Attached files
| file | filename |
|---|---|
| EX-99.1 - KH FUNDING CO | v174620_ex99-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
8-K
CURRENT
REPORT
PURSUANT
TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
Date of
Report (Date of earliest event reported): February 5,
2010
KH
FUNDING COMPANY
(Exact
name of registrant as specified in its charter)
|
Maryland
|
333-106501
|
52-1886133
|
|
(State
or other jurisdiction of
|
(Commission
file number)
|
(IRS
Employer
|
|
incorporation
or organization)
|
Identification
No.)
|
|
10801 Lockwood Drive, Suite
370, Silver Spring, Maryland 20901
(Address
of principal executive offices) (Zip Code)
(301)
592-8100
(Registrant’s
telephone number, including area code)
N/A
(Former
Name or Former Address, if Changed Since Last Report)
Check the
appropriate box below if the Form 8-K filing is intended to simultaneously
satisfy the filing obligations of the registrant under any of the following
provisions:
o Written
communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
o Soliciting
material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
o Pre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR
240.14d-2(b))
o Pre-commencement
communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR
240.13e-4(c))
INFORMATION
TO BE INCLUDED IN THE REPORT
|
Item 2.02
|
Results of Operations and
Financial Condition.
|
The information required by this Item is
contained in Item 2.04 of this report and incorporated herein by
reference.
|
Item
2.04
|
Triggering
Events That Accelerate or Increase a Direct Financial Obligation or an
Obligation under an Off-Balance Sheet
Arrangement.
|
On February 5, 2010, KH Funding Company
(the “Company”) received notice (the “Acceleration Notice”) from Wells Fargo
Bank (the “Trustee”), the trustee under the Company’s Indenture dated August 2,
2004, as amended and supplemented to date( the “Indenture”), that the Trustee
has accelerated all of the Company’s outstanding Series 3 Senior Secured Notes
(the “Series 3 Notes”) and Series 4 Subordinated Unsecured Notes (the “Series 4
Notes” and together with the Series 3 Notes, the “Notes”). The effect
of the acceleration is that the unpaid principal balance due under all Notes,
and all accrued but unpaid interest thereon, was declared immediately due and
payable. The acceleration is effective immediately with respect to
Series 3 Notes and is effective with respect to Series 4 Notes five business
days after the holders of Series 3 Notes receive the Acceleration Notice from
the Trustee. As noted in the Indenture, the Series 4 Notes are junior
in right of payment of principal and interest to the Company’s Senior Debt (as
defined in the Indenture), including the Series 3 Notes, and any payments
received by the holders of Series 4 Notes (together with the holders of Series 3
Notes, the “Holders”) must be held in trust for the benefit of holders of Senior
Debt. As of the date hereof, the Series 3 Notes constitute the only
Senior Debt of the Company.
The acceleration was made pursuant to
Section 6.2 of the Indenture because the Company is in payment default (the
“Default”) with respect to approximately $3.86 million aggregate liquidation
amount of Notes and, thus, the Indenture. The Default relates to
Notes that have been called for redemption by the holders thereof or that have
matured. As of the date of the Acceleration Notice, the Company had
outstanding approximately $36.57 million aggregate liquidation amount of Series
3 Notes and approximately $1.24 million aggregate liquidation amount of Series 4
Notes.
The
Trustee has known about the Default since October 2008 and the Company has been
working diligently with the Trustee in an attempt to cure the
Default. In that regard, prior to its receipt of the Acceleration
Notice, the Company had taken or proposed to take the following
actions:
|
·
|
It obtained
written waivers of the Default from Holders representing approximately
$3.26 million, or 84.46%, of the Notes with respect to which the Company
was in Default (the “Affected Holders”), with the result that non-waiving
Holders accounted for only $.60 million of Notes, or 1.59% of all
outstanding Notes.
|
|
·
|
It
proposed to fully payoff any Notes for which it could not obtain a
written waiver of the Default.
|
2
|
·
|
It
had discussed the possibility of a repayment plan with the
Trustee that would have provided for pro rata installment payments to
all Affected Holders in amounts and at times that the Company believed
were reasonable, given its anticipated cash flows, while continuing its
strategy of marketing and selling its Real Estate Owned, valued at
approximately $5.88 million at December 31, 2009, and certain other
saleable assets at a level that could support payments to Affected Holders
and the continuation of the Company’s business and
operations.
|
|
·
|
In
an effort to limit additional redemption requests that would add to the
amount of the Default, the Company also proposed to continue its practice
of making interest payments and required minimum distributions on
Individual Retirement Accounts where the Holder of the Note has elected to
receive such payments.
|
The Company believes that, given the
state of the economy and the local real estate market, its proposed action plan
would have maximized the possibility that the Company would eventually be able
to pay all Affected Holders in full, as a large portion
of the Company’s assets is made up of real-estate secured loans and Real Estate
Owned. At December 31, 2009, these assets made up approximately 98.4%
of the Company’s total assets.
In spite of the fact that the Company
believes the Indenture did not (prior to its receipt of the Acceleration Notice)
prohibit the Company’s proposed action plan during the period of the Default,
the Trustee refused to allow the Company to implement that plan and has instead
opted to require the Company to immediately pay all amounts due under all Notes,
not just the Notes held by non-waiving Affected Holders. At
December 31, 2009, the Company had cash and cash equivalents of approximately
$337,000, which is not enough to immediately redeem, in full, all outstanding
Notes. The Company is engaged in discussions with the Trustee in an
effort to devise a plan for paying off outstanding Notes. Given the
Company’s current financial condition and business outlook, however, the Company
believes there is a good possibility that it will need to liquidate
substantially all of its assets to satisfy these obligations. The
Company cannot predict the manner or timing of how all Notes will be paid
off.
In the event of the liquidation of
the Company (or of a bankruptcy, insolvency or receivership proceeding or upon
the assignment for the benefit of the Company’s creditors or other marshalling
of assets), all obligations due, or to become due, in respect of the Senior Debt
must first indefeasibly be paid in full, or provision must have been made for
such payment, in cash, cash equivalents or otherwise in a manner satisfactory to
the holders of Senior Debt, before any payment is made on account of the
principal of, premium, if any, or interest on the Series 4 Notes, except that
Holders may receive securities that are subordinated to at least the same extent
as the Series 4 Notes are to (i) Senior Debt and (ii) any securities issued in
exchange for Senior Debt. Further, in any such event, any payment or
distribution of assets of the Company of any kind or character, whether in cash,
property or securities, to which the Holders of the Series 4 Notes or the
Trustee would be entitled must be paid by the Company or by any receiver,
trustee in bankruptcy, liquidating trustee, agent or other person making such
payment or distribution, or by the Holders of the Series 4 Notes or by the
Trustee if received by them, directly to the holders of Senior Debt (pro rata to
such holders on the basis of the amounts of Senior Debt held by such holders),
or to the trustee or trustees under any indenture pursuant to which any of such
Senior Debt may have been issued, as their interests may appear, for application
to the payment of Senior Debt remaining unpaid until all such Senior Debt has
been indefeasibly paid in full, or provisions shall have been made for such
payment, in cash, cash equivalents or otherwise in a manner satisfactory to the
holders of Senior Debt, after giving effect to any concurrent payment,
distribution or provision therefor to or for the holders of Senior
Debt.
3
The risks associated with the
liquidation of the Company and the other potential consequences of the
acceleration are discussed in the “Risk Factors” section of the Company’s
Quarterly Report on Form 10-Q for the quarter ended June 30, 2009 and of the
Company’s Annual Report on Form 10-K for the year ended December 31, 2008 that
were filed with the Securities and Exchange Commission (the “SEC”).
Under the Indenture, the Trustee may
pursue any available remedy to collect the payment of principal or interest on
the Notes or to enforce the performance of any provision of the Notes and/or the
Indenture, including the bringing of a suit for collection. The
Trustee may also file proofs of claim to have the claims of the Trustee
(including any claim for the reasonable compensation, expenses, disbursements
and advances of the Trustee, its agents and counsel) and the Holders allowed in
any judicial proceedings relative to the Company, its creditors or its property
and is entitled and empowered to collect, receive and distribute any money or
other property payable or deliverable on any such claims. The
Indenture provides that, generally, the Company must indemnify the Trustee
against any and all losses, liabilities or expenses incurred by it arising out
of or in connection with the acceptance or administration of its duties under
the Indenture.
If the Trustee collects any money
pursuant to the exercise of its foregoing remedies, it must pay out the money in
the following order: (i) first, to the Trustee, its agents and
attorneys for amounts due to it under the Indenture, including payment of all
compensation, expenses and liabilities incurred, and all advances made, if any,
by the Trustee and the costs and expenses of collection; (ii) second, to Holders
of Series 3 Notes and to holders of any other Senior Debt (as defined in the
Indenture); (iii), third, to Holders for amounts due and unpaid on the Notes for
principal and interest and any other indebtedness of the Company (other than
indebtedness that represents an accrued expense or a trade payable) of equal
priority, ratably, without preference or priority of any kind, according to the
amounts due and payable on the Notes for principal and interest, respectively;
and (iv) fourth, to the Company or to such party as a court of competent
jurisdiction may direct.
A Holder may pursue a particular
remedy with respect to the Indenture or the Notes only if: (i) the
Holder gives the Trustee written notice of a continuing event of default under
the Indenture; (ii) the Holders of at least a majority in principal amount of
the then outstanding Notes make a written request to the Trustee to pursue the
remedy; (iii) such Holder or Holders offer and, if requested, provide to the
Trustee indemnity satisfactory to the Trustee against any loss, liability or
expense; (iv) the Trustee does not comply with the request within 60 days after
receipt of the request and the offer and, if requested, the provision of
indemnity; and (v) during such 60 day period, the Holders of a majority in
principal amount of the then outstanding Notes do not give the Trustee a
direction inconsistent with the request. A Holder may not, however,
use the Indenture to prejudice the rights of another Holder or to obtain a
preference or priority over another Holder.
4
The foregoing discussion of the
provisions of the Indenture and the rights and remedies of the Trustee and the
Holders is intended only as a summary and is qualified in its entirety by
reference to the terms of the Indenture, as supplemented, which are on file with
the SEC as follows:
|
·
|
Indenture
dated August 2, 2004, filed as Exhibit 4 to the Company’s Post-Effective
Amendment No. 1 to the Registration Statement on Form SB-2 filed on July
1, 2005 (File No. 333-124155);
|
|
·
|
First
Supplemental Indenture dated July 1, 2005, filed as Exhibit 4.3 to the
Company’s Pre-Effective Amendment No. 2 to the Registration Statement on
Form SB-2 filed on July 1, 2005 (File No. 333-124155);
and
|
|
·
|
Amended
and Restated Second Supplemental Indenture dated January 16, 2008, filed
as Exhibit 4.6 to the Company’s Pre-Effective Amendment No. 2 to the
Registration Statement on Form SB-2 filed on January 23, 2008 (File No.
333-124155).
|
This report contains forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. These forward-looking statements include, but are not limited
to the plans, objectives, expectations and intentions of the Company and other
statements contained in this report that are not historical facts, and other
statements identified by words such as “expects”, “anticipates”, “intends”,
“plans”, “believes”, “should” or words of similar meaning generally intended to
identify forward-looking statements. These forward-looking statements
are based upon the current beliefs and expectations of the Company and are
inherently subject to significant business and economic uncertainties and
contingencies, including the future actions of the Trustee and the Holders, many
of which are beyond the Company’s control. Actual results may differ
materially from the anticipated results discussed in these forward-looking
statements because of numerous possible uncertainties. The Company
cautions that the foregoing list of factors is not
exclusive. Moreover, readers are cautioned not to place undue
reliance on such forward looking statements, which speak only as of the date of
this report. Except as required by law, the Company assumes no
obligation to update any forward looking statements even if experience or future
changes make it clear that projected results expressed or implied in such
statements will not be realized.
|
Item
9.01.
|
Financial
Statements and Exhibits
|
(d) Exhibits
The exhibits filed with this report are
listed in the Exhibit Index that immediately follows the signatures hereto,
which index is incorporated herein by reference.
5
SIGNATURES
Pursuant to the requirements of Section
13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
| KH FUNDING COMPANY | |||
|
Dated: February
16, 2010
|
By:
|
/s/ Robert L. Harris | |
| Robert L. Harris | |||
| President | |||
6
EXHIBIT
INDEX
| Exhibit No. | Description |
|
99.1
|
Notice
of Acceleration, dated February 5, 2010, from Wells Fargo, National
Association (filed herewith)
|
7