November 30th is the date (hopefully). They have an agreement with
their main warehouse lender that if they dont get a deal done by the
end of November, more dilution will occur. Currently, this lender
gets 40% of the company's equity for making available a $30+ million
line. If a deal does not get done, the equity percentage that this
lender gets increases -- if the delay continues this lender could get
90% of the company. So Nov. 30th is the date to minimize the
disadvantage to shareholders.
Pursuant to the $33 million Greenwich Street facility, Greenwich Street received
a $3.3 million commitment fee, and exchangeable preferred stock representing the
equivalent of 40% of the fully diluted equity of the Company, for making the
facility available to the Company. The Greenwich Street facility provides that
under certain circumstances, upon the Company entering into a definitive
agreement which effectuates a change of control of the Company, Greenwich Street
may elect either to receive (a) a repayment of the facility, plus accrued
interest at 10% per annum, and a take-out premium or (b) additional exchangeable
preferred stock.
The amount of any take-out premium is based on the average of the facility
outstanding between the facility's effective date and the date of any definitive
agreement for a change of control, multiplied by either 20%, 100% or 200% as
outlined below. If there is no change of control then no take-out premium is
due.
The amount of additional exchangeable preferred stock potentially issuable to
Greenwich Street is based upon the time elapsed between the effective date of
the facility and the date of any such definitive agreement as outlined below.
<TABLE>
<CAPTION>
Take-Out Percentage of Cumulative
Days Premium Diluted Equity Issued in the Form of
Elapsed Percentage Additional Preferred Stock
------- ---------- ------------------------------------
(In addition to the initial 40%)
<S> <C> <C>
0-45 20% 0%
46-90 100% 20%
Over 90 200% 50%
</TABLE>
The facility matures at the end of the 90-day commitment period, at which time,
it could be exchanged at the holder's election for preferred stock representing
the equivalent of an additional 50% of the diluted equity. If not exchanged for
preferred stock, the facility must be repaid together with interest.
The terms of the above standby revolving credit facility and the intercreditor
agreement will result in both significant interest expense and stockholder
dilution in the fourth quarter of 1998. Interest expense and dilution with
respect to the standby revolving credit facility in addition to its 10% terms
and $3.3 million commitment fee, is dependent on whether and to what extent the
take out premium becomes effective, whether a definitive agreement is entered
into and if so, the timing of such agreement and on the value attributable to
the preferred stock issued or to be issued. Interest expense with respect to the
intercreditor agreement will be increased due to the value attributed to the
warrants issued. Management cannot estimate the amount of interest expense or
dilution at this time due to the variable factors involved, but expects each to
be significant.
29
<PAGE> 32
The Company's business requires continual access to short and long-term sources
of capital. In view of, among other things, reduction in available cash and
credit resources, the Company has retained Donaldson, Lufkin & Jenrette
Securities Corporation ("DLJ") to advise the Company as to financial and
strategic alternatives. The Company is actively working with DLJ to seek a
long-term investor in the Company or a sale or similar transaction resulting in
a change of control of the Company. Although the Company is actively working
with DLJ to seek a long-term investor, in light of volatile market conditions
and the fact the total market capitalization of the Company's common stock
outstanding currently (total common stock outstanding multiplied by the quoted
market price of the Company's common stock) is below the equity value of the
Company at September 30, 1998, there can be no assurance the Company will be
able to execute a change of control transaction at a price that would be able to
recover the equity value of the Company or execute a change of control
transaction at all.
The Company has substantial capital requirements and it anticipates that it will
need to arrange for additional external cash resources through the sale or
securitization of interest-only and residual certificates, increased credit
facilities or the sale or placement of debt, preferred stock or equity
securities. There can be no assurance that existing warehouse and interest-only
and residual certificate lenders will continue to fund the Company under their
uncommitted and committed facilities, that existing credit facilities can be
increased, extended or refinanced, that the Company will be able to arrange for
the sale or securitization of interest-only and residual certificates in the
future on terms the Company would consider favorable, that debt, preferred stock
or equity sources will be available to the Company at any given time or on terms
the Company would consider favorable or that funds generated from operations
will be sufficient to repay its existing debt obligations or meet its operating
and capital requirements. To the extent that the Company is not successful in
increasing, maintaining or replacing existing credit facilities, in selling or
securitizing interest-only and residual certificates or in the placement of
debt, preferred stock or equity securities, the Company would not be able to
hold a large volume of loans pending securitization and therefore would have to
curtail its loan production activities or attempt to increase the volume of
whole loan sales to sustain operations. There can be no assurance the Company
would be successful in increasing whole loan sales to the level required to
sustain operations.
Additionally, there can be no assurance that the Company will be able to enter
into a letter of intent relating to a change of control in order to continue the
intercreditor agreements with the significant warehouse lenders and the
forbearance and intercreditor agreement with BankBoston in effect. If a letter
of intent is not executed within 45 days (by the end of November 1998) from the
signing of the intercreditor agreements and the forbearance and intercreditor
agreement, the agreements would expire and the lenders could demand repayment at
a time when the Company is without resources to make such payments. In such
event the Company would be unable to continue its business. |
