluating and gathering necessary documentation on potential mortgage
acquisitions, securing and servicing end investors and disposing of
non-performing mortgages, both through renegotiations and repossession and
liquidation of the underlying real estate. From May 1994 to present, Mr.
LaPointe developed a start up company that ultimately became Texas Financial
Corporation. As Chief Executive Officer of Texas Financial Corporation, Mr.
LaPointe was instrumental in developing a $10,000,000 revolving line of credit
to purchase non-conforming mortgages and subsequently package them for resale.
In March 1997, Mr. LaPointe sold his interest in Texas Financial to the
remaining partners in order to organize the Company.
TERRY G. HARTNETT has been Chief Financial Officer and Treasurer of
the Company since its inception in 1997. Mr. Hartnett will retire from this
position on December 31, 1999 but will continue as a director of the Company.
From 1965 to 1973 Mr. Hartnett served as a Supervising Senior Accountant for the
accounting firm of Peat, Marwick, Mitchell & Co., in the Peoria, Illinois
office. From 1973 to 1982, Mr. Hartnett served as Vice-President and Secretary
of American Savings & Loan Association, in Pekin, Illinois. His duties included
overseeing all mortgage origination and collection activity for the S&L. From
1982 to 1984, Mr. Hartnett worked with several investment banking firms, helping
to develop additional asset backed products as well as expanding their client
base. In 1984, Mr. Hartnett co-founded Capitol Securities, an Austin, Texas
based investment banking firm which specialized in asset based securitizations
and was the first firm in the country to securitize student loans, a now common
practice. In 1993, Capitol Securities Group was sold to Morgan, Keegan
Securities, Inc., a Memphis, Tennessee based regional investment banking firm.
Mr. Hartnett and two other partners from Capitol Securities subsequently formed
Tejas Asset Management, Inc., and Tejas Securities Group, Inc. In 1995, the
original partners of Tejas accepted a buy-out offer from firm employees. Since
1995, Mr. Hartnett has acted as an investment banking consultant to various
companies engaged in asset backed transactions.
BRADLEY J. FARLEY has been the owner of Farley Financial Services since
1988. Services provided there include counsel on investments, personal and
corporate finance, and risk management. He also advises businesses in the
correct implementation of 401(k), pension plans, and employee benefits. The
Mortgage Division of Farley Financial Services concentrates on funding
commercial ventures and residential housing. From 1994 to the present Farley has
also been the owner of Seminars for Adult Education, a subsidiary of Farley
Financial Services. The company's primary focus is on financial competencies
with specialization in personal learning in corporate and private settings.
Additionally, Farley is a franchisee of Successful Money Management Seminars,
corporate and public seminars to equip individuals with the knowledge for
personal financial planning. From 1989 to 1995 Farley was owner of ADA Staff, a
company whose primary service was to provide human resource capacities to small
businesses. Farley was responsible for 400 employees, consolidation of
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payrolls, reduction of worker's compensation expenses, and streamlining the cost
of employee benefits.
GLENN G. FARLEY has been a director of the Company since 1999. Since
1994, Mr. Farley has worked as an independent business and financial consultant
for various companies and managed his personal investments. Prior to that, he
served as Vice President and Local Recording Agent/Commercial Lines/Office
Manager at Casso-Farley & Quinn Insurance Agency, Inc. from 1988 to 1994. Prior
to that he was Secretary/Treasurer and Local Recording Agent/Commercial
Lines/Office Manager of the company. From 1980 to 1987 Farley was Local
Recording Agent/Office Manager at Austin Insurance Agency, Inc.
in Austin, Texas.
SHANNON D. STEWART has served as Vice President of Marketing
Operations at AFC since 1998. His work there involves developing marketing
strategies and organizing a marketing team. Prior to his work at AFC, Stewart
was area supervisor for American Greetings in Corpus Christi from 1997 to 1998.
He was responsible for account operations and for gaining additional growth
within the accounts. He also managed 40 merchandisers, a talk that included
hiring and training new merchandisers. From 1992 to 1997 Stewart was a marketing
associate for Sysco Services in San Antonio, Texas where he was responsible for
developing the customer base, customer service and new account development and
was involved in the laptop computer conversion and training for all marketing
associates.
KAREN HELLER has been a Senior Acquisition Analyst with the Company
since July 1997. From June 1988 to December 1989, Mrs. Heller worked at Barclays
Bank of North Carolina in Charlotte, North Carolina, as a loan servicing
supervisor. While in Charlotte, Mrs. Heller supervised a team of five customer
service employees. From December 1989 to August 1992, Mrs. Heller worked at
Citizens Federal Bank in Ft. Lauderdale, Florida, as a loan servicing
supervisor. Her duties included supervising a team of 15 customer service
representatives and servicing residential and installment loans in five states.
From August 1992 to April 1994 Mrs. Heller worked at Michael WM Mead, Attorney
in Ft. Walton Beach, Florida, as a real estate closer. Her duties included
closing residential and commercial real estate closings. From April 1994 to June
1995, Mrs. Heller worked at Destin Bank in Destin, Florida, as a mortgage
closing officer. Her duties included originating secondary market residential
mortgage loans and coordinating conventional and VA loans from initial
application and disclosure through closing, funding, and shipping. From October
1995 to March 1996, Mrs. Heller worked at Ontra, Inc., in Austin, Texas, as a
disposition contracts specialist. While at Ontra, Mrs. Heller was responsible
for resolving title problems and closing sales on REO properties in numerous
states, which requires coordination with buyers, sellers, real estate agents,
attorneys, and title companies. From March 1996 to July 1997, Mrs. Heller worked
at Towne and Country Title, Inc. in Austin, Texas as an Escrow Officer. Her
duties there included coordinating and closing all residential real estate sales
for a National Builder account. Mrs. Heller was involved in all aspects of
settlement including title review, document execution, recording, balancing,
funding, and shipping.
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JENNIFER ANN V. BULLOCK has been a Senior Acquisition Analyst with
the Company since June 1997. She worked as a loan processing Officer at Savings
of America from 1993 to 1995. Her duties included processing conventional
residential mortgage loans and contacting applicants to request information and
documentation throughout the loan process. Mrs. Bullock was then promoted to
Senior Loan Processing Officer and Office Manager at Savings of America in
Austin, Texas. She held this position from 1995 to 1996. Her duties included
assisting in the start-up of a new office and acting as liaison between Loan
Consultants and Underwriters. Mrs. Bullock functioned as the initial point of
contact for telephone inquiries between brokers and applicants and coordinated
and processed conventional, VA, and FHA mortgage loans. In 1997, Mrs. Bullock
worked at First Equity Corp. in Austin, Texas, as a Loan Processor. Her duties
included second lien mortgage lending and coordinating closings with first lien
mortgage lenders and title companies. Mrs. Bullock processed and closed Home
Improvement Loans and shipped closed loans to investors.
Directors of the Company serve three-year staggered terms so that
approximately one-third of the directors are elected at each annual meeting of
shareholders. The initial terms of five of the eight directors on the classified
Board of Directors may be viewed as inhibiting a change in control of the
Company and having possible anti-takeover effects. The Company does not
currently compensate its directors for their service in such capacity. The Board
of Directors acting as a nominating committee nominates directors to be elected
to the Board.
The executive officers of the Company are elected annually and hold
office until their respective successors have been elected and qualified or
until death, resignation or removal by the Board of Directors. The executive
officers of the Company are as set forth in the above table. Effective December
31, 1999, Mr. Terry Hartnett will resign as Chief Financial Officer and Mr.
David Farrar will take his place. [INSERT FARRAR INFORMATION]
Executive officers of the Company receive no remuneration in their
capacity as the Company's executive officers. For information regarding
compensation of directors and executive officers of AFC, see "Executive
Compensation."
BOARD COMMITTEES
The Board of Directors has established an Executive and Policy
Committee, Audit Committee, Compensation Committee and Stock Plan Committee. The
Executive and Policy Committee has Glenn A. LaPointe, Terry G. Hartnett, and
Bradley J. Farley as its members. During intervals between meetings of the
Board, that Committee exercises all of the power of the Board in the management
of the Company. The Audit Committee, consisting of Bradley J. Farley and Glenn
G. Farley, reviews the adequacy of internal controls and results and scope of
the audit and other services provided by the Company's independent auditors. The
Compensation Committee and the Stock Plan Committee each consist of Bradley J.
Farley and Glenn G. Farley. The Compensation Committee establishes and
recommends salaries, incentives and other forms of compensation for officers and
other key employees. The Stock Plan Committee administers the 1999 Stock Option
and Incentive Plan, including the selection of participants and the granting of
awards.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of November 30, 1999, the beneficial
ownership of the Company's 21,333,333 outstanding shares of Common Stock by (1)
the only persons who own of record or are known to own, beneficially, more than
5% of the Company's Common Stock; (2) each director and executive officer of the
Company; and (3) all directors and officers as a group.
Name and Address Percent of
of Beneficial Owners Relationship with Company No. of Shares(1) Class (%)(1)
-------------------- ------------------------- ---------------- -------------
Glenn A. LaPointe Chairman, President, Chief 6,783,872 32%
9002 Jolly Hollow Drive Executive Officer and Director
Austin, Texas 78750
Bradley J. Farley Director 26%
1202 Hallmark 5,553,227(2)(3)
San Antonio, Texas 78216
Glenn G. Farley Director 3,391,936 16%
709 East Calton Road, Suite 101
Laredo, Texas 78041
Shareholder
L.H. Hardy, Jr. 2,261,291 11%
325 South Commons Ford
Austin, Texas 78733
Terry G. Hartnett Chief Financial Officer and 100,000(3) --
6000 Shepherd Mountain Director
Cove, No. 106
Austin, Texas 78730
Shannon D. Stewart Officer and Director 529,994 2%
1901 Aster Way
Round Rock, Texas 78664
Karen R. Heller Officer and Director 106,007 --
17206 Reed Park Road
Jonestown, Texas 78645
Jennifer Ann V. Bullock Officer and Director 106,007 --
6049 Abilene Trail
Austin, Texas 78749
Officers and directors, as a group (8 16,571,043 78%
persons)
- ----------------
(1) Does not include options granted to the above persons in the amount of
5,000 shares each
(2) Mr. Farley also holds 1,500,000 shares of the Company's Series A
Preferred Stock which has no voting rights and is redeemable by the
Company for $1.4 million. See "Certain Relationships and Related
Transactions."
(3) Mr. Farley has acquired 2,161,291 shares of Common Stock from Mr.
Hartnett pursuant to an option agreement between the two. Mr. Hartnett
retains 100,000 shares of Common Stock.
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INDEMNIFICATION
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 ("Securities Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Company has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Company of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Company will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In 1998, Glenn LaPointe, Terry Hartnett, L.H. Hardy, Jr. and an officer
of the Company organized a business named CalTex Funding Corporation ("CalTex")
for the initial purpose of purchasing seller-financed mortgage notes and then
selling such notes to investors of the Company. After six months, CalTex
discontinued that business. CalTex next served as a vehicle to acquire mobile
homes and put them on real estate for sale to home buyers. On May 5, 1998 the
Company began making advances to CalTex in order to fund its operations. At
March 31, 1999, the Company had advances of $28,830. As homes were sold, the
Company would make loans to borrowers who were purchasing the homes. In an
effort to close out sales of certain homes, employees of the Company and their
family members purchased some homes and borrowed money from the Company to
finance those purchases. As a result, the Company holds six loans aggregating
approximately $500,000 to employees and their family members secured by homes
sold by CalTex.
In October 1998, Hardy had a limited partnership interest in
CertAustin, Ltd., a Texas limited partnership, which owned loans and other
financial assets. In an effort to enhance AFC's financial position, AFC
exchanged 500 shares of its Class A Preferred Stock for a 98% limited
partnership interest in CertAustin, Ltd. owned by L.H. Hardy, Jr. The Company
participated in the partnership until April 1999 when the Company assigned the
limited partnership interest back to Mr. Hardy for the cancellation of the 500
shares of preferred stock. At the same time, Mr. Hardy conveyed his 1,000 shares
of Common Stock back to AFC.
In April 1999, AFC issued 500 shares of its Class B Preferred Stock to
Bradley J. Farley and Glenn G. Farley in exchange for a $500,000 certificate of
deposit and the assignment of a $500,000 note receivable. The $500,000 note
receivable is from Banks International Global Services, Inc., an affiliate of
Mr. Glenn G. Farley. As a part of the Class B Preferred Stock transaction, AFC
entered into a consulting agreement with Bradley J.
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Farley to pay him a monthly consulting fee of $15,000. See "Executive
Compensation-Consulting Agreements with Directors." Under the terms of the
Preferred Stock Purchase Agreement, either of the Farleys could at their
election cause the Company to purchase the 500 shares or the Company could cause
the Farleys to sell such shares. In May 1999, the Farleys converted their 500
shares of Class B Preferred Stock to 324,324 shares of Common Stock of AFC,
which was then exchanged for 6,783,872 of the Company Common Stock.
Since its organization in 1997, the Company from time to time has
borrowed monies from and sold loans to L.H. Hardy, Jr. and Bradley J. Farley. In
one such transaction, Mr. Hardy provided through affiliated entities short term
lines of credit to AFC in amounts up to $267,000 charging back to AFC interest
on funds advanced short term. Total interest collected from the Company for
fiscal 1998 was approximately $10,000. These loans and purchase arrangements
were on terms favorable to the Company and not in excess of then market rates.
None of these loans are outstanding and none of the directors or executive
officers have any agreement with or obligation to purchase loans from the
Company.
Glenn LaPointe, Terry Hartnett, Joe Shaffer, Bradley J. Farley and
Glenn G. Farley have each guaranteed the indebtedness of the Company on one or
more loan agreements. LaPointe and Hartnett have each jointly and severally
guaranteed the payment by the Company of a $500,000 line of credit with a
financial institution. LaPointe, Hartnett, Glenn Farley and Brad Farley have
each jointly and severally guaranteed two separate $5,000,000 warehouse
facilities. In addition, LaPointe, Hartnett and Shaffer have guaranteed the
lease of office space for the Company. Each of these guarantees have been in an
effort to assist the Company and none of these guarantors have been compensated
for their assurances.
During the period ended March 31, 1998, the Company purchased a
contract to sell property from a relative of Glenn A. LaPointe, the President of
the Company, for approximately $89,000. The property was subsequently sold to an
unrelated third party resulting in a net gain of $47,258 to the Company.
L.H. "Rick" Hardy, Jr. has had various business involvements with AFC
since its foundation. Initially he provided a personal guarantee and pledged the
required collateral consisting of $250,000 in mortgage notes to secure a
warehouse line of credit. Mr. Hardy's personal guarantee and the initial
collateral pledged continue as of this filing. Under a business arrangement with
AFC, Mr. Hardy received 1,000 shares of Common Stock and participated in the
profits of the Company with total amount received for fiscal year 1997 being
$76,928.09 and for 1998 being $21,854.05. The profit sharing arrangement was
discontinued after February 1998 and Mr. Hardy became the holder of 1,000 shares
of Common Stock and was paid a salary.
On September 30, 1999, Mr. Bradley G. Farley purchased 1,500,000 shares
of the Company's 1999 Series A Preferred Stock in exchange for approximately
$1,433,000 in advances that he has made to the Company. The Preferred Stock sold
to Farley pays no dividend, nor has any conversion or voting rights. The Company
may redeem the 1999
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Series A Preferred Stock for $1.00 per share upon giving Farley ten days advance
notice. Such shares were issued without registration pursuant to an exemption
from registration under Regulation D of the Securities Act of 1933.
DESCRIPTION OF SECURITIES
DESCRIPTION OF THE DEBENTURES
The debentures will be issued under an indenture between the Company
and Norwest Bank Minnesota, N.A., as Trustee. The debentures are not savings
accounts or deposits and are not insured by the FDIC or any other governmental
agency. The terms and provisions of the debentures include those stated in the
indenture and those made part of the indenture by reference to the Trust
Indenture Act of 1939 as in effect on the date of the indenture. References in
this section to the Company are solely to Austin Funding.com Corporation and not
to its subsidiaries.
THE FOLLOWING IS A DESCRIPTION OF THE MATERIAL TERMS OF THE DEBENTURES.
THIS SUMMARY OF THE INDENTURE IS NOT COMPLETE AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO THE INDENTURE, INCLUDING THE DEFINITIONS IN THE INDENTURE OF
CERTAIN TERMS USED BELOW. YOU SHOULD READ THE ENTIRE INDENTURE AND THE TRUST
INDENTURE ACT OF 1939 FOR A COMPLETE UNDERSTANDING OF THE TERMS OF THE
DEBENTURES.
General. The debentures:
o are general obligations of ours limited to $10 million in
aggregate principal amount,
o are secured by one or more non-callable U.S. government or
government agency zero coupon bonds due on or about December
31, 2015 (sometimes referred to as the "Zero Coupon Bonds"),
o do not have the benefit of a sinking fund for the retirement
of principal,
o rank equal to all of our subordinated indebtedness,
o are subordinated in right of payment to all of our current or
future Senior Indebtedness or liabilities which are not
expressly by their terms subordinate or equal in right of
payment to the debentures, and which may include our
obligations to AFC, and
o interest on the debentures will cease to accrue on the
debentures upon redemption under the terms and subject to the
conditions of the indenture.
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The Principal Amount at maturity of each debenture, and all interest
accrued and payable, is payable by the Company at the office or agency of the
paying agent, initially the Trustee, in Minneapolis, Minnesota, or any other
office of the paying agent maintained for this purpose. Debentures in definitive
form may be presented for exchange for other debentures or registration of
transfer at the office of the registrar. Initially, the Trustee will be the
paying agent and the registrar. The Company will not charge a service charge for
any registration, transfer or exchange of debentures. However, the Company may
require the holder to pay for any tax, assessment or other governmental charge
to be paid in connection with any registration, transfer or exchange of
debentures.
The debentures mature on December 31, 2015, unless redeemed earlier,
which we may do at our option. See "Redemption of Subordinated Debentures." The
debentures bear interest at the rate of 8% per year. We will pay interest
monthly on the first day of each month commencing on the first day of the first
full calendar month after the date of issuance to the person in whose name the
debenture (or any predecessor debenture) is registered at the close of business
on the first day of the preceding calendar month, as the case may be. We will
compute interest on the debentures on the basis of a 360-day year of twelve
30-day months. The Trustee will pay the principal and interest on the debentures
when due by check mailed to the person entitled to payment.
The debentures are denominated in U.S. dollars, and payments of
principal and interest on the debentures are in U.S. dollars. The debentures
will be issued in book entry form in denominations of $1,000 and integral
multiples thereof. The debentures may be presented for transfer or exchange and
shall be duly endorsed or accompanied by a written instrument of transfer in
form satisfactory to the registrar duly executed by the holder thereof or his
attorney duly authorized in writing. The registered holder of a debenture will
be treated as its owner for all purposes. Money for the payment of principal or
interest upon redemption remaining unclaimed for two years will be paid back to
the Company at its request.
Our primary source of funds for the payment of principal and interest
on the debentures is dividends from AFC. From time to time while the debentures
are outstanding, AFC may be subject to regulatory or contractual constraints
that restrict its ability to pay dividends to us.
Security. The Company's obligations to pay the principal of and
interest on the debentures will be secured by a pledge of one or more
non-callable United States government or government agency zero coupon bonds due
on or about December 31, 2015 with an aggregate face amount of the debentures
sold in the Offering. The zero coupon bonds will be purchased by the Company
from Choice at one or more closings of the offering and will be pledged as
security in repayment of the debentures.
Zero coupon bonds are bonds that do not pay interest periodically in
the fashion of conventional types of bonds, but instead sell at discounts of par
until their final maturity, when payment of principal at par plus all of the
interest accumulated at the rate specified at the time of original issuance of
the bonds is paid in a lump sum.
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For the Company, the attraction of the zero coupon bond is the locking
in of the prevailing interest rate, to accumulate compounded and to be paid at
final maturity along with the full principal at par. Thus a combination of
interest income (based on the specified interest rate at issuance) and the
capital gain from discount price at issuance to full par at maturity would be
indicated. Nevertheless, the Company will be paying taxes on the portion of the
interest that accrues each year on the zero coupon bond, although no cash would
be received until final maturity.
Redemption Of Subordinated Debentures. We may redeem the debentures at
our option, in whole or in part, at any time after December 31, 2001, by payment
of all principal and interest accrued thereon. The Company may redeem the
debentures for cash as a whole at any time, or from time to time in part by
giving by mail to holders of debentures not less than 20 days' nor more than 60
days' notice of redemption for an amount in cash equal to the sum of (1) the
Principal Amount to be redeemed, and (2) accrued but unpaid interest thereon
through the date of redemption. At the same time, Company will provide public
notice of redemption through certain financial news services. The debentures may
be redeemable in multiples of $l,000 Principal Amount. No sinking fund is
provided for the debentures.
If less than all of the outstanding debentures held are to be redeemed,
the Trustee will select the debentures to be redeemed in Principal Amounts of
$1,000 or integral multiples thereof by lot, pro rata or by another method the
Trustee considers fair and appropriate.
Subordination. The debentures will be issued under an indenture between
the Company and Norwest Bank Minnesota, N.A., as Trustee.
As set forth in the indenture, the debentures are subordinate in right
of payment to the holders of all existing and future Senior Indebtedness.
Subordination of the debentures will not prevent the occurrence of any event of
default under the indenture. Upon any distribution of assets of the Company upon
any:
o dissolution,
o winding up,
o voluntary or involuntary bankruptcy,
o insolvency,
o liquidation,
o reorganization,
o receivership,
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o similar proceeding relating to the Company or its property, or
o an assignment for the benefit of creditors or any marshaling
of the Company's assets or liabilities,
the holders of Senior Indebtedness will be entitled to receive payment in full
before the holders of debentures will be entitled to receive any payment in
respect of the debentures.
By reason of the subordination, if any of the events described above
occur, holders of Senior Indebtedness may receive more, ratably, than the
Company's other creditors. For the same reason, the holders of debentures may
receive less, ratably, than the Company's other creditors.
If the debentures are declared due and payable prior to maturity
because of an event of default, then the Company must promptly notify holders of
Senior Indebtedness of the acceleration. The Company may not pay amounts owed
pursuant to the debentures until five days have passed after acceleration
occurs. After five days have passed, the Company may pay amounts owed pursuant
to the debentures only if the terms of the indenture otherwise permit payment at
that time. The Company also may not make any payment on the debentures if:
o a default in any payment obligations in respect of Senior
Indebtedness occurs and is continuing, without regard to any
applicable period of grace, whether at maturity or at a date
fixed for payment or by declaration or otherwise (provided,
the Zero Coupon Bonds are non-callable and the Trustee may not
dispose of, or disburse the proceeds of, the Zero Coupon Bonds
until its maturity in 2015 and, provided further, the Trustee
may not undertake any action which could impair the value of
the Zero Coupon Bonds); or
o any other default occurs and is continuing with respect to
Senior Indebtedness that permits holders of the Senior
Indebtedness as to which the default relates to accelerate its
maturity and the Trustee receives a notice of the default,
also referred to as a payment blockage notice, from a
representative for any issue of Senior Indebtedness.
Payments on the debentures may be resumed:
o in case of a payment default, the earlier of the date on which
the default is cured or waived or ceases to exist; and
o in case of a nonpayment default, the earlier of the date on
which the non-payment default is cured or waived or ceases to
exist or 179 days after the date on which the applicable
payment blockage notice is received by the Trustee, if
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the maturity of the Senior Indebtedness has not been
accelerated, and in either case only if the terms of the
indenture otherwise permit payment at that time.
No new period of payment blockage with respect to a nonpayment default
may be commenced pursuant to a payment blockage notice until 365 days have
elapsed since the initial effectiveness of the immediately prior payment
blockage notice. A nonpayment default that existed or was continuing on the date
of delivery of any payment blockage notice to the Trustee will not be the basis
for a subsequent payment blockage. Any action of the Company or any of its
subsidiaries occurring subsequent to delivery of a payment blockage notice that
would give rise to any event of default under Senior Indebtedness under which an
event of default previously existed or was continuing at the time of delivery of
the payment blockage notice will constitute a new event of default for this
purpose. Any breach of a financial covenant giving rise to a nonpayment default
for a period ending subsequent to the date of delivery of the respective payment
blockage notice constitutes a new event of default for this purpose.
In the event that, notwithstanding the foregoing, the Trustee or any
holder of the debentures receives any payment of any kind in contravention of
the subordination provisions of the indenture before full payment of the Senior
Indebtedness, then the payment will be held by the recipient in trust for the
benefit of, and paid over to, holders of Senior Indebtedness or their
representatives. These payments can be made in any form of consideration but
must take into account any concurrent payment or distribution to the holders of
Senior Indebtedness.
The Trustee or the holders may accelerate the maturity of the
debentures because the Company fails to make any payments due and owing on the
debentures during a period of payment blockage. The holders of a majority in
principal amount at maturity of the then outstanding debentures may rescind an
acceleration and its consequences by sending notice of the rescission to the
Trustee if the rescission would not conflict with any judgment or decree and if
all existing events of default (except nonpayment of principal or interest, if
any, that has become due wholly because of the acceleration) have been cured or
waived.
The debentures are obligations exclusively of the Company. Since
substantially all of the operations of the Company are conducted through
subsidiaries, the cash flow and the consequent ability to service debt,
including the debentures, are dependent upon the earnings of its subsidiaries
and the distribution of those earnings to, or upon loans or other payments of
funds by those subsidiaries to, the Company. The subsidiaries are separate and
distinct legal entities and have no obligation, contingent or otherwise, to pay
any amount pursuant to the debentures or to make any funds available therefor,
whether by dividends, loans or other payments. Because the Company's
subsidiaries are regulated, the payment of dividends and making of loans and
advances to the Company's by its subsidiaries are subject to statutory
restrictions. In addition, the payment of dividends and making of loans and
advances are contingent upon the earnings of those subsidiaries and are subject
to various business considerations.
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Any right of the Company to receive assets of any of its subsidiaries
upon their liquidation or reorganization, and the consequent right of the
holders of the debentures to participate in those assets, will be effectively
subordinated to the claims of that subsidiary's creditors. The only exception
would be if the Company is itself recognized as a creditor of the subsidiary. In
that case, the Company's claims would still be subordinate to any security
interests in the assets of the subsidiary and any Indebtedness of the subsidiary
senior to that held by the Company.
At September 30, 1999, the Company and its subsidiaries had
approximately $6.6 million of Indebtedness and other liabilities, including
trade and other payables, outstanding, but excluding intercompany liabilities
and liabilities of a type not required to be reflected on a balance sheet in
accordance with generally accepted accounting principles, to which the
debentures would have been effectively subordinated.
The indenture does not limit the amount of additional Indebtedness,
including Senior Indebtedness, which the Company can incur, assume or guarantee.
Furthermore, the indenture does not limit the amount of Indebtedness which any
subsidiary can incur, assume or guarantee.
Certain Covenants. The indenture contains certain customary covenants
found in indentures under the Trust Indenture Act, including covenants with
respect to paying principal and interest and maintaining an office or agency for
administering the debentures.
Mergers and Sales of Assets by the Company. The Company may not
consolidate with or merge into any other person or convey, transfer or lease its
properties and assets substantially as an entirety to another person, unless,
among other items:
o the resulting, surviving or transferee person, if other than
the Company, is organized and existing under the laws of the
United States, any state thereof or the District of Columbia;
o the successor person assumes all of the Company's obligations
under the debentures and the indenture; and
o the Company or the successor person will not immediately
thereafter be in default under the indenture.
Upon the assumption of the Company's obligations by a successor as described
above, subject to certain exceptions, the Company will be discharged from all
obligations under the debentures and the indenture.
Defaults And Remedies. The indenture provides that, if an event of
default specified in the indenture has happened and is continuing, either the
Trustee or the holders of not less than
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25% in aggregate principal amount at maturity of the debentures then outstanding
may declare due and payable:
o the Principal Amount of the debentures, plus
o interest on the debentures, accrued and unpaid to the date of
the declaration.
In the case of certain events of bankruptcy or insolvency, the
Principal Amount plus interest on the debentures accrued to the occurrence of
the event will automatically become and be immediately due and payable.
Under certain circumstances, the holders of a majority in aggregate
principal amount at maturity of the outstanding debentures may rescind any
acceleration with respect to the debentures and its consequences.
Under the indenture, events of default are defined as:
(1) default in payment of:
o the Principal Amount at maturity,
o accrued interest on the debentures (if the default continues
for 30 days), or
o redemption price
with respect to any debenture when it becomes due and payable, whether or not
payment is prohibited by the provisions of the indenture;
(2) the Company's failure to comply with any of its other agreements in
the debentures or the indenture upon the receipt by Company of notice of the
default by the Trustee or by holders of not less than 25% in aggregate principal
amount at maturity of the debentures then outstanding and the Company's failure
to cure the default within 60 days after receipt by the Company of the notice;
or
(3) certain events of bankruptcy or insolvency.
The Trustee will give notice to holders of the debentures of any
continuing default known to the Trustee within 90 days after the occurrence;
provided, except in the case of a default as described in clause (1) above, the
Trustee may withhold notice if it determines in good faith that withholding the
notice is in the interests of the holders.
The holders of a majority in aggregate principal amount at maturity of
the outstanding debentures may direct the time, method and place of conducting
any proceeding for any remedy available to the Trustee or exercising any trust
or power conferred on the Trustee;
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provided, the direction may not conflict with any law or the indenture and will
be subject to certain other limitations. Before proceeding to exercise any right
or power under the indenture at the direction of the holders, the Trustee will
be entitled to receive from the holders reasonable security indemnity
satisfactory to it against the costs, expenses and liabilities incurred by it in
complying with the direction. No holder of any debenture will have any right to
pursue any remedy with respect to the indenture or the debentures unless:
o the holder will have previously given the Company and the
Trustee written notice of a continuing event of default;
o the holders of at least 25% in aggregate principal amount at
maturity of the outstanding debentures have made a written
request to the Trustee to pursue the remedy;
o the holder or holders have offered to the Trustee reasonable
indemnity satisfactory to the Trustee;
o the holders of a majority in aggregate principal amount at
maturity of the outstanding debentures have not given the
Trustee a direction inconsistent with the request within 60
days after receipt of the request;
o the Trustee has failed to comply with the request within the
60-day period; and
o the Trustee may not undertake any action which could impair
the value of the Zero Coupon Bonds without the prior, written
consent of holders of at least 66% in aggregate Principal
Amount of the debentures at the time outstanding.
However, the right of any holder to receive payment of:
o the principal amount at maturity,
o accrued but unpaid interest on the debentures,
o redemption price, and
o any interest in respect of a default in the payment of any
amounts due in respect of a debenture, on or after the due
date of the debenture
will not be impaired or adversely affected without the holder's consent.
The holders of at least a majority in aggregate principal amount at
maturity of the outstanding debentures may waive an existing default and its
consequences, other than:
o any default in any payment on the debentures; or
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o any default in respect of certain covenants or provisions in
the indenture which may not be modified without the consent of
the holder of each debenture as described under the caption
entitled "Modification of the Indenture" below.
The Company will be required to furnish to the Trustee annually a
statement as to any default by the Company in the performance and observance of
its obligations under the indenture.
Satisfaction, Discharge And Defeasance. The indenture provides that if
the Company seeks to pay interest and/or Principal Amount when due to the record
address of the holder located within the United States and such interest and/or
Principal Amount is returned undeliverable to the Trustee, then we, at our
option, may:
o pay such interest and/or Principal Amount on any Special
Record Date;
o pay such interest and/or Principal Amount in any other lawful
manner not inconsistent with the requirements of any
securities exchange on which the debentures may be listed; or
o pay such interest and/or Principal Amount with the proceeds of
the Zero Coupon Bonds. Notwithstanding the foregoing to the
contrary, the Zero Coupon Bonds are non-callable and the
Trustee may not dispose of, or disburse the proceeds of, the
Zero Coupon Bonds until maturity in 2015 and, provided
further, the Trustee shall not undertake any action which
could impair the value of the Zero Coupon Bonds.
The indenture further provides that the Trustee shall remit to the Company all
monies held by it with respect to the Securities, including, without limitation,
Defaulted Interest, Defaulted Principal and the Zero Coupon Bonds, on the
earlier to occur of (i) the Discharge Date, or (ii) as of June 30, 2016.
Modification of the Indenture. Modification and amendment of the
indenture or the debentures may be effected by the Company and the Trustee with
the consent of the holders of not less than a majority in aggregate principal
amount at maturity of the debentures then outstanding. Notwithstanding the
foregoing, no amendment may, without the consent of each holder affected:
o reduce the Principal Amount at maturity, redemption price or
extend the stated maturity of any debenture or alter the
manner or rate of accrual of interest, or make any debenture
payable in money or securities other than that stated in the
debenture;
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o make any change to the principal amount at maturity of
debentures whose holders must consent to an amendment or any
waiver under the indenture or modify the indenture provisions
relating to amendments or waivers with respect to the payment
of principal at maturity; or
o modify the provisions of the indenture relating to the
subordination of the debentures in a manner adverse to the
holders of the debentures.
The indenture also provides for certain modifications of its terms
without the consent of the holders.
Form, Denomination and Registration. The debentures are issuable in
book entry form, with a minimum of $5,000 principal amount at maturity and
multiples of $1,000. The Company may not reissue a debenture that has matured,
been redeemed or otherwise canceled, except for the transfer, exchange or
replacement of the debenture.
Information Concerning the Trustee. The Company has appointed Norwest
Bank Minnesota, N.A., as Trustee under the indenture, and as paying agent,
registrar and custodian with regard to the debentures.
Certain Definitions. Set forth below are certain defined terms used in
the prospectus.
"Indebtedness" means, with respect to any Person and without
duplication:
(1) all indebtedness, obligations and other liabilities,
contingent or otherwise, of such person for borrowed
money;
(2) all reimbursement obligations and other liabilities,
contingent or otherwise, of such person with respect
to letters of credit, bank guarantees or bankers'
acceptances;
(3) all obligations and liabilities, contingent or
otherwise, in respect of leases of such person;
(4) required, in conformity with generally accepted
accounting principles, to be accounted for as
capitalized lease obligations on the balance sheet of
such person, or required, in conformity with
generally accepted accounting principles to be
accounted for as an operating lease, provided, either
(i) such operating lease requires, at the end of the
term thereof, that such person make any payment other
than accrued periodic rent in the event that such
person does not acquire the leased real property and
related fixtures subject to such lease, or (ii) such
person has an option to acquire the leased real
property and related fixtures, whether such option is
exercisable at any time or under specified
circumstances;
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(5) all obligations of such person, contingent or
otherwise, with respect to an interest rate swap, cap
or collar agreement or other similar instrument or
agreement;
(6) all direct or indirect guaranties or similar
agreements by such person in respect of, and
obligations or liabilities, contingent or otherwise,
of such person to purchase or otherwise acquire or
otherwise assure a creditor against loss in respect
of, indebtedness, obligations or liabilities of
another person of the kind described in clauses (1)
through (4) above;
(7) any indebtedness or other obligations described in
clauses (1) through (4) above secured by any
mortgage, pledge, lien or other encumbrance existing
on property which is owned or held by such person,
regardless of whether the indebtedness or other
obligation secured thereby will have been assumed by
such person; and
(8) any and all deferrals, renewals, extensions and
refundings of, or amendments, modifications or
supplements to, any indebtedness, obligation or
liability of the kind described in clauses (1)
through (7).
"Principal Amount" means the principal amount at the stated maturity of
the debenture as set forth on its face.
"Senior Indebtedness" means the principal of, premium, if any,
interest, including all interest accruing subsequent to the commencement of any
bankruptcy or similar proceeding, whether or not a claim for post-petition
interest is allowable as a claim in any such proceeding, rent and end of term
payments payable on or in connection with, and, to the extent not included in
the foregoing, all amounts payable as fees, costs, expenses, liquidated damages,
indemnities, repurchase and other put obligations and other amounts to the
extent accrued or due on or in connection with Indebtedness of the Company,
whether outstanding on the date of the indenture or thereafter created,
incurred, assumed, guaranteed or in effect guaranteed by the Company, including
all deferrals, renewals, extensions or refundings of, or amendments,
modifications or supplements to, the foregoing. Notwithstanding the foregoing,
the term Senior Indebtedness does not include:
(1) Indebtedness evidenced by the debentures;
(2) Indebtedness of the Company to any subsidiary of the Company,
a majority of the voting stock of which is owned, directly or
indirectly, by the Company;
(3) accounts payable or other Indebtedness to trade creditors
created or assumed by the Company in the ordinary course of
business; and
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(4) any particular Indebtedness in which the instrument creating
or evidencing the same or the assumption or guarantee thereof
expressly provides that such Indebtedness will not be senior
in right of payment to, or is pari passu with, or is
subordinated or junior to, the debentures.
Material U.S. Federal Income Tax Considerations. The following is a
general discussion of material U.S. federal income tax considerations relating
to the initial purchase, ownership and disposition of the debentures, and
certain material U.S. federal income and estate tax considerations relating to
the purchase, ownership and disposition of the debentures to non-U.S. holders.
The discussion is a summary only and does not purport to be a complete analysis
of all the potential tax considerations relating to the purchase, ownership and
disposition of the debentures. We have based this summary on the U.S. federal
income tax laws on the date of this prospectus. These laws may change, possibly
retroactively. There can be no assurance that the IRS will not challenge one or
more of the tax consequences described herein, and we have not obtained, nor do
we intend to obtain, a ruling from the IRS or an opinion of counsel with respect
to the U.S. federal tax consequences of purchasing, owning or disposing of
debentures.
The discussion does not address all tax consequences that may be
important to you in light of your specific circumstances. For instance, this
discussion does not address the alternative minimum tax provisions of the tax
code, or special rules applicable to certain categories of investors, such as
certain financial institutions, insurance companies, tax-exempt organizations,
dealers in securities, or persons who hold debentures as part of a hedge,
conversion or constructive sale transaction, straddle or other risk reduction
transaction, that may be subject to special rules. This discussion is limited to
purchasers of debentures who acquire the debentures from the Company in the
initial offering of the debentures, and will not apply unless the holder holds
the debentures as capital assets. This discussion also does not address the tax
consequences arising under the laws of any foreign, state or local jurisdiction
or U.S. estate and gift tax law as applicable to U.S.
holders.
Persons considering the purchase of a debenture should consult their
own tax advisors as to the particular tax consequences to them of acquiring,
holding or otherwise disposing of the debentures, including the effect and
applicability of state, local or foreign tax laws.
As used in this discussion, the term U.S. holder means a holder of a
debenture that is:
o for United States federal income tax purposes, a citizen or
resident of the United States;
o a corporation, partnership or other entity created or
organized in or under the laws of the United States or of any
political subdivision thereof;
o an estate, the income of which is subject to United States
federal income taxation regardless of its source; or
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o a trust, the administration of which is subject to the primary
supervision of a court within the United States and which has
one or more United States persons with authority to control
all substantial decisions, or if the trust was in existence on
August 20, 1996, and has elected to continue to be treated as
a United States trust.
A non-U.S. holder is any holder other than a U.S. holder.
U.S. Holders. Upon the sale or exchange of a debenture, a U.S. holder
will generally recognize gain or loss equal to the difference between the sale
or redemption proceeds and the U.S. holder's adjusted tax basis in the
debenture.
The terms of the debentures may be modified upon the consent of a
specified percentage of holders and, in some instances, without consent of the
holders. In addition, the debentures may be assumed upon certain transactions
involving Company. The modification or assumption of a debenture could, in
certain instances, give rise to a deemed exchange of a debenture for a new
debenture for U.S. federal income tax purposes. If an exchange is deemed to
occur by reason of a modification or assumption, the amount and timing of
taxable income required to be recognized by a U.S. holder with respect to a
debenture could be affected.
Information reporting will apply to payments of interest on or the
proceeds of the sale or other disposition of the debentures with respect to
certain non-corporate U.S. holders, and backup withholding at a rate of 31% may
apply to such payments unless the recipient of such payment supplies a taxpayer
identification number, certified under penalties of perjury, as well as certain
other information or otherwise establishes an exemption from backup withholding.
Any amount withheld under the backup withholding rules is allowable as a credit
against the U.S. holder's federal income tax, provided that the required
information is provided to the IRS on a timely basis.
Non-U.S. Holders. The following discussion is a summary of the
principal U.S. federal income and estate tax consequences resulting from the
ownership of the debentures by non-U.S. holders.
The payment of principal of a debenture by us or any of our paying
agents to any non-U.S. holder will not be subject to U.S. federal withholding
tax; provided, in the case of payment of cash in respect of original issue
discount (i) the non-U.S. holder does not actually or constructively own 10% or
more of the total voting combined power of all classes of our stock, (ii) the
non-U.S. holder is not a controlled foreign corporation that is related to us
within the meaning of the tax code, and (iii) either (A) the beneficial owner of
the debenture certifies to the applicable payor or its agent, under penalties of
perjury, that it is not a U.S. holder and provides its name and address on
United States Treasury Form W-8, or a suitable substitute or successor form, or
(B) a securities clearing organization, bank or other financial institution that
holds customers' securities in the ordinary course of its trade or business, and
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holds the debenture certifies under penalties of perjury that such a Form W-8,
or suitable substitute form, has been received from the beneficial owner by it
or by a financial institution between it and the beneficial owner and furnishes
the payor with a copy thereof.
A non-U.S. holder generally will not be required to pay U.S. federal
income tax on gain realized on the sale or redemption of a debenture unless:
o in the case of an individual non-U.S. holder, such holder is
present in the United States for 183 days or more in the year
of such sale or redemption and either (A) has a tax home in
the United States and certain other requirements are met, or
(B) the gain from the disposition is attributable to an office
or other fixed place of business in the United States;
o the non-U.S. holder is required to pay tax pursuant to the
provisions of U.S. tax law applicable to certain U.S.
expatriates; or
o the gain is effectively connected with the conduct of a U.S.
trade or business of or, if a tax treaty applies, is
attributable to a U.S. permanent establishment of, the
non-U.S. holder.
A debenture held by an individual who at the time of death is not a
citizen or resident of the United States, as specially defined for U.S. federal
estate tax purposes, will not be required to pay U.S. federal estate tax if the
individual did not actually or constructively own 10% or more of the total
combined voting power of all classes of our stock and, at the time of the
individual's death, payments with respect to such debenture would not have been
effectively connected with the conduct by such individual of a trade or business
in the United States. Common stock held by an individual who at the time of
death is not a citizen or resident of the United States, as specially defined
for U.S. federal estate tax purposes, will be included in such individual's
estate for U.S. federal estate tax purposes, unless an applicable estate tax
treaty otherwise applies.
Under current Treasury Regulations, backup withholding and information
reporting will not apply to payments of principal, including cash payments in
respect of the debentures by us or our agent to a non-U.S. holder if the
non-U.S. holder certifies as to its non-U.S. holder status under penalties of
perjury or otherwise establishes an exemption, provided that neither we nor our
agents have actual knowledge that the holder is a U.S. person or that the
conditions of any other exemptions are not in fact satisfied. The payment of the
proceeds on the disposition of debentures to or through the United States office
of a United States or foreign broker will be subject to information reporting
and backup withholding unless the owner provides the certification described
above or otherwise establishes an exemption. The proceeds of the disposition by
a non-U.S. holder of debentures to or through a foreign office of a broker will
not be subject to backup withholding or information reporting. However, if such
broker is a U.S. person, a controlled foreign corporation for U.S. tax purposes,
or a foreign person, 50% or more of whose gross income from all sources for
certain periods is from activities that
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are effectively connected with a U.S. trade or business, or, in the case of
payments made after December 31, 2000, a foreign partnership with certain
connections to the United States, information reporting requirements will apply
unless such broker has documentary evidence in its files of the holder's
non-U.S. status and has no actual knowledge to the contrary or unless the holder
otherwise establishes an exemption.
The Treasury Department recently promulgated final regulations
regarding the withholding and information reporting rules discussed above. In
general, these regulations do not significantly alter the substantive
withholding and information reporting requirements but rather unify current
certification procedures and forms and clarify reliance standards. In addition,
these regulations impose more stringent conditions on the ability of financial
intermediaries acting for a non-U.S. holder to provide certifications on behalf
of the holder, which may include entering into an agreement with IRS to audit
certain documentation with respect to such certifications. These regulations are
generally effective for payments made after December 31, 2000, subject to
certain transition rules. You should consult your own tax advisor to determine
the effects of the application of these regulations to your particular
circumstances.
COMMON STOCK
The Company is authorized to issue 80,000,000 shares of Common Stock,
$.001 par value. The holders of Common Stock are entitled to one vote for each
share held of record on all matters to be voted on by stockholders. There is no
cumulative voting with respect to the election of directors, with the result
that the holders of more than 50% of the shares voting for the election of
directors can elect all of the directors then up for election. The holders of
Common Stock are entitled to receive dividends when, as and if declared by the
Board of Directors out of funds legally available. In the event of liquidation,
dissolution or winding up of the Company, the holders of Common Stock are
entitled to share ratably in all assets remaining which are available for
distribution to them after payment of liabilities and after provision has been
made for each class of stock, if any, having preference over the Common Stock.
Holders of shares of Common Stock, as such, have no conversion, preemptive or
other subscription rights, and there are no redemption provisions applicable to
the Common Stock. All of the outstanding shares of Common Stock are fully paid
and nonassessable.
PREFERRED STOCK
The Company is authorized to issue 20,000,000 shares of Preferred
Stock with rights, preferences and limitations to be determined by the Board of
Directors. As of September 30, 1999, 1,500,000 shares of Preferred Stock have
been issued. See "Management-Certain Relationships and Related Transactions."
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RESTRICTIONS ON ACQUISITIONS AND RELATED TAKEOVER DEFENSIVE PROVISIONS
The following discussion is a summary of material provisions of the
Company's Articles and Bylaws and certain other state law provisions, which may
be deemed to have an "anti-takeover" effect and could potentially discourage or
even prevent a bid for the Company which might otherwise result in stockholders
receiving a premium for their stock. Further, ownership restrictions imposed by
state and federal law could potentially serve as a basis to invalidate or
otherwise restrict the use or exercise by management or others of revocable
proxies. The following description of certain of these provisions is necessarily
general and, with respect to provisions contained in the Company's Articles and
Bylaws, reference should be made in each case to the document in question.
Provisions of the Company's Articles and Bylaws Affecting a Change in
Control. Certain provisions of the Articles and Bylaws may provide the Board
with more negotiating leverage by delaying or making more difficult unsolicited
acquisitions or changes of control of the Company. It is believed that such
provisions will enable the Company to develop its business in a manner that will
foster its long-term growth without disruption caused by the threat of a
takeover not deemed by the Board to be in the best interests of the Company and
its stockholders. Such provisions could have the effect of discouraging third
parties from making proposals involving an unsolicited acquisition or change of
control of the Company, although such proposals, if made, might be considered
desirable by a majority of the Company's stockholders. Such provisions may also
have the effect of making it more difficult for third parties to cause the
replacement of the management of the Company without the concurrence of the
Board. These provisions include (i) the availability of capital stock for
issuance from time to time at the discretion of the Board, (ii) the
classification of the Board into three classes, each of which serves for a term
of three years, (iii) requirements for advance notice for raising business or
making nominations at stockholders' meetings and (iv) the requirement of a
super-majority vote to remove directors with or without cause.
Classified Board; Removal of Directors. The Articles provide that the
Board's membership is divided into three classes as nearly equal in number as
possible, each of which serves until the third succeeding annual meeting with
one class being elected at each annual meeting of stockholders. As a result, at
least two annual meetings of stockholders may be required for the Company's
stockholders to change a majority of the members of the Board. In addition,
directors may be removed, with or without cause, only by the affirmative vote of
the holders of at least 70% of the voting power of all shares of voting stock of
the Company, voting together as a single class. The Articles contain a provision
requiring the affirmative vote of the holders of at least 70% of the voting
power of all shares of voting stock of the Company, voting together as a single
class, to alter, amend, repeal or adopt provisions inconsistent with the
classified board provision of the Articles, and the provision requiring a 70%
vote to remove directors. The Bylaws prohibit increases in the size of the Board
that have the effect of delaying the ability of stockholders to change a
majority of the directors for more than two annual meetings.
The classified board provision and the requirement of a 70%
supermajority vote to remove directors may make it more difficult to change the
composition of the Board.
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The Company believes that a classified board of directors will assure
continuity and stability of the Company's management and policies, without
diminishing accountability to stockholders. The Company's classified Board will
ensure that a majority of directors at any given time will have experience in
the business, competitive affairs and regulatory environment of the Company's
business. The Company believes that an experienced board is best situated to
enhance the value of the Company's business. A classified board and the
continuity it fosters will be important in developing, refining and executing
the Company's long-term strategic plan. The Company's classified Board will be
better positioned to make fundamental decisions that are in the best interests
of the Company. A classified board will also prevent an abrupt change in the
composition of the Board and will therefore eliminate delays inherent in the
familiarization by the new Board with the Company and its business and will
moderate changes in corporate policies, decisions and strategies that may not be
in the best interests of the Company and its stockholders and other appropriate
constituencies. At the same time, stockholders have the power to propose and
elect their own nominees for the class of directors to be elected at each annual
meeting, and in that manner change the Board's composition. By reducing the
threat of an abrupt change in the composition of the entire board,
classification of directors will give the Board sufficient time to review any
takeover proposal, study appropriate alternatives and achieve the best results
for all stockholders and other appropriate constituencies. The Company believes
that a classified board will enhance the Company's ability to resist an abusive
takeover attempt or to negotiate a fair price and appropriate protections for
other constituencies. The Company does not expect the classified Board
necessarily to discourage takeover offers or ultimately prevent a hostile
acquisition at a fair price and with appropriate protections for other corporate
constituents. The Company believes that a classified board of directors is fully
accountable to stockholders. To ensure this accountability, the Bylaws prohibit
increases in the size of the Board that have the effect of delaying the ability
of stockholders to change a majority of the directors for more than two annual
meetings. The classified board provision also will not prevent persons from
making unsolicited proposals to acquire the Company. The Company believes that a
classified board of directors thus remains accountable to stockholders.
Moreover, directors are bound by fiduciary duty to serve stockholders' interests
throughout their term of office.
Advance Notice for Raising Business or Making Nominations at Meetings.
The Bylaws establish an advance notice procedure for stockholder proposals to be
brought before an annual meeting of stockholders and for nominations by
stockholders of candidates for election as directors at an annual or special
meeting at which directors are to be elected. Only such business may be
conducted at an annual meeting of stockholders as has been brought before the
meeting by, or at the direction of, the Board, or by a stockholder who has given
to the Secretary of the Company timely written notice, in proper form, of the
stockholder's intention to bring that business before the meeting. The chairman
of such meeting has the authority to make the determination of whether business
has been properly brought before such meeting. Only persons who are nominated
by, or at the direction of, the Board, or who are nominated by a stockholder who
has given timely written notice, in proper form, to the Secretary prior to
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a meeting at which directors are to be elected will be eligible for election as
directors of the Company.
To be timely, notice of business to be brought before an annual meeting
or nominations of candidates for election as directors at an annual meeting must
be personally delivered or sent by United States mail, postage prepaid, to the
Secretary of the Company not less than 90 nor more than 120 days prior to the
anniversary date of the immediately preceding annual meeting; provided, however,
that in the event the date of the annual meeting is more than 30 days earlier or
more than 60 days later than such anniversary date, notice by the stockholder
must be so delivered or received not earlier than the 120th day prior to such
annual meeting and not later than the close of business on the later of the 90th
day prior to such annual meeting or the tenth day following the day on which
public announcement of the scheduled date of such meeting is first made.
Similarly, notice of nominations to be brought before a special meeting must be
received by the Secretary not earlier than the 90th day prior to such special
meeting and not later than the close of business on the 60th day prior to such
special meeting or the tenth day following the date on which notice of such
meeting is first given to stockholders.
The notice of business to be brought before an annual meeting by a
stockholder must set forth, as to each matter the stockholder proposes to bring
before the annual meeting, a brief description of the business desired to be
brought before the meeting and the reasons for conducting such business at the
meeting and, in the event that such business includes a proposal to amend either
the Articles or the Bylaws, the text of the proposed amendment; the name and
address, as they appear on the Company's books, of the stockholder proposing
such business; a representation that the stockholder is a holder of record of
stock of the Company entitled to vote at such meeting and intends to appear in
person or by proxy at the meeting to propose such business; any material
interest of the stockholder in such business; and if the stockholder intends to
solicit proxies in support of such stockholder's proposal, a representation to
that effect.
The notice of any nomination for election as a director must set forth
the name and address of the stockholder who intends to make the nomination and
of the person or persons to be nominated; a representation that the stockholder
is a holder of record of stock of the Company entitled to vote at such meeting
and intends to appear in person or by proxy at the meeting to nominate the
person or persons specified in the notice; a description of all arrangements or
understandings between the stockholder and each nominee and any other person or
persons (naming such person or persons) pursuant to which the nomination or
nominations are to be made by the stockholder; such other information regarding
each nominee proposed by such stockholder as would have been required to be
included in the proxy statement filed pursuant to the proxy rules of the
Commission had each nominee been nominated, or intended to be nominated, by the
Board; the consent of each nominee to serve as a director if so elected; and, if
the stockholder intends to solicit proxies in support of such stockholder's
nominee(s) without such stockholder having made the foregoing representation, a
representation to that effect.
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The Company expects to hold its first annual meeting of stockholders in
August 2000. Each stockholder will have until the close of business on the tenth
day following the day on which the first public disclosure of the date of such
first annual meeting is made to give notice to the Company, in proper form, of
such stockholder's intention to bring any matter before such first annual
meeting.
Nevada General Corporation Law ("NGCL"). The terms of Chapter 78 of the
NGCL apply to the Company since it is a Nevada corporation. Under certain
circumstances, the following selected provisions of the NGCL may delay or make
more difficult acquisitions or changes of control of the Company. The Articles
and By-laws do not exclude the Company from such provisions of the NGCL. Such
provisions also may have the effect of preventing changes in the management of
the Company. It is possible that such provisions could make it more difficult to
accomplish transactions that stockholders may otherwise deem to be in their best
interests.
Control Share Acquisitions. Pursuant to Sections 78.378 to 78.3793 of
the NGCL, an "acquiring person" who acquires a "controlling interest" in an
"issuing corporation" may not exercise voting rights on any "control shares"
unless such voting rights are conferred by a majority vote of the disinterested
stockholders of the issuing corporation at a special meeting of such
stockholders held upon the request and at the expense of the acquiring person.
In the event that the control shares are accorded full voting rights and the
acquiring person acquires control shares with a majority or more of all the
voting power, any stockholder, other than the acquiring person, who does not
vote in favor of authorizing voting rights for the control shares is entitled to
demand payment for the fair value of his or her shares, and the corporation must
comply with the demand. For purposes of the above provisions, "acquiring person"
means (subject to certain exceptions) any person who, individually or in
association with others, acquires or offers to acquire, directly or indirectly,
a controlling interest in an issuing corporation. "Controlling interest" means
the ownership of outstanding voting shares of an issuing corporation sufficient
to enable the acquiring person, individually or in association with others,
directly or indirectly, to exercise (i) one-fifth or more but less than
one-third, (ii) one-third or more but less than a majority and/or (iii) a
majority or more of the voting power of the issuing corporation in the election
of directors. Voting rights must be conferred by a majority of the disinterested
stockholders as each threshold is reached and/or exceeded. "Control shares"
means those outstanding voting shares of an issuing corporation that an
acquiring person acquires or offers to acquire in an acquisition or within 90
days immediately preceding the date when the acquiring person became an
acquiring person. "Issuing corporation" means a corporation which is organized
in Nevada, has 200 or more stockholders (at least 100 of whom are stockholders
of record and residents of Nevada) and does business in Nevada directly or
through an affiliated corporation. The above provisions do not apply if the
articles of incorporation or bylaws of the corporation in effect on the 10th day
following the acquisition of a controlling interest by an acquiring person
provide that said provisions do not apply. As noted above, the Articles and
Bylaws do not exclude the Company from the restrictions imposed by such
provisions.
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Certain Business Combinations. Sections 78.411 to 78.444 of the NGCL
restrict the ability of a "resident domestic corporation" to engage in any
combination with an "interested stockholder" for three years after the
interested stockholder's date of acquiring the shares that cause such
stockholder to become an interested stockholder, unless the combination or the
purchase of shares by the interested stockholder on the interested stockholder's
date of acquiring the shares that cause such stockholder to become an interested
stockholder is approved by the board of directors of the resident domestic
corporation before that date. If the combination was not previously approved,
the interested stockholder may effect a combination after the three-year period
only if such stockholder receives approval from a majority of the disinterested
shares or the offer meets certain fair price criteria. For purposes of the above
provisions, "resident domestic corporation" means a Nevada public corporation
that has 200 or more stockholders. "Interested stockholder" means any person,
other than the resident domestic corporation or its subsidiaries, who is (i) the
beneficial owner, directly or indirectly, of 10% or more of the voting power of
the outstanding voting shares of the resident domestic corporation or (ii) an
affiliate or associate of the resident domestic corporation and, at any time
within three years immediately before the date in question, was the beneficial
owner, directly or indirectly, of 10% or more of the voting power of the then
outstanding shares of the resident domestic corporation. The above provisions do
not apply to corporations that so elect in a charter amendment approved by a
majority of the disinterested shares. Such a charter amendment, however, would
not become effective for 18 months after its passage and would apply only to
stock acquisitions occurring after its effective date. As noted above, the
Articles and Bylaws do not exclude the Company from the restrictions imposed by
such provisions.
Rights and Options. Section 78.200 of the NGCL provides that a
corporation may create and issue, whether in connection with the issue and sale
of any shares of stock or other securities of the corporation, rights or options
for the purchase of shares of stock of any class of the corporation, to be
evidenced by such instrument as is approved by the board of directors. The terms
upon which, the time or times, which may be limited or unlimited in duration, at
or within which, and the price at which, any such shares may be purchased from
the corporation upon the exercise of any such right or option must be fixed and
stated in the Articles or in a resolution adopted by the board of directors
providing for the creation and issuance of such rights or options, and, in every
case, set forth or incorporated by reference in the instrument evidencing the
rights or options.
Directors' Duties. Section 78.138 of the NGCL allows directors
and officers, in exercising their respective powers with a view to the interests
of the corporation, to consider the interests of the corporation's employees,
suppliers, creditors and customers, the economy of the state and the nation, the
interests of the community and of society and the long and short-term interests
of the corporation and its stockholders, including the possibility that these
interests may be best served by the continued independence of the corporation.
Directors may resist a change or potential change in control if the directors,
by a majority vote of a quorum, determine that the change or potential change is
opposed to or not in the best interest of the corporation upon consideration of
the interests set forth above or if the board has reasonable grounds to believe
that, within a reasonable time, the debt created as a result of the change in
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control would cause the assets of the corporation or any successor to be less
than the liabilities or would render the corporation or any successor insolvent
or would lead to bankruptcy proceedings.
MARKET FOR COMPANY SECURITIES
AND RELATED STOCKHOLDER MATTERS
Prior to this offering, there has been no public market for the
debentures. The Company intends to apply to have the debentures traded on the
over-the-counter market and listed on the "yellow sheets" published by the
National Quotation Bureau, LLC. No assurance can be given that such listing will
be approved and, if approved, that an active trading market for the debentures
will be established or maintained. Although the Company expects that Choice will
assist in making a market in the debentures, Choice will not be obligated to do
so and any such market making may be discontinued at any time. Since the prices
of securities generally fluctuate, there can be no assurance that purchasers of
the debentures will be able to sell the debentures at or above the purchase
price paid for them.
The Company is a reporting company under the Securities Exchange Act of
1934. The Common Stock of the Company has been registered under Section 12(g) of
that Act and application has been made to the National Association of Securities
Dealers ("NASD") to initiate trading on the OTCBB. No assurance can be given
that such application will be approved and, if approved, that an active trading
market for the Common Stock will be established or maintained. The Common Stock
of the Company has not traded on any organized market. Sales of shares of Common
Stock may have occurred on a private basis, but management of the Company is
unaware of the specific price or terms of such transactions.
Except for the stock options for 80,000 shares issued to employees and
directors under the 1999 Stock Option and Incentive Plan, there are no
outstanding options or warrants to purchase, or securities convertible into,
shares of Common Stock. See "Executive Compensation."
When the Company was spun off from Innovation International,
shareholders of Innovation International received the rights to 1,600,000 shares
of common stock of the Company. Shareholders of Innovation International are
free to trade their shares upon effectiveness of the registration statement
filed on Form 10-SB with the Commission on July 23, 1999. The remaining
shareholders of the Company who acquired their shares in the Company as a part
of an acquisition of the Company's subsidiary will have their shares eligible
for sale on the first anniversary of their issuance, subject to the restrictions
and volume limitations of Rule 144.
In general, under Rule 144, a person (or persons whose shares are
aggregated) who has beneficially owned his or her restricted shares for at least
one year, including persons who may be deemed "affiliates" of the Company, as
that term is defined under the Securities Act, would be entitled to sell within
any three-month period a number of shares that does not exceed the
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greater of 1% of the then-outstanding shares of the Company's Common Stock or
the average weekly trading volume in the over-the-counter market during the four
calendar weeks preceding such sale. A person who is deemed not to have been an
affiliate of the Company at any time during the 90 days preceding a sale by such
person, and who has beneficially owned his or her restricted shares for at least
two years, would be entitled to sell such shares under Rule 144 at any time and
without regard to the volume limitations described above.
The Company on November 10, 1999 registered the 2,000,000 shares of
Common Stock reserved under the Company's stock option programs. See "Executive
Compensation-Stock Option and Incentive Plan." This registration was not done
for the purpose of securing capital. Shares issued upon exercise of outstanding
stock options after the effective date of such registration statement generally
will be available for sale in the open market.
None of the holders of any shares of Common Stock of the Company are
entitled to any registration rights.
The Company has not paid any dividends on its Common Stock and intends
to retain all earnings for use in its operations and to finance the development
and the expansion of its business. It does not anticipate paying any dividends
on the Common Stock in the foreseeable future. The payment of dividends is
within the discretion of the Company's Board of Directors. Any future decision
with respect to dividends will depend on future earnings, future capital needs
and the Company's operation and financial condition, among other factors.
As of September 30, 1999, there were approximately 360 holders of
record of the Company's common stock and no holders of record of the Company's
preferred stock.
EXECUTIVE COMPENSATION
COMPENSATION
During the year ended March 31, 1999, the Company did not pay
compensation to its executive officers separate from the compensation they
received as employees of the Subsidiary. The Company has a small group of
officers who do not have substantial duties with the Company. These officers
also hold positions with the Subsidiary and each officer has substantial duties
with the Subsidiary. Each officer is compensated by the Subsidiary for the
duties performed for the Subsidiary. Separate compensation will not be paid to
the officers of the Company until such time as the officers of the Company
devote significant time to separate management of Company affairs, which is not
expected to occur until the Company becomes actively involved in additional
significant business beyond that of its subsidiary, AFC.
The following table sets forth information concerning the
compensation paid or granted to AFC's Chief Executive Officer in
fiscal years ended March 31, 1999 and 1998. No other executive
officer of AFC had an aggregate salary and bonus which exceeded $100,000 in
fiscal 1999.
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Summary Compensation Table 4
Long Term All Other
Compensation Compen-
Annual Compensation Awards sation(1)($)
------------------------------------------------------
Name and Fiscal Other Annual Options/
Principal Position Year 3 Salary ($) Bonus ($) Compensation ($) SAR's (2)(#)
- ------------------ ------ ---------- --------- ---------------- ------------
Glenn A. LaPointe, 1999 $ 92,000 $ -- $ -- -- $ 9,073
President and Chief 1998 31,000 -- -- -- 1,512
Executive Officer
Terry G. Hartnett, 1999 108,000 -- -- -- 8,362
Executive Vice President 1998 57,500 -- -- -- 1,394
and Chief Financial Officer
L. H. Hardy, Jr., 1999 100,000 -- -- -- 6,800
Consultant 1998 -- -- -- -- --
- --------
(1) Taxable fringe benefits including value of personal use of the Company
provided automobile.
(2) The term "SAR" refers to stock appreciation rights.
(3) For the fiscal years ended March 31, 1999 and 1998.
(4) Director Bradley J. Farley entered into a consulting agreement with the
Company in April 1999 by which he is to receive a monthly payment of
$15,000 for his financial and business development consulting services.
The following table provides information regarding stock options
granted to AFC's officers on July 23, 1999. No stock options or stock
appreciation rights ("SAR's") were granted during fiscal 1999.
OPTION\SAR GRANTS
Individual Grants
Number of % of Total
Securities Options/SAR's Exercise
Underlying Granted to or Base
Options/SAR's Employees in Price Expiration
Name Granted (#) Fiscal Year ($/Sh) Date
---- ------------- ------------- --------- ----------
Glenn A. LaPointe 5,000 8.0% $1.10 June 30, 2004
Terry G. Hartnett 5,000 8.0% $1.10 June 30, 2004
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement with Glenn A.
LaPointe providing for an initial term of three years. The employment agreement
will become effective upon July 31, 1999 and provide for an annual base salary
of $180,000 and a bonus based on a profit sharing formula. The agreement
provides for an annual extension, subject to the performance of an annual
evaluation by disinterested members of the Board of Directors. The
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agreement also provides for termination upon the employee's death or for cause.
The employment agreement is also terminable by the employee upon 90 days' notice
to the Company.
In the event Mr. LaPointe is involuntarily terminated without cause, he
will receive his salary and insurance benefits for a period of 12 months. In
addition, in the event employment involuntarily terminates in connection with a
"change in control" of the Company or within twelve months thereafter, the
employment agreement provides for the payment to LaPointe of an amount equal to
299% of his five-year average annual base compensation. If the employment of
LaPointe had been terminated as of July 31, 1999 under circumstances entitling
him to a change in control severance payment as described above, he would have
been entitled to receive a lump sum cash payment of approximately $538,200. The
agreement also provides for the continued payment to LaPointe of health benefits
for the remainder of the term of his contract in the event he is terminated in
connection with a change in control.
CONSULTING AGREEMENTS WITH DIRECTORS
Directors Bradley J. Farley and L.H. Hardy, Jr. each have consulting
agreements with the Company. Beginning in April 1999, Director Farley has been
acting as a financial and business development consultant to the Company. He has
a written Consulting Agreement under which Mr. Farley is paid $15,000 a month
for his services. The Agreement continues until such time as Mr. Farley sells
his shares of common stock in the Company.
Director L.H. Hardy, Jr. is also serving as a consultant to the Company
where he assists the President with certain operational matters and provides
strategic and financial consulting. The Company pays Director Hardy a monthly
consulting fee of $10,000 per month. In addition to his consulting fee, the
Company leases an automobile for Mr. Hardy at a cost of approximately $680 per
month. The Company does not have a written consulting agreement with Mr. Hardy
and the Company may terminate his services at any time.
From time to time in the past, the Company has asked Mr. Hardy to
assist the President or other officers on special projects. Since 1997, Mr.
Hardy has served in this capacity as a consultant on some occasions and as an
employee on others. During fiscal year ended March 31, 1999, Mr. Hardy was
employed by the Company from April 1998 to January 1999. He was paid a total
salary of $100,000 during fiscal year 1999.
STOCK OPTION AND INCENTIVE PLAN
The stockholders and the Board of Directors of the Company have adopted
a Stock Option and Incentive Plan as set forth in Exhibit 6(a) (the "Stock
Option Plan"). Under the terms of the proposed Stock Option Plan, stock options
covering shares representing an aggregate of up to 2,000,000 shares of Common
Stock may be granted to directors, officers and employees of the Company or its
subsidiaries under the Stock Option Plan. The shares
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covered by the Stock Option Plan if granted and exercised would equal
approximately 10% of the issued and outstanding shares of the Company.
Options granted under the Stock Option Plan may be either options that
qualify under the Internal Revenue Code as "incentive stock options" (options
that afford preferable tax treatment to recipients upon compliance with certain
restrictions and that do not normally result in tax deductions to the employer)
or options that do not so qualify. The exercise price of stock options granted
under the Stock Option Plan is required to be at least equal to the fair market
value per share of the stock on the date of grant. All grants are made in
consideration of past and future services rendered to the Company, and in an
amount deemed necessary to encourage the continued retention of the officers and
directors who are considered necessary for the continued success of the Company.
The proposed Stock Option Plan provides for the grant of stock
appreciation rights ("SAR's") at any time, whether or not the participant then
holds stock options, granting the right to receive the excess of the market
value of the shares represented by the SAR's on the date exercised over the
exercise price. SAR's generally will be subject to the same terms and conditions
and exercisable to the same extent as stock options.
Limited SAR's may be granted at the time of, and must be related to,
the grant of a stock option or SAR. The exercise of one will reduce to that
extent the number of shares represented by the other. Limited SAR's will be
exercisable only for the 45 days following the expiration of the tender or
exchange offer, during which period the related stock option or SAR will be
exercisable. However, no SAR or Limited SAR will be exercisable by a 10%
beneficial owner, director or senior officer within six months of the date of
its grant. The Company has no present intention to grant any SAR's or Limited
SAR's.
The proposed Stock Option Plan will be administered by a Stock Plan
Committee of the Company which will consist of at least two disinterested
directors. The Stock Plan Committee will select the recipients and terms of
awards made pursuant to the Stock Option Plan.
The Committee currently intends to grant options in the amount of 5,000
shares to each employee of AFC (13 persons). In addition, under the terms of the
Stock Option Plan, each non-employee director of the Company at the time of
stockholder ratification of the Stock Option Plan will be granted an option to
purchase 5,000 shares of Common Stock (3 persons). The remaining balance of the
available awards is unallocated and reserved for future use. All options will
expire 10 years after the date such option was granted, provided that options to
persons who hold more than 10% of the outstanding stock will expire in five
years. All proposed option grants to officers are subject to modification by the
Stock Plan Committee based upon its performance evaluation of the option
recipients at the time of stockholder ratification of the Stock Option Plan.
The Stock Option Plan will be funded either with shares purchased in
the open market or with authorized but unissued shares of Common Stock. The use
of authorized but unissued
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shares to fund the Stock Option Plan could dilute the holdings of stockholders
who own Common Stock in the Company.
Under SEC regulations, so long as certain criteria are met, an optionee
may be able to exercise the option at the Purchase Price and immediately sell
the underlying shares at the then-current market price without incurring
short-swing profit liability. This ability to exercise and immediately resell,
which under the SEC regulations applies to stock option plans in general, allows
the optionee to realize the benefit of an increase in the market price for the
stock without the market risk which would be associated with a required holding
period for the stock after payment of the exercise price. Under SEC regulations,
the short-swing liability period now runs for six months before and after the
option grant.
PLAN OF DISTRIBUTION
OFFERING OF DEBENTURES
Debentures in the amount of up to $10,000,000 will be offered for sale,
subject to certain restrictions described below, through an offering to the
general public. A minimum amount of $3,000,000 of the debentures must be sold if
any are to be sold. The price at which the debentures are sold in the offering
will be at par.
The offering will expire at 4:00 p.m. Austin, Texas time, on February
11, 2000 (the "Expiration Date") unless extended by the Company. The offering
may be extended until six months from the date of this Prospectus by the
Company. If the offering is extended beyond February 11, 2000, all subscribers
will be permitted to modify or cancel their subscriptions and to have their
subscription funds returned promptly with interest. In the event of such an
extension, all subscribers will be notified in writing of the time period within
which the subscriber must notify the Company of his intention to maintain,
modify or rescind his subscription. In the event the subscriber does not respond
in any manner to the Company's notice, the funds will be refunded to the
subscriber with interest and/or the subscriber's withdrawal authorizations will
be terminated.
The Company may terminate or withdraw the offering prior to the
Expiration Date. Once the minimum amount of $3,000,000 of the debentures are
sold, the Company intends to close on that minimum amount and continue to sell
the remainder of the debentures until the expiration of the offering. The
Company reserves the right to withdraw the offer of debentures and close the
offering prior to February 11, 2000 upon the sale of the minimum amount of the
debentures. In the event that the offering is not effected, all funds submitted
and not previously refunded pursuant to the offering will be promptly refunded
to subscribers with interest. In the event of an oversubscription, the
debentures will be allocated first pro rata among the subscribers in the
offering based on the amount of their subscriptions. The opportunity to
subscribe for debentures in the offering is subject to the right of the Company,
in its sole discretion, to accept or reject any such orders in whole or in part
either at the time of receipt of an order or as soon as practicable following
the Expiration Date.
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The minimum purchase is $5,000. Additional amounts may be sold in
increments of $1,000. Pursuant to the terms of this offering, no person (which
includes a natural person, company or other entity) or group of persons acting
together for the purpose of acquiring, holding or disposing of the debentures,
may purchase more than $1,000,000 of the shares being offered hereby if such
person would be deemed the beneficial owner of such debentures within the
meaning of Rule 13(d)(3) promulgated under the Securities Exchange Act of 1934.
Choice will be available to answer questions about the offering and may
also hold informational meetings with interested persons where licensed
executive officers and directors of the Company may participate. Such officers
and directors will not be permitted to make statements about the Company unless
such information is also set forth in the Prospectus, nor will they render
investment advice. All purchasers of the shares offered hereby will be
instructed to send payment directly to Choice, where such funds will be
delivered to a special escrow account with Compass Bank, N.A. ("Compass") and
not released until the debentures are sold or the offering is terminated, as
provided herein.
Depending upon market and financial conditions, the Board of Directors
of the Company, without approval of the subscribers, may increase or decrease
any of the above purchase limitations at any time. Factors the Company may
consider in increasing or decreasing the purchase limitations include, among
other things, (i) changes in market conditions, (ii) an oversubscription of
debentures or (iii) the failure to sell a minimum amount of the debentures.
Subscribers will be notified by mail in the event of an increase in the purchase
limitations. In the event of a decrease in the purchase limitations, subscribers
will be notified, to the extent their orders are affected at the time they
receive final confirmation of their orders.
Debentures purchased in the offering will be freely transferable except
as described below. In addition, under National Association of Securities
Dealers, Inc. ("NASD") guidelines, members of the NASD and their associates are
subject to certain restrictions on transfer of securities purchased in
accordance with this offering and to certain reporting requirements upon
purchase of such securities.
The debentures received in the offering by persons who are not
"affiliates" of the Company may be resold without registration. Debentures
received by affiliates of the Company (primarily the directors, officers and
principal shareholders of the Company) will be subject to the resale
restrictions of Rule 144 under the Securities Act, which are discussed below.
Rule 144 generally requires that there be publicly available certain information
concerning the Company, and that sales thereunder be made in routine brokerage
transactions or through a market maker. If the conditions of Rule 144 are
satisfied, each affiliate (or group of persons acting in concert with one or
more affiliates) is entitled to sell in the public market, without registration,
in any three-month period, a number of debentures which does not exceed the
greater of (i) 1% of the number of outstanding debentures of the Company or (ii)
if the debentures are admitted to trading on a national securities exchange or
reported through the
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automated quotation system of a registered securities association the average
weekly reported volume of trading during the four weeks preceding the sale.
The Company will make reasonable efforts to comply with the securities
laws of all states in the United States in which Choice and the Board desires to
offer the debentures.
MARKETING AND UNDERWRITING ARRANGEMENTS
The Company has retained Choice, which is a broker-dealer registered
with the SEC and a member of the NASD, to consult with and advise the Company
and to assist in the distribution of debentures in the offering on a best
efforts basis. Choice will have no obligation to take or purchase any
debentures. Choice will assist the Company in the offering as follows: (1) in
conducting informational meetings for subscribers and other potential
purchasers; (2) in keeping records of all subscriptions; and (3) in training and
educating the Company's employees regarding the mechanics and regulatory
requirements of the offering process. For its services, Choice will receive a
financial advisory fee of $50,000 and a sales fee equal to 5.0% of the aggregate
Purchase Price of the debentures sold in the offering by Choice. Depending upon
market conditions, the debentures may be offered for sale in the offering on a
best efforts basis by a selling group of selected broker dealers agreed upon by
Choice and the Company. In addition, the Company will reimburse Choice for all
reasonable out-of-pocket expenses (including expenses related to attorneys' fees
and expenses) not to exceed $22,500.
Choice was formed in 1983 as a registered securities broker-dealer.
Since that time, Choice has served its customers as broker-dealers but has not
acted as an underwriter in any public offerings. Although Choice's principals
have extensive experience in the securities industry, there can be no assurance
that Choice's limited operating history will not have an adverse effect on the
offering or the market for the Company's securities.
The Company has agreed to indemnify Choice against certain liabilities,
including liabilities under the Securities Act, and to contribute to payments
Choice may be required to make in respect thereof. It is the opinion of the
Securities and Exchange Commission that such indemnification is contrary to
public policy and unenforceable.
The foregoing does not purport to be complete statements of the terms
and conditions of the Marketing Agreement and related documents, copies of which
are on file at the offices of Choice, the Company and the Securities and
Exchange Commission, forms of which have been filed as an exhibit to the
Registration Statement of which this Prospectus forms a part.
In addition, directors and executive officers of the Company may
participate in the solicitation of offers to purchase debentures. Other
employees of the Company may participate in the offering in administrative
capacities, providing clerical work in effecting a sales transaction or
answering questions of a potential purchaser provided that the content of the
employee's responses is limited to information contained in the Prospectus or
other offering
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document. Other questions of prospective purchasers will be directed to
registered representatives of Choice. Company employees have been instructed not
to solicit offers to purchase debentures or provide advice regarding the
purchase of debentures. Sales of debentures will be made from the Sales Center.
Until final approval of the appropriate state dealer registrations are obtained,
officers, directors and employees of the Company will not be allowed to
participate in the sale of the debentures. Assuming such registrations are
received, the Company will rely on Rule 3a4-1 under the Act, and sales of
debentures will be conducted within the requirements of Rule 3a4-1, so as to
permit officers, directors and employees to participate in the sale of
debentures under federal law. No officer, director or employee of the Company
will be compensated in connection with his participation by the payment of
commissions or other remuneration based either directly or indirectly on the
transactions in the debentures.
DEBENTURE PRICING
Prior to this offering, there has been no public market for the
Company's debentures and therefore no public market price. The public offering
price of par for the debentures has been determined by negotiation between the
Company and Choice. Among the factors considered in determining the public
offering price were the earnings and certain other financial and operating
information of the Company in recent periods, the future prospects of the
Company and its industry in general and the price-earning ratios, price-book
value ratios, market prices of securities and certain financial and operating
information of companies engaged in activities similar to those of the Company.
The Company and Choice also considered the Company's desire to (i) conduct the
offering in a manner to achieve the widest distribution of the debentures, and
(ii) promote liquidity in the debentures subsequent to the offering.
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METHOD OF PAYMENT FOR SUBSCRIPTIONS
Subscribers must, before the appropriate expiration date (or such
extensions thereof), return an original order form to the Company, properly
completed, together with cash, checks or money orders in an amount equal to the
purchase price. Subscriptions which are returned by mail must be received by the
Company by the Expiration Date. All funds will be placed in an escrow account
with Compass and will earn interest from the date of receipt until completion or
termination of the offering. Compass may invest the escrow funds in short-term
Government securities or money market investments. Subscriptions received by the
Company may not be modified, withdrawn or canceled by the subscriber without the
consent of the Company and, if accepted by the Company, are final unless the
offering is extended as described above. Subscriptions which are not received by
the appropriate expiration date or are not in compliance with the order form
instructions may be deemed void by the Company. The Company has the right to
extend the offering Expiration Date or to waive or permit correction of
incomplete or improperly executed order forms, but does not represent that it
will do so. If the minimum amount of $3,000,000 of the debentures have not been
sold by the termination of this offering, all funds received from subscribers
will be promptly refunded, with interest.
In addition to the foregoing, if a selected dealer arrangement is
utilized, a purchaser may pay for his debentures with funds held by or deposited
with a selected dealer. If an order form is executed and forwarded to the
selected dealer or if the selected dealer is authorized to execute the order
form on behalf of a purchaser, the selected dealer is required to promptly
forward the order form and funds to Choice for deposit in the escrow account on
or before noon, Austin, Texas time on the business day following receipt of the
order form or execution of the order form by the selected dealer. Alternatively,
selected dealers may solicit indications of interest from their customers to
place orders for debentures. Such selected dealers shall subsequently contact
their customers who indicated an interest and seek their confirmation as to
their intent to purchase. Those indicating an intent to purchase shall execute
order forms and forward them to their selected dealer or authorize the selected
dealer to execute such forms. With the exception of "non-customer carrying
broker-dealers," the selected dealer will acknowledge receipt of the order to
its customer in writing on the following business day and will debit such
customer's account on the fifth business day after the customer has confirmed
his intent to purchase (the "debit date") and on or before noon, Austin, Texas
time, on the next business day following the debit date will promptly send order
forms and funds to the Company for deposit in the escrow account. If such
alternative procedure is employed, purchasers' funds are not required to be in
their accounts with selected dealers until the debit date. In the case of a
non-customer carrying broker-dealer, checks will be made payable to the Company
and promptly transmitted to the Company by the broker-dealer by noon of the day
after receipt of the check.
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RISK OF DELAYED OFFERING
In the event that the debentures are not sold in the offering, the
Company may extend the offering to a date which is six months from the date of
this Prospectus. Until the termination of the offering, the subscription funds
will be invested by Compass as Escrow Agent in short-term U.S. Government
securities and money market investments. The actual rate of interest on these
investments is not known because they fluctuate as often as daily. The interest
that such subscription funds may earn, while in escrow, may be lower than those
otherwise available to subscribers.
A material delay in the completion of the sale of all debentures in the
offering may result in a significant increase in the costs of completing the
offering. Significant changes in the Company's operations and financial
condition, the aggregate market value of the debentures to be issued in the
offering and general market conditions may occur during such material delay. In
the event the offering is delayed as described herein, the Company would charge
accrued offering costs to then current period operations.
PRICE STABILIZATION
Certain persons participating in the offerings may engage in
transactions that stabilize, maintain or otherwise affect the price of the
debentures and the common stock, including overallotment, entering stabilization
bids, effecting syndicate covering transactions and imposing penalty bids.
In connection with this offering, certain underwriters may engage in
passive market making transactions in the debentures and the common stock in
accordance with rule 103 of Regulation M.
LEGAL MATTERS
The validity of the issuance of the debentures offered hereby will be
passed upon for the Company by the firm of Selman Munson & Lerner, P.C., 111
Congress Avenue, Austin, Texas 78701. Certain legal matters regarding the
offering will be passed upon for Choice by Jack W. Ledbetter & Associates, P.C.,
3563 Far West Boulevard, Suite 107, Austin, Texas 78731.
EXPERTS
The financial statements of the Company included in this Prospectus
have been audited by Sprouse & Winn, L.L.P., independent accountants, to the
extent and for the periods indicated in their report appearing elsewhere herein,
and are included herein in reliance upon the authority of said firm as experts
in accounting and auditing.
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HOW TO GET MORE INFORMATION
The Company has filed with the Securities and Exchange Commission a
registration statement on Form SB-2 under the Securities Act for the debentures
being offered by this prospectus. This prospectus does not contain all of the
information set forth in the registration statement and the exhibits. For
further information about the Company and the debentures offered, see the
registration statement and the exhibits thereto. Statements contained in this
prospectus regarding the contents of any contract or any other document to which
reference is made are not necessarily complete, and, in each instance where a
copy of a contract or other document has been filed as an exhibit to the
registration statement, reference is made to the copy so filed, each of those
statements being qualified in all respects by that reference. A copy of the
registration statement and the exhibits may be inspected without charge at the
Commission's offices at Judiciary Plaza, 450 Fifth Street, Washington, D.C.
20549, and copies of all or any part of the registration statement may be
obtained from the Public Reference Room of the Commission, Washington, D.C.
20549 upon the payment of the fees prescribed by the Commission. The public may
obtain information on the operation of the Public Reference Room by calling the
Commission at 1-800-SEC-0330. The Commission maintains a web site ( that
contains reports, proxy and information statements and other information
regarding registrants, such as the Company, that file electronically with the
Commission. The Company is subject to the information and reporting requirements
of the Securities Exchange Act of 1934, as amended, and it will file periodic
reports, proxy statements and other information with the Commission. The Company
intends to furnish the holders of the debentures and its stockholders with
annual reports containing audited financial statements and with quarterly
reports for the first three quarters of each year containing unaudited interim
financial information, pursuant to the Securities Exchange Act of 1934.
No dealer, salesman or any other person has been authorized to give any
information which is not contained in this Prospectus or to make any
representation in connection with this offering other than those which are
contained in the Prospectus, and if given or made, such information or
representation must be relied upon as having been authorized by the Company.
This Prospectus does not constitute an offer to sell or a solicitation
of an offer to buy any of the securities which are offered hereby to any person
in any jurisdiction where such offer or solicitation would be unlawful. Neither
the delivery of this Prospectus nor any sale hereunder shall under any
circumstances create any implications that there has been no change in the
affairs of the Company or the facts which are herein set forth since the date
hereof.
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AUSTIN FUNDING.COM CORPORATION
INDEX TO FINANCIAL STATEMENTS
The following financial statements of the Company are included herein:
Independent Auditors' Report F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Income F-3
Consolidated Statements of Stockholders' Equity F-4
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-6 to F-12
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AUSTIN FUNDING.COM CORPORATION
(FORMERLY AUSTIN ASSET
MANAGEMENT CORPORATION)
AND ITS WHOLLY-OWNED SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1999 AND 1998 (UNAUDITED), MARCH 31, 1999 AND 1998
74
AUSTIN FUNDING.COM CORPORATION
(FORMERLY AUSTIN ASSET MANAGEMENT CORPORATION)
AND ITS WHOLLY-OWNED SUBSIDIARY
AUSTIN, TEXAS
TABLE OF CONTENTS
PAGE
----
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS
Consolidated Balance Sheets 2
Consolidated Statements of Income 3
Consolidated Statements of Stockholders' Equity 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6-13
75
Austin Funding.com Corporation
(formerly Austin Asset Management Corporation)
And Its Wholly-Owned Subsidiary
Austin, Texas
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance sheets of Austin
Funding.com Corporation (formerly Austin Asset Management Corporation) (AFCC)
and its wholly-owned subsidiary as of March 31, 1999 and 1998, and the related
consolidated statements of income, stockholders' equity and cash flows for the
year ended March 31, 1999 and the period from inception, April 4, 1997, to March
31, 1998. The consolidated financial statements are the responsibility of AFCC's
management. Our responsibility is to express an opinion on the consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Austin Funding.com
Corporation (formerly Austin Asset Management Corporation) and its wholly-owned
subsidiary as of March 31, 1999 and 1998, and the results of its operations and
its cash flows for the year ended March 31, 1999 and the initial period ended
March 31, 1998 in conformity with generally accepted accounting principles.
June 22, 1999
SPROUSE & WINN, L.L.P.
AUSTIN, TEXAS
-1-
76
CONSOLIDATED FINANCIAL STATEMENTS
77
AUSTIN FUNDING.COM CORPORATION
(FORMERLY AUSTIN ASSET MANAGEMENT CORPORATION)
AND ITS WHOLLY-OWNED SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1999 AND 1998 (UNAUDITED), MARCH 31, 1999 AND 1998
UNAUDITED
SEPTEMBER 30, MARCH 31,
-------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
ASSETS
CURRENT ASSETS
Cash $ 152,020 $ 141,189 $ 4,245 $ 115,482
Accounts receivable -0- -0- -0- 1,611,768
Inventory (Notes 2 and 5) 7,566,943 4,096,072 1,852,937 1,288,416
----------- ----------- ----------- -----------
Total Current Assets 7,718,963 4,237,261 1,857,182 3,015,666
----------- ----------- ----------- -----------
OTHER RECEIVABLES
Stockholder receivable (Note 5) 48,560 41,760 48,760 36,560
Other receivables (Note 5) 39,524 -0- 28,830 -0-
Notes receivable 500,000 11,952 11,866 11,952
----------- ----------- ----------- -----------
Total Other Receivables 588,084 53,712 89,456 48,512
----------- ----------- ----------- -----------
PROPERTY AND EQUIPMENT
Furniture and equipment 45,802 34,642 45,802 17,080
Accumulated depreciation (11,535) (1,700) (11,535) (1,700)
----------- ----------- ----------- -----------
Net Property and Equipment 34,267 32,942 34,267 15,380
----------- ----------- ----------- -----------
Deposits 427,822 3,217 5,669 2,107
----------- ----------- ----------- -----------
INVESTMENT IN LIMITED PARTNERSHIP (Note 6) 745,284 -0- 484,968 -0-
----------- ----------- ----------- -----------
TOTAL ASSETS $ 9,514,420 $ 4,327,132 $ 2,471,542 $ 3,081,665
=========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 126,592 $ 14,291 $ 115,962 $ 58,468
Deferred income -0- 97,087 73,476 25,677
Income taxes payable -0- -0- -0- 40,966
Other liabilities -0- -0- 20 133
Current maturities of long-term debt (Note 3) 9,816 -0- 9,226 -0-
Lines of credit and mortgage purchase agreement (Note 2) 6,499,389 4,064,015 1,823,312 2,790,232
Deferred income taxes (Note 7) -0- -0- -0- 769
----------- ----------- ----------- -----------
Total Current Liabilities 6,635,797 4,175,393 2,021,996 2,916,245
LONG-TERM DEBT, net of current maturities (Note 3) 12,102 -0- 17,162 -0-
DEFERRED INCOME TAXES LESS CURRENT PORTION
(Note 7) -0- -0- -0- 3,076
----------- ----------- ----------- -----------
Total Liabilities 6,647,899 4,175,393 2,039,158 2,919,321
STOCKHOLDERS' EQUITY 2,866,521 151,739 432,384 162,344
----------- ----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,514,420 $ 4,327,132 $ 2,471,542 $ 3,081,665
=========== =========== =========== ===========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
-2-
78
AUSTIN FUNDING.COM CORPORATION
(FORMERLY AUSTIN ASSET MANAGEMENT CORPORATION)
AND ITS WHOLLY-OWNED SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX-MONTH PERIOD ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED),
THE YEAR ENDED MARCH 31, 1999,
AND THE PERIOD APRIL 4, 1997 (INCEPTION) TO MARCH 31, 1998
UNAUDITED
SEPTEMBER 30, MARCH 31,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
SALES $ 8,784,739 $ 16,758,801 $ 20,548,383 $ 10,345,625
COST OF SALES 8,224,824 15,694,538 19,432,063 9,753,230
------------ ------------ ------------ ------------
GROSS PROFIT 559,915 1,064,263 1,116,320 592,395
------------ ------------ ------------ ------------
SELLING AND ADMINISTRATIVE
Salaries and wages 363,145 658,690 866,275 260,883
Office expense and supplies 35,602 56,965 64,055 37,855
Occupancy (Note 4) 40,021 30,066 41,921 12,495
Travel and entertainment 45,083 42,538 90,041 11,509
Telephone 29,407 42,618 71,914 26,263
Depreciation -0- -0- 9,834 1,700
Automobile expenses (Note 4) 14,489 14,448 25,065 2,297
Professional fees 186,366 19,080 70,700 29,466
Insurance 20,095 22,931 34,115 14,586
Equipment rental and maintenance (Note 4) 9,624 6,592 13,207 4,993
Advertising and marketing 16,948 45,441 33,310 5,576
Telemarketing 5,910 10,026 3,635 8,693
Other expenses 61,576 33,763 73,997 48,494
------------ ------------ ------------ ------------
Total Selling and Administrative 828,266 983,158 1,398,069 464,810
------------ ------------ ------------ ------------
OPERATING INCOME (LOSS) (268,351) 81,105 (281,749) 127,585
GAIN ON SALE OF PROPERTY (Note 5) -0- -0- -0- 47,258
OTHER INCOME (EXPENSES) 12,939 6,309 42,009 9,617
------------ ------------ ------------ ------------
INCOME, before income taxes (255,412) 87,414 (239,740) 184,460
INCOME TAX EXPENSE (BENEFIT)
(Note 7) -0- -0- (44,812) 47,116
============ ============ ============ ============
NET INCOME (LOSS) $ (255,412) $ 87,414 $ (194,928) $ 137,344
============ ============ ============ ============
EARNINGS (LOSS) PER SHARE $ (.01) $ 43.71 $ (97.46) $ 235.63
============ ============ ============ ============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
-3-
79
AUSTIN FUNDING.COM CORPORATION
(FORMERLY AUSTIN ASSETS MANAGEMENT CORPORATION)
AND ITS WHOLLY-OWNED SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE SIX-MONTH PERIOD ENDED SEPTEMBER 30, 1999 (UNAUDITED),
THE YEAR ENDED MARCH 31, 1999,
AND THE PERIOD APRIL 4, 1997 (INCEPTION) TO MARCH 31, 1998
Preferred Stock Common Stock*
--------------------------- ---------------------------
Shares Shares
(Issued and (Issued and
Outstanding) Amount Outstanding) Amount
------------ ---------- ------------ -------
Balance at March 31, 1997 $ -0- $ -0-
Issued 2,000 common
shares -0- 2,000 20
Net income -0- -0-
---------- ---------- -------
Balance at March 31, 1998 -0- 2,000 20
Issued 500 preferred
shares - April 1998 500 5 -0-
Dividend paid -0- -0-
Net income (loss) -0- -0-
--------- ---------- -------
Balance at March 31, 1999 500 5 2,000 20
Redeemed 500 preferred
shares - April 1999 (500) (5) -0-
Issued 500 preferred
shares - April 1999 500 5 -0-
Conversion of preferred
stock to common stock (500) (5) 500 5
Issued 108,108 common
shares - June 1999 108,108 1,081
Distribution of shares -0- 21,333,333 21,333
Issued 1,433,533 preferred
shares - September 1999 1,433,533 1,433,533 -0- -0-
Net income (loss) -0- -0-
Elimination of intercompany
accounts -0- -0- (110,608) (1,106)
--------- ---------- ---------- -------
Balance at September 30, 1999 1,433,533 $1,433,533 21,333,333 $21,333
========= ========== ========== =======
Additional Retained
Paid-In Earnings
Capital (Deficit) Total
----------- ---------- -------------
Balance at March 31, 1997 $ -0- $ -0- $ -0-
Issued 2,000 common
shares 24,980 -0- 25,000
Net income -0- 137,344 137,344
----------- ---------- -------------
Balance at March 31, 1998 24,980 137,344 162,344
Issued 500 preferred
shares - April 1998 484,963 -0- 484,968
Dividend paid -0- (20,000) (20,000)
Net income (loss) -0- (194,928) (194,928)
----------- ---------- -------------
Balance at March 31, 1999 509,943 (77,584) 432,384
Redeemed 500 preferred
shares - April 1999 (484,963) -0- (484,968)
Issued 500 preferred
shares - April 1999 995,695 -0- 995,700
Conversion of preferred
stock to common stock -0- -0- -0-
Issued 108,108 common
shares - June 1999 744,203 -0- 745,284
Distribution of shares (21,333) -0- -0-
Issued 1,433,533 preferred
shares - September 1999 -0- -0- 1,433,533
Net income (loss) -0- (255,412) (255,412)
Elimination of intercompany
accounts 1,106 -0- -0-
----------- ---------- -------------
Balance at September 30, 1999 $ 1,744,651 $ (332,996) $ 2,866,521
=========== ========== =============
*100,000,000 shares authorized, $0.001 par value as of September 30, 1999
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
-4-
80
AUSTIN FUNDING.COM CORPORATION
(FORMERLY AUSTIN ASSET MANAGEMENT CORPORATION)
AND ITS WHOLLY-OWNED SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX-MONTH PERIOD ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED),
THE YEAR ENDED MARCH 31, 1999,
AND THE PERIOD APRIL 4, 1997 (INCEPTION) TO MARCH 31, 1998
UNAUDITED
SEPTEMBER 30, MARCH 31,
-------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (255,412) $ 87,414 $ (194,928) $ 137,344
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation -0- -0- 9,834 1,700
(Increase) decrease in receivables -0- 1,611,768 1,611,768 (1,611,768)
(Increase) decrease in inventories (5,714,006) (2,875,362) (564,435) (1,288,416)
(Increase) decrease in other receivables (728) (5,200) (41,010) (48,512)
(Increase) decrease in deposits (422,153) (1,110) (2,452) (2,107)
Increase (decrease) in accounts payable and accrued 10,630 (58,468) 57,383 58,468
liabilities
Increase (decrease) in deferred tax liabilities -0- -0- (2,735) 3,845
Increase (decrease) in federal income taxes payable -0- (40,966) (43,187) 40,966
Increase in deferred income and other liabilities (58,203) 71,410 47,799 25,810
----------- ----------- ----------- -----------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (6,439,872) (1,210,514) 878,037 (2,682,670)
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment -0- (17,562) (28,722) (17,080)
Investment in partnership (760,316) -0- -0- -0-
----------- ----------- ----------- -----------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (760,316) (17,562) (28,722) (17,080)
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt -0- -0- 30,218 -0-
Net borrowings on line of credit 4,676,078 1,273,783 (966,920) 2,790,232
Principal payments on long-term debt (5,060) -0- (3,830) -0-
Proceeds from issuance of stock 2,676,945 -0- -0- 25,000
Dividends paid -0- (20,000) (20,000) -0-
----------- ----------- ----------- -----------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 7,347,963 1,253,783 (960,532) 2,815,232
----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH 147,775 25,707 (111,217) 115,482
CASH, Beginning of Year or Period 4,245 115,482 115,482 -0-
----------- ----------- ----------- -----------
CASH, End of Year or Period $ 152,020 $ 141,189 $ 4,265 $ 115,482
=========== =========== =========== ===========
TAXES PAID $ -0- $ 1,110 $ 1,110 $ 2,304
=========== =========== =========== ===========
INTEREST PAID $ 127,897 $ 147,721 $ 414,573 $ 153,141
=========== =========== =========== ===========
NON-CASH FINANCING ACTIVITY:
o 500 shares of preferred stock were issued in exchange for a limited
partnership interest in April 1998. These shares were subsequently
redeemed back in exchange for the limited partnership interest in April
1999.
o 500 shares of preferred stock was issued in exchange for a $500,000
certificate of deposit and a $500,000 negotiable security in April
1999.
o All remaining shares of preferred stock (500 shares) were converted
into 500 shares of common stock in June 1999.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
-5-
81
AUSTIN FUNDING.COM CORPORATION
(FORMERLY AUSTIN ASSET MANAGEMENT CORPORATION)
AND ITS WHOLLY-OWNED SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998 (UNAUDITED), MARCH 31, 1999 AND 1998
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Austin Funding.com Corporation (formerly Austin Asset Management
Corporation) (AFCC) was incorporated in Nevada, on April 29, 1999, as
a wholly owned subsidiary of Innovation International, Inc.
(Innovation).
On June 7, 1999, Innovation's Board of Directors authorized the
pro-rata distribution to its shareholders of 1,600,000 shares of the
$.001 par value common stock of AFCC as a dividend-in-kind. Effective
with the June 14, 1999, notice to shareholders concerning that
("spin-off") distribution, and the acquisition described below, AFCC
became separate from and was no longer a subsidiary of Innovation.
On June 14, 1999, pursuant to an Agreement dated May 26, 1999, AFCC
acquired 100% of the capital stock of AFC Mortgage Corporation (AFC)
from eleven individuals representing all of the holders of said
stock. Effective with the completion of that acquisition, AFC became
a wholly-owned subsidiary of AFCC.
As of September 30, 1999, the capital stock of AFCC consists of
100,000,000 shares of common stock, par value of one tenth of a cent
($.001) per share, and 20,000,000 shares of preferred stock, par
value of one tenth of a cent ($.001). Consideration in the
acquisition of AFC included the issuance of 19,733,333 common shares
to the former shareholders of AFC. In addition, the former
shareholders of AFC may receive up to a total of 2,500,000 additional
shares over the next five calendar years if certain targeted compound
internal growth rates, as defined, are achieved.
AFCC, through its subsidiary AFC, is engaged primarily in the
business of buying and selling real estate mortgages to secondary
markets. When loans are purchased they are categorized as inventory
until they can be resold into the secondary market. Revenues are
generally recognized when the closing sale is completed. Revenue
includes loan amounts as well as various fees.
Generally, neither AFCC or AFC retain any servicing rights on loans
acquired for resale.
-6-
82
AUSTIN FUNDING.COM CORPORATION
(FORMERLY AUSTIN ASSET MANAGEMENT CORPORATION)
AND ITS WHOLLY-OWNED SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998 (UNAUDITED), MARCH 31, 1999 AND 1998
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
BUSINESS ACQUISITION
The acquisition of AFC has been accounted for under the purchase
method in accordance with APB 16. The assets and liabilities of AFC
were transferred at fair value which approximated book value at the
date of acquisition.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Austin
Funding.com Corporation and its wholly-owned subsidiary Austin
Funding Corporation. Austin Funding.com Corporation was incorporated
in Nevada on April 29, 1999 and acquired Austin Funding Corporation,
as detailed above, on June 14, 1999. All significant intercompany
accounts and transactions have been eliminated.
ACCOUNTING BASIS
AFCC prepares its financial statements on the accrual basis of
accounting.
BASIS OF PRESENTATION
The accompanying balance sheets as of September 30, 1999 and 1998,
and March 31, 1999 and 1998, and statements of income and cash flows
for the six months ended September 30, 1999 and 1998, and the twelve
months ended March 31, 1999, and from April 4, 1997 (inception) to
March 31, 1998, include the accounts of AFCC and AFC.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements. Actual results could differ
from those estimates.
INVENTORY
Inventory consists of real estate mortgages held for resale.
Mortgages are accounted for under the specific identification method.
They are recorded at the lower of cost or market.
-7-
83
AUSTIN FUNDING.COM CORPORATION
(FORMERLY AUSTIN ASSET MANAGEMENT CORPORATION)
AND ITS WHOLLY-OWNED SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 1999 AND 1998 (UNAUDITED), MARCH 31, 1999 AND 1998
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Assets are depreciated
using the straight-line method over their estimated useful lives
which range from three to seven years.
Maintenance and repairs are charged to operations as incurred, and
betterments of existing assets are capitalized.
AFCC accounts for long-lived assets as prescribed by the Financial
Accounting Standards Board issued Statement No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of, which requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment
are present and undiscounted cash flows estimated to be generated by
those assets are less than the assets' carrying amount. There has
been no impairment recorded in the financial statements.
INCOME TAXES
AFCC is a corporation subject to federal and state income taxes. AFCC
has elected to be taxed on a separate entity since its inception on
April 29, 1999. AFCC and its wholly-owned subsidiary intend to file a
consolidated tax return for 1999.
AFCC accounts for its income taxes in accordance with Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes.
CONCENTRATION OF CREDIT RISK
Accounts receivable potentially expose AFCC to concentrations of
credit risk as defined by Statement of Financial Accounting Standard
No. 105, Disclosure of Information about Financial Instruments with
Off-Balance Sheet Risk and Financial Instruments with Concentrations
of Credit Risk.
AFCC purchases mortgages in the normal course of business from
customers located throughout the United States.
-8-
84
AUSTIN FUNDING.COM CORPORATION
(FORMERLY AUSTIN ASSET MANAGEMENT CORPORATION)
AND ITS WHOLLY-OWNED SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 1999 AND 1998 (UNAUDITED), MARCH 31, 1999 AND 1998
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PREFERRED STOCK - Subsidiary AFC
The preferred stock of AFC is redeemable at the option of the
stockholders or AFC at any time. AFC must redeem the stock five years
after the date of issuance, or upon notification from a stockholder
that AFC has materially breached the stock purchase agreement.
ADVERTISING
Advertising costs are expensed when incurred.
INTERIM FINANCIAL STATEMENTS
The results of operations for the six months ended September 30, 1999
and 1998, are not necessarily indicative of the results to be
expected for the full fiscal year. All information as of and for the
six months ended is unaudited, but, in the opinion of management,
contains all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the combined financial
position, results of operations and cash flows of AFCC.
RECLASSIFICATION
Certain amounts in March 31, 1998, have been reclassified to be
consistent with the financial statement presentation in March 31,
1999.
-9-
85
AUSTIN FUNDING.COM CORPORATION
(FORMERLY AUSTIN ASSET MANAGEMENT CORPORATION)
AND ITS WHOLLY-OWNED SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998 (UNAUDITED), MARCH 31, 1999 AND 1998
NOTE 2: LINES OF CREDIT AND MORTGAGE PURCHASE AGREEMENT
MARCH 31,
---------------------------
1999 1998
----------- -----------
AFCC had a $3,000,000 line of credit with a financial
institution which was terminated in February 1999. The line of
credit is due on demand. Proceeds from sales of loans are made
directly to the line of credit to the extent of original cost,
plus interest at prime rate plus two percent through maturity
date, and prime rate plus three percent after maturity date.
The debt is secured by the mortgage inventory and all assets of
AFCC. The debt is additionally secured by personal guarantees
of the stockholders and an affiliate of AFCC, as well as
$250,000 in collateral pledged by the affiliate. The
available line of credit at March 31, 1999 is $-0-. $1,388,550 $2,790,232
AFCC has a $2,000,000 mortgage purchase agreement with a
financial institution. Each loan is individually accepted or
rejected by the lender and the agreement has no expiration
date. Proceeds from sales of loans are made directly to the
mortgage purchase agreement, and interest is calculated at
prime rate plus two percent through maturity date, and prime
rate plus three percent after maturity date. The debt is
secured by the mortgage inventory. 24,866 -0-
AFCC has a $500,000 line of credit with a financial
institution. The line of credit expires on January 1, 2000.
Proceeds from sales of loans are made directly to the line of
credit, and interest is calculated using a weighted-average of
interest rates for loans held through maturity date, and the
weighted-average plus 2 percent after maturity. The debt is
secured by the mortgage inventory and is personally guaranteed
by the stockholders. 162,971 -0-
AFCC has a $250,000 line of credit with a financial
institution. The line of credit expires on June 9,
1999. Interest is calculated at 9.75%. The debt is
personally guaranteed by an employee of AFCC. 246,925 -0-
---------- ----------
$1,823,312 $2,790,232
========== ==========
-10-
86
AUSTIN FUNDING.COM CORPORATION
(FORMERLY AUSTIN ASSET MANAGEMENT CORPORATION)
AND ITS WHOLLY-OWNED SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998 (UNAUDITED), MARCH 31, 1999 AND 1998
NOTE 3: LONG-TERM DEBT
AFCC has a note payable with an individual. The original amount of the
note was $36,000 and was dated October 5, 1998. Payments of $1,000 are
due in monthly installments which include interest at 12.5% beginning
November 1, 1998 and continuing until November 1, 2001, when the
balance is due. The note is secured by the assets of AFCC.
MARCH 31, 1999
--------------
Current $ 9,226
Long-term 17,162
---------
Total $ 26,388
=========
Future commitments on long-term debt are:
Year Ended March 31,
--------------------
2000 $ 9,226
2001 10,444
2002 6,718
---------
Total $ 26,388
=========
NOTE 4: LEASES
AFCC leases office space, vehicles and certain office equipment under
operating leases which terminate at various dates. The lease for office
space is personally guaranteed by both stockholders and a former
employee of AFCC. In addition, the Vice-President of AFCC has
personally guaranteed a lease for a vehicle. Rentals paid under these
leases were approximately $80,192 and $19,784 for March 31, 1999 and
1998, respectively. Future commitments on these leases are:
Year Ended March 31,
--------------------
2000 $ 67,681
2001 66,541
2002 5,507
---------
Total $ 139,729
=========
-11-
87
AUSTIN FUNDING.COM CORPORATION
(FORMERLY AUSTIN ASSET MANAGEMENT CORPORATION)
AND ITS WHOLLY-OWNED SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998 (UNAUDITED), MARCH 31, 1999 AND 1998
NOTE 5: RELATED PARTY TRANSACTIONS
Included in stockholder receivable at March 31, 1999 and 1998, are
advances of $48,760 and $36,560 made to a stockholder.
Included in other receivables at March 31, 1999, is an amount of
$28,830 due from a separate corporation owned by the stockholders of
AFCC.
Included in inventory is a loan of $79,721 to a sister of an officer of
AFC.
During the period ended March 31, 1998, AFCC purchased a property from
a relative of a stockholder for approximately $89,000. The property was
subsequently sold to an unrelated third party resulting in a net gain
of $47,258.
During the period ended March 31, 1998, an employee of AFCC personally
funded outstanding loans of approximately $267,400. Upon the sale of
loans, these amounts were included in revenue and cost of sales of
AFCC. The employee was reimbursed for the amount funded plus interest
for the period from which loans were funded through the date of sale.
Amounts paid to the employee were not materially different from amounts
funded.
NOTE 6: INVESTMENT IN LIMITED PARTNERSHIP
AFCC received a 98% limited partnership interest in exchange for 500
shares of preferred stock. The investment is accounted for using the
equity method. Partnership income is first allocated based on the
aggregate of net loss that has been allocated, and then based on
partnership interest percentages; partnership losses are allocated 50
percent to limited partners and 50 percent to general partners.
NOTE 7: INCOME TAXES
The income tax provision shown in the statements of operations is
comprised of the following:
MARCH 31,
-----------------------------
1999 1998
---------- ----------
Current $ -0- $ 43,271
Deferred (44,812) 3,845
---------- ----------
Total taxes $ (44,812) $ 47,116
========== ==========
-12-
88
AUSTIN FUNDING.COM CORPORATION
(FORMERLY AUSTIN ASSET MANAGEMENT CORPORATION)
AND ITS WHOLLY-OWNED SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998 (UNAUDITED), MARCH 31, 1999 AND 1998
NOTE 7: INCOME TAXES (CONTINUED)
Deferred income taxes reflect the impact of temporary differences
between amounts of assets and liabilities for financial reporting
purposes and such amounts as measured by tax laws. These temporary
differences are determined in accordance with SFAS No. 109 and are more
inclusive in nature than "timing differences" as determined under
previously applicable accounting principles.
The net deferred tax liability as of March 31, 1998 relates to the
following temporary differences:
Depreciation $ 15,380
----------
Net temporary differences $ 15,380
==========
Calculated tax liability from temporary
differences at statutory rates $ 3,845
==========
Current portion $ 769
Long-term portion 3,076
----------
Total deferred taxes $ 3,845
==========
United States Federal $ 3,845
----------
Total deferred taxes $ 3,845
==========
NOTE 8: SUBSEQUENT EVENTS
During April 1999, AFC issued 500 shares of its preferred stock in
exchange for a $500,000 certificate of deposit and a $500,000
negotiable security assigned to AFCC by the shareholder.
During April 1999, AFC redeemed 500 shares of its preferred stock,
releasing the shareholder from a collateral agreement for a line of
credit.
During June 1999, preferred stock shareholders converted all preferred
stock to common stock.
During May 1999, AFC made three mortgage loans to a stockholder in the
amount of $266,500.
-13-
89
WE HAVE NOT AUTHORIZED ANY DEALER, SALESPERSON OR OTHER PERSON TO
PROVIDE ANY INFORMATION OR MAKE ANY REPRESENTATIONS ABOUT ALLQUEST.COM EXCEPT
THE INFORMATION OR REPRESENTATIONS CONTAINED IN THIS PROSPECTUS. YOU SHOULD NOT
RELY ON ANY ADDITIONAL INFORMATION OR REPRESENTATIONS IF MADE.
This prospectus does not constitute an offer to sell, or a solicitation
of an offer to buy any securities:
- except the debentures offered by this prospectus;
- in any jurisdiction in which the offer or solicitation is not
authorized.
- in any jurisdiction where the dealer or other salesperson is
not qualified to make the offer or solicitations;
- to any person to whom it is unlawful to make the offer or
solicitation; or
- to any person who is not a United States resident or who is
outside the jurisdiction of the United States.
The delivery of this prospectus or any accompanying sale does not imply
that:
- there have been no changes in the affairs of Austin
Funding.com Corporation after the date of this prospectus; or
- the information contained in this prospectus is correct after
the date of this prospectus.
UNTIL _________________, ALL DEALERS EFFECTING TRANSACTIONS IN THE
REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS AS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR SOLD ALLOTMENTS OR SUBSCRIPTIONS.
$10,000,000 8% SUBORDINATED DEBENTURES DUE 2015
AUSTIN FUNDING.COM CORPORATION
----------------
PROSPECTUS
----------------
CHOICE INVESTMENTS, INC.
December ___, 1999
90
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Articles of the Company waive the personal liability of a
director or officer for damages for breach of fiduciary duty except for (i) acts
or omissions which involve intentional misconduct, fraud or a knowing violation
of law, or (ii) the payment of distributions in violation of Section 78.300 of
the NGCL, which concerns the unlawful payment of distributions to stockholders.
While the Articles provide directors and officers with protection
from awards for monetary damages for breaches of their duty of care, they do not
eliminate such duty. Accordingly, the Articles will have no effect on the
availability of equitable remedies such as an injunction or rescission based on
a director's or officer's breach of his or her duty of care.
The Bylaws provide for indemnification of the directors and officers
of the Company to the fullest extent permitted by applicable state law, as then
in effect. The indemnification rights conferred by the Bylaws are not exclusive
of any other right to which a person seeking indemnification may otherwise be
entitled. The Company plans to purchase liability insurance for the directors
and officers for certain losses arising from claims or charges made against them
while acting in their capacities as directors or officers. The Commission has
taken the position that the provisions discussed in this section do not
eliminate the monetary liability of directors or officers under the Federal
securities laws.
Item 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses to be borne by
the Registrant in connection with the issuance and distribution of the
securities being registered hereby other than underwriting discounts and
commissions.
SEC registration fee $ 3,330
NASD filing fee 1,500
Accounting fees and expenses 10,000
Legal fees 90,000
Blue sky fees and expenses 25,000
Marketing Agent's marketing fee 50,000
Marketing Agent's expenses including
counsel fees and expenses 22,500
Cost of printing and engraving 15,000
Escrow Agent and Trustee Fees 10,000
Transfer Agent Fees 1,000
Miscellaneous 5,000
------------
Total $ 233,330
91
Item 26. RECENT SALES OF UNREGISTERED SECURITIES
On June 7, 1999, Innovation International authorized the Company to
distribute 1,600,000 common shares of the Company to the shareholders of
Innovation International as a dividend-in-kind and as a result of this
distribution ("spin-off"), the Company became separate from and was no longer a
subsidiary of Innovation International. Such shares were issued without
registration because the shares were a spin-off transaction not involving a sale
of the securities of the Company as described in SEC Staff Legal Bulletin No. 4,
dated September 16, 1997.
The Company entered into an agreement with the shareholders of AFC
pursuant to which it became a subsidiary of the Company. The Company issued
19,733,333 common shares to the former shareholders of AFC in consideration for
their AFC shares. In addition, the former shareholders of AFC (and not the
former shareholders of Innovation International) may receive the rights of up to
a total of 2,500,000 additional shares over the next five calendar years if
certain targeted compound internal growth rates of the Company are achieved.
Under the terms of the agreement with Innovation International, if the audited
consolidated Pretax Income of AFC shall have reflected a 25% compound internal
growth rate for three consecutive years, then AFC (or its successor the Company)
shall issue and deliver an additional 2,500,000 shares of common stock to the
former AFC shareholders on a pro rata basis.
None of the securities discussed herein were registered under the
Securities Act. AFC has issued shares of its common stock and preferred stock
since its inception in 1997. The first such sale occurred when AFC was
organized. It issued Terry G. Hartnett and Glenn A. LaPointe 1,000 shares each
for cash contributions totaling $25,000. Such shares were issued without
registration pursuant to an exemption from registration under Section 4(2) of
the Securities Act.
In 1998 AFC issued 500 shares of its Series A Preferred Stock to L.H.
Hardy, Jr. for a 98% limited partnership interest in a limited partnership. In
that same year, AFC issued 1,000 shares to Mr. Hardy for his help in arranging
for a loan for AFC. The 500 shares of Series A Preferred Stock and the 1,000
shares of Common Stock conveyed to Hardy have been repurchased by AFC and such
shares have been canceled. Such shares were issued without registration pursuant
to an exemption from registration under Section 4(2) of the Securities Act. In
April 1999, AFC issued 500 shares of its Class B Preferred Stock in exchange for
a $500,000 certificate of deposit and the assignment of a $500,000 note
receivable from Bradley J. Farley and Glenn G. Farley. See "Certain
Relationships and Related Transactions." In May 1999 the Farleys converted their
500 shares of Class B Preferred Stock to 324,324 shares of Common Stock of AFC,
which was then exchanged for 6,783,872 of the Company Common Stock. In June 1999
AFC issued 78,549 of its shares (approximately 1,643,006 Company shares after
the exchange) to a group of six employees for services rendered. Such shares
were issued without registration pursuant to an exemption from registration
under Section 4(2) of the Securities Act.
92
On September 30, 1999, Mr. Bradley G. Farley purchased 1,500,000 shares
of the Company's 1999 Series A Preferred Stock in exchange for approximately
$1,433,000 in advances that he has made to the Company. The Preferred Stock sold
to Farley pays no dividend, nor has any conversion or voting rights. The Company
may redeem the 1999 Series A Preferred Stock for $1.00 per share upon giving
Farley ten days advance notice. Such shares were issued without registration
pursuant to an exemption from registration under Regulation D of the Securities
Act.
In each of the above transactions, no general advertising or
solicitation was utilized in connection with any such sale. Investors were
offered access to the Company's books and records and the opportunity to meet
with officers of the Company.
Item 27. EXHIBITS
The following exhibits were previously filed or are either filed
herewith or incorporated by reference to documents filed herewith as indicated
below:
EXHIBITS DESCRIPTION
1 Form of Marketing Agreement between Choice Investments, Inc.
and the Company
2.1 Reorganization Plan and Agreement dated May 26, 1999 by and
among Innovation International, Inc., the Company and Austin
Funding Corporation.*
2.2 Amendment to Reorganization Plan and Agreement dated June 12,
1999.*
3.1 Certificate of Amended and Restated Articles of Incorporation
of the Company*
3.2 Bylaws of the Company*
3.3 Certificate of Designation, Preferences, Rights and
Limitations of 1999 Series A Preferred Stock of Austin
Funding.com Corporation*
4.1 Form of Indenture between the Company and Norwest Bank
Minnesota, N.A. as Trustee, with respect to the 8%
Subordinated Debentures
4.2 Specimen Subordinated Debenture
4.3 Pledge Agreement between the Company and Trustee
5 Opinion of Selman Munson & Lerner, P.C., regarding the
validity of issuance of the Subordinated Debentures
93
10.1 1999 Stock Option and Incentive Plan of the Company*
10.2 Employment Agreement as of July 19, 1999 between the Company
and Glenn A. LaPointe*
10.3 Consulting Agreement between Subsidiary and Bradley J. Farley
dated April 14, 1999*
10.4 Whole Loan Purchase Agreement between Subsidiary and
EquiCredit Corporation of America dated March 17, 1998*
10.5 Master Agreement for Sale and Purchase of Mortgages between
Contimortgage Corporation and Subsidiary*
10.6 Bulk Continuing Loan Purchase Agreement between Household
Financial Services, Inc. and Subsidiary dated June 28, 1999*
10.7 Mortgage Loan Purchase and Sale Agreement between Life Bank
and Subsidiary dated February 22, 1999*
10.8 Seller Agreement between Impac Funding Corporation and
Subsidiary dated April 7, 1999*
10.9 Commercial Loan and Servicing Agreement between First National
of North America, LLC and Subsidiary dated December 22, 1998*
10.10 Mortgages Purchase Agreement between Residential Mortgage
Services of Texas, Inc. and Subsidiary dated October 14, 1998*
10.11 Loan and Security Agreement between Capital First Mortgage
Corporation and Pioneer Commercial Funding Corp. dated June 2,
1997*
10.12 Lease Agreement between 823 Congress Ltd. and Capital First
Mortgage Corporation dated April, 1997*
10.13 First Amendment to Lease Agreement dated September 1, 1998*
10.14 Mortgages Purchase Agreement between Residential Mortgage
Services of Texas, Inc. and Subsidiary dated June 11, 1999*
10.15 Master Repurchase Agreement between Impac Warehouse Lending
Group and Austin Funding Corporation dated June 22, 1999*
94
10.16 Stock Exchange Agreement between Bradley J. Farley and the
Company*
10.17 Subscription Escrow Agreement between the Company and Compass
Bank, N.A.
10.18 Agreement of Sale and Purchase between Austin Funding.com
Corporation and Greater South Texas Savings Bank, FSB dated
November 29, 1999***
10.19 Departure Agreement between Terry Hartnett and the Company
dated December 6, 1999***
10.20 Consulting Agreement between David Hall and the Company dated
November 11, 1999
11 Statement regarding computation of earnings to fixed charges****
15 Sprouse & Winn, L.L.P.'s letter regarding the Company's
unaudited interim financial statement**
21 Subsidiaries of the Company**
23.1 Consent of Accountants
23.2 Consent of Selman Munson & Lerner, P.C.
25 Statement of eligibility of Trustee
27 Financial Data Schedule****
99 Additional Exhibits
- ----------
* Filed as part of the Registration Statement on Form 10-SB filed by the
Company as amended (File No. 000-26815), and incorporated herein by
reference.
** Previously filed.
*** Filed as part of the Current Report on Form 8-K filed by the Company on
December 9, 1999, and incorporated herein by reference.
**** Filed as part of the Form 10-QSB/A filed by the Company on November 23,
1999, and incorporated herein by reference.
Item 28. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes to:
95
(1) File, during any period in which it offers or sells
securities, a post-effective amendment to the Registration Statement to:
(i) Include any prospectus required by Section 10(a)(3) of
the Securities Act;
(ii) Reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or together, represent a
fundamental change in the information in the Registration Statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of the securities offered would not exceed
that which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective Registration Statement; and
(iii) Include any additional or changed material
information on the plan of distribution.
(2) For determining liability under the Securities Act, treat
each post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at the time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from
registration any of the securities that remain unsold at the end of the
offering.
(b) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act, as amended (the "Securities Act"), the information omitted from
the form of prospectus filed as part of this registration statement in reliance
upon Rule 430A and contained in a form of prospectus filed by the registrant
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(c) It will provide to Choice at the closing specified in the
underwriting agreements, certificates in such denominations and registered in
such names as required by Choice to permit prompt delivery to each purchaser.
96
SIGNATURES
IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE
REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL
OF THE REQUIREMENTS FOR FILING ON FORM SB-2 AND HAS DULY CAUSED THIS
REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO
DULY AUTHORIZED, IN THE CITY OF AUSTIN, STATE OF TEXAS, ON DECEMBER 9, 1999.
AUSTIN FUNDING.COM CORPORATION
By: /s/ Glenn A LaPointe
-------------------------------------------------
Glenn A. LaPointe, President
By: /s/ Terry G. Hartnett
-------------------------------------------------
Terry G. Hartnett, Chief Financial Officer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints
Glenn A. LaPointe as his true and lawful attorneys-in-fact and agents with full
power of substitution and resubstitution, for him and his name, place and stead,
in any and all capacities, to sign any or all amendments (including post
effective amendments) to this Registration Statement and a new Registration
Statement filed pursuant to Rule 462(b) of the Securities Act and to file the
same, with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorney-in-fact
and agents, and each of them, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
foregoing, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or either of them, or their substitutes, may lawfully do or cause to be
done by virtue hereof.
97
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates stated.
Signature Title Date
- --------- ----- ----
/s/ GLENN A. LAPOINTE
- --------------------------- President, Chairman of the Board, Executive Officer December 9, 1999
Glenn A. LaPointe and Director (Principal Executive Officer)
/s/ TERRY G. HARTNETT
- --------------------------- Chief Financial Officer and Director December 9, 1999
Terry G. Hartnett
/s/ BRADLEY J. FARLEY
- --------------------------- Director December 9, 1999
Bradley J. Farley
/s/ GLENN G. FARLEY
- --------------------------- Director December 9, 1999
Glenn G. Farley
/s/ SHANNON D. STEWART
- --------------------------- Officer and Director December 9, 1999
Shannon D. Stewart
/s/ KAREN R. HELLER
- --------------------------- Officer and Director December 9, 1999
Karen R. Heller
/s/ JENNIFER ANN V. BULLOCK
- --------------------------- Officer and Director December 9, 1999
Jennifer Ann V. Bullock
98
INDEX TO EXHIBITS
EXHIBITS DESCRIPTION
- -------- -----------
1 Form of Marketing Agreement between Choice Investments, Inc.
and the Company
2.1 Reorganization Plan and Agreement dated May 26, 1999 by and
among Innovation International, Inc., the Company and Austin
Funding Corporation.*
2.2 Amendment to Reorganization Plan and Agreement dated June 12,
1999.*
3.1 Certificate of Amended and Restated Articles of Incorporation
of the Company*
3.2 Bylaws of the Company*
3.3 Certificate of Designation, Preferences, Rights and
Limitations of 1999 Series A Preferred Stock of Austin
Funding.com Corporation*
4.1 Form of Indenture between the Company and Norwest Bank
Minnesota, N.A. as Trustee, with respect to the 8%
Subordinated Debentures
4.2 Specimen Subordinated Debenture
4.3 Pledge Agreement between the Company and Trustee
5 Opinion of Selman Munson & Lerner, P.C., regarding the
validity of issuance of the Subordinated Debentures
10.1 1999 Stock Option and Incentive Plan of the Company*
10.2 Employment Agreement as of July 19, 1999 between the Company
and Glenn A. LaPointe*
10.3 Consulting Agreement between Subsidiary and Bradley J. Farley
dated April 14, 1999*
10.4 Whole Loan Purchase Agreement between Subsidiary and
EquiCredit Corporation of America dated March 17, 1998*
10.5 Master Agreement for Sale and Purchase of Mortgages between
Contimortgage Corporation and Subsidiary*
10.6 Bulk Continuing Loan Purchase Agreement between Household
Financial Services, Inc. and Subsidiary dated June 28, 1999*
10.7 Mortgage Loan Purchase and Sale Agreement between Life Bank
and Subsidiary dated February 22, 1999*
10.8 Seller Agreement between Impac Funding Corporation and
Subsidiary dated April 7, 1999*
10.9 Commercial Loan and Servicing Agreement between First National
of North America, LLC and Subsidiary dated December 22, 1998*
10.10 Mortgages Purchase Agreement between Residential Mortgage
Services of Texas, Inc. and Subsidiary dated October 14, 1998*
10.11 Loan and Security Agreement between Capital First Mortgage
Corporation and Pioneer Commercial Funding Corp. dated June 2,
1997*
10.12 Lease Agreement between 823 Congress Ltd. and Capital First
Mortgage Corporation dated April, 1997*
10.13 First Amendment to Lease Agreement dated September 1, 1998*
10.14 Mortgages Purchase Agreement between Residential Mortgage
Services of Texas, Inc. and Subsidiary dated June 11, 1999*
10.15 Master Repurchase Agreement between Impac Warehouse Lending
Group and Austin Funding Corporation dated June 22, 1999*
10.16 Stock Exchange Agreement between Bradley J. Farley and the
Company*
99
10.17 Subscription Escrow Agreement between the Company and Compass
Bank, N.A.
10.18 Agreement of Sale and Purchase between Austin Funding.com
Corporation and Greater South Texas Savings Bank, FSB dated
November 29, 1999***
10.19 Departure Agreement between Terry Hartnett and the Company
dated December 6, 1999***
10.20 Consulting Agreement between David Hall and the Company dated
November 11, 1999
11 Statement regarding computation of earnings to fixed charges****
15 Sprouse & Winn, L.L.P.'s letter regarding the Company's
unaudited interim financial statement**
21 Subsidiaries of the Company**
23.1 Consent of Accountants
23.2 Consent of Selman Munson & Lerner, P.C.
25 Statement of eligibility of Trustee
27 Financial Data Schedule****
99 Additional Exhibits
- ----------
* Filed as part of the Registration Statement on Form 10-SB filed by the
Company as amended (File No. 000-26815), and incorporated herein by
reference.
** Previously filed.
*** Filed as part of the Current Report on Form 8-K filed by the Company on
December 9, 1999, and incorporated herein by reference.
**** Filed as part of the Form 10-QSB/A filed by the Company on November 23,
1999, and incorporated herein by reference.